Clearwater Paper Corp (CLW) 2014 Q2 法說會逐字稿

Welcome to Clearwater Paper Corporation's second quarter 2014 earnings conference call. As a reminder, this call is being recorded today, July 23, 2014. I would now like to turn the conference over to Ms. Robin Yim, Vice President Investor Relations of Clearwater Paper. Please go ahead.

Thank you, [Saied]. Good afternoon and thank you for joining Clearwater Paper's second quarter 2014 earnings conference call. Joining me on the call today are Linda Massman, President and CEO, and John Hertz, Chief Financial Officer.

Financial results for the second quarter were released shortly after today's market closed. Posted on the Investor Relations page of our website at clearwaterpaper.com you will find both the earnings press release and the presentation of supplemental information including an updated outlook slide providing the Company's current expectations and estimates as to certain costs, pricing, shipment, production and other factors for the third quarter of 2014. 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 material 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 and Form 10-Q for the quarter ended March 31, 2014. Any forward-looking statements are made only as of this date and the Company assumes no obligation to update any forward-looking statement.

John Hertz will begin today's call with a review of the financial results for the second quarter, and Linda Massman will provide an overview of the business environment and our outlook for the third quarter of 2014, and then we will open up the call for the question-and-answer session. Now I will turn the call over to John.

Thank you, Robin. Before I get to our second 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 second quarter of 2014 those include $2 million of costs associated with the prior closure of our Long Island, New York and Thomaston, Georgia converting facilities and a $1.4 million one-time tax non cash tax expense associated with a change in the New York State Tax Code. The mark-to-market impact from directors cash settled stock units was de minimis in the second quarter.

Second quarter net sales came in at $499 million up 3% versus the first quarter due to a 3% increase in paperboard pricing resulting from previously announced price increases and a 6% increase in tissue shipment volumes which was slightly above the high end of our updated outlook of up 4% to 5%. The higher tissue volumes more than offset a 2% decline in paperboard shipments caused by the previously announced operational issues at our Arkansas Pulp and Paperboard facility. In the third quarter the paper machine at the Arkansas mill has been running well, and other than the $1 million cost headwind associated with the recovery boiler we do not expect those same issues to impact Q3. Versus Q2 2013 net sales were up 6%, primarily due to higher paperboard prices and volumes.

Second quarter adjusted gross margin of $67 million or 13.4%, which excludes the Thomaston and Long Island shutdown cost was up 40 basis points from the first quarter due primarily to lower energy prices and usage compared to the first quarter as the weather related issues abated towards the end of April as well as lower operating supply costs. That was partially offset by higher external pulp market prices and the Arkansas operational issues. Versus Q2 2013 gross margin was 128 basis points higher due to strong paperboard pricing and volumes, which was partially offset by about 3% higher external pulp prices, higher chemical costs due to increased polyethylene prices, lower conventional paper prices and the operational issues in Arkansas.

Adjusted SG&A expense was $32 million or 6.3% of second quarter net sales, which is up approximately $1 million from Q1 primarily due to higher marketing cost in the Consumer Product division. Compared to Q2 '13 adjusted SG&A is up $4 million due to higher IT spend related to our ERP implementation and higher profit and accruals. Adjusted corporate expense was $13 million of the SG&A spend in the second quarter up 3% over Q1 primarily due to planned spending related to our ERP implementation.

Adjusted operating income was $35 million or 7.1% margin was slightly above the high end of our updated outlook of 6% to 7%, and up from 6.7% in Q1. Price increases in paperboard, lower energy prices and usage, medical and workers' comp benefits and operating supply cost, realization of cost savings from facility closures all contributed to operating margin improvement. Versus Q2 2013 adjusted operating income increased 19%, and operating margin improved by 80 basis points primarily due to operating margin gains in our pulp and paperboard division through higher prices of volumes shipped. Adjusted EBITDA was $57 million or 11.5% of net sales compared to 11.3% in Q1 and 11.2% in Q2 2013. Net interest expense of $11 million was flat with the first quarter.

Turning to taxes. On an adjusted basis our Q2 effective tax rate was 38%, on the high end of our outlook of 36% plus or minus 2%, and versus 36% in the first quarter. Second quarter 2014 GAAP net earnings were $12 million or $0.61 per diluted share, and on an adjusted basis $15 million or $0.74 per diluted share. That is compared to adjusted net earnings of $14 million or $0.60 per diluted share in the first quarter and $12 million or $0.51 per diluted share in the second quarter of 2013.

Non cash expenses in the second quarter of 2014 included $22 million of depreciation and amortization, $1.6 million of non cash pension and retiree medical expense and $2.4 in equity based compensation. Employee head count at the end of second quarter was approximately 3,700 or flat with Q1.

Now I will discuss the segment results. Consumer Products' net sales were $299 million for the second quarter of 2014 up 4.4% versus the first quarter. We shipped 135,000 tons up 5.5% from Q1 and slightly above the high end of our updated outlook of up 3% to 5%. Retail and non retail tons were up 6% and 5% respectively. Case shipments were up 5% to a record 14.1 million cases shipped in Q2. Tissue pricing was down 1%, and in line with our revised outlook.

Contributions to EBITDA resulting from TAD expansion related shipment came in as expected at $9 million Q2, which was up from $7 million in Q1. Consumer Products' adjusted operating income for the second quarter of 2014 was $15 million or 5% of net sales versus $9 million or 3% in the first quarter. The improvement was primarily due to the absence of Q1 weather related costs, lower usage of operating supplies and further realized savings from the closure of our Long Island, New York converting facility. Those savings were partially offset by lower average sales price per ton and persistently high softwood pulp prices. Consumer Products' Q2 adjusted EBITDA margin increased 24% to $30 million or 10% of sales from $24 million or 8.4% in the first quarter, but remained below our CPD model of 17%. Linda will talk about our initiatives to improve operating and EBITDA margins within the Consumer Products division.

Now turning to the Pulp and Paperboard division. Pulp and Paperboard net sales of $200 million for the second quarter of 2014 were up 1% versus the first quarter. Flow-through from the previously announced price increases more than offset a 2% decrease in shipment volumes caused by the operational issues at our Arkansas mill. Average pricing of $1,017 per ton was up 3% in Q2 which was in line with our expectations. Pulp and Paperboard adjusted operating income for the second quarter of 2014 was $34 million or 16.8% of net sales, as compared to $37 million or 18.5% of net sales in the first quarter.

The 170 basis point margin decrease versus Q1 was primarily due to $9 million in cost headwinds offset by a $6 million benefit from the price increases. The makeup of the Q2 cost headwinds, which were outlined in our June 18th press release include lower production volumes and elevated chemical usage related to the Arkansas operational issues as well as $4 million of increased maintenance cost associated with the planned boiler washes at the Arkansas and Idaho mills, which was less than the $7 million cost we estimated at the beginning of the quarter. We expect only $1 million of the $9 million cost headwinds to recur in the third quarter. Pulp and Paperboard Q2 EBITDA margin of 20% remains above the 19% divisional objective inherent in our cross cycle financial model but was down 180 basis points from Q1 as price increases were not able to offset the operational issues in Arkansas and incremental maintenance spending in the quarter.

Now turning to the balance sheet. Capital expenditures were $17 million in the second quarter of 2014 and are expected to total approximately $78 million in 2014. Long-term debt outstanding on June 30, 2014, remain unchanged at $650 million.

Turning to the stock buyback program. In Q2 we repurchased approximately 734,000 shares for $45 million under our $100 million share repurchase authorization at an average price of $61.32 per share. Year-to-date through July 22 we have repurchased 1,302,000 shares for $81 million at an average price of $62.21 per share, and we remain committed to retuning at least 50% of discretionary free cash flow to shareholders via share repurchases for the 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 have contributed $9 million to those plans through Q2 of 2014 and expect to contribute an additional $8 million during the remainder of 2014.

With regard to our liquidity, we ended the first quarter with $81 million unrestricted cash and short-term investment. During the second quarter we generated $60 million of cash from operating activities or 12% of net sales. That is up from 7.3% in Q1.

Our focus is driving shareholder value. That is not just an operating results focus but also strong management of the balance sheet and capital structure. We are proud that since 2011 we have tripled the spread between our return on invested capital and the weighted average cost of that capital from 4 percentage points to 12 percentage points. I will now turn the call over to Linda who will discuss the Company's outlook.

Thanks, John. Hello everyone and thanks for joining us today. On balance we had a solid quarter despite the operational issues in Arkansas. Our adjusted operating profit came in at $35 million or 7.1%, which was slightly above the high end of our revised outlook for Q2 despite coming in at the low end of the range in revenues. This is evidence that the steps we are taking to improve operating efficiencies are beginning to take hold and we are still in the early stages of our planned improvements. Our EBITDA margin improved modestly in Q2 helped by price increases in SBS, a reduction in weather related energy costs and better operating leverage due plant closures and consolidation of converting activities. These improvements were offset by some Q2 operational challenges in our Arkansas mill that are largely behind us. Paperboard market conditions remain tight and pricing firm. Our paperboard backlogs are currently ranging from four to six weeks.

I am very pleased with the progress we have made in our Consumer Products division. TAD sales grew 15% in Q2, and we had our highest level of TAD product sales this quarter. Our tissue volumes were up nearly 6% quarter-over-quarter, which is indicative of our leading supplier position that were solidified during Q1 with key customers. The volume growth is a result of our overall momentum with customers across all sales channels. A 1% decline in pricing versus Q1 was as expected driven by the persistently competitive market environment.

Before I address our view of the market environment and outlook, I would like to mention that we have created a new cross divisional supply chain function to bring increased focus to purchasing and supply management with the goal of driving out costs system wide, achieving greater operational efficiencies and improving customer service performance within our supply chain processes. Joining our team to lead this function is Pat Burke. Pat has more than 25 years of supply chain and manufacturing experience at various Fortune 50 Consumer Products companies, and we are very pleased that he is here. Our supply chain organization is currently engaged in a national optimization study focused on lower freight, warehousing cost and inventory levels. You will be hearing more about the things we are doing in this area going forward.

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. In another move to further streamline and optimize our Consumer Products business we are now organized around a retail tissue group and non retail tissue, which we refer to as specialty products. This group will focus on sales and manufacturing of parent rolls, machine glazed and other speciality paper. The benefits of this change include greater focus and flexibility to manage and run the specialty products business in a way that maximizes returns and better serves our customers. Other optimization opportunities that we are working on include SKU rationalization, pulp optimization, maintenance standardization, leveraging procurement and purchasing power, improved scheduling and asset optimization, uniform engineering standards and reducing waste in converting supplies to name a few.

The overall tissue market remains very competitive with continued verification of increasing tissue capacity coming online in 2015 through 2016. Growth in consumer tissue is tracking as expected at 1% to 2%, and we are confident in our ability to grow with our retail customers even in the midst of the key branded manufacturer focus on promotional activity. We expect to see a continued trend towards expansion and focus on private label products by our customers across all channels. We expect momentum in Q2 TAD shipments to continue into Q3. Additionally, at long last we are beginning to see an improvement in hardwood pulp prices starting in Q3 with the new South American supplies already coming online.

Getting to our third quarter outlook for the Consumer Products business, we are expecting shipment tons to remain flat with Q2. That being said, we expect our TAD shipments to grow as a percentage of our total Consumer Products shipments, therefore we expect price mix to be up 1% from the second quarter resulting from growing TAD volume. On the cost side of the equation, we expect to see lower external hardwood pulp prices from new sources coming online. Chemicals, energy, operating and packaging supply cost, maintenance and SG&A are expected to be stable. In addition, transportation costs are expected to be up in Q3 due to continued tightness and seasonality in the carrier market.

Finally, I am pleased to report that our TAD EBITDA contribution ramp is back on track. In Q2 we hit our target of $9 million, and it looks as though the current momentum with customers coupled with lower pulp prices has us on the path to achieve $11 million to $12 million in Q3. The remaining key risks to this target is the level of promotional activity from brands.

Turning to Pulp and Paperboard. The paperboard market continues to see strong demand across all product segments. The most notable growth continues to be in food service categories particularly in cup and to a lesser extent plate driven by the trend away from plastic and foam for environmental reasons. As we look into Q3 in addition to strong market conditions in SBS we are seeing the typical seasonal ramp up of business. Our Pulp and Paperboard segment is currently running at historically high production levels, and we expect shipment volumes to be higher by 3% to 5%, and pricing to be approximately 1% higher as we implement the remainder of previously announced price increases.

Q3's operating productivity is on the upswing in paperboard. For the most part variable costs per ton are expected to decline and operating leverage is poised to improve as a result of lower maintenance expense compared to Q2 and overall better fixed cost absorption due to higher production volumes. These operating improvements do include incremental chemical and energy costs related to our Arkansas recovery boiler that will remain until March of 2015. And like Consumer Products Pulp and Paperboard will also be subject to higher transportation costs due to continued tight market conditions.

Looking at the consolidated business for Q3 versus Q2, we expect net sales to be up 2% to 4% due to higher volumes in paperboard and higher price mix for both divisions, and consolidated operating margin to be in the range of 9% to 10.5%. In addition, we expect adjusted SG&A to be flat, adjusted corporate spending to be $12 million to $13 million, net interest expense to be about $11 million, and the outlook for our adjusted tax rate for the third quarter is 36% plus or minus a couple of percent. All these variables combined, are expected to result in a Q3 EBITDA range of $68 million to $76 million. The key variables that will determine where we land in that range are pulp prices, brand promotional activities, runabilty of our paperboard machines and our tissue converting productivity. If we consider the changes to input costs and average selling prices between 2011 and quarter two that just ended, that adjusted EBITDA range would be $75 million to $83 million in Q3. Despite the headwinds in conventional tissue pricing, the proliferation of promotions from the brands and high pulp prices, our $75 million adjusted EBITDA target is still within our expected Q3 EBITDA range.

In conclusion, we are positioned to leverage a strong paperboard market and solid momentum in our Consumer Products business while continuing to improve operational efficiency across the Company. We are already seeing improvements in operating efficiencies, but we are still in the very early stages. Our success is all about the hard work of the loyal and committed employees of Clearwater Paper. Thank you for listening to our prepared remarks, and we will now take your questions.

Thank you. (Operator Instructions). And our first question comes Paul Quinn from RBC Capital Market. Your line is open. Please go ahead.

Thanks very much, and nice results. Just a question on Shelby, where are you in terms of the ramp up of that facility and when do you expect to have it fully ramped up?

I would say, Paul, the paper machine is performing to full expectations. The biggest factor is what mix we run on the machine. Converting is performing quite well. We still have maybe some opportunities on that side of the equation, but for the most part it is up and running where we would expect.

So when do you start to look at further capacity expansions at Shelby or other facilities? Is that in the 2014 or is that a 2015 look, or is that something you are currently nervous around given the other capacity additions coming in the market?

Paul, we have said before that through 2015 we are more focused on internal efficiencies and growing margin and cash flow and at the top of our list would not be a significant capital expansion. So I will stick with that story line.

Okay. And then just on -- you mentioned hardwood pulp pricing expected to come down in Q3. We have seen some pretty strong shipment data today on global stats. What kind of pricing drop are you anticipating?

It is going to be somewhat modest, Paul, but we are starting to some of that already. And the same thing on softwood we are starting to see some of the spot market have a little bit more favorable pricing than some of the contract pricing we have seen. So across the board I guess we would probably expect to see some modest improvement in Q3.

Okay. And that is backed into our EBITDA guidance of $68 million to $76 million.

It is.

Yes.

Okay. And then just lastly on paperboard, where are we at or how do you guys manage on the recent price increase? And it looks like your guiding price is up by 1% for Q3. Does that fully capture the price increase or is it a portion of it?

That would round out the balance of the price increase that was announced in Q1. And the reason for the delay is just through contractual arrangements with certain customers.

Okay. And you guys haven't noticed any additional imports coming in on the paperboard side in North American as of yet?

I wouldn't say in any kind of material way. The market is pretty stable, very strong, no concerns from that regard today.

Okay. That is all I had. Great. Thanks very much.

Thanks, Paul.

Thank you. Our next question comes from James Armstrong from Vertical Research. Your line is open. Please go ahead.

Hi, thanks for taking my question, and congrats on a good quarter. My first question is on the Arkansas mill issue, do you still expect that to be resolved early next year, and is there an estimate to the additional capital needed to completely fix the issue?

James, so there is a planned major maintenance in the first quarter where that mill will come down, and so we will get in and look at the recovery boiler at that time. In terms of -- we haven't put anything out there in terms of what we think the total cost of that is, and I think we will probably learn more as we get closer to that and would update you maybe at the end of Q4.

Okay, that helps. And then switching to Consumer Products, as you continue to place TAD tons, how is the market acceptance of the private label product? Another way of asking this is, if you had more tons to ship today, do you think the market would accept the additional tonnage?

The market is really strong with regard to the TAD products. I would say there has been very good retailer and consumer acceptance of the product. I think the biggest factor with regard to how much this is going to grow in the next couple of quarters is all around the brand promotions, how deep the promotions go, how frequent they are. But I would say we are feeling pretty good about how the TAD shipments are shaping up.

Okay. That is helpful. And then switching gears one more time, the Pulp and Paperboard segment seems to be running ahead of your boiler plate capacity. Do you think that is sustainable over the next few quarters? Just the volumes coming out of there were very, very impressive.

They are very impressive, and we do expect that to continue and hopefully even get better from there.

Okay. Thank you very much.

Thank you. (Operator Instructions). I am showing no further questions. I would like to hand the conference back over to Ms. Massman for closing or additional remarks.

Great, thank you. Just to close out I would just say we are very excited about the prospects of our business and the opportunities to increase operating efficiency across the Company. We really appreciate everybody joining us today for the call, and definitely thank you for your continued interest in Clearwater Paper. And then on one final note, we will be presenting at the RBC Global Industrial Conference on September 9th in Las Vegas and hope to see you all there. Thank you.

Ladies and gentlemen, that does conclude the Clearwater Paper second quarter 2014 earnings conference call. We do appreciate your participation.