Clearwater Paper Corp (CLW) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Clearwater Paper's fourth-quarter and full-year 2013 earnings conference call and webcast.

(Operator Instructions)

As a reminder, this conference call is being recorded.

Today's speakers are Ms. Linda Massman, President and Chief Executive Officer; Sir John Hertz, Senior Vice President and Chief Financial Officer. At this time I would like to hand the conference over to Mr. John Hertz.

Sir, you may begin.

Thank you, Sahid.

Good afternoon and welcome to Clearwater Paper's fourth-quarter 2013 conference call. Our press release this afternoon includes details regarding our fourth quarter results. And you'll find a presentation of supplemental information posted on the Investor Relations area of our website at cIearwaterpaper.com.

I would like to remind you that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements are based on current expectations, estimates, assumptions, and projections that are subject to change.

Actual results may differ materially from the forward-looking statements. Factors that could cause actual results to differ materially include those expressed or implied by risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2012, and our quarterly filings on Form 10-Q.

Any forward-looking statements are made only as of this date and we undertake no obligation to update any forward-looking statements.

With that, I will now report on our fourth-quarter and full-year 2013 results.

2013 certainly had its challenges, but much was accomplished that we believe positions the Company well for 2014 and beyond. From a capital structure and capital allocation perspective, we significantly improved our weighted average cost of capital by refinancing 10 5/8% senior notes for 4 1/2% senior notes.

We returned $100 million to shareholders via share buybacks at an average price of $48.31 per share. Today we are announcing that the Board has approved a new $100 million share buyback authorization. We expect to return at least 50% of our 2014 discretionary free-cash flow via share repurchases under that authorization.

Also, as of the year-end 2013, we have seen an underfunded status of our Company sponsored pension plans improve from $79 million at the end of 2012 to just $7 million today. There are also a number of operational accomplishments that Linda will speak to in her remarks that follow.

Before we get into the actual financial results, I will start with a little housekeeping. We are providing both GAAP results and results that are adjusted to exclude certain charges and benefits that we believe are not indicative of our core operating performance.

For the full-year 2013, those include $6 million of costs associated with the closure of our Thomaston, Georgia, converting facility; $17 million of debt retirement costs; and $4 million related to mark-to-market adjustments to outstanding directors' common stock units.

We also recognize $81 million in tax benefits, mostly associated with alternative fuel mixture tax credits. Of that amount, $63 million is a result of an IRS memorandum released in November that we believe significantly decreases the likelihood that taxes will be due on such credits.

Accordingly, we released the reserve for uncertain tax positions related to alternative fuel mixture credits. The remaining amounts are associated with additional credits taken during the year, conversion of credits between alternative fuel mixture and cellulosic biofuels, and the release of reserves related to certain state tax credits.

As it relates specifically to Q4, we incurred costs of $3 million associated with the Thomaston closure and $1.5 million related to mark-to-market adjustments to outstanding directors' common stock units. We also recognize the $63 million tax benefit that I just discussed.

Turning to the full year of 2013 results. We had net sales of $1.9 billion; GAAP diluted earnings of $4.80 per share, and adjusted earnings of $1.96 per share versus adjusted earnings of $3.10 per share in 2012.

Adjusted EBITDA came in at $200 million, or 11% of net sales. That is a $29 million and 2% margin-point decline from 2012, due primarily to higher pulp prices and TAD transition costs and to lesser extent increases in chemicals, packaging, energy and waste costs.

Now turning to the fourth quarter. Fourth-quarter net sales come in at $470 million. That is down 4% versus the third quarter, and below the outlook that we provided on our Q3 earnings call of a 1% to 2% decrease, as total shipped tons within our Consumer division declined more than expected.

Consolidated price mix improved 1%, in line with our outlook. Versus Q4 2012 net sales were up 2% on higher tissue and paperboard average selling prices per ton.

Fourth-quarter adjusted gross margin of 15.3%, which excludes the Thomaston shutdown costs, was up 5.5 margin points from the third quarter, due primarily to the absence of the $17.5 million in major maintenance expense that was incurred in Q3 as well as lower fiber, pulp, chemicals and TAD transition costs.

Compared to the fourth-quarter 2012, adjusted gross margin was up 1 percentage point due to lower fiber, fiber, maintenance, and purchased paper costs, along with improved tissue mix associated with the ramp of TAD tissue shipments and higher paperboard pricing.

Adjusted SG&A expense, which includes the mark-to-market expenses, was $29 million, or 6.2% of fourth-quarter net sales and was at the high end of our outlook. Adjusted SG&A expense as a percentage of sales was 5.6% in the third quarter and 6.7% in the fourth quarter of 2012. We expect adjusted SG&A to be $30 million to $32 million in the first quarter.

Adjusted corporate expense, excluding the mark-to-market expense, was $12 million of the SG&A spend in the fourth quarter and in line with our Q4 outlook and up $1.5 million from Q3 due to higher IT spending. We expect adjusted corporate spending to be $11 million to $13 million per quarter in 2014.

Adjusted EBITDA, which excludes the Thomaston and mark-to-market expenses, was $65 million and just $1 million shy of a quarterly record. Adjusted EBITDA margin was 13.9% of net sales compared to 8.8% in Q3.

The 5% margin-point improvement was primarily due to the absence of major maintenance, lower consumer product costs, and higher mix of TAD shipments. Fourth-quarter 2012 adjusted EBITDA margin was 12.1%.

Net interest expense of $11 million was flat with the third quarter, as we expected. Compared with the fourth quarter of 2012, net interest expense increased $4 million, mainly because we are no longer capitalizing interest associated with our TAD tissue expansion project. We expect net interest expense to be about $11 million in the first quarter.

Turning to taxes. On a GAAP basis, Q4 taxes were a net $56 million benefit, mostly the result of the release of the uncertain tax position reserves.

On an adjusted basis, our effective tax rate for the fourth quarter was 26.6%, or an $8 million expense, which was down 10 points from 37% in the third quarter. The decrease was primarily due to reductions of valuation allowances on state tax credits and NOL carry forwards, as well as the impact of a true-up for the full-year 2013 effective tax rate in the fourth quarter.

We expect an adjusted 2014 effective tax rate of 38% plus or minus a couple points.

Fourth-quarter 2013 GAAP net earnings were $83 million, or $3.87 per diluted share, and on an adjusted basis $23 million, or $1.09 per diluted share. That is compared to adjusted net earnings of $6 million, or $0.29 per diluted share, in the third quarter and $19 million and $0.82 in the fourth quarter of 2012.

Non-cash expenses in the fourth quarter of 2013 included $23 million of depreciation amortization, $3 million of total equity-based compensation, and $4 million of non cash pension and retiree medical expense. Permanent employee headcount at the end of 2013 was approximately 3,860, which is flat versus the end of 2012.

Now I will discuss the segment results. Consumer Products net sales were $282 million for the fourth quarter of 2013, down 4% compared to the third quarter, primarily due to a 4% decrease in shipment volumes to 128,000 tons.

That is slightly below our outlook of down 1% to 3%, due to promotional spending by brands and lower contract manufacturing volumes. Retail tons were down 2% to $71,000; but non retail tons declined 6% to $58,000.

Converted product case sales volumes declined 5%. Average tissue pricing was roughly flat versus the third quarter, at $2,196 per ton, which is at the low end of our outlook range of flat to up 2%. A 1% increase in retail pricing was mostly offset by a 2% decline in non retail pricing.

As we expected, TAD expansion-related shipments contributed approximately $7 million to EBITDA in the fourth quarter. As we look forward, we are expecting that contribution to ramp to approximately $9 million in Q1 and then to approximate $12 million run rate in Q3 of 2014.

Consumer Products adjusted operating margin for the fourth quarter of 2013 was $17 million, or 6.2%, versus $15 million, or 5.2%, in the third quarter. The improvement was primarily due to a richer mix of retail case sales, as well as lower pulp and TAD transition costs.

Consumer Products Q4 adjusted EBITDA margin also improved $34 million, or 12%, from $31 million, or 11%, in the third quarter.

Now turning to the Pulp and Paperboard division. Pulp and Paperboard net sales of $188 million for the fourth quarter of 2013 were down 4% versus the third quarter, due to seasonally lower volumes.

Paperboard shipment volumes decreased 5% to 189,000 tons and were at the low end of our outlook. Average pricing of $978 per ton was up 1% and came in at the high end of our expectations as the Q3 price increases were fully realized in the quarter.

We also had about $3 million of opportunistic external pulp sales. Pulp and Paperboard operating margin for the fourth quarter of 2013 was $37 million, or a record 20% of net sales, as compared to $16 million, or 8% in net sales, in the third quarter.

The margin increase versus Q3 was primarily due to the absence of major maintenance costs, as well as lower wood fiber and chemical costs. Our next major maintenance outage is scheduled for the first half of 2015.

Pulp and Paperboard Q4 EBITDA margin of 23% was also a record high. I would like to personally thank all of our Pulp and Paperboard employees for embracing our productivity and cost-reduction initiatives in achieving those record results.

Now turning to the balance sheet. Capital expenditures were $32 million in the fourth quarter of 2013, which included $3 million related to our TAD tissue expansion project, bringing total TAD project expenditures to $266 million that excludes capitalized interest through the end of Q4.

Capital expenditures for 2014 are expected to be approximately $75 million. Long-term debt outstanding on December 31, 2013, was $650 million, which was the same as the September 30 amount.

As mentioned, we completed our $100 million share buyback program in Q4, and for 2014 we are committed to returning at least 50% of discretionary free cash flow to shareholders via share repurchases.

As a reminder we define discretionary free cash flow as cash flow from operating activities minus $50 million of maintenance CapEx.

As previously mentioned, our Company-sponsored pension plans are under funded by approximately $7 million as of December 31, which is down substantially from year-end 2012, due primarily to rising interest rates, strong investment returns and cash contributions. We contributed to $2.5 million to those plans in Q4 for a 2013 total of $15.1 million and expect to contribute $15 million in 2014 as well.

With regard to our liquidity, we ended the fourth quarter with $94 million of unrestricted cash and short-term investments. For all of 2013, we generated $136 million of cash from operating activities, or 7% of net sales, with $45 million in 9% of sales in the fourth quarter.

In conclusion, favorable markets and good internal execution combined to yield a near-record EBITDA performance in the fourth quarter. We ended a challenging year on a strong note and believe we are well positioned for 2014.

I will now turn the call over to Linda Massman, who will discuss the Company's outlook.

Thanks, John. Hello, everyone, and thanks for joining us today.

Before I discuss our outlook, there were some key operational accomplishments in 2013 that we believe position us well for 2014 and beyond.

That includes: successfully ramping production at our new 70,000-ton TAD tissue machine in Shelby, North Carolina; and upgrading our Las Vegas TAD tissue machine to make TAD bath tissue for the first time; launching our new TAD bathroom tissue product line and shipping it to over 30 customers as of the end of 2013. Consumer acceptance of our TAD products is trending positively, as seen by increasing retail sales rates and has resulted in expansion of our tissue customer base.

We realized $17 million in cost reductions in 2013. We have identified, and in some cases implemented, initiatives worth an additional $20 million to $32 million that we expect to realize in 2014 and beyond, which includes: shutting down the Thomaston facility and redeploying the converting lines to more strategic locations; ramping up the Clearwater fiber chipping facility; and extending the time between major maintenance shutdowns at our Lewiston, Idaho, Pulp and Paperboard facility.

Our Pulp and Paperboard operation delivered its strongest quarterly EBITDA margin in Company history. And we accomplished all of this with the safety performance that is the best in the Company's history.

Specifically, we bettered 2012's record safety levels by nearly 25%, with an incident rate significantly below comparable industry performance.

It is important to note that our success is not possible without the hard work and dedication of our employees. That is why we started 2013 with a launch of a company-wide strategic plan called DRIVE to energize employees to improve safety, customer relationships, sustainability, efficiency, and profitability.

The early outcomes have been positive, as employees have embraced the plan with the collective goal of making the Company the best that it can be.

As I mentioned, we are implementing projects that are expected to result in significant annual cost savings. As we move into 2014, we are maintaining our efforts of improving our financial position by focusing the organization on achieving our financial model with a cross-cycle consolidated 15% EBITDA margin.

With the Paperboard division operating at record margins, the clear opportunity and focus in 2014 will be expanding margins in the Consumer Products division.

Turning to our view of the market environment for each of our business segments, and starting with the Consumer Products business. For 2013, US retail tissue cases shipped, as reported by IRI on multi-outlook retail sales, were up 4.3% versus 2012.

Private label was up 8.7%, while national brands increased 2.8% and Clearwater Paper was up 4.8%. Private label tissue market share grew 120 basis points to 27.5% in 2013 with increased production of TAD bathroom tissue by four private label suppliers, including us. And we maintained our share of the growing US retail tissue market.

Looking into 2014, we expect the US tissue market to grow at least 2%, consistent with the long-term trends. We believe private label will continue to gain share given the increased production of TAD bath tissue.

The rate of growth in private label share will depend on the competitive dynamics and continued retailer and consumer acceptance of the new TAD products.

Turning to the paperboard market, as we begin 2014, the market outlook remains positive. We have already begun to see a pickup in orders after the holiday season, which has resulted in historically-high backlogs for this time of the year.

While it is early, our indicators are very positive and pricing has remained stable. In fact, we have announced a $50 price increase across all product segments effective early March.

The demand for SBS board has remained robust despite the new coated ivory board capacity coming online in China. The effect of that capacity continues to be most evident overseas, with limited acceptance and impact in the US as of now.

Now to our outlook. For the full-year 2014, as detailed on page 14 of our supplemental earnings presentation, we are currently expecting tissue and paperboard shipment volumes to increase.

We expect our Consumer Products average sales price per ton to continue to rise with increased TAD bath tissue mix, slightly offset by mix changes within in conventional tissue, while paperboard prices are expected to trend up, given our recent price increase announced earlier this week.

On the cost side, we are expecting lower external pulp costs, as capacity continues to come online, and higher energy costs related to additional Shelby production and natural gas price increases associated with the very cold temperatures experienced in the Midwest and East.

Finally, SG&A should be slightly higher. And maintenance and repair should decline $20 million due to the absence of scheduled major maintenance in 2014.

Looking specifically at the first quarter for our Consumer Products business, we're expecting a 1% to 3% increase in shipment tons compared to Q4 due to seasonally higher retail announced non-retail volumes.

We expect price mix to be flat to up 1% versus the fourth quarter due to an increasing mix of TAD tissue. However, high levels of competitive activity have continued into 2014, as a new TAD capacity is absorbed into the market place. We will continue to monitor this closely as we progress through the year.

On the cost side of the equation for Consumer Products in Q1, we expect increasing pulp, energy and maintenance costs to be partially offset by cost-savings programs. We expect SG&A expenses to increase up to $1 million on profit-related accruals.

Regarding our first quarter outlook for the Pulp and Paperboard segment, we expect paperboard shipment volumes to be stable and price mix to be flat to up 1%. However, Pulp and Paperboard net sales could be down slightly, as we do not expect the $3 million for external pulp sales we had in Q4 to recur in the first quarter.

With the exception of slight increases in fiber and energy costs, we expect Pulp and Paperboard input costs to be stable versus the fourth quarter.

Looking at the consolidated business for Q1 versus fourth quarter, we expect net sales to be flat to up 2%, due primarily to higher tissue volumes along with increased price mix for both segments. We are expecting our consolidated operating margin to be 8% plus or minus 1 point.

In summary, while we started the year with some additional costs associated with the launch of our new TAD bathroom tissue product, we ended the year on a high note with a near-record quarterly adjusted EBITDA. We are progressing towards our adjusted EBITDA targeted of $300 million based on 2011 pricing and cost-input structure.

As we have illustrated on slides 16 and 17 of our earnings presentation, the 2013 adjusted EBITDA of $200 million was impacted by $40 million of pricing and cost input headwinds versus 2011 and $16 million in 2013 TAD transition costs.

In addition, we expect to get the full TAD EBITDA run rate of $12 million per quarter in Q3 2014, and to realize an additional $5 million to $8 million per quarter in cost savings initiatives that are in varying stages of implantation.

We believe these expected contributions to adjusted EBITDA, together with a renewed focus on margin improvement for the Consumer Products division, will enable us to achieve our stated objective quarterly run rate by the third quarter of 2014.

Finally, we will be presenting at the Bank of America's Mid Cap Conference in Boston on March 18, and the Goldman Sachs Paper, Forest Products and Packaging Conference in Montréal on March 19, and hope to see you there. Thank you for listening to our prepared remarks.

We will now take questions.

(Operator Instructions)

Steve Chercover, Davidson.

John ran through a bunch of numbers, in terms of the impact on Q1. I missed a few of them, so prior to SG&A, which I think was $13 million and interest expense of $11 million, can you run through the previous numbers, please, John?

You're talking about the adjustments that we are making or the --?

No, I think it was the amortization and a few other just guidance related things prior to the tax rate, interest expense and SG&A. If you go back through your script to the first couple of numbers that you indicated for Q1?

Give me a second here. We said we expected adjusted SG&A to be $30 million to $32 million. We expected corporate spending to be $11 million to $13 million. Did I catch you up now?

Yes, those were the ones I missed.

Okay.

Thanks, I will hop back in the queue.

(Operator Instructions)

Paul Quinn, RBC.

Congratulations on the good results. Your Paperboard division has been running at a very high levels of profitability and yet you've got another price hike in front of it. Is this a new level of sustainability for this business or do you sleep well at night worrying about this ivory board coming in North America?

Paul, I think the recent price increase that we announced is more indicative of the strong demand we're seeing in the marketplace right now and the strong backlogs. SBS board has remained robust despite the new capacity in China. We haven't seen much of an impact of that board here in the US, but like we said, we are just going to keep our eye on it and watch the trends as we progress to 2014.

Can you give us a little bit more detail on how big are the backlogs? What are they normally at? Do you see that transition away from foam to paper cup as being one of these trends that are favorable on demand?

I would say our backlogs are running anywhere from four to five weeks right now. I think some of that transition to cup is probably having an impact in the market, yes.

Just switching over to the tissue side. I am just wondering, in terms of orders, or winning additional private label business, are those contracts coming up on a regular basis? Or is there one specific quarter that has more of those that would be reset than others? If you could give me some flavor for just how those contract negotiations are done?

Paul, I see on the retail side, those contracts are not necessarily time bound with regard to specific day the price has to be negotiated in terms and conditions. Tends to be a little bit more free form than that. There is not any particular quarter where you're going to see a bunch of contracts renewing all at once.

It takes time to work through negotiations. That is also hard to predict depending on the extent of what they want to do from a category perspective. I think it is just something you will have to listen to our calls and we'll try to give some insight into where we are in some of those processes.

Okay. Last question I had on capital allocation. I think a number of your followers and investors are looking for some kind of dividend. Can you walk through the decision on reaffirming $100 million share buyback versus initiating a dividend?

Paul, this is John. Welcome. Yes, it's a discussion we obviously have with the Board. The way we and the Board looked at where the business is, not completely through the full ramp of the TAD product line, that for this year a little bit more prudent way to return cash to shareholders is the stock buyback. That doesn't preclude where we might end up when we think about 2015, where we still have that commitment to return 50% of discretionary free cash flow, we could end up using a dividend or some of both in 2015.

Great. Thanks very much. That is all I had. Best of luck.

James Armstrong, Vertical Research.

The first question is, looking at the retail tissue sub segment, could you update us on how TAD pricing versus conventional is going? Is your benefit in that segment more of a mix shift or are you actually seeing pricing in that segment?

With regards to TAD, it is definitely at a higher price per ton than conventional. We have not actually stated specifically how much higher. We are seeing that expectation come to fruition as we are placing TAD out in the market place with regard to the bath tissue. I think what you are seeing really sequentially from Q3 to Q4 on the retail pricing per ton was really, of course, the benefit of increasing mix to our new TAD products offset by some of the competitive activity I made mention of as well as some mix in conventional tissue products.

Okay. That helps. Switching gears to the bleach board segment, the Paperboard. That did amazingly well. However, the price increase announced in the market, have you announced a similar price increase of $50 a ton? If you were to get a price increase, how would that flow through your quarters?

We have announced a $50 price increase across all of our Paperboard grades effective early March. I don't think we have given any insight into how it would flow, but I could say you wouldn't obviously see the impact in Q1. Definitely not a full impact, or potentially not a full impact, even as early as Q2. But by the back half of the year, we should see it flow through pretty fully.

Thank you. Lastly, the tax rate year-over-year, I know there were a lot of moving parts, especially in the third and fourth quarter, but the tax rate seems a lot higher. Is there anything special going on there that is increasing the rate to 38%?

You mean as we look into 2014?

As we look into 2014, yes.

I think we always kind of been around the 36% to 38%. I can't think of anything necessarily specific that I would call out.

Okay, that's fair. Thank you.

Thank you. I am showing no further questions at this time. I would like to hand the conference over to Ms. Linda Massman for any closing remarks.

Great. Thank you. In summary, we believe our strong fourth-quarter performance reflects the strength of the Company's team to succeed in 2013 despite the high level of competition in the market place. The team here at Clearwater Paper is looking forward to continued success in 2014. I really appreciate you all joining us for the quarter. Thanks

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect. Have a wonderful day.