Clearwater Paper Corp (CLW) 2016 Q2 法說會逐字稿

Welcome to Clearwater Paper Corporation's second-quarter 2016 earnings conference call. As a reminder, this call is being recorded today, July 21, 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, Danielle. Good afternoon and thank you for joining Clearwater Paper's second-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 second 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 for an adjusted EBITDA range for the third quarter and the full year of 2016 and certain costs, pricing, shipment, production, and other factors for the third 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 supplement 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, and Form 10-Q for the quarter ended March 31, 2016, 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 second quarter and Linda Massman will provide an overview of the business environment and our outlook for the third 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. Q2 was a great quarter for the Company. We delivered $66 million, or 15.2%, of adjusted EBITDA margin, which was above the high end of our outlook range of $64 million and just above our target model EBITDA margin of 15%. In addition, adjusted EPS reached a record high of $1.37.

Before I get into the details of our second-quarter 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 the supplemental slides posted on our website.

For the second quarter of 2016, those items totaled approximately $4 million of pretax expense and are comprised of an approximate $3.5 million charge related to the mark-to-market adjustment to our outstanding directors common stock units and a $500,000 charge associated with the closed Long Island, New York, facility. So with that, let's get to our results.

Our second-quarter net sales came in at $437 million. That is about flat with the first quarter and below the low end of our outlook of up 1% to 3%. A richer product mix in tissue was offset by lower shipment volumes in paperboard. The strong dollar continues to put pressure on the export of commodity grade paperboard from the US and we are competing with that incremental supply that is staying in North America.

Versus Q2 2015, net sales were down 1.8%, due primarily to a 5% year-over-year decline in SBS pricing and a 3% decline in volume resulting from lower-than-expected SBS shipments. That was partially offset by an improved product mix in tissue with an 11% volume increase in retail tissue shipments.

Second-quarter adjusted gross profit of $75 million, or a 17.3% margin, improved 148 basis points from the first quarter due in part to lower natural gas prices and higher usage of internally-generated power and also a partial reimbursement of previously-incurred costs related to recovery boiler performance issues at our Arkansas mill during the 2013 through 2015 timeframe. All of that was partially offset by higher profit dependent compensation accruals and elevated transportation costs due to customer mix.

Adjusted SG&A expense was $31 million, or 7% of second-quarter net sales, which is flat with Q1. Adjusted corporate expense was $15 million of the SG&A spent in the second quarter and consistent with Q1. The second quarter included higher profit-dependent compensation accruals and increased depreciation related to completed IT projects.

Adjusted operating income of $44 million, or a 10.1% margin, came in above the high end of our outlook of 9.5%. As I previously stated, adjusted EBITDA was $66 million, or 15.2% of net sales, and above the high end of the EBITDA outlook range of $64 million. That compares to $60 million, or 13.7% in Q1, and compares to second-quarter 2015 adjusted EBIT margin of 11.4%, which included $7 million of major maintenance costs, at the Arkansas mill.

Net interest expense in Q2 was $7 million.

Turning to taxes, on an adjusted basis our Q2 effective tax rate was 36.2% versus 38.7% in the first quarter and in line with our outlook of 37%, plus or minus a couple of percentage points. Second-quarter 2016 GAAP net earnings were $21 million, or $1.21 per share, and on an adjusted basis $24 million, or $1.37 per share. That compares to adjusted net earnings of $19 million, or $1.09 per share, in the first quarter and $14 million, and $0.74, in the second quarter of 2015.

Non-cash expenses in the second quarter of 2016 included $22 million of depreciation and amortization, $6 million of total equity-based compensation, and $300,000 of net non-cash pension and retiree medical expenses. Employee headcount at the end of the second quarter was approximately 3,300.

Now I will discuss the segment results. Consumer products net sales were $248 million for the second quarter of 2016, up 1% compared to the first quarter due to a higher mix of retail sales, which represented 80% of the shipment volume versus 76% in the first quarter. Price mix improved 5% due to a higher mix of recent shipments versus payout roles and a higher percentage of ultra-tier products overall. Both of which got us to the high end of our outlook of up 3% to 5%.

Consumer products adjusted operating income for the second quarter of 2016 was $19 million, or 7.7% of net sales, which was flat with Q1. CPD adjusted EBITDA of $33 million was up $700,000 from Q1. The adjusted EBIT margin improved 10 basis points from 13.3% in Q1 to 13.4% and remains at the highest levels in the last three years.

Now turning to pulp and paperboard division, net sales of $189 million for the second quarter of 2016 were down 2% versus the first quarter, due to slightly lower pricing for SBS and 1% decline in shipment volumes due to the previously mentioned backup in US supply. Average pricing per ton was lower by $4, which had a negative 2% impact on EBITDA and was in line with our outlook of down 1% to 3%.

Pulp and paperboard adjusted operating income for the second quarter of 2016 was $40 million, or 21.2% of net sales, as compared to $35 million, or 18.3% of net sales, in the first quarter. The margin improvement versus Q1 was due in part to a $3 million reduction in energy costs resulting from lower natural gas prices and increased availability and usage of internally-produced power. In addition, there was the previously mentioned $3 million benefit from partial reimbursement of previously incurred costs.

Paperboard's Q2 operating income also benefited versus our outlook from the timing of the $3 million cost of the Arkansas water wash flowing through the Q3 P&L versus Q2. Pulp and paperboard's Q2 adjusted EBITDA was $46 million, or 24.6% margin, and continues to well exceed the divisions target model of 19%.

Now turning to the balance sheet, capital expenditures were $29 million in the second quarter of 2016, of which $15 million was spent on strategic and other ROI-positive projects. Our expected CapEx for the year is approximately $155 million, of which $95 million is for strategic projects and $60 million is for maintenance. To date, we have spent a total of $55 million.

Long-term debt outstanding on June 30, 2016, remained unchanged at $575 million.

Now turning to the stock buyback program. In the second quarter we purchased approximately 126,000 shares at an average purchase price of $59.75. Year-to-date we have purchased 835,000 shares at an average price of approximately $42 and we have spent $35.2 million under our $100 million Board authorization. We remain committed to returning at least 50% of our 2016 discretionary free cash flow to shareholders via share repurchase.

With regard to our liquidity, we ended the second quarter with $9 million of unrestricted cash and short-term investments and we have $125 million available under our revolver. During the second quarter, we generated $47 million of cash from operating activities, or 10.9% of net sales, compared to 11.2% in Q1.

In closing, great execution on both sides of the business more than offset continuing SBS pricing pressures and we were able to deliver above model-adjusted EBITDA margins and record quarterly adjusted -- record quarterly-adjusted EPS.

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 pleased to report an outstanding quarter with results that were comfortably above the high end of our adjusted EBITDA and adjusted operating margin outlook for the quarter, along with a record high adjusted EPS of $1.37.

I would also like to add that in May Clearwater Paper was a recipient of the 2016 Rainforest Alliance Standard Setter Award for Excellence in advancing sustainability in climate goals. I'm pleased with the work our team has done and to be recognized for our commitment to protect our forest and our environment.

Our consumer products business continued to improve into the second quarter. Retail and converted case shipment volumes picked up and we shipped product to a new customer. More importantly, operating efficiency and profitability gains held through the second quarter and the quarterly CPD adjusted EBITDA margin ticked up to 13.4% and remains the highest in more than three years.

For the pulp and paperboard business, shipment volumes were affected by global currency impact and, as expected, pricing in the second quarter declined by about 40 basis points from Q1. Our CPD backlogs have improved and are stable and tracking slightly above levels for the same period last year. We continue to see price pressure as the strong US dollar has negatively impacted the SBS export market.

We have made excellent progress with our strategic capital investments in the second quarter. The multi-year pulp digester and optimization project remains on schedule and within budget. The excavation and foundation are completed and a new 1,000-ton high density storage chest for pulp stock is nearing completion.

Our engineering team periodically inspects the digester vessels under construction and confirmed that this is progressing within specification and on schedule. Regarding warehouse automation, our Shelby, North Carolina, facility contributed to operating efficiency gains in the quarter with reduced damage and yield improvements in paper handling, storage, and retrieval. We are now nearing full automation of the finished goods storage and shipping portion of the warehouse.

Warehouse automation activities are also well underway in our Las Vegas plant. We expect to see phased startups of the laser-guided vehicles for finished goods handling during the quarter. Planning, engineering, and implementation activities are also progressing in our Lewiston, Idaho, and Elwood, Illinois, operations.

Thanks to the team's hard work and relentless drive to deliver operational sales and marketing efficiencies and to execute on our strategic capital projects, we produced $9 million of EBITDA from these activities in the second quarter and $28 million since the first quarter of 2015, which was the inception of our three-year strategic plan.

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 June 30 the total US tissue market, as measured in dollars sales, was down 2.6% compared to Q1 2016, which was in line with typical seasonal trends. The brands declined 3.3% in the second quarter and underperformed private-label in the quarter, which only declined by 0.5 percentage points. However, Clearwater Paper per outperformed both the brand and private-label competitors with modest growth of 10 basis points, while all other private-label declined 80 basis points over that period.

At the end of the second quarter, private-label market share is approximately 24% of total tissue according to IRI. Clearwater Paper's share of private-label is 33.2% in the second quarter of 2016, up from 33% in the first quarter of 2016. According to the ad tracking service that we use, traditional promotional print ads by the brands declined 2% quarter over quarter. 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 2016 forecast for net new North American retail tissue capacity of 293,000 tons is down from 388,000 tons reported in our last earnings call. The revised capacity now yields an operating rate of 97% through the end of 2016, up from 96% at the end of Q1. The primary driver of the capacity reduction is the reported push out of a 75,000-ton paper machine to 2017 and the removal of a 20,000-ton modification in capacity.

Turning to pulp and paperboard, the near-term risk continues to be the strength of the US dollar. To date, the impact has mostly affected the commodity grades of SBS for platestock and some foodservice folding cartons. Pricing remains competitive.

According to RISI's June Paper and Packaging Monitor report, the SBS market remains relatively balanced through the second quarter, with backlog stabilizing at just under four weeks, due in part to the shutdown of two paper machines by another producer. While bleach board prices have remained stable since April, RISI is not ruling out the potential for headwinds sometime in the back half of the year.

Demand for foodservice and cup stock remain healthy and folding carton orders were in line with normal seasonal demand patterns. In the second quarter, order backlogs recorded by the AF&PA were up another 11% following a 19% increase in the first quarter of 2016. Despite two consecutive quarters of improvement, backlog levels were still approximately 7% lower than the levels reported during the same period last year.

Now getting to our third-quarter outlook. For the consumer products business, we are expecting revenue dollars to be flat to up 1%. Price mix is expected to improve significantly and offset the decline in shipment volume due to a higher level of retail shipments versus parent roles in Q3 as we replenish retail case inventory.

These items will have a net positive impact to EBITDA of $0.5 million to $2.5 million. With the exception of higher pulp and energy costs per shipped ton, we expect all other input costs and SG&A to remain stable in Q3.

Turning to the third-quarter outlook for our pulp and paperboard division, we expect to see revenue dollars flat to down 1%. Shipment volumes are expected to be flat with the second quarter. Price mix is expected to be down and negatively impact EBITDA by $1.5 million to $2.5 million as the RISI price adjustment announced in April continues to take effect. Input costs are expected to rise for wood fiber due to increased regional demand in the Pacific Northwest, along with increased prices for chemicals and energy.

Maintenance is expected to be up $21 million to $22 million, $15 million to $18 million of that is attributed to the major outage in Idaho. We also have the $3 million impact rolling in from the late second-quarter Arkansas water wash that John mentioned and incremental spending to implement boiler (inaudible) at our Lewiston, Idaho, mill. The remaining operating supplies, transportation, and SG&A are expected to remain stable.

Earlier this month, the Lewiston mill experienced an electrical power outage. Power was restored within 24 hours and there was no negative impact to customers. While we are still evaluating the total financial impact of the event, we expect the incident will result in a $4 million to $5 million negative impact to EBITDA.

Looking at the consolidated business for Q3 versus Q2, we expect the net sales dollars to be flat to up 1%. EBITDA impact from changes in volume and price mix to be $500,000 to $2.5 million. Consolidated adjusted operating margin to be in the range of 2% to 3% and an adjusted tax rate of 37%, plus or minus 2 percentage points, is expected and excludes any prior-period return adjustments. All these variable combined are expected to result in a Q3 adjusted EBITDA range of $30 million to $35 million.

The key variables that we see determining where we land in that range for the quarter are: changes in paperboard market conditions, planned major maintenance at the Lewiston, Idaho, plant, recovery costs and related insurance benefits for the Lewiston power outage, pulp and wood fiber prices, brand promotional activities, and changes in customer and consumer demand. As we look forward to the balance of the year, we expect a full-year adjusted EBITDA to be in the range of $210 million to $220 million.

In conclusion, I would like to thank our employees for their hard work and dedication, which contributed to improved efficiencies in our operations and produced strong results in the second 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 of our shareholders.

And that concludes the remarks.

(Operator Instructions) Paul Quinn, RBC Capital Markets.

Thanks and good afternoon. Just a couple questions, one on the Arkansas boiler reimbursement. Maybe you could give us a little bit more background. I wasn't expecting that; I'm not sure whether you were expecting that. Is this under insurance proceeds?

No, it's not insurance. It was -- back in the 2013 timeframe we had a fairly significant project to improve both the emission standards as well as the efficiency of the Arkansas boiler. That did not go great and, in fact, things kind of got worse before -- worse than they were before we did the project.

And we were having to spend incremental money on chemicals and such just to kind of limp along until we fixed all that last year when we were down in Arkansas. And that was about $10 million to $12 million of, call it, incremental cost that we incurred over the 2013 to 2015 timeframe.

We -- I don't know if you recall that we typically highlighted that in our quarterly calls or the bridges. So we were able to get some of that back in negotiations with the supplier. We got $3 million back, which wasn't the full amount, but it's better than zero.

Okay. So we are not expecting any more money to come back from that?

No.

Okay. Then just on the Lewiston power outage, that $4 million to $5 million hit you expect in Q3. Is that insured?

We do have business interruption insurance and that's something that we have already been in contact with the provider. It's something that we'll obviously take that when we get it, but we've got to work through the process first.

Is there an expected timeline on that?

It could be by the end of third quarter. I don't know. It's kind of tight between right by the end of the third quarter and maybe early part of fourth quarter.

Okay, it looks like you had really good operating results in the quarter. Just wondering -- just turning to strategic investments.

Pretty impressed with the improvements on the operations. Just wondering, from where we sit anyways, it looks like the warehouse automation is a little bit slower than we anticipated. Is that your expectation as well?

Was a little bit -- when we got into the -- we expected to be kind of fully humming on warehouse automation as we left the first quarter in Shelby. It was a little bit more complicated than we thought in the finished goods warehouse. So much of Q2 is getting that nailed where we thought we would just be flying on it, and so that's probably why you are seeing less than maybe what you expected in the second quarter.

Okay. And then just lastly in the paperboard markets. I think, Linda, you referenced RISI's expectation for some potential headwinds in the back half of the year. Is that your expectation as well?

I think we are still seeing price competition, so I wouldn't rule it out. I'm not sure if we could continue increasing impact from competitive pressure, but I think it at least remains stable.

You mentioned just backing up I guess exports out of North America. What about import pressure? Have you seen continued increase in imports into North America?

I think those have been relatively stable or at least immaterial from our perspective. We do see some. Obviously, we are seeing some ivory board out West and some Scandinavian board out East but I wouldn't call any of that impact substantial from what we can see.

I think the overall sentiment for us with regard to the SBS market is it's performing consistently with what we have been talking about for the last couple quarters and seems relatively stable.

Great and great results. Thanks very much. That's all I had.

Steve Chercover, D.A. Davidson.

Thank you. Good afternoon, everyone. So my first question is with respect to the 10.7 growth in retail tons in consumer products. How does that reconcile with the guidance in Q1 that suggested that volumes be down 2% to 4%?

Well, in total it's going to be down, but when you break it up between retail and parent rolls, you get a mix shift into retail. So you had retail up, which was good from an ASP and margin standpoint; parent rolls down in total. From a volume standpoint, I think we were relatively stable.

Got it, okay. So this is a good development in so far as you are selling the finished product as opposed to the parent?

Yes, right, right. In a perfect world we would have 100% retail cases and no parent rolls, but we are long parent rolls.

Understood. Moving to slide 9 where -- I guess it's for the total market private label is 24% and brands are 76%. For some reason I thought that the private-label market was about a third. Thought it was a third/two-thirds private-label branded. So maybe I'm conflating your share of private-label with that overall private-label?

Steve, I think whether you measure that based on case volume or retail dollars you get a different answer. We are giving it based on dollars and that's the 24%. If you did case volume, I think that's where you get the 33%.

Okay, got it. Okay, thanks. Then a couple other pieces of clarification.

First of all that $3 million reimbursement, obviously we are glad you got it. I'm just wondering why that was incorporated into your adjusted EBITDA. I would think that that's nonoperating.

We incurred incremental costs associated with that that flowed through our P&L in the 2013 to 2015 timeframe. We look at this as -- we just got some of that back. We didn't adjust out the incremental costs when they were happening, so I don't know why you would adjust out when you get some of it back.

All right. Then on page 19 and 20 you've given us third-quarter EBITDA guidance of $20 million to $35 million and full year of $210 million to $220 million. Was there a corresponding slide for the full year back in Q1?

It seems to me that the full-year EBITDA might've come down by $10 million or $15 million, despite being at the top end of the range in the second quarter.

This is the first time we've given full-year EBITDA guidance, so you wouldn't have seen that in the first quarter. So I don't have a reference point to say whether or not it's come down or not from a public disclosure standpoint.

Because we were aware that Q3 maintenance would be about $14 million higher than Q2 and that was already given in your deck last quarter. So it just seems like that's gotten a little bit more onerous.

I think it went up because of the shift of the $3 million that John referenced coming from Q2 to Q3 and then we've also included the outage in Idaho in that number as well, the increased number.

All right. That's all I had, thank you.

James Armstrong, Vertical Research.

Good afternoon. Thanks for taking my question. First ones on the price mix guidance in tissue, you said that was going to add 5% to 10% impact on adjusted EBITDA. Could you go into a little more detail of what's actually happening there?

We are mixing out to more retail versus parent roll is probably the biggest and most substantial change.

Okay. Then how (multiple speakers).

And then within retail more of a mix shift towards the ultra-tier versus conventional or value.

Okay. Then how much of your total tonnage approximately is still being made in parent rolls? I'm just trying to get a sense of how much more can mix into the retail.

Parent rolls are about 40,000 to 50,000 tons per year. Keep in mind, some of that is kind of more on the value end of it where maybe it would make sense to turn it into cases, but it's less obvious at that quality level than it is at the upper tiers.

Okay. So you would expect the mix shift between parent rolls into retail tissues probably almost at the end of the line or do you think that there's a little bit more to go?

No, I think -- A) we think we can grow our converting capacity, not with new machines, but just by increasing our OEEs, and then B) I'd say at least half of what that 40,000 to 50,000 is good paper that we would like to convert if we had demand for it.

Okay, that helps. Then moving to paperboard; is the price mix guidance just a result of pricing flow-through or is the mix deteriorating in some way as well?

It's price. I think mix is pretty well.

So mix is more or less stable? Perfect. That's all the questions I have. Thank you very much.

(Operator Instructions) Dan Jacome, Sidoti.

Appreciate the time. Just a couple questions here. Can you just talk a little bit more about your transportation costs? I think the last time we heard from you you guys were looking for this to be stable and I think it was a little bit elevated this quarter. I think you mentioned mix. Can you just give us some more thoughts on that?

Yes, it was mostly on the consumer side of the business where, depending on how we mix out, some of our customers are much closer to our converting sites and some of them are further away. So this quarter it kind of lined up where some of the further routes we had to go on.

Okay, so just kind of like timing? I think you mentioned, to that end, you had a new win in the retail channel. Have I heard you correctly? Was that correct?

Correct, yes.

Would you mind sharing if it was -- was that like in a dollar store, a drugstore, a grocery? I don't know if you are able to elaborate on.

I think at this time our preference is not to elaborate on that, but it's a customer we are pleased to have and look forward to serving them.

Okay, sounds good. Then, lastly, is there any update on I think you talked about RISI's forecast for paperboard pricing in the back half. Any update on what we are expecting from I think it's Metsaa Group and how much tonnage you think they might be bringing to the US, if they do?

I can't comment on that. I think, like I said earlier, we still see definitely price pressure, price competitiveness, but at the same time the market is relatively stable when it comes to backlogs and holding up okay.

Okay, that's fair. Then I wanted to talk about your, I guess, EBITDA expectations. You are guiding to $220 million for the year and, say, if you come in at the high end of $35 million for the third quarter I guess it would imply you would need to do about $59 million in the fourth quarter. And that's what you did last year, if I'm not mistaken.

So can you just -- maybe if you can provide a little bit more how you are thinking about it, the puts and takes of how we get there. If there's any kind of -- if you have any cushion to that.

We are not going to necessarily give Q4 guidance now. I agree with your math. Obviously, the biggest hitter when you go from Q3 to Q4 is we don't have a major outage.

The outage associated with Lewiston (multiple speakers) and then the major maintenance.

I appreciate it. Overall strong quarter, thanks a lot.

Thank you, ladies and gentlemen. That does conclude our question-and-answer session. At this time I would like to turn the call over to Ms. Massman for any closing or additional remarks.

Thank you. We completed a strong first half of 2016 and we're excited and focused on the opportunities we have ahead of us for the rest of the year. Thank you for joining us today and for your continued interest on Clearwater Paper.

On a final note, we will be at the RBC and KeyBanc conferences in September and we hope to see you there.

Ladies and gentlemen, that does conclude the Clearwater Paper first-quarter 2016 earnings conference call. We do appreciate your participation.