Clearwater Paper Corp (CLW) 2016 Q3 法說會逐字稿

Welcome to Clearwater Paper Corporation's third-quarter 2016 earnings conference call. As a reminder, this call is being recorded today, October 20, 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. Good afternoon and thank you for joining Clearwater Paper's third-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 third quarter were released shortly after today's market close. You will find a copy of the presentation of supplemental information, including an updated outlook slide providing the Company's current outlook as to certain cost, pricing, shipment, production, and other factors for the fourth quarter of 2016, posted on the Investor Relations section page of our website at clearwaterpaper.com.

Additionally, we will be providing certain non-GAAP information in this afternoon's discussions. 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, and Form 10-Q, for the quarters ended March 31 and June 30, 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 third quarter, and Linda Massman will provide an overview of the business environment and our outlook for the fourth 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. Before I get to our third-quarter 2016 results, I would like to preface my comments by stating throughout the rest of my remarks I will be distinguishing between GAAP and non-GAAP or adjusted results.

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 in the supplemental slides posted on our website.

For the third quarter of 2016, those items netted to a $2 million pretax expense and are comprised of $3.5 million in pension settlement expense associated with the remeasurement of the salary pension plan due to lump sum payouts that occurred in Q3 and approximately $500,000 in costs associated with the closed Long Island, New York facility. All of that is partially offset by a $2 million benefit resulting from the release of an escrow account related to the Q4 2014 sale of the specialty mill.

So, with that, let's get to the results. Third-quarter adjusted EBITDA came in at the high end of the guidance range we provided on our Q2 earnings call. Getting to the specifics, our third-quarter net sales came in at $435 million. That is down 30 basis points versus the second quarter and just under our outlook of flat to up 1%. Increased retail sales volume in consumer products was more than offset by lower paperboard shipment volumes and the full effect of the April RISI price watch price decrease.

On the consumer side of the business, we saw increased sales volume from several of our top five customers in a mix shift from parent roles to retail. Versus Q3 2015, net sales were down 160 basis points. Higher consumer products sales volumes were more than offset by a combination of lower sales volumes and less favorable price mix in paperboard.

Third-quarter adjusted gross profit of $41 million or a 9.4% margin declined by $34 million from the second quarter, primarily due to planned major maintenance costs on the pulp and paperboard side, as well as in the net margin impact of electrical power outage at the Lewiston Mill. There is also increased investment to drive manufacturing productivity on the consumer product side and higher transportation costs to meet peak summer demand. The total margin impact of the electrical outage was $9 million, and we settled a related insurance claim in Q3 for $5 million, resulting in a net margin impact of $4 million in the quarter.

Adjusted SG&A expense was $29 million or 6.8% of third-quarter net sales, which is down approximately $2 million from Q2. Adjusted corporate expense was $14 million of the SG&A spend in the third quarter, which is down approximately $1 million compared to Q2. Adjusted operating income decreased by $33 million to $12 million or a 2.7% margin, which is at the high end of our Q3 outlook range of 2% to 3%. Adjusted EBITDA was $34 million or 7.9% of net sales and on the high end of Q3's outlook range of $30 million to $35 million. That compares to $66 million or 15.2% in Q2, which did not have any major maintenance costs.

Compared to Q3 2015, in which there was no major maintenance downtime, adjusted EBITDA was $63 million or 14.3%. Net interest expense of $8 million was consistent with Q2.

Turning to taxes, on an adjusted basis, our Q3 effective tax rate was 41.1% versus 36.2% in the second quarter, due to some returned provision adjustments associated with the filing of federal and state returns in Q3.

Third-quarter 2016 GAAP net earnings were $1 million or $0.05 per diluted share and on an adjusted basis $2 million or $0.14 per diluted share as compared to Q2 2016 adjusted net earnings, which were $24 million or $1.37 per diluted share.

Non-cash expenses in the third quarter of 2016 included $23 million of depreciation and amortization, approximately $2 million of total equity-based compensation, and $3.6 million of non-cash pension and retiree medical expense. That includes the $3.5 million in non-cash pension settlement expense I previously mentioned that is precluded from adjusted EBITDA.

Employee headcount at the end of the third quarter was approximately 3300.

Now I will discuss the segment results. Consumer products net sales were $253 million for the third quarter of 2016, up 2.2% compared to the second quarter and above the high end of our outlook range of flat to up 1%. That was due to a 1.5% increase in total shipment volumes, primarily driven by a 3.9% increase in retail shipments, due to market share gains, which was partially offset by an 8.2% drop in nonretail shipments which includes payrolls.

Retail tissue prices remained flat compared to the second quarter.

Consumer products adjusted operating income for the third quarter of 2016 was $60 million or 6.3% of net sales, which was down $3 million from the second quarter. The approximate $2 million improvement in price mix and volume, along with $2 million lower hold costs, was more than offset by a combined $7 million increase on the cost side due to higher maintenance investment to drive productivity, seasonally higher electrical rates, and higher natural gas usage at Lewiston that resulted from the power outage that occurred in early Q3 and higher transportation costs to support customer demand.

(inaudible) adjusted EBITDA of $31 million was down $2 million in Q2. The adjusted EBITDA margin was 12.2%, down from 13.4% in Q2.

Now turning to the pulp and paperboard division. Net sales of $182 million for the third quarter of 2016 was down 3.6% versus the second quarter and well below our guidance range of flat to down 1%, due primarily to 1.4% lower shipment volumes and 2.2% lower price mix as we saw the full impact of the April RISI price decrease, as well as a less favorable product mix.

Pulp and paperboard adjusted operating income for the third quarter of 2016 was $10 million or 5.5% of net sales as compared to $40 million or 21.2% of net sales in the second quarter. The margin decrease versus Q2 was mainly due to the $18 million of planned major maintenance costs for our Lewiston mill, plus $3 million from an impact of the late Q2 Arkansas water wash flowing through the Q3 P&L and a net $4 million of costs associated with the electrical outage at the Lewiston mill.

Pulp and paperboard's Q3 adjusted EBITDA margin was 9.1%.

Now turning to the balance sheet, capital expenditures were $55 million in the third quarter of 2016, of which $35 million was spent on strategic and other ROI positive projects. Our expected CapEx for the year is approximately $156 million, of which $92 million is for strategic projects and $64 million is for maintenance CapEx.

To date, we have spent a total of $109 million. Long-term debt outstanding at September 30, 2016, remained unchanged at $575 million. In addition, we have a $13 million drawn down on the revolver.

Turning to the stock buyback program, in the third quarter, we repurchased approximately 264,000 shares at an average purchase price of $62.08 per share. Year to date, we have purchased approximately 1.1 million shares at an average price of $46.91 per share, and we have spent $52 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 repurchases.

With regard to our liquidity, as of September 30, we have $107 million available under our revolver. During the third quarter, we generated $42 million of cash from operating activities or 9.8% of net sales compared to 10.9% in Q2.

So, in conclusion, the quarter had a number of challenges, particularly on the paperboard side, but we are pleased that in the face of those challenges we delivered financial results at the high end of our outlook.

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

Thank you, John. Hello, everyone, and thank you for joining us today.

As John discussed, our third-quarter results were at the high end of our outlook for the quarter, revenues were essentially flat, and our adjusted operating margin at 2.7% and adjusted EBITDA of $34 million were on the high end of our outlook ranges. Below our third-quarter results compared to Q2 were primarily due to the planned major maintenance outage at our Lewiston Idaho plant, which is done as a regular part of operations every 18 months. Based on that schedule, the next Lewiston Mill outage is due in the first quarter of 2018.

However, since we will be shutting down the mill to go live with the pulp digester, we have decided to pull the major maintenance for Lewiston from Q1 2018 into the third quarter of 2017 to coincide with that shutdown.

As a reminder, our Arkansas mill has its biannual outage scheduled for Q2 of 2017. I would like to thank our Lewiston team for bringing the middle back online quickly after it suffered an unexpected electrical power outage in July. Thanks to their hard work, our customers did not suffer any service interruptions in the third quarter.

I would also like to add that in September the Company was recognized as the Pollution Prevention Champion by the Idaho Department of Environmental Quality for our successful efforts to reduce emissions and waste at the Lewiston mill.

Since 2012, we have reduced water consumption by 1 million gallons per day, which is equivalent to the daily water consumption of over 2500 average American households. Energy consumption has been reduced by 20 megawatts, equal to the amount of energy used by 20 households for a month, and solid waste has been reduced by 40,000 tons each year, which is the equivalent to waste generated by approximately 50,000 people.

I am very proud of the work our team has done and to be recognized for our commitment to protect our environment.

In our consumer products business, both revenues and retail volumes have grown quarter over quarter, and our business remains solid. We saw a 3.9% increase in retail volumes shipped, and the number of cases shipped reached 13.8 million cases, the highest volume in two years.

Now I would like to provide an update on our strategic capital investment, which remains on track. First, the multi-year pulp digester and optimization project continues to remain on schedule and within budget. The excavation and foundation were completed in the second quarter as we discussed, and a new 1000-ton high density storage chest for pulp stock was completed in Q3. The digestment vessels were shipped to Longview, Washington, and barged up the Columbia and Snake Rivers to the Port of Lewiston at the end of September.

Regarding warehouse automation, our Shelby, North Carolina facility contributed operating efficiency gains in the quarter with reduced labor costs, reduced damage and yield improvements in paper roll handling, storage and retrieval. We are now at full automation in Shelby.

In Las Vegas, warehouse automation activities were completed at the end of the quarter. With lessons learned from the installation at Shelby, the laser-guided vehicles started up smoothly. Planning, engineering and implementation activities are also progressing in our Lewiston, Idaho and Elwood, Illinois operations. Thanks to the teams' commitment and relentless drive to deliver operational efficiencies and execute on our strategic capital projects, we generated $13 million of EBITDA from these activities in the third quarter and $41 million since the inception of our three-year strategic plan in the first quarter of 2015.

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, as of September 30, the total US tissue market as measured in dollar sales was up almost 2% compared to Q2. Based on IRI scan data, which does not include all club and Internet channels, the national brands declined 1% in the third quarter and underperformed private-label, which declined modestly by 20 basis points in Q3 from Q2.

In the third quarter, Clearwater Paper outperformed both the brands and private label with healthy growth of 3.5%. At the end of the third quarter, private-label market share is approximately 24.5% of total tissue, according to IRI. Clearwater Paper's share of private label is 33.9% in Q3 2016, up from 32.7% in the second quarter of 2016.

According to the ad tracking service that we use, traditional promotional print ads by the brands increased by 3% quarter over quarter, likely due to seasonality.

Competitive pressures in tissue remain as brands continue to defend their position in tissue products. We will continue to focus on delivering superior product quality and excellent customer service to differentiate ourselves from the competition.

RISI's forecast through 2018 for net new North American retail tissue capacity is 774,000 tons. This is up 190,000 tons from 584,000 tons reported in our latest investor debt. The revised capacity now yields demand capacity rates of 97% through the end of 2018. The primary driver of the capacity increase is two paper machines totaling 140,000 tons of capacity recently announced by a European company, which is expected to come online in Ohio in late 2018. The remaining 50,000 listed by RISI is to rebuild a fine paper machine to tissue in Virginia.

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

According to AFMPA's September box board report, the SBS market remains relatively balanced through September with backlogs at 4.1 weeks of production, up from the low point of 3.6 weeks in March. Closure of two paper machines by another SBS manufacturer late in 2015 and earlier this year appears to have balanced supply and demand for bleached SBS and bristol grades. This has helped to keep RISI's index bleached board prices stable since April. Demand for food service and cup stock remained healthy, and folding carton orders were in line with normal seasonal demand patterns.

In the third quarter, order backlogs reported by the (inaudible) dropped 3% following an 11% increase in the second quarter and a 19% increase in the first quarter of 2016. Despite the modest reduction in the third quarter, backlog levels remained 3% higher than the levels reported during the same period last year.

Our strategy remains focused on providing premier premium paperboard products supported by superior local service and technical support.

Now getting to our fourth-quarter outlook for the consumer products business. We are expecting revenue dollars to be down 6% to 8%. Shipment volumes and price mix are expected to decline due to seasonality. We expect all input costs per ship ton to be down, except for pulp and chemical costs, which are expected to remain stable in Q4. SG&A is also forecasted to be stable in Q4.

Turning to the fourth-quarter outlook for our pulp and paperboard division, we expect to see revenue dollars down 4% to 6%, due to lower shipment volumes and less favorable product mix compared to the third quarter due to normal seasonal trends.

Input costs are expected to rise for wood fiber due to continued regional demand in the Pacific Northwest, along with increased prices for chemicals and energy.

Maintenance is expected to be down approximately $22 million, mainly attributed to the absence of a major outage in Idaho. The remaining operating supply and transportation and SG&A expenses remain stable.

Looking at the consolidated business for Q4 versus Q3, we expect net sales dollars to be down 5% to 7%, EBITDA impact from changes in volumes and price mix to be down $6 million to $10 million, consolidated adjusted operating margins to be in the range of 6.5% to 8%, and an adjusted tax rate of 36% plus or minus 2 percentage points is expected for Q4, as well as for the whole year. All these variables combined are expected to result in a fourth-quarter adjusted EBITDA range of $49 million to $55 million, and we now expect full-year adjusted EBITDA to be in the range of $210 million to $216 million.

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

To wrap up, I would like to thank our teams for their focus on safety, producing top-quality products, taking care of our customers and our communities in delivering on our environmental goal. We remain committed to all of our customers and serving as good stewards for our shareholders and their investment in Clearwater Paper.

With that, we will open the call up for questions.

(Operator Instructions) Paul Quinn, RBC Capital Markets.

Just a couple questions on the paperboard side. You had that $3.5 million power outage at Lewiston. What was behind that, and is that something that you expect to repeat going forward?

No, it was a power failure with the utility company, and it should be a discrete event.

Any recourse on trying to claim that money back?

Go ahead.

We did have the insurance claim in business interruption for $5 million of it. So, if you are asking about the remaining delta, we will look into it, but I wouldn't count on anything.

So is the simple way to look at that is it cost you about $8.5 million and then you got $5 million back, so the net is $3.5 million?

Yes.

Yes.

Okay. And then, it looks like the pricing in paperboard was down $20 quarter over quarter, and it seems like it is just a lag effect from the April drop. What are you expecting for the balance of the year, and how do you -- are you sort of -- it sounded like you were describing that as balanced market. Do you expect any price weakness going into Q4 besides mix change?

I think just mix change is what we primarily see. We are seeing it as a relatively stable market. I mean, no doubt, it is challenging, but I think we are feeling pretty confident going into the fourth quarter. Talking with our customers about the balance of this year and next year, I don't think we are seeing anything overly concerning. In fact, I think we look forward to hopefully a better year next year.

Okay. And then, flipping over to the tissue side, definitely noticing this growth in private label is slowing, although you guys are outgrowing the private-label space in total. But kind of surprised to see those two machine ads in 2018 that you referenced. I was sort of expecting one, but I didn't expect both. Is that a little bit of a surprise to you?

I don't know if I would call it a surprise. I mean, clearly, we didn't know what was planned for the Ohio site. But, typically, with any kind of greenfield site, the more machines you can have on site, the more productive it can be.

So I wouldn't say it caught us by complete surprise, but it wasn't something that was in the RISI forecast that we were counting on. Keeping in mind that the market does still remain very balanced, even with those two machines through the end of 2018. So that is a good sign.

And as a positive way of looking at that, those are smart operators. They must see something in the US market that they are willing to make that investment.

Yes. That is definitely one way to look at it, or you have got good competitors coming into your markets, which is also -- could be looked at as problematic.

In terms of -- the last question I had was just in terms of capacity adds for yourselves. Do you -- at some point down the road, you can increase your integration right here. What does that look like in terms of additional production for you guys? At some point do you see that happening in the near term?

We haven't really talked a lot about what our future strategic plans are, but I think the best way to characterize it is, today, we are growing nicely with our customers. We see continued growth with our customer base. As you know, Shelby was our last addition of a paper capacity, and ultimately we are sold out on overcapacity. So we will just keep our eye on the market and what our customers' growth needs are and consider what our alternatives are to make sure we can take care of our customers going forward.

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

James Armstrong, Vertical Research Partners.

First one is just a little modeling question. The pension settlement expense, was that all on the corporate line, or was that spread between the segments? I'm just trying to figure out where that actually hit the P&L.

It is all on the corporate line.

All on the corporate line. Perfect. And then, additionally, on the Long Island closure --

Hey, Jim. I just want to make sure that you count for adjusted EBITDA purposes, we did adjust that out.

Yes. For adjusted, I did it out; I would just wasn't sure if it was spread between the segments. And then, on the Long Island closure, when did that cost start to fall off?

Pretty --

I think at the end of 2017. End of 2017.

Okay. So it will be there (multiple speakers). It shouldn't change much between then, right?

No.

Perfect. And then, more strategically, could you -- with your backlogs, could you help us put a bound on how much lower your volumes are going to be in the fourth quarter versus the third quarter? Just trying to get a range around that.

I would look more at our history of seasonality. We have been as low as, call it, 180,000, and last year I think we were 200,000. So, I think if you look at kind of the frequency, you are more often towards the low end of that range than the higher end of that range, but that is kind of what it can do.

Okay. So similar -- yes, that makes sense. And then, in tissue -- well, in tissue, could you go over the mix of what you are selling to consumer versus parent roles and if that has moved more towards or away from the parent role?

So Q3 definitely was a richer mix on retail case side. That can move quarter to quarter, depending on circumstances. Our objective would be to have more cases. The more retail cases, the better.

Okay. And then, lastly, could you update us -- have you decided or planned your CapEx expenditure in 2017? Could you help us with a range around that?

Well, we have talked in terms of our three-year strategic plan, and so I will just reference back to our prior public statement in that regard, and 2017 should be pretty similar from a total CapEx as 2016.

That helps. Thank you.

Anthony Young, Macquarie.

I think you guys referenced some market share numbers in the 2Q versus the Q3, and I think you are to [33.9] versus [32.7]. Did you have another big win on the quarter, or was that supplying more material to your existing customer base?

We had some shipping around of customers, but I would say it is more a growth in our top five accounts, was more of a factor than any big win.

Okay. And then, just so we can get a feel for share buybacks in the fourth quarter, you gave your CapEx number. What portion of that is growth versus discretionary?

CapEx?

Yes.

Well, for a year, I believe we said for the year we are going to be at $60 million of maintenance CapEx for the balance. $90 million-ish will be the strategic capital.

Okay. That is helpful. That is the extent of my questions. Thanks, guys.

(Operator Instructions) Dan Jacome, Sidoti & Company

Sorry if I missed it, it sounds like $4 million of the high-end of your 2016 EBITDA guidance. Was that correct?

Yes. So last quarter when we gave a range for the year of $210 million to $220 million, the range now was $210 million to $216 million. Okay. And sorry if I missed it again, what is the number one driver behind that?

Paperboard pricing.

Paperboard pricing. Okay. That is what I thought. Yes, I am not too surprised by the headwinds there. I was maybe a little caught off-guard by the tissue outlook for revenue for the coming -- for the fourth quarter, and it sounds like you guys aren't getting more share on the retail side, less parent roles. So I would have thought that that would have helped you on the revenue side. So can you just help clarify that for me? I know it is a long question, but can you just clarify that for me?

Yes. On the tissue side, you wouldn't necessarily think of it given the end market dynamics. There is some seasonality in the fourth quarter where we typically do see some decreases in the fourth quarter, and it has a lot to do with all the promotions by the brands.

Okay. And then, I hate to put you on the spot, but have you guys -- how are you guys thinking about paperboard prices pricing for 2017? I mean, is it too soon, or are you going to maybe comment on that in the next quarter?

Yes. Our next quarter we will likely put a better outlook together for 2017, but I did say earlier on the call that we think the balance of the year -- the pressure is really more around mix, less on price, and in talking with our customers and looking at demand trends, I mean, we are feeling pretty confident about 2017. So knock on wood, we hope it is a better year than 2016.

Okay. And then, lastly, I was just wondering if you guys -- more curiosity if you guys were attracting the Kroger news and any potential acquisition they might do in the pharmacy side, if that were to get through. Have you guys thought about that at all, or is that maybe not want to discuss that now?

I would just say they that we are always in discussions with our customers. I don't know that we would be privy to any of their strategic plans, per se, but (multiple speakers) stand ready and able to grow whenever they need us to.

Yes. I would have thought, if that goes through, that could help you. I mean, if you were to -- it could help you, right?

Absolutely.

Right.

Okay. Well, that's good. Thanks a lot for the details.

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 appreciate your time and look forward to finishing another great year while getting ready for 2017. Thank you for joining us today and for your continued interest in Clearwater Paper. And then, on a final note, we will be at the Bank of America Merrill Lynch Leverage Finance Conference in December, and we hope to see you there.

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