Clearwater Paper Corp (CLW) 2016 Q1 法說會逐字稿

Welcome to Clearwater Paper Corporation's first-quarter 2016 earnings conference call.

As a reminder, this call is being recorded today, April 28, 2016.

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, Crystal.

Good afternoon and thank you for joining Clearwater Paper's first-quarter 2016 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 first 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 expectations and estimates as to certain costs, pricing, shipment, production, and other factors for the second quarter of 2016 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 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, 2015.

Any forward-looking statements are made only as of today's 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 first quarter, and Linda Massman will provide an overview of the business environment and our outlook for the second quarter of 2016.

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.

I am pleased to report a very good quarter, which came in at the high end of our Q1 EBITDA outlook range.

Before I get to the results, I would 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 our press release and supplemental materials posted on our website.

For the first quarter of 2016, those items netted to a $1.2 million charge and includes approximately $750,000 on the mark to market adjustments to our outstanding directors' common stock units and approximately $450,000 associated with the closed Long Island, New York, facility.

So with that, let's get to our results.

Our first-quarter net sales came in at $437 million, up 1.3% versus the fourth quarter.

That is just above the high end of the outlook range of flat to up 1% that we provided in our Q4 2015 earnings call.

Tissue shipment volumes increased 3.4% versus Q4.

The impact of that volume increase was partially offset by a lower paperboard average sales price.

Versus Q1 2015, net sales were up 70 basis points.

First-quarter adjusted gross profit of $69 million or a 15.8% margin was up 20 basis points from the fourth quarter due to a lower input costs for transportation and energy and better absorption of fixed costs on higher production levels, which was partially offset by a planned water wash at our Lewiston pulp and paperboard facility.

Adjusted SG&A expense was $30 million or 6.9% of first-quarter net sales, which was flat with Q4 2015.

Adjusted corporate expense was $15 million of the SG&A spend in the first quarter, up approximately $1 million versus Q4 due primarily to higher travel in the quarter and expenses related to selecting and onboarding our two new directors.

Adjusted operating income of $39 million or an 8.9% margin came in above the high end of our outlook of 7% to 8.5%.

Adjusted EBITDA was $60 million or 13.7% of net sales, and at the high end of the adjusted EBITDA outlook of $52 million to $60 million.

This compares to $59 million or 13.6% in Q4.

First-quarter 2015 adjusted EBITDA margin was 8.7%.

Net interest expense of approximately $8 million was flat with Q4.

Turning to taxes.

On an adjusted basis, our Q1 effective tax rate was 38.7% versus 54.4% in the fourth quarter, which is slightly lower than our outlook of 40%.

Our full-year 2016 tax rate outlook remains unchanged at 37% plus or minus a couple of points.

First-quarter 2016 GAAP net earnings were $18 million or $1.05 per diluted share.

And on an adjusted basis, $19 million or $1.09 per diluted share.

That compares to adjusted net earnings of $13 million or $0.75 per diluted share in the fourth quarter and $7 million and $0.36 in the first quarter of 2015.

Non-cash expenses in the first quarter of 2016 included $21 million of depreciation and amortization, $2 million of total equity-based compensation expense, and $1 million of net non-cash pension and retire medical expense.

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

Now I will discuss the segment results.

Consumer products net sales were $245 million for the first quarter of 2016, up 2.8% compared to the fourth quarter due to 3.4% higher shipment volumes, including a 2.9% increase in converted case shipments and a 5.6% growth in non-retail tons, which includes parent rolls.

This was well above the high end of our outlook for shipment volumes of flat to up 1% due to strengthened positions at our top-four customers, which resulted in higher-than-expected shipment levels.

Total tissue average sales price declined $15 per short ton or 60 basis points to $2,464, which is below our Q1 outlook of flat to up 1%.

Average non-retail prices improved by 2%, while retail pricing declined by 70 basis points, resulting from customer mix.

Customer products -- consumer products' adjusted operating income for the first quarter of 2016 was $19 million or 7.7% of net sales versus $11 million or 4.8% in the fourth quarter.

Improvement was the result of a $6.4 million total reduction in costs due to primarily to, one: lower transportation costs resulting from network efficiency improvements and favorable carrier rates.

Two: lower prices for external hardwood pulp.

And three: improved absorption of wages and benefits on higher production volumes.

CPD adjusted EBITDA of $33 million increased 27% from $26 million in Q4.

The adjusted EBITDA margin improved 256 basis points to 13.3% from 10.7% in Q4.

Now turning to the pulp and paperboard division, net sales of $192 million for the first quarter of 2016 were down 60 basis points versus the fourth quarter due to a 40-basis-point decrease in average sales price, despite a better product mix of more prime paperboard and relatively flat shipment volumes.

Paperboard shipment volumes of 201,000 short tons were stable with Q4 and came in at the low end of our outlook of flat to up 1%.

Average pricing of $952 per ton was down $4 per ton or 40 basis points, which was slightly weaker than our outlook of a flat price mix in the quarter.

Pulp and paperboard adjusted operating income for the first quarter of 2016 was $35 million or 18.3% of net sales as compared to $40 million or 20.5% of net sales in the fourth quarter.

The margin decrease versus Q4 was mainly due to a $3 million increase in planned maintenance costs for a scheduled water wash at the Lewiston boiler and elevated regional wood prices due to high demand in the Pacific Northwest, which was modestly offset by lower natural gas costs.

Paperboard's Q1 2016 adjusted EBITDA margin was 21.6% compared to 23.9% in the fourth quarter.

Now turning to the balance sheet.

Capital expenditures were $26 million in the first quarter of 2016, of which $18 million was spent on strategic and other ROI-positive projects.

Our expected total CapEx for the year remains unchanged at approximately $155 million, of which $90 million is for strategic projects and $60 million is for maintenance.

We have $6 million of borrowings outstanding under our revolver at quarter end.

Long-term debt outstanding on March 31, 2016, remained unchanged at $575 million.

Turning to the stock buyback program.

Through March 31, we have repurchased approximately 709,000 shares for $28 million under our $100 million share repurchase authorization at an average price of $38.99 per share.

And through 2016, we remain committed to returning at least 50% 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 standard maintenance CapEx of $50 million.

With regard to our liquidity, we ended the first quarter with $2 million of unrestricted cash and we have $113 million available under the revolver.

During the first quarter, we generated $49 million of cash from operating activities or 11.2% of net sales.

That concludes my remarks.

And 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.

I am also very pleased with our strong start to 2016, with consolidated first-quarter results that were across the board at the high end of our outlook ranges for the quarter.

Our consumer products business continued to improve, shipment volumes picked up, and more importantly, operating efficiency and profitability continually strengthened through the first quarter.

The quarterly adjusted EBITDA margin of 13.3% is the highest in more than three years.

For the pulp and paperboard business, shipment volumes remain solid.

And as expected, pricing through the first quarter was lower than average 2015 levels.

Our paperboard backlogs are similar to levels at this time last year, which includes a seasonal pickup as we enter the second quarter.

We have made excellent progress with our strategic capital investments in the first quarter.

The multi-year pulp digester and optimization project remains on schedule and within budget.

The excavation is completed and the foundation is under construction.

Our engineering team recently inspected the digester vessel, which is under construction and progressing within spec.

Regarding warehouse automation, installation, and startup at our Shelby, North Carolina, facility is on schedule and made a modest contribution to our operating efficiency gains in the quarter.

The laser-guided vehicles are up and running 24/7 and fully operational in paper handling, storage, and retrieval.

Work is also well underway on our next steps to automate our case storage and shipping operations.

Warehouse automation installation for our Las Vegas plant is also on schedule, with a phased implementation to begin in the latter half of the second quarter.

We also completed installation of our high-speed bath and towel converting equipment in Las Vegas, which did start up on April 1 as planned.

And it is exceeding startup expectations.

I am very proud of the Clearwater Paper team, whose hard work and relentless drive to deliver operational and sales and marketing efficiencies resulted in $7 million of EBITDA improvement in the first quarter.

Since the inception of our three-year strategic plan in the first quarter of 2015, we have delivered $19 million of EBITDA improvements.

We are laser focused on executing our strategic initiatives and everyone across the Company is engaged and invested in this effort.

Now I will discuss our view of the market environment and our outlook for both business segments, starting with consumer products.

According to IRI data as of March 31, the total US tissue market as measured in dollars sales was up 2.4% compared to the fourth quarter of 2015.

The brands grew 3.3% in the first quarter and outpaced private-label in the quarter, which declined by 60 basis points.

We believe primarily as a result of increased branded digital and in-store promotional activity.

The good news is Clearwater Paper outperformed the private-label competitors with growth of approximately 6.7%, while all other private label declined 3.9% over that period.

At the end of the first quarter, private-label market share is approximately 23% total tissue, according to IRI.

Clearwater Paper's share of private label is 33.1% in Q1 of 2016, up from 30.9% in the fourth quarter of 2015.

According to the ad tracking service that we use, traditional promotional print ads by the brands declined 6% quarter over quarter.

But we believe that was augmented with digital and in-store promotions, which drove growth for the brands in Q1.

Competitive pressures in tissue remain, so we will continue to focus on delivering superior product quality and excellent customer service to differentiate ourselves from the competition.

RISI's forecast for new net North American retail tissue capacity of 388,000 tons remains unchanged, which yields an operating rate of 96% through the end of 2016.

Turning to pulp and paperboard, the near-term risk continues to be the strength of the US dollar.

So far, the impact continues to affect the commodity grades of SBS replace stock and some food service folding cartons.

Pricing on the lower-end grades remains competitive.

The SBS market remains balanced with modestly improving demand.

Food service and cup stock demand remains healthy, and folding carton orders are strengthening, which is in line with normal seasonal demand patterns.

Since the beginning of the year, order backlogs reported by AF&PA have improved and are up 19%, but are still approximately 15% lower than the levels reported during the same period last year.

Now, getting to our second-quarter outlook.

For the consumer products business, we are expecting shipment volumes to be down due to lower shipments of parent rolls in Q2.

We expect that this will negatively impact EBITDA by 2% to 4% compared to Q1.

The price mix is expected to improve with a higher level of retail shipments.

And we expect a positive impact to EBITDA of 3% to 5%.

We expect input costs for pulp, chemicals, operating and packaging supplies, transportation, energy, and maintenance and repairs to remain stable in Q2.

SG&A is expected to increase slightly due to timing of profit-dependent accruals.

Turning to the second-quarter outlook for our pulp and paperboard division, we expect to see shipment volumes up modestly compared to the first quarter.

We expect that will positively impact EBITDA by 1% to 3%, which will be offset by modestly lower SBS pricing, which we expect will negatively impact EBITDA by 1% to 3%.

Input costs for chemicals, operating supplies, and transportation are expected to remain stable.

However, wood fiber costs are expected to be slightly higher due to market conditions in the Pacific Northwest.

Along with higher maintenance costs related to a water wash of boiler in Arkansas and some maintenance in Lewiston that was pushed from Q1 to Q2.

Note that we are now providing a quarterly forecast of total paperboard maintenance expense for 2016 on page 14 of our supplemental slide deck.

On the positive side, energy costs are expected to be lower due to lower hedged natural gas prices.

Looking at the consolidated business for Q2 versus Q1, we expect net sales to be up 1% to 3%, consolidated adjusted operating margin to be in the range of 8% to 9.5%, an adjusted tax rate of 37% plus or minus 2 percentage points.

All these variables combined are expected to result in a Q2 EBITDA range of $56 million to $64 million.

The key variables that we see determining where we land in that range are changes in paperboard market conditions, pulp and wood fiber prices, brand promotional activities, and changes in customer and consumer demand.

I would like to wrap up the prepared remarks by thanking our employees for their hard work and dedication, which contributed to the improved efficiencies in our operations and produced strong results in the first quarter.

I would also like to thank our customers for putting their trust in us to produce and deliver high-quality products.

And for the continued support for our shareholders.

Thank you for listening to the prepared remarks.

We will now take your questions.

(Operator Instructions) Paul Quinn, RBC Capital Markets.

Just curious as to what the real difference between your guidance -- it looks like you had higher-than-expected tissue shipments.

And you cited the increased volume to your four biggest customers.

Do you think that was -- that volume got actually sold by the customers in the quarter or are you going to see a pushback in Q2 from that?

No.

I think it was -- it will be sold by the customers.

Okay.

And then just on the negatives on that tissue price mix, why was that down quarter over quarter versus the guide that was positive?

There was a couple elements to that.

One is the mix of parent rolls; we had more parent rolls.

And there's higher -- or lower price point on that.

And then within the retail cases, a mix kind of -- to some of our higher volume customers where there is volume discount pricing.

Okay.

And then just asking a question around the brand promotion, just so I understand this.

It sounds like the brands gained market share in Q1 here, and you are citing really on the digital side.

Because your ad tracking is showing the promotional on ad volume to be down.

How do you track that digital?

And what would you say is the breakdown in branded promotional dollars between normal ads and digital ads?

Yes.

So Paul, I would say it is a lot easier to track the traditional ads that you would see in printed form.

And so when we refer to the in-store promotions, that is really more anecdotal, given how often we are out in the field and in the stores and see what is being promoted.

So we rely heavily on our sales team to report back to us as to what they are seeing out in the stores.

Okay.

And then just lastly, you mentioned -- it looks like higher maintenance in Q2.

But I think you cited pushing off some of this stuff in Lewiston to Q2.

Why was it moved to Q2?

We had a couple things we are doing in Lewiston that operationally because of what happened to be going on at the site, it didn't make sense to actually do that in the first quarter.

And we said we are going to do that in the second quarter.

Best of luck, guys.

James Armstrong, Vertical Research Partners.

Thanks for taking my question.

First, on the branded tissue, to dig into that a little more.

Is there any evidence of anything more than just heavy promotional activity yet?

Or is it just promotion and it doesn't seem to be moving much on price?

I think I would characterize it as promotion and ways of driving some marketing to get consumers to try the branded product.

I am not seeing a lot on price.

I mean, ultimately, it all ends up in price, but I would say it is more driven by promotion.

Okay.

That helps.

And then switching to bleach board, there is a lot of worry in the market right now.

What are you seeing in terms of imports or further competition in your bleach board business?

I would say with regard to the market -- general market conditions, the market is okay.

Not overly robust, but fairly stable.

And with regard specifically to imports, I don't think we have much of an update above and beyond what we have been talking about for the last couple of quarters.

We are seeing a bit of ivory board out west.

We are seeing a little bit of the Scandinavian board out east.

Nothing is having a material impact, and I would say it is just consistent with what we have been expecting.

Okay.

And then lastly, with all the projects going on, do you believe working capital will be a source or a use of funds this year?

I think with the initiatives we have around -- we have had strong initiatives around the payable side of the equation.

And now we have got strong initiatives around inventory.

So I am planning on working capital being a source at the end of the year.

Okay.

Thank you very much.

Steve Chercover, D. A. Davidson.

Forgive me if these are kind of along the same line of questioning.

But would you say then that your increased sales of jumbo rolls are a function of your productivity outpacing the demands through the current channels?

Well, no, I think -- I mean, there is always opportunities to sell the parent rolls.

We had stronger production, so we had more parent rolls available.

So I don't think it's really anything more than that.

But you are doing well with your top-four customers.

So I guess you can't pressure them if you are already happy with their offtake.

Right.

Yes.

Okay.

So the parent rolls are basically a relief valve.

Yes.

Exactly.

It is kind of opportunistic and depends on facts and circumstances each quarter as to whether we are up or down.

And we indicated it will kind of come back in balance in Q2 to more historical levels.

The jobbers who take this, do they turn around and undermine your own markets in due course?

I would say that that is always a possibility, but I would say our sales team is pretty careful about where we are placing those parent rolls so that we can try to minimize that impact as much as possible.

But ultimately, paper is going to get where it is going to go.

So we don't kill too many brain cells on that one.

And I would say the large majority of our parent roll sales are on the value into the segment.

So I guess that is less of a concern on our part in that segment.

Okay.

And it is probably way premature to start thinking of tissue the way people have been harping on containerboard.

But there is also some new machines on the horizon.

Do you ever get to the point where you will consider even throttling back your production just to ensure that it doesn't undermine price?

I would say that we keep a pretty tight look at our supply chain.

And from time to time, we will do that to keep everything in balance and in order.

But overall, I think what we?ve have said is through at least the balance of this year, the capacity coming online really should be a pretty balanced market.

And Linda's comment is primarily focused on the converting side versus the paper machine.

Yes.

Got it.

Okay.

Thanks.

And then on paperboard, and the question has been somewhat asked.

But your current guidance, does that reflect the $20-per-ton drop at pulp and paper we just published?

It does.

It does, yes.

Okay, great.

That?s all I had.

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.

We believe another strong quarter is underway.

And I would like to thank you for joining us today and for your continued interest in Clearwater Paper.

On a final note, we will be at the following conferences in the second quarter.

Goldman Sachs' Leveraged Finance conference in California on May 16, and their Basic Materials Conference on May 18 in New York.

We will be at the Macquarie's Emerging Leaders Conference on June 2 in New York, Deutsche Bank's Industrials and Materials Summit on June 8 in Chicago, and Citibank's Small and MidCap Conference on June 9 in New York.

And we hope to see you there.

Thank you.

Ladies and gentlemen, that does conclude the Clearwater Paper first-quarter 2016 earnings conference call.

We do appreciate your participation.

Thank you and have a great day.