Clearwater Paper Corp (CLW) 2015 Q2 法說會逐字稿

Welcome to Clearwater Paper Corporation's second-quarter 2015 earnings conference call. As a reminder, this call is being recorded today, July 30, 2015. I would now like to turn the conference over to Ms. Robin Kim, Vice President, Investor Relations of Clearwater Paper. Please go ahead.

Thank you, Ben. Good afternoon, and thank you for joining Clearwater Paper's second-quarter 2015 earnings conference call. Joining me on the call today are Linda Massman, President and Chief Executive Officer, and John Hertz, Chief Financial Officer.

Financial results for the second quarter were released shortly after today's market close. You will find the presentation of supplemental information, including an updated outlook slide providing the Company's current expectations and estimates as to certain costs, pricing, shipments, production and other factors for the third quarter of 2015, posted on the Investor Relations page 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, 2014, and Form 10-Q for the quarter ended March 31, 2015; as well as our earnings release and supplemental information. Any forward-looking statements are made only as of this date and the Company assumes no obligation to update any forward-looking statements.

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 2015. And then we'll 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 into our second-quarter 2015 results, I'd like to preface my comments by stating that throughout the rest of my remarks I will be distinguishing between GAAP and non-GAAP, or adjusted results. The adjusted results exclude certain charges and benefits that we believe are not indicative of our core operating performance. Reconciliation from GAAP to adjusted results is provided in the supplemental slides posted on our website.

For the second quarter of 2015 those items netted to a $2.1 million pretax benefit and is comprised of a $1.5 million benefit related to the mark-to-market adjustments to our outstanding directors' common stock units; a $1.3 million net gain due to the release of restricted cash in escrow, related to the sale of the specialty mills; and those items are offset by $700,000 in costs associated with the closed Long Island, New York, facility.

So with that, let's get to our results. Q2 was a solid quarter, with stronger-than-expected seasonal demand for paperboard and good operational execution in our consumer product division. As a result, we ended the quarter above the high end of our outlook for revenues, shipments, shipment volumes, operating income and EBITDA. Improving operational efficiencies on the tissue side of the business continue to contribute to better financial results.

With that, our second-quarter net sales came in at $445 million. That is up 2.4% versus the first quarter, and above the high end of our outlook of flat to up 2% that we provided in our Q1 earnings call. As I mentioned, we saw stronger-than-expected paperboard shipments, and we also saw higher parent roll shipments. That volume upside was partially offset by a less-favorable price/mix in both paperboard and tissue products.

Versus Q2 2014, net sales were down 10.9%, due primarily to the December 2014 sale of the specialty mills. Second-quarter adjusted gross profit of $61 million, or a 13.7% margin, improved by 300 basis points from the first quarter because of lower major maintenance costs, lower natural gas prices and usage due to warmer weather, seasonally lower wood fiber and packaging supply costs, and continued improvements in supply-chain optimization and operating efficiencies.

Adjusted SG&A expense was $31 million or 7% of second-quarter net sales, which is up approximately $1 million from Q1 but flat as a percent of sales. Adjusted corporate expense was $14 million of the SG&A spend in the second quarter, and consistent with Q1. Adjusted operating income of $30 million or a 6.8% margin came in above the high end of our outlook of 6.1%, as we improved operating leverage, especially in consumer products, through greater operating efficiencies, and both businesses benefited from lower input costs.

Adjusted EBITDA margin was $51 million or 11.4% of sales, and well above the EBITDA outlook range of $42 million to $48 million. That compares to $38 million or 8.7% in Q1, which included $15 million of major maintenance costs for our Lewiston, Idaho, mill versus the $7 million in costs related to the Q2 major maintenance in Arkansas. Second-quarter 2014 adjusted EBITDA margin was 11.5%. That did not include any major maintenance costs. Net interest expense of $8 million was consistent with Q1.

Turning to taxes, on an adjusted basis, our Q2 effective tax rate was 36.2% versus 24.3% in the first quarter. Recall that Q1 included a $1 million release of reserves for uncertain tax positions. We expect the full year 2015 tax rate to be 36%, plus or minus 2 percentage points.

Second-quarter 2015 GAAP net earnings were $60 million or $0.81 per diluted share, and on an adjusted basis, $14 million or $0.74 per diluted share. That compares to adjusted net earnings of $7 million or $0.36 per diluted share in the first quarter, and $15 million and $0.74 in the second quarter of 2014. Non-cash expenses in the second quarter of 2015 included $21 million of depreciation and amortization, $1 million of total equity-based compensation, and $2 million of net, non-cash pension and retiree medical expense. Employee headcount at the end of the second quarter was approximately 3,300.

Now I will discuss the segment results, starting with consumer products. Consumer products net sales were $239 million for the second quarter of 2015; that's up nearly 2% compared to first quarter, due to a 4% increase in shipment volumes primarily driven by a 17% increase in parent roll shipments. That did negatively impact price/mix in the second quarter, as total average tissue pricing decreased by 2.5% compared to Q1.

The shipment volume increase was well above our outlook of flat to up 2%. Retail case volume in the quarter improved modestly by 1%, as merger-related distractions began to normalize at a top-five customer, and we made initial shipments to a new grocery customer and to incremental distribution centers of an existing mass retailer. Consumer products adjusted operating income for the second quarter of 2015 was $16 million or 6.9% of net sales, versus $14 million or 5.8% in the first quarter.

The improvement was primarily due to a $2 million reduction in operating labor costs and benefits, as operational efficiency gains continued to take hold in the second quarter. Additionally, pulp costs were lower due to a reduction in the use of external pulp, with our Lewiston pulp mill back in full production after the major maintenance down taken in the first quarter. Packaging costs were lower due to a sales mix shift from facial, towards bath and towels, and we experienced lower natural gas prices.

PPD adjusted EBITDA of $30 million was up from $27 million from Q1. The adjusted EBITDA margin improved 120 basis points from 11.3% in Q1, to 12.5% as a result of further operational efficiencies and lower input prices.

Now, turning to the pulp and paperboard division. Net sales of $205 million for the second quarter of 2015 were up 3% versus the first quarter, due primarily to 7% higher shipment volumes. The pulp and paperboard division set a new record in paperboard shipment volumes of 205,000 tons. This came in well above our outlook of flat to up 1% as a result of better-than-expected seasonal demand. We saw most of the increased demand in folding carton, plate and cup stock. Average pricing of $997 per ton was lower by 3.3%, which was below our outlook for stable pricing, primarily due to a product mix shift to a higher percentage of non-extruded products and a quality-related customer rebate, which was limited in customers and grade. That issue has been resolved and we do not anticipate any further economic impact beyond the second quarter.

Pulp and paperboard adjusted operating income for the second quarter of 2015 was $28 million or 13.5% of net sales, as compared to $17 million or 8.6% of net sales in the first quarter. The margin improvement versus Q1 was mainly due to the $7 million decrease in maintenance costs. In addition, another $4 million in lower input costs also contributed to the improvement in operating margin, resulting from improved supply in the wood baskets surrounding our mills in Idaho and Arkansas, which led to lower fiber prices; lower polyethylene prices and reduced chemical usage due to capital improvements at our Arkansas mill's recovery boiler; and lower natural gas prices along with seasonally lower usage. Pulp and paperboard's Q2 adjusted EBITDA margin was 16.8%.

Now turning to the balance sheet. Capital expenditures were $30 million in the second quarter of 2015, of which $12 million was spent on strategic projects. Our expected total CapEx for the year is approximately $155 million, of which $85 million is for strategic projects and $70 million is for maintenance. Long-term debt outstanding on June 30, 2015, remained unchanged at $575 million.

Turning to the stock-buyback program. Through July 29, we have purchased approximately 600,000 shares at an average purchase price of $61.97 in 2015, and we remain committed to returning at least 50% of our 2015 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 maintenance CapEx.

With regard to our liquidity, we ended the second quarter with $71 million of unrestricted cash and short-term investments. During the second quarter we generated $60 million of cash from operating activities, or 13.5% of net sales, which is up from $28 million in Q1 due to stronger earnings, improvements in working capital -- particularly lower inventories -- and improved days payable outstanding, which together shortened the cash-conversion cycle by eight days year to date.

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

Thanks, John. Hello, everyone. Thank you for joining us today. I'm pleased to report a strong second quarter with results that were comfortably above the high end of our outlook. On the consumer side, the business performance continues to improve. During the quarter we added a significant new grocery customer in the East and additional distribution centers for an existing mass customer in the West. Initial shipments for this new business will help to fill some of the volume gap we experienced at a recently merged top-five customer. Equally as important, our efforts to improve the division's cost structure through the divestiture of the specialty mills and focus on operating efficiencies, are continuing to show up in our financial results.

Compared to a year ago, our consumer products division improved operating leverage by 110 basis points to a 7% adjusted operating margin, despite a 20% drop in revenue due to sale of the specialty mills. Adjusted EBITDA margin reached 12.5% in the second quarter, which is the highest level since Q4 2012. On the paperboard side, stronger-than-expected seasonal demand led to a record level of shipment volumes. We saw the typical upswing in cup, plate and gable stock in preparation for the summer months, and the initial ramp up of folding cartons for the holiday season.

And now I'd like to provide an update on our strategic capital investment projects, which are all on track. First, in pulp optimization, we are still in the engineering design and planning phase, and working through environmental permitting requirements. Moving to warehouse automation, our first conversion -- at Shelby, North Carolina -- is progressing on schedule. We completed the engineering and design phase of the equipment and product flow, and equipment has been ordered, and installation is scheduled for the first quarter of 2016. Las Vegas is the second plant that will be converted, and the preliminary engineering and design phase is underway.

With regard to supply-chain efficiencies for the first half of the year, we reduced CPD product transportation by 3.3 million miles or 22% compared to the back half of 2014, and maintained the same level of transportation savings in Q2 that we achieved in Q1. I'm very proud of the Clearwater Paper team for what they have accomplished in the first half of the year. We still have a lot more to do, but we remain engaged, focused on the right priorities, and heavily invested in our collective success.

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 data, the total US tissue market, as measured in cases, was down 5% compared to Q1 2015, which is in line with average seasonal patterns. Total private label decreased by 4%, and Clearwater Paper maintained its market share, while brands declined 6% over the period. Despite the seasonal decrease in tissue sales, we see growth in the tissue market tracking 21% to 2% for the year. According to the ad-tracking service that we use, brand ads and promotions declined approximately 5% quarter over quarter, in line with the typically lower seasonal volume of promotions in the second quarter.

Given the sustained increases in input costs over the last three years, we announced a price increase in the second quarter for all retail tissue products, which will be effective in August. While price increases are challenging, we have been working closely with customers through this change. We're still in the process of implementing the price increase, and we expect an EBITDA impact of $2 million in Q3 and approximately $3 million per quarter at full run rate.

Turning to capacity, according to RISI's latest US tissue monthly data report, operating rates through 2016 could range between 94% to 96%, which we view as a balanced market. At the low end of that range the operating rate includes all 594,000 tons of forecasted new tissue capacity. All but 150,000 tons of that new capacity has been announced and identified. If you exclude the 150,000 tons of unidentified capacity, that would equate to operating rates of 96%.

Turning to pulp and paperboard, the environment continues to be good, but not as robust compared to market conditions we experienced this time last year. Industry backlogs are tracking approximately 19% below the levels a year ago. The $15 price reduction published by RISI in the first quarter will start to impact an increasing portion of our shipments in the third quarter, that adjusts in relation to the RISI index.

The continued strength of the dollar against the euro increases the risk of European imports into the US. So far, we've seen a minimal impact on the SBS segment, but we continue to monitor it closely. The European capacity built specifically for export to North American markets is forecasted to start in 2016, but RISI does not expect this will have a significant impact on global trade until 2017. We review the recently announced closure of 93,000 tons of North American boxboard capacity as marginally positive for SBS in the short term. This additional 93,000 tons is incremental to the shutdown of 350,000 SBS tons announced last quarter.

Now getting to our third-quarter outlook. For the consumer products business we are expecting shipment volumes to be flat to up 2% compared to Q2, as new customer volume ramps up. We expect price/mix to be flat to up 2%, as our announced price increase starts to take effect in August and we ship to a higher percentage of retail cases versus parent rolls. We expect stable input costs per shipped ton for pulp, chemicals, operating and packaging supplies, energy, and maintenance. The only exception is transportation cost, which is expected to increase due to an increase in linehaul rates that we discussed on last quarter's call, which came into effect in Q2, and will fully impact the third quarter.

Turning to the outlook for our pulp and paperboard division, we expect to see shipment volumes and price/mix to remain stable with Q2. Input costs for wood fiber, operating supplies and transportation are expected to remain stable. Chemical costs are expected to be lower, as the capital improvements made during the major maintenance down have improved operating efficiency, particularly at the Arkansas recovery boiler. Energy costs are also expected to be lower, and maintenance costs will be lower because there will be no major maintenance expense for the remainder of the year.

Looking at the consolidated business for Q3 versus Q2, we expect net sales to be flat to up 2%. We expect further improvement to our consolidated adjusted operating margin, which should be in the range of 9% to 10.5%; adjusted SG&A to be flat with Q2; adjusted corporate spending to be approximately $13 million; net interest expense to be about $8 million; and an adjusted tax rate of 36%, plus or minus 2 percentage points. All these variables combined are expected to result in a Q3 EBITDA range of $62 million to $70 million. The key variables we see determining where we perform in that range are pulp and wood fiber prices, brand promotional activities, and any changes in customer and consumer demand.

As we look forward to the balance of the year we continue to expect a full-year adjusted EBITDA to be in the range of $210 million to $225 million dollars, which we stated in our last quarterly earnings call. I would like to wrap up my remarks today with thanks to all of our talented and hard-working employees, who are vital to our ability to deliver strong results. Thank you for listening to the prepared remarks. We'll now take your questions.

(Operator Instructions). Steve Chercover of D. A. Davidson.

So first question is on tissue prices. One of the big boys indicated that their retail tissue prices were down 4% year-over-year. So if you stripped out the elimination of the specialty mills that you sold, would your mill mats have been down approximately that same magnitude?

Steve, I think our retail prices have been fairly stable. I think what you see more of is the mix going on in our numbers this quarter, with the increased parent roll shipments. And then of course we have the mix of product from conventional TAD. And as we stated before, we have seen pricing pressures in conventional tissue, but nothing new this quarter from last quarter.

But I thought you said your tissue prices were down 2.5% versus Q1?

Yes, and that would be because of the mix of more parent rolls versus retail cases. An increase in parent rolls versus the mix.

Okay.

That's on a per-ton basis.

And did you say you're going for 8% in Q3?

8%?

8%?

Price hike?

No.

No. We gave an EBITDA dollar impact that we've -- full run-rate of $3 million and in the second quarter, too.

Yes, no, I got that, but what was the magnitude, then, of the price hike on a per-ton basis?

Yes, we didn't give that.

Okay. Then switching gears, there is a new entrant, evidently, from what's traditionally been a newsprint company, that are targeting private-label, high-end tissue. How much of a threat is that? And is that the thin edge of the wedge for those guys?

You know, Steve, I'd say first of all, overall -- we talked about capacity. And if you look at all the announcements that have been out there, including that company that you're referring to, we still are in operating ranges of 94% to 96%, which we said is fairly balanced. I'd say specifically, private-label tissue as you know is a pretty competitive business, and from our experience a lot of our retail customers are looking for suppliers that have breadth geographically as well as product mix and quality. So I think that tends to come from companies that have a little bit more scale than one tissue machine. But nonetheless, it's going to remain a fairly balanced market even with that capacity addition.

Very good; thank you for taking my questions.

(Operator Instructions). James Armstrong of Vertical Research.

My first question is on the paperboard side, and it looked like shipments were higher than your boilerplate capacity, if I'm correct. Did you draw down inventory, or did the mix shift allow you to run a bit faster in that segment?

Yes, we drew down on some of the inventory.

Okay, so that will be hard to repeat those shipment levels on a sustainable basis, okay. And then, going over to tissue, what are you seeing from branded players in the market? You talked a little bit about this, but are you seeing any signs of price competition, or do the branded players really just continue to use promotional activity to maintain their market share?

Yes, I would say it's been pretty stable. We said promotional activity was down a little bit, primarily seasonal is what we would attribute that to. We've seen some product changes and some innovation from the brands, which of course we are looking at and determining how we're going to potentially adjust our quality level to meet those new products. But other than that it's a pretty stable market.

Okay. And then are you -- thank you again for the market-share slide. Are you seeing any noticeable change in the market size? What I'm really trying to figure out is, is the market growing fast enough that private-label is just providing the additional capacity? Or do you actually see private-label taking share, or taking -- reducing branded volumes?

I'd say generally the market we think is growing still 1% to 2% a year. I would say that private-label has grown share historically. We expect it would continue to grow share. But again, it's modest.

Okay, that helps. Thank you very much.

Thank you. (Operator Instructions). And ladies and gentlemen, that does conclude our question-and-answer session. At this time I will turn the call over to Ms. Massman for any additional or closing or additional remarks.

Great, thank you. We are proud of the Clearwater Paper team, who delivered a strong second-quarter by providing solid operational execution, and we look forward to further increasing operating efficiency across the Company. Thank you for joining us today, and for your continued interest in Clearwater Paper. On a final note, we will be at the RBC, KeyBanc and UBS conferences in September and we hope to see you there. Thanks.

Ladies and gentlemen, that does conclude the Clearwater Paper second-quarter 2015 earnings conference call. We do appreciate your participation.