Clearwater Paper Corp (CLW) 2014 Q1 法說會逐字稿

Welcome to Clearwater Paper Corporation's First Quarter 2014 Earnings Conference Call. As a reminder, this call is being recorded today, April 23, 2014. I would now like to turn the conference over to Mr. John Hertz, Chief Financial Officer of Clearwater Paper. Please go ahead, sir.

Thank you, Sayeed. Good afternoon and welcome to Clearwater Paper's First Quarter 2014 Conference Call. Before we get started I wanted to take the opportunity to introduce Robin Yim, our new Vice President of Investor Relations. Robin has over 25 years of experience in investor relations, treasury, and banking. We are fortunate to have Robin on the Clearwater Paper team and she looks forward to meeting you.

I also want to thank Sean Butson for his four years of investor relations support to Clearwater Paper and wish him well in his future endeavors.

With that I'll now turn the call over to Robin.

Thank you, John, and good afternoon everyone. I'm very happy to be here, and while I've had the opportunity to meet some of you, I'm definitely looking forward to meeting everyone.

So with that, let's get started. Our press release this afternoon includes details regarding our first quarter results, and you will find a presentation of supplemental information posted on the investor relations area of our website at clearwaterpaper.com.

Additionally, we will be providing certain non-GAAP information in this afternoon's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release or in the supplemental materials provided on our website.

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, and actual results may differ materially from the forward-looking statements.

Factors that could cause actual results to differ materially include those 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, 2013. Any forward-looking statements are made only as of this date, and the Company assumes no obligation to update any forward-looking statement.

In addition to John Hertz, Linda Massman, our President and CEO, is also on the call today. John will begin with a review of the financial results for the first quarter and Linda will provide an overview of the business environment and our outlook for the second quarter of 2014, and then we'll open up the call for the question and answer session.

Now I'll turn the call over to John.

Thank you, Robin. Before I get to our first quarter 2014 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 first quarter of 2014 those include $9 million of costs associated with the closure of our Long Island, New York and Thomaston, Georgia converting facilities, and $3 million of expense related to the mark-to-market adjustments to our outstanding directors common stock units.

First quarter net sales came in at $485 million. That's up 3% versus the fourth quarter. That is above our updated outlook that we provided on March 18th due primarily to a stronger than expected 6% increase in paperboard shipment volumes. Excluding pulp sales, consolidate price mix improved slightly while consolidated volumes grew 4%. Versus Q1 2013 net sales were up 5% on higher tissue prices and higher paperboard prices and volumes.

First quarter adjusted gross profit of $63 million or a 13% margin which excludes the Thomaston and Long Island shut-down costs was down 230 basis points from the fourth quarter due primarily to $9 million in higher energy and transportation costs associated with the extremely cold winter in the Midwest and East as well as $3 million of increased external pulp and wood fiber costs.

Adjusted SG&A expense which excludes the mark-to-market expenses was $30 million or 6.3% of first quarter net sales, which is up approximately $1 million from Q4 '13 due to higher compensation costs related to 2014 profit-dependent accruals. Adjusted corporate expenses was $13 million of the SG&A spend in the first quarter and at the high end of our outlook and also due to the higher compensation costs as discussed.

Adjusted operating income of $33 million or a 6% margin was slightly below our updated outlook of 7% as energy and packaging costs were up more than what we expected in March and more than offset the paperboard revenue upside.

Adjusted EBITDA was $55 million. Adjusted EBITDA margin was 11.3% of net sales compared to 13.9% in Q4. The 260 basis point decline was primarily due to the previously mentioned weather-related costs in incremental pulp and wood fiber costs. First quarter 2013 adjusted EBITDA margin was 8.3%.

Net interest expense of $11 million was flat with the fourth quarter.

Turning to taxes. On an adjusted basis our Q1 effective tax rate was 36.2% versus 26.6% in the fourth quarter.

First quarter 2014 GAAP net earnings were $6 million or $0.29 per diluted share and on an adjusted basis $14 million or $0.66 per diluted share. That is compared to adjusted net earnings of $23 million or $1.09 per diluted share in the fourth quarter and $2.4 million and $0.11 respectively in the first quarter of 2013.

Non-cash expenses in the first quarter of 2014 included $22 million of depreciation and amortization, $5 million of total equity-based compensation, $4 million of impairment charges related to the Long Island closure, and $3 million of non-cash pension and retiree medical expense. Employee headcount at the end of the first quarter was approximately 3,700 versus 3,860 at the end of 2013.

Now we'll discuss the segment results. Consumer products net sales were $287 million for the first quarter of 2014, up 2% compared to the fourth quarter and above our updated outlook of flat to up 1% primarily due to a 2% increase in tissue pricing to $2,239 per ton resulting from a higher than expected pricing mix.

We shipped 128,000 tons, down less than 1% versus the fourth quarter which is slightly below our updated outlook of flat due to non-retail tons declining 2% as some product availability was limited as a result of a planned outage at our Neenah, Wisconsin mill as well as weather-related transportation issues. Retail tons of 71,000 were up slightly from Q4 while converted product case sale volumes rose 1% to 13.4 million.

Contributions to EBITDA resulting from TAD expansion-related shipments were approximately $7 million in Q1, which was flat with Q4. We had expected TAD EBITDA contributions to be $9 million this quarter, but the weather-related issues combined with a competitive market did cause volumes and product margins to come in below our expectations.

Consumer products adjusted operating income for the first quarter of 2014 was $9 million or 3% of net sales versus $17 million or 6.2% in the fourth quarter. The decline was primarily due to the weather-related costs, higher pulp prices, and packaging costs.

Consumer products Q4 adjusted EBITDA margin of $24 million or 8.4% declined from $34 million or 11.9% in the fourth quarter which even after considering the cold weather impact is well below the 17% divisional objective inherent in our cross-cycle financial model. Linda will discuss some of the steps we are taking to improve our margin in line with this objective.

Now turning to pulp and paperboard division. Pulp and paperboard net sales of $198 million for the first quarter of 2014 were up 6% versus the fourth quarter due to higher volumes and improved product mix. Paperboard shipment volumes rose 6% to 201,000 tons and were well above our updated outlook of up 1% as a result of a strong market and certain customers pulling in shipments ahead of a pending price increase. Average pricing of $988 per ton was up 1% which was in line with our expectations.

Pulp and paperboard operating income for the first quarter of 2014 was $37 million or 18.5% of net sales as compared to $37 million or 20% of net sales in the fourth quarter. The margin decrease versus Q4 was primarily due to seasonally higher wood pricing and increased weather-related costs.

There was no major maintenance in the quarter, and our next major planned outage for both Idaho and Arkansas is scheduled for the first half of 2015. While there won't be a major outage in 2014, we do have a planned water wash at each of those mills in the second quarter. Four boilers will be down for the water wash and we will concentrate some routine maintenance on those boilers into that timeframe. Therefore, Q2 maintenance and repair costs will increase approximately $7 million versus the first quarter, and we would expect the maintenance spend to then decline by $6 million in the third quarter.

Pulp and paperboard Q4 EBITDA margin of 22% was well above the 19% divisional objective inherent in our cross-cycle financial model but down 130 basis points from the record high in Q4.

Now turning to the balance sheet. Capital expenditures were $15 million in the first quarter of 2014 and are expected to total approximately $78 million in 2014. Long-term debt outstanding on March 31, 2014, remained unchanged at $650 million.

Turning to the stock buyback program. Through April 22nd, we have repurchased [681,000] (corrected by Company after the call) shares for $43 million under our $100 million share repurchase authorization at an average price of $63.19 per share, and we remain committed to returning at least 50% of discretionary free cash flow to shareholders via share repurchase this year.

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

As of the most recent measurement date of December 31, 2013, our Company-sponsored pension plans were underfunded by approximately $7 million. We contributed $4 million to those plans in Q1 and expect to contribute an additional $15 million during the remainder of 2014.

With regard to our liquidity, we ended the first quarter with $83 million of unrestricted cash and short-term investments. During the first quarter we generated $35 million of cash from operating activities or 7.3% of net sales.

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. Our first quarter adjusted operating profit and margin of $33 million or 6.7% was roughly in line with the updated outlook that we provided in March.

Upside in terms of volumes and pricing was fully offset by incremental costs associated with the bad weather experienced during the quarter. As we began the second quarter, so far we have seen natural gas prices decline to the mid $4.00 range but we have not seen reductions in transportation costs due to the tight carrier environment which we expect will continue through the balance of the second quarter.

There were a number of positive sales developments in the quarter. In the consumer products business we completed negotiations with several key customers, and I'm very pleased to tell you that not only have we solidified long-term supplier positions, we are partnering closing with our customers to grow private label sales.

Additionally, we were awarded business at a number of new customers and are seeing incrementally positive momentum at several large customers in non-grocery channels.

On the pulp and paperboard side shipment volumes increased 6.3% quarter over quarter to approximately 201,000 tons, which is near record levels, and the favorable pricing environment continues to hold.

Now I will discuss our view of the market environment and our outlook for each of our business segments starting with the consumer products business. According to IRI worldwide data, the total tissue market as measured in cases was down 0.3% compared to Q4 '13. Total private label declined by 1.3%. Clearwater Paper was down 0.8% while brands grew 0.1% over this period.

This trend is in line with an ad tracking database that we subscribe to, and their reports show advertising and promotional activity by the brands are up approximately 65% from the prior year.

Our first quarter results for consumer products were negatively impacted by severe winter weather and continued aggressive competition in the market. Looking forward, with the exception of transportation, we expect the weather-related issues to abate. However, we do see the competitive environment continuing through the remainder of the year.

We expect the brands to continue to promote at similar levels to our recent experience and private label competitors with new incremental capacity to competitively pursue new business opportunities, just like we're doing.

Given the current competitive environment, we're a bit puzzled by the new capacity announcements made in the last several months, but I can assure you we're focused on variables within our control to mitigate the competitive pressures. We're focused on running our business as efficiently as possible with a continued emphasis on EBITDA dollars and margin percentage improvements through further optimization of our manufacturing and distribution network.

We see multiple opportunities to improve efficiency across our business. Particularly related to the CPD business, we are developing strong and lasting customer relationships as a top priority. We're on solid footing with our core customers garnering multi-year contracts as a key supplier and we've made great progress in further penetrating existing end-targeted customers in the non-grocery categories.

On the cost side, we've already taken steps to close high-cost converting facilities in Thomaston and Long Island. We're in the process of installing and implementing phase one of an upgraded ERP system and bringing key focus on efficiently managing our logistics, transportation, and supply chain. We have already embarked on measures to improve operational efficiencies on all levels.

In addition, we have set operating margin objectives for each mill to cumulatively build towards the 17% model EBITDA margin goal for our consumer products business and have established action plans to begin closing the gap. To the extent we're unable to execute on those action plans, we will consider all actions including further network rationalization.

Back in 2009 we set out to do the very same thing with our paperboard business and we are reaping the benefits of those optimization efforts, which coupled with current favorable market conditions, yielded record EBITDA margins in the fourth quarter 2013 and strong performance continuing into 2014.

I'm very proud of our paperboard team and have complete confidence our tissue team will also be successful as they launch their optimization efforts.

Getting to our second quarter outlook for the consumer products business, we are expecting a 3% to 5% increase in shipment tons compared to Q1 due to higher retail and non-retail volumes. We expect price mix to be flat with the first quarter as the impact of an increasing mix of TAD tissue will be offset by price declines in certain conventional shipments.

We have announced and in some cases already implemented price increases on parent rolls which could favorably impact consumer products price mix for the quarter.

On the cost side of the equation, we expect our costs to be up $5 million to $9 million in total. Pulp costs are expected to be higher due to slightly higher prices combined with higher shipment volumes. Chemical, packaging, and transportation are all expected to be up as well due to increased volumes. Transportation rates remain unchanged because we're not seeing any relief in the carrier market which remains tight into the second quarter.

On the positive side, we expect energy costs for this division to decline with the weather-related issues impacting our business. And we expect both maintenance and SG&A expenses to be flat with the first quarter.

Finally I'd like to provide a status update on our TAD EBITDA contribution [land]. In first quarter we have secured TAD business with about 90% of the customers we believe are necessary to achieve the $12 million target and we are actively pursuing the remaining 10%. However, if the promotional activity from the brands as well as historically high pulp costs persist into the third quarter, there is volume and product margin risk to achieving that $12 million target. I would therefore put a range on the third quarter TAD EBITDA contribution of $10 million to $12 million.

Turning to pulp and paperboard, the paperboard market is seeing strong demand across all product segments and we're seeing increased market recognition of the renewable paper products we offer. The growth in food service categories including the recent move away from foam to paper cups is a good example of that trend. As we look into the second quarter we're seeing the typical seasonal ramp up of business activity with backlogs growing.

Last Friday (inaudible) Price Watch report confirmed that SDS price increases of $40 for folding carton and $50 for cup stock went through. To help you understand the financial impact of those price increases, if they had been effective for all of Q1 at the volumes we shipped, pulp and paperboard would have generated approximately $6 million in incremental EBITDA.

We are actively monitoring the China ivory board capacity, but we believe that we're well positioned in our export market mix which is almost entirely to Japan, and we don't believe there's a significant threat in that market from the Chinese ivory board for the foreseeable future. The impact to our domestic business continues to be minimal.

Regarding our second quarter outlook for the pulp and paperboard segment which is running very well and at historically high productivity levels, we expect shipment volumes to be higher by 2% to 4% and pricing to be 1% to 3% higher as we implement the recent price increase.

On the cost side, in total we expect an increase ranging from $2 million to $5 million compared to Q1 as wood fiber will go up slightly in Q2 and chemical and transportation are expected to be up due to higher shipment volumes with the partial offset from improving energy costs. Add to that $7 million of incremental maintenance cost in Q2 that John mentioned and SG&A is expected to remain flat with Q1.

Looking at the consolidated business for Q2 versus Q1, we expect net sales to be up 3% to 5% due to higher volumes and pricing for both divisions and consolidated operating margin to be 7% plus or minus a point. We expected adjusted SG&A to be up $1 million due to our phase one ERP implementation which goes live in May, adjusted corporate spending to be approximately $13 million to $14 million, net interest expense to be about $11 million in Q2.

The outlook for our adjusted tax rate for the second quarter is 36% plus or minus 2%.

In summary, while we're pleased with our top line performance and pulp and paperboard's operating margins in the quarter, the competitive pressures on the consumer products side remain and the unexpected spikes in cost largely due to weather were unfortunate.

All that being said, I'd like to emphasize that there continues to be opportunities for us to simplify our consumer products business from a logistics, transportation, and supply chain perspective, and we're actively pursuing those opportunities. We remain focused on achieving our annual adjusted EBITDA target of $300 million based on 2011 pricing and cost input structure and continue to believe that $75 million is achievable in Q3 this year as upside from paperboard pricing should more than offset any risks of the $12 million TAD EBITDA contribution target.

In conclusion we're poised to take advantage of a great paperboard market and we're all focused on taking the important steps needed across the Company and on the consumer product side in particular to ensure Clearwater Paper performs well strategically and operationally.

Thank you for listening to the prepared remarks. We'll now take your questions.

Thank you. (Operator Instructions.) Our first question comes from James Armstrong from Vertical Research. Your line is open. Please go ahead.

Good day and thanks for taking my question.

Hi, James.

Hi. My first question is on the paperboard side. Those were -- the shipment levels out of the paperboard segment continue to be very high. Do you think that those shipment levels are sustainable, or said another way, do you believe that your -- what is your annual paperboard capacity?

James, this is John. So we're coming off a seasonally low first quarter and going into stronger second and third quarter, so for that reason we do expect volumes to continue to go up. The market is very strong.

From a capacity standpoint, from a production capacity standpoint, I think 210,000 on a quarterly basis.

More like 197.

On a go-forward basis? 197? 197, James.

So you're running slightly above your capacity, so you're pulling inventory out of the system? Would that be the right way to think about it?

Yes.

Okay. And then switching gears, what do you think is -- is it just promotional activity that's causing the private label market share to decline slightly Q1 versus Q4? And do you believe that your retail market penetration will improve as the year progresses?

I think it's probably a lot to do with the promotional activity we're seeing, but keep in mind those market share numbers are going to kind of move around quarter over quarter depending on what's going on.

I think we're generally on track with the overall tissue category growth, and how much we grow is going to be dependent on what happens in the competitive market from the promotional activity.

Okay. And then lastly, the sales volumes were down in the quarter and I assume a good chunk of that was due to weather. How much of this do you expect to get back as we go into Q2 and maybe into Q3?

James, I would say just talking about it from a cost side of the equation, so we had about $9 million between energy and transportation, and as Linda said, from a transportation standpoint we're not necessarily seeing that relief here in the second quarter yet as they continue to kind of have to work through the issues that the cold weather presented.

We are seeing the benefit of a decrease in our energy spending. I think with natural gas down at mid $4.00 range, so we would expect to probably see $4 million to $5 million of benefit related to the -- on the energy side but no benefit on the transportation side.

And then on volumes, do you expect any volume recovery that you might have missed because of the heavy snow in the Northeast in the first quarter?

I think we -- what we have in the outlook in our supplemental material on the consumer product side is about 3% to 5% higher on the shipment volumes. Some of that might be kind of getting back some of that volume from the first quarter but probably not a lot of it.

Okay. That helps. Thank you very much.

Thanks, James.

Thank you. Our next question comes from Steve Chercover from D.A. Davidson. Your line is open. Please go ahead.

Thanks. Good afternoon. I had also two volume related questions. First of all, on paperboard is part of the reason that the volumes are up year over year due to that consignment arrangement that you entered into a year ago?

No, not really. I'd say it's a function of a strong market, but it's also a function of our teams performing very well with regard to paperboard production. And we actually have set some internal records as of late and have the inventory to supply a strong market.

But I would say that kind of an increment that we saw that was even more than we thought when we updated you in March, a lot of that came from situations where it was consigned inventory. So even in the light of tight transportation, that's why they were able to kind of be up 6% versus the 1%.

Okay. But the volume in the first quarter is not sustainable, so where do your inventories stand?

I think we're pretty normal inventory levels and we're actually expected to go a little bit seasonally higher on shipments in Q2, so that could go up about 2% to 3%.

We have made in the last quarter to 6 months pretty significant production efficiency improvements, particularly in Arkansas. And so that's keeping us from being in a tight inventory position on the paperboard side.

Okay. And on tissue, the fact that your volume is down year over year, is that a function of cannibalization of your conventional product?

Well I'd say one, it's weather, it's called a third. Two is the promotional activity by the brands. And then year over year if you go back to last year, we were actually in a position where the brands were pretty much stepping out of promotional activity and the retailers were asking us to step in, and so we kind of have the opposite happening right now. So that's an impact as well.

And we had a piece of business in the dollar segment last year that was a contributor to some of the operational issues that we saw that we walked away from that business versus where we are right now.

Why do you think that the brands have resumed their promotional activity? Are they just tired of [seating] share?

You know, Steve, I can't comment on what the brands are doing, but I can tell you that we've launched a really good private label product that competes well with some of the favored bath and towel product out there.

Are you able to divulge any of the new customers that you've secured over the last few months?

Not willing to divulge that, no.

All right. Well we've still got to try. Okay, I think that was it. Thank you.

Thank you.

Thank you. (Operator Instructions.) Ladies and gentlemen, this does conclude our question and answer session. At this time I would like to turn the call over to Ms. Massman for any closing additional remarks.

Yes. Thank you, Sayeed. While we have many challenges ahead in 2014, we also are very excited about our business prospects and opportunities to increase the level of efficiency in running our business.

Thank you for joining us today and for your continued interest in Clearwater Paper. On a final note, we'll be presenting at the Goldman Sachs Basic Materials Conference on May 20th in New York and we hope to see you there.

Ladies and gentlemen, this does conclude Clearwater Paper First Quarter 2014 Earnings Conference Call. We do appreciate your participation. You may disconnect and have a wonderful day.