Clearwater Paper Corp (CLW) 2015 Q3 法說會逐字稿

Welcome to Clearwater Paper Corporation's third-quarter 2015 earnings conference call. As a reminder, this call is being recorded today, October 29, 2015. 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, Vince. Good afternoon and thank you for joining Clearwater Paper's third-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 third quarter were released shortly after today's market close. You will find a presentation of supplemental information, including an updated outlook slide providing the Company's current outlook as to certain costs, pricing, shipment, production, and other factors for the fourth 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 quarters ended March 31 and June 30, 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 statement.

John Hertz will begin today's call with a review of the financial results for the third quarter, and Linda Massman will provide an overview of the business environment and our outlook for the fourth quarter of 2015. 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 into our third-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. The reconciliation from GAAP to adjusted results is provided in the press release and supplemental slides posted on our website.

For the third quarter of 2015, those items netted to a $2 million pretax expense and are comprised of $2 million in legal expenses and settlement costs, primarily related to a closed converting and distribution facility; $1 million in reorganization-related costs to address the remaining stranded overhead from the sale of our specialty mills; and approximately $1 million in costs associated with the closed Long Island, New York, converting and distribution facility. All of that was partially offset by a $2 million benefit related to the mark-to-market adjustments to our outstanding directors' common stock units.

So with that, let's get to the results. I'll start by saying that I am happy to report that our Q3 consolidated adjusted EBITDA margin of 14.3% is our best consolidated return since Q4 of 2010, and Q3 adjusted EBITDA dollars of $63 million came within the updated adjusted EBITDA outlook range that we provided on September 9. That performance, coupled with our capital allocation strategy over the last three years, enabled us to post $1.28 of adjusted EPS, which equals a Clearwater record last posted in Q3 of 2014.

Now, getting to the specifics, our third-quarter net sales came in at $442 million. That is down 50 basis points versus the second quarter and just under our revised outlook of flat sequential sales. And that is due to the commodity-grade paperboard conditions. Specifically, commodity-grade paperboard pricing and shipment volumes are being adversely impacted by the strong US dollar as imports from Europe have increased and US SPS exports have declined.

On the consumer side of the business, we are pleased with the increased sales volume and percentage mix of retail TAD products in the quarter, driven by new business in mass retail and grocery. Versus Q3 2010, net sales were down 13.5%, due primarily to the December 2014 sale of the specialty mills, as well as a 4.8% decrease in paperboard sales.

Third-quarter adjusted gross profit of $69 million or a 15.6% margin improved by 190 basis points from the second quarter, primarily due to the absence of major maintenance costs on the pulp and paperboard side, along with lower energy usage due to warmer weather, lower workers' comp expense, and lower operating, packaging, and supply costs.

Adjusted SG&A expense was $27 million or 6.1% of third-quarter net sales, which was down just over 12% or approximately $4 million from Q2 as we began to address the $7 million in stranded overhead remaining from the December 2014 sale of the specialty mills and is now in line with our cross-cycle target model of 6% of net sales.

Adjusted corporate expense was $12 million of the SG&A spend in the third quarter, which was lower by approximately $2 million or 12.4% compared to Q2. Adjusted operating income increased by $12 million to $42 million or a 9.5% margin, which is at the midpoint of our updated Q3 outlook range of 9% to 10%.

Adjusted EBITDA margin was $63 million or 14.3% of net sales and within the revised Q3 outlook range of $62 million to $66 million. That compares to $51 million or 11.4% in Q2, which included $7 million of major maintenance costs at the Arkansas pulp and paperboard mills.

Compared to Q3 2014, which included approximately $54 million in revenue and $5 million in adjusted EBITDA contribution from the specialty mills and had $37 per ton higher paperboard pricing, Q3 2015 adjusted EBIT dollars were down $9 million, but adjusted EBITDA margin improved by 20 basis points year over year and demonstrates the improvement in operating leverage and efficiencies made over the last year. Net interest expense of $8 million was consistent with Q2.

Turning to taxes, on an adjusted basis, our Q3 effective tax rate was 28.5% versus 36.2% in the second quarter, as certain provision to tax return true-ups were made in the quarter in conjunction with the filing of federal and state tax returns. Based on some tax planning decisions, we now believe certain state operating loss carryforwards can be realized in current and future periods. Therefore, we released approximately $2 million in valuation allowances. We now expect the full-year 2015 adjusted tax rate to be 33%, plus or minus 1 percentage point.

Third-quarter 2015 GAAP net earnings were $23 million or $1.21 per diluted share, and on an adjusted basis, $24 million or $1.28 per diluted share, which, as I previously stated, equals the record $1.28 adjusted EPS set in Q3 of 2014. As compared to Q2 of 2015, adjusted net earnings were $14 million or $0.74 per diluted share. Noncash expenses in the third quarter of 2015 included $21 million of depreciation and amortization, approximately $1 million of total equity-based compensation, and $2 million of net noncash pension and retiree medical expense.

Employee headcount at the end of the third quarter was approximately 3,300.

Now I will discuss the segment results. Consumer products net sales were $247 million for the third quarter of 2015, up 3% compared to the second quarter due to a 2% increase in total shipment volumes, primarily driven by an 8% increase in retail shipments, which more than offset a 14% drop in parent roll shipments. That richer product mix, combined with the impact of our previously announced tissue price increase, helped to improve total average tissue pricing by 1.3% compared to Q2.

The shipment volume increase came in on the high end of our Q3 outlook of flat to up 2%. Retail case volume in the quarter increased by 2% due to market share gains, especially in the mass retail segment. In Q3, our shipment volumes of ultra-premium products to additional distribution centers of a mass retail customer increased by nearly 25%.

Consumer products' adjusted operating income for the third quarter of 2015 was $17 million or 6.8% of net sales, which was in line with the second quarter at $16 million or 6.9%. The approximate $4 million in improvements to product mix, price, and volume were nearly offset by a nearly $4 million increase in transportation costs, as the incremental business that came online in Q3 ramped faster than we anticipated. In order to fill the new distribution centers with inventory, we incurred higher internal and customer freight costs to support changes in product mix, meet the initial demands of the new business, and support a more geographically diverse customer base overall. That impact was also exacerbated by the implementation of phase 2 of our ERP system, which upgrades our manufacturing, demand planning, scheduling, and invoicing systems.

CPD adjusted EBITDA of $31 million was up 3% from $30 million in Q2. The adjusted EBITDA margin was 12.5% and flat with Q2, as the division maintained the operating efficiencies gained to date despite the growing complexity in the business with the addition of new customers.

Now turning to the pulp and paperboard division, net sales of $195 million for the third quarter of 2015 were down 5% versus the second quarter, due primarily to lower demand in pricing and commodity-grade paperboard, which we discussed previously. As a result, paperboard volumes were down 3% to 199,000 tons from 205,000 tons and in line with our revised Q3 outlook of down 3% to 4%. Average price per ton was lower by nearly 2%, to $979 from $997 per ton, versus our revised outlook of flat to down 1%.

Pulp and paperboard adjusted operating income for the third quarter of 2015 was $38 million or 19.3% of net sales as compared to $28 million or 13.5% of net sales in the second quarter. The margin improvement versus Q2 was mainly due to the absence of major maintenance costs and $5 million in lower input costs. Pulp and paperboard's Q3 adjusted EBITDA margin was 22.7% and back above its cross-cycle target of 19%.

Now turning to the balance sheet, capital expenditures were $33 million in the third quarter of 2015, of which $22 million was spent on strategic projects. We now are on a run rate to spend approximately $135 million in 2015, of which $72 million is for strategic projects and $63 million is for maintenance.

2015 CapEx spending levels are down $20 million from our previous annual outlook due to a combination of market demands and project timing. Particularly, with the new wins in the retail tissue business, we couldn't take the required downtime to complete certain projects, primarily on tissue converting lines. We do, however, expect to complete those projects in 2016 and add the remaining $20 million to next year's CapEx budget.

Long-term debt outstanding on September 30, 2015, remained unchanged at $575 million.

Turning to the stock buyback program, we completed the existing $100 million stock repurchase authorization in October. In Q3 specifically, we repurchased $57 million of Clearwater Paper stock or approximately 1.2 million shares at an average price of $49.23. Year-to-date 2015, we repurchased approximately 1.9 million shares at an average price of $53.13. The total shares repurchased represents approximately 10% of the fully diluted shares outstanding at the end of 2014.

With regard to our liquidity, we ended the third quarter with $23 million of unrestricted cash and short-term investments. During the third quarter, we generated $20 million of cash from operating activities, or 4.4% of net sales, which is down from $60 million in Q2. Despite stronger earnings, working capital has gone from a $26 million source of cash in the second quarter to a $14 million net use of cash in Q3.

The main working capital uses of cash were a $13 million increase in inventory due to a seasonal buildup of logs; anticipation of a wet El Nino season in Arkansas; and parent roll inventory to support the new CPD business. In addition, we saw a $14 million increase in accounts receivable, which resulted from some invoicing issues when phase 2 of our new ERP system went live in Q3, which was remedied in September and payments were received within the first few weeks of Q4. Those items were partially offset by an $11 million increase in accounts payable.

In conclusion, the Company performed well to mitigate market conditions within the commodity paperboard grade and delivered a 14.3% adjusted EBITDA margin, which is approaching our 15% cross-cycle P&L target model.

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.

We delivered an adjusted EBITDA margin of 14.3% or $63 million, which was within our revised outlook range and is also our best consolidated performance since the fourth quarter of 2010. This strong performance, coupled with our capital allocation strategy over the last three years, enabled us to equal our best adjusted earnings per share performance of $1.28. We achieved these results by managing our costs aggressively and driving operational efficiencies.

In our consumer tissue business, our operating and EBITDA margins are relatively flat quarter over quarter, and our business remains solid. As we discussed previously, our retail tissue volumes were adversely impacted by the merger of a top-five customer. In the third quarter, shipment volumes for this customer have normalized, albeit at a reduced level. And we have been able to replace all of the reduced volume with incremental business at a mass retailer and a new grocery customer in the East.

Total average tissue pricing per ton was higher than the second quarter due to a richer product mix of TAD and the recently implemented price increase. The new business volume has come online faster than forecasted, which required us to invest in filling our customers' supply chain and distribution centers with sufficient inventory. We expect this investment to continue through the fourth quarter before normalizing in the first quarter of 2016.

Our EBITDA of $31 million was up slightly versus the second quarter, and our margins remained stable quarter to quarter as we maintained the operating efficiencies gained to date while working through new service requirements associated with the incremental volume we discussed. Compared to a year ago, our consumer products division improved adjusted EBITDA margin 160 basis points to 12.5% in the third quarter, despite the 19% drop in revenues due to the sales of specialty tissue mills. On the paperboard side, our EBITDA margin was 22.7%, which is above our cross-cycle target of 19%.

I would like to provide an update on our strategic capital investments, which are largely on track. As John mentioned, we are not spending the full amount we forecasted for 2015 and will push $20 million of that CapEx spending into early 2016. We needed to adjust the timing on projects related to our converting line, because it requires downtime, which we couldn't afford to take, given the new business in CPD. More importantly, we expect a minimal effect on the expected EBITDA improvements for 2016.

First, regarding the continuous pulp digester and optimization project, we are progressing through the engineering, design, and planning phase and have obtained the necessary environmental permits and have been provided tax incentives by the local government, which we greatly appreciate. We broke ground on the project in mid-September and accelerated the completion date by one quarter. We now expect to complete the project late in the fourth quarter of 2017.

Regarding warehouse automation, our first conversion at our Shelby, North Carolina, facility is on schedule for startup in the first quarter of 2016. Las Vegas will be the second facility to be converted. The engineering and design phase of the equipment and product flow is complete. The equipment has been ordered, and installation is scheduled for the second quarter of 2016.

The next facility slated for automation is Lewiston. The engineering and design is on schedule and expected to be completed in the first quarter of 2016, with targeted go-live in fourth quarter.

With regard to supply chain efficiencies, we have begun to see improvements. However, they have been masked in the third quarter with an increase in transportation costs related to the new retail tissue business, temporary issues with our major systems upgrade, and our short-term towel capacity constraints. We expect transportation costs to normalize in the first quarter of 2016.

In order to achieve even more efficiencies and to address the remaining stranded overhead after the sale of specialty mills, we implemented a reorganization of the Company in the third quarter. The key change includes the consolidation of leadership for both the consumer products and pulp and paperboard divisions under the Group President position held by Pat Burke. Consolidating the leadership of these divisions gives us the chance to build a more efficient, agile organization that allows us to balance resources to help meet our top priorities and customer needs. We believe we can also leverage the strength of a one-company approach with our customers and suppliers.

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 up 2% compared to the second quarter of 2015, which is in line with the average seasonal patterns. Total private-label was flat quarter over quarter, while Clearwater Paper grew 4% and gained market share. The brands also grew 3% over the same period. We see growth in the tissue market remaining on track at 1% to 2% growth for 2015.

According to an ad tracking service that we use, brand ads and promotions declined approximately 14% quarter over quarter, but still remain at historically elevated levels, which we now view as the new normal.

Turning to capacity, according to RISI's latest US tissue monthly data report, the operating rate through 2016 could range between 95% to 96%, which we view as a balanced market. At the low end, the operating rate includes all 573,000 tons of forecasted new tissue capacity during the period. All but 150,000 tons of this new capacity have been announced and identified. Excluding the 150,000 tons of unidentified capacity, that would put the operating rate at 96%.

Turning to pulp and paperboard, our markets are in balance, with the exception of some weakness in the commodity grades, mainly plate. Industry backlogs have been stable at just under four weeks, while tracking approximately 16% below last year's levels. We view the shutdown of approximately 350,000 tons of capacity announced in the first quarter of this year as positive for the SPS market overall.

We continue to closely monitor the impact of any global capacity changes. The new European capacity is forecasted to start in 2016. But RISI forecasts limited impacts in the US in 2016. Today we have seen some declines in US export volumes and limited gains by imported grades of paperboard. We understand that North America is an attractive market for global players when their domestic demand is soft and currency exchange rates are in their favor. Our strategy remains focused on providing premium paperboard products supported by superior local service and technical support that other producers do not provide.

Now, getting to our fourth-quarter outlook, for the consumer products business, we are expecting shipment volumes to be flat to down 1% compared to the third quarter due to seasonality. We also expect the price mix to be flat, as our price increase will be offset by mix changes. We expect stable input costs per shipped ton for pulp, chemicals, operating and packaging supplies, and maintenance.

Energy costs are expected to be lower because electrical rates in our Las Vegas facility returned to more average levels. Transportation costs are expected to increase due to the new volume we gained in our consumer products business.

Turning to the outlook for our pulp and paperboard division, we expect to see 4% to 6% lower shipment volumes, in line with normal seasonal patterns, and price mix flat to down 2% from the third quarter due to mix and based on recent pricing pressure on some commodity grades. Input costs for wood fiber, transportation, and energy are expected to remain stable. Chemical costs are expected to be lower due to the drop in polyethylene prices. Maintenance costs are expected to be down due to less planned maintenance, and operating supplies are expected to be up.

Looking at the consolidated business for Q4 versus Q3, we expect net sales to be down 3% to 5%; consolidated adjusted operating margins to be in the range of 8% to 9.5%; adjusted SG&A to be flat with the third quarter; adjusted corporate spending to be approximately $12 million; net interest expense to be about $8 million; and an adjusted tax rate of 36%, plus or minus 2 percentage points.

All of these variables combined are expected to result in a fourth-quarter adjusted EBITDA range of $54 million to $62 million and a full-year adjusted EBITDA range of $206 million to $214 million. This compares to our original range of $210 million to $225 million, which lowers the midpoint of the range by approximately $7 million or 3%, mainly due to approximately $19 million in paperboard pricing headwinds versus what we saw in the first quarter this year.

Our team did a great job to identify new business opportunities, drive efficiencies, and control spending in order to offset most of those market conditions. The key variables that will determine where we perform in that range are changes in paperboard market conditions, brand promotional activities, and changes in customer and consumer demand.

I would like to wrap up my remarks today with many thanks to our employees, who have embraced the changes made during our recent reorganization and remain focused on building our capabilities to continually improve our Company.

Before we open the line for questions, I am very sad to report that we suffered a fatality at our Ladysmith, Wisconsin, mill this week. We would like to pay our respects to Mike Quinlan. Mike was a 17-year member of the Clearwater family and will be missed. This is an incredibly difficult time for our Company. And on behalf of the Clearwater employees and me, we humbly offer our thoughts and prayers to Mike's family.

We appreciate you joining us today and listening to the prepared remarks. We'll now take your questions.

(Operator Instructions) James Armstrong, Vertical Research Partners.

Thanks for taking my question. My first question is simple: What was the share count at the end of the third quarter? You obviously bought a lot of stock back during the quarter, and I don't think it was all reflected in the diluted number. So I'm just trying to get a handle on that.

Yes. So you want the -- you don't want it diluted? You want it just the --

The basic, yes. I just want to know how many shares you have outstanding at the end of the third quarter.

We will get back to you here in a second with that exact number. I don't have it here right in front of me.

That's fine. Moving on, corporate expense was down a bit this quarter. What drove it? And is it likely to continue into 2016?

I think it's a combination of two things, James. One is that, you know, some of the reorganization activity we took to get rid of the stranded overhead. And that portion of it we'll sustain. We did take a number of steps as it relates to really putting the cramp on discretionary spending and that kind of thing in the quarter that will continue into the fourth quarter. But thinking about that long term as continuing is probably not the case.

Okay. And then on the consumer products side, some of the branded producers spoke of lower pricing, but you then said that the promotional activity has come off at least 14%, though we are still at elevated levels. Could you give us a little more color about what you are seeing in the market? Do you think that we're kind of stable at these levels for the foreseeable future?

Well, it's kind of -- it still is, from a historical perspective, at accelerated, high levels. It is down 14%. We were glad to see that. It was down last quarter a little bit, too. So we are glad to see this trend, but it's still at elevated levels. So we watch and hope that trend continues.

Okay. And then lastly, could you remind us of the downtime scheduled for 2016? Is this the skip year? Or could you remind us of which quarters will be impacted?

Yes. So we will just have one major maintenance, and it's at our Lewiston facility. And that will happen in Q3.

Perfect. Thank you very much.

Steve Chercover, D.A. Davidson.

Yes, I also wanted to ask about the tissue pricing situation. If you could strip out your mix improvement, would your realizations have trended down, similar to the major branded competitor that suggested prices were down 2%?

No. I think, Steve, if everything were to stay the same from a mix perspective versus last quarter, you would have seen the impact of our price increase, and you would've seen 1% to 2% of price increase for our book of business if mix hadn't stayed the same.

So that price increase was specific to private-label?

Yes.

Yes.

Got you. Okay. And then we heard that the RISI forecast for operating rates is 95% to 96%. And you had to actually defer maintenance. So are you pretty much sold out now on Shelby?

Yes. I think we are.

So the objective going forward is to improve operations and, presumably, mix? Do you contemplate further growth?

Yes, I mean, there still is, from a converting standpoint, both from a machine output, as well as we've got the Las Vegas line coming on here at the beginning of next year, we will have more converting capacity that will allow us to grow in cases versus parent rolls.

Okay. Well, how many -- can you give us the volume of parent rolls that you are selling currently?

13,000? 50,000 -- 50,000 a year.

-- parent rolls to third parties. Okay, thanks. And then is it safe to say that you're going to authorize a new $100 million share repurchase?

I am going to give you my same answer I give you every time this year, which is we discuss that with our Board in December. And in terms of capital allocation, stock buyback will be on the table; dividend will be on the table; and it will be a discussion based on facts and circumstances at that time.

Yes. So do I recall correctly that you've gone through three of these programs so far?

It's actually four. There was a smaller one if you go back four years. But three years in a row, we've had $100 million buyback.

Got it. Thank you. And finally, I'm not sure if you said this, John, but what was your expected tax rate when you revised the guidance in early September?

Well, we didn't really talk about tax rate specifically when we revised. But inherent in that was what we said at the beginning of the quarter, which was 36%, plus or minus.

Okay. That's it for me. Thank you very much.

(Operator Instructions) Paul Quinn, RBC Capital Markets.

Just a question around paperboard markets. Could you give us some kind of color on the amount of imports coming in to North America from outside? Is it principally Europe? What have you seen on the China situation? And then, flipping it over on the export side out of North America, have we seen a material drop in the exports as well?

Yes. Hi, Paul. This is John. So to the one part of your question, most of what we have seen from the import perspective is from Europe, and it's, generally speaking, from one of the major suppliers in Europe. You can kind of look at their recent SEC filings and look at what their shipment rates were to North America, if you go back a couple years, versus where they are now. And you can see that they are elevated from where they were a couple of years ago.

China has not really been the issue. We see a little bit of that on the West Coast. But really, in terms of what we talked about in our earnings call today, that was more about what's coming from Europe. And then US exports have slowed down --

6%.

About 6%, I think, is what our data says.

Okay. And then capacity additions to the market outside of North America -- where are we seeing the machines starting up in 2016 and 2017?

Well, we talked about the one in Europe. It's going to be on the coast of Sweden, I believe. And then there was some discussion on one down in South America, which I know a little bit less about.

Okay. And just your expectation on the effect on the North American market -- I mean, I guess it's a hard thing to quantify, given exchange rates and all that stuff. But do you think it's going to have a growing impact going forward or a lessening impact?

Well, if you look at what RISI says in the near term through 2016, it's not going to have too much of an impact, we don't think. And then we will just have to see what the market does after that.

All right. That's all I had. Best of luck. Thanks.

Thank you. 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 closing or additional remarks.

Thank you for participating on today's call. On a final note, we will be at the Bank of America-Merrill Lynch Leveraged Finance Conference in December, and we hope to see you there. And thank everybody for your time.

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