Clearwater Paper's Management Presents at UBS Global Paper and Packaging Forum (Transcript)

Sep.12.13 | About: Clearwater Paper (CLW)

Clearwater Paper Corporation (NYSE:CLW)

UBS Global Paper and Packaging Forum Call

September 12, 2013 11:45 ET

Executives

John Hertz - Chief Financial Officer

Dan Johansen – President, Pulp and Paper Division

Unidentified Analyst

Alright. To try to stay a little bit on schedule, we are going to move to our next speaker. I am happy to introduce John Hertz, CFO of Clearwater Paper and Dan Johansen, the President of Clearwater’s Pulp and Paper Division, a leading producer of private label tissue in the U.S. that’s just been investing in expanding as well as coated paperboard as well.

John Hertz - Chief Financial Officer

Thank you, Gail. Do we need to get presentation up? Okay. So I will start off just with the Safe Harbor disclosure on the first slide and then move into an overview of Clearwater Paper. We spin out Potlatch in 2008, but we have been operating these assets within the Potlatch framework go back now 50 years. Two main businesses, paperboard as well as tissues about 60% tissue and about 40% paperboard.

But in terms of the financial overview, last 12-month net sales $1.9 billion, EBITDA of $208 million and a CAGR from the 2000 expense from an EBITDA perspective of 23% and were approximately 4,000 employees. Starting with the consumer side of the business, tissue, and as I have kind of moved through the slide from the upper left hand side, you can get a picture of the products were all 9% private label on the tissue side. So all brands that are the store brands and we cover bathroom tissue, paper towels, napkins, facial.

Moving to the upper right hand side, we have got a national footprint in terms of both paper machines as well as converting facilities. And then if you move down to the lower row to look at the industry, you can see kind of the makeup of the industry from a customer standpoint, grocery at 37% is the largest and then you’ve got mass growing at 27% and club. Specifically from a Clearwater standpoint, on the bottom right hand box, where we are strongest in grocery that’s been our legacy, where 100% market share with the major grocery retailers and more of the presence on the West Coast and on East Coast, but growing with the mass.

As we move then to Slide 5 and we look at industry dynamics, what this chart really shows is this is a business that basically grow the population and it’s been a 1% to 2% growth in population over this timeframe in corresponding growth in demand from a tissue standpoint. So next business to be in from a growing demand perspective, and we look at more of the private label dynamics. From a total retail perspective, we need to see the mix by products, got some tissue of about 60%, paper towels 30%, and then facial napkins throw out the difference. Specific to private label, you can see versus 2003 timeframe, the private label has gained share across all the product categories, largest in napkins and most opportunity and that’s in tissue. And that’s largely because of the strength in particular, but the brands and that’s also with our launch to our drive manufacturing technology and the quality of that brings the largest opportunity from a private label standpoint to gain market share. We’ve got questions they just piped in they will wait till the end.

Next slide on Slide 7 really illustrates the opportunity we have from a geographic standpoint. As I said before we have been traditionally strong in grocery and in Midwest. But if you look to the right of that chart in terms of the amount of the population as well as our market share and private label in general market share, you can see it’s less than the Midwest and in the east and just the size of market opportunity from a geographic standpoint you said, if you are able to replicate our market share that we see in the less across the Midwest and the east 25 million incremental cases in the Midwest as 37 million as we look at the east.

Turning to slide 8, now this is the slide that we have had for about the last year given the TAD capacity that has come online and Q4 of ‘12 was what was early ’13 there has been kind of some dire predictions of too much capacity and impact on pricing and we’ve kind of talked about. If you believe the market growth goes with population we do the math on what that means from how many paper machines are getting need to fill that demand is about 2.5 paper machines a year. As we get into 2014 it should also being balanced and that should be a concern. Now, we’ve kind of updated this slide from TAD because we actually have seen and let me step back.

We have also said that while this plays it’s still about through the 2014 timeframe that there should be a quarter or two that gets lumpy. And we’ve actually saw or seen a quarter here in third quarter where we are seeing more in the way of demand and price than what we saw in the second quarter and what we have expected to see and that it has implications both on our third quarter as well as how we see the EBITDA contribution ramp of our TAD project. And I will get specific on that in a future slide.

Alright, so that’s tissue, if we go to paperboard products in the upper left hand side of the slide. You can see liquid packaging which is primarily in which is Japanese customers. If you move to right folding carton and in the bottom is cut stock. If you move to the right, you can see our manufacturing footprint. We’ve got a facility in Lewiston, Idaho that serves the West as well as the Japanese market and a facility down in Arkansas that serves more the east. If you move to the bottom row in terms of the industry make up you can see folding carton is the biggest percentage of that followed by liquid packaging and pulp. And if you would have layered Clearwater in terms of share by category on top of that it would look very similar – similar to that. And then this is an industry that really is five players over time kind sorted out to have five players that really make up 85% of the market. Two are the larger players and then followed by three that are kind of the same size which we would include us.

So move then to the next slide to Slide 10 and this slide I guess I point out the next slide in terms of paperboard market, it is somewhat correlated to GDP, so there is more cyclicality to have been what we see in the tissue side of business. And I would point out if you kind of look at that orange lines which is price line and kind of back to the 2005 timeframe and watch how that kind of slowly drifted up through today and that’s really a function of some rationalization and consolidation that’s proven industry over time. I think it’s an industry that has improved rationally as it relates to price. The leadership of the industry tends to now take either share capacity or take some down time versus compete on price. And so over the last five years it’s been a pretty healthy business to be in from a pricing standpoint. So, moving then to shifting gears and now I am on to Slide 12 to the Clearwater strategic plan. Since our stand and our long-term strategy continues to be one to grow the tissue business and two to optimize the profitability of paperboard that’s really what we’ve been focusing on.

And if you switch to the next slide, Slide 13, you can see kind of some of our major accomplishments the spin-out date to be able to execute to that strategy. We have completed the Shelby facility production that the loan production ramp is going better than expectation and plan. We are in the middle I’ll call it the shipment, ramp on that. As I said, we are seeing kind of some lumpiness here in the third quarter, but we have had a lot of good wins with incremental new customers. So well, we prefer not to have the lumpiness in the quarter. We feel good about the shipment launch. We acquired Cellu Tissue to give us that national footprint and that integration we have seen an objective to basically get about initially $20 million to $30 million of synergies out of that acquisition as we work through it, we quickly got to $20 million then $30 million and increased the target to $40 million and as we left the fourth quarter ‘12 we were achieving the $40 million plus synergy run rate associated with Cellu Tissue.

We continue to expand our channel and geographic reach by taking advantage of the Cellu Tissue assets as well as Shelby and penetrating East Coast grocery stores as well as the national mass chain. From a paperboard business perspective, we are really focused on taking cost out and increasing operating margin and EBITDA margin. We think we are going to be in that 19% to 20% EBITDA margin from a paperboard prospective given the cyclicality of the business. And then finally on the capital structure, so yes, I think if you go on the last 12-month basis where that’s about 2.7 or EBITDA we think we are comfortable in the 2.5 to 3.5 range. And we, in January, announced $100 million share buyback that we are committed to completing by the end of 2013 and then we committed for ‘14 and ‘15 to return 50% of free cash flow – discretionary free cash flow to shareholders.

As we kind of looked in into 2013, I have already talked about that the share buyback we also were able to refinance some (indiscernible) interest debt at 4.5% in January. Next to our Lewiston facility, we acquired a whole lot shipping plans, where we were about 8% of that vendors business and that gives us cheaper whole logs because you don’t have the profit margin plus strategically it gives us more influence in that fiber basket. We now said we have got some converting assets in Georgia that with the ramp of Shelby are now somewhat redundant that we are going to close our facility and move that varying capacity some will be going to Oklahoma, some to Shelby to give the converting assets in more strategically located spots.

And then finally, while our long-term strategy continues to be to grow the tissue business and optimize paperboard in the next two plus years, we really are more focused inward on operational excellence, margin expansion. And as part of that, we launched a three-year strategy which we call drive on the next slide. You can see what drive stands for, but essentially like I said it’s focused on achieving year-end development EBITDA, expanding operating margins, we have got to model P&L on a consolidated basis to try to be at 15% of EBITDA, and so a number of initiatives in place in order to achieve that and focus on a workforce.

So now I will take you to the value proposition on Slide 14, and this is a slide we actually kind of put out there about a year ago exactly to give a roadmap of how we see this business getting to $300 million EBITDA run rate. And there is only three main categories to achieving that, one is the Shelby ramp, which would be a $50 million to $60 million contribution, and we are bridging from 2011, and this assumes the 2011 cost structure. The next is Cellu Tissue synergies, which we have fully achieved, and then last like we just hit a $90 million plus was cost saving opportunities.

And as we sit here today, we’ve achieved $70 million of cost saving opportunities and we think we have minus $8 million, so another $26 million as we look beyond into 2014. So we are going beyond the $19 million, it is $19 million plus as it relates to that. As it relates to the Shelby ramp, I talked about some of the competitive pressure that we saw in the third quarter. We had initially expected to kind of achieve that $12 million to $15 million of EBITDA contribution in the first quarter of 2014 as a result of what we’ve seen in the third quarter that is pushing itself out. And you can see I believe that ramp by quarter out, so about $2 million in the second quarter. We thought we’re going to see about $5 million in the Q3, but that’s probably going to be like $2 million or $3 million. Q4 is $7 million Q1 is $9 million and that versus the $12 million to $15 million that’s what we thought we can see in the first quarter and getting to that full run rate then in the third quarter of 2014.

When we break it down on the next Slide 18 on a quarterly basis and this is the slide we started to put in at the end of the first quarter. We had a difficult first quarter to kind of give get people some visibility how we thought we could actually get from there to the $75 million run rate. As I said before on the previous slide, the expectation on – at the full EBITDA contribution from the TAD project we have now moved out to Q3 and so basically as you walk around that roadmap and it’s the bridge on the top. We’ve looked to that to be kind of the Q3 event that we would get to the $73 million to $78 million run rate. And you can see the different categories, how that plays itself out.

And on the bottom with that chart I have tried to give you some insight into what we see the first quarter shaping up. In July we saw that – like I said step back and say that we’re seeing about $8 million a quarter of cost headwinds and paperboard pricing headwind in the second quarter versus the 2011 cost structure. And we saw that comps in July that despite that we still get to the $75 million run rate in the first quarter of 2014 with the push out of the EBITDA ramp up confidence about little bit less than that. And we still think with some of the cost saving, incremental cost saving opportunities what we have achieved that we think are achievable but we put range on the first quarter of $70 million to $75 million.

Turning to slide 19, this slide that shows our stock price performance since the spin, we are on the green line. We’ve historically – we would trended to be either kind of at the top or close to the top, there has been bit of a run up in paperboard in the last quarter. So they are getting on ahead of us but 360% total returns on to spin. And from margins or a multiple standpoint and we came out the spin we are at about 3, well below the industry. And as we’ve grown the stock prices, we started to come in line with our peers in terms of multiple at 7.6 kind of in line with paperboard. But still have opportunity – still have opportunity relates to small capital issues as well as kind of prepare ourselves to the consumer side of business.

Finally, I will close on our outlook for the third quarter. As I’ve talked about with kind of pricing pressure that we saw we have updated our guidance and for the third quarter and really where the meter all of that is from the price mix category, where we had previously thought that we would see about 1 to 3 points of improvement over the second quarter. Because retail cases which we thought would be up 1% to 3% are now going to be flat to down, but our shipment timings are still expected to be up 1% to 3% and that’s because we are basically building the rest (indiscernible), but the impact of that has about – its causing a flat to down 2% impact on price mix for the quarter.

So, I think I’ll stop there with the outlook and I will open it up to questions.

Question-and-Answer Session

Unidentified Analyst

Hi, I guess turning with the pressure that you’ve seen in the tissue market obviously seems to come by a bit of surprise. Are they coming in an any particular geographic region, any product area is it coming from producers that bringing on incremental capacity is there any sort of color and can you kind of put out that?

John Hertz

We didn’t see in the second quarter as we are kind of bringing on the traditional customer base and we didn’t expect to be seeing that kind of the middle of the July timeframe. I guess one of the things that was going on in the second quarter in July and that was kind of put it selves out is as we talk about this on the call was that we had or kind of in the middle of the big process, three large national type accounts, couple of those were once where if we did have a position that was pretty small position so that kind of – that new kind of customers. And we did gain share there, we did get incremental business with those new customers, but not at the level that we expected and kind of the new cost of that was some of the price competition from number of our peers are launching add machine about same time. So you are seeing the same three to four five names showing up in this process and we think we’ve got a competitive advantage in basically our demonstrated ability to serve the national footprint or others may that might be more risk in our ability to do that and despite that put these customers kind of willing to go with some pricing decision and then so taking a little bit of risk associated with that.

Unidentified Analyst

And whether the new capacity that’s come on this year seems to be secured a bit more surprise – a little market may be brand result and is that or you think any seeing any sings about the catalyst that private label will start to make emerge in the east and Midwest and catch up with where established in the last or not so much.

John Hertz

It’s not, I think exactly see in that I guess was the mass side of the business there are kind of trade in the grocery change in terms of grocery private label and what they are going to do there that they are clearly are now embracing it so their presence in the Midwest and the easy will drive just what you said and we are affectively talking to many of the more regional east coast version change them talking about private label program. So yeah, I think we think private label opportunities to grow their share on the East Coast.

Unidentified Analyst

But there is anyone in the room, but I’ll keep going otherwise.

Unidentified Analyst

You mentioned $8 million of (indiscernible).

John Hertz

That pulp was part of that was both, yes.

Unidentified Analyst

And you have any timing that you can give us on the additional it was like $5.5 million of cost savings that you’ve identified now?

John Hertz

Yeah, I mean, I think we have line of sites that have that we fully in the run rate by the end of 2014.

Unidentified Analyst

Do you guys consider buying back in the 4.5 number (indiscernible).

John Hertz

Yeah, I mean that it hasn’t been constantly considered I think for the trade around 90 or something like that. Is that hasn’t been something that we’ve been considered certainly policies that we’ve value add as we move through the year and years, but our focus right now in terms of capital allocation is we have done share buyback.

Unidentified Analyst

Can you maybe talk a little bit about the paperboard market we’re seeing a pretty healthy uptake in industry backlogs and developments is that something you’ve experienced in your business is that something that proven sustainable in the third quarter?

John Hertz

Yeah and since we have Dan with us as the President…

Dan Johansen

Sure, I think it’s very sustainable to the third quarter typically our business will drop off in Q4 seasonal that way so I would expect backlog to backup a bit in the fourth quarter but when you look at the numbers in June and July they industry backlogs were higher than ever been historically so, coming off a very high peak and get a sense we’ll probably get soft landing in Q4 which is good when you are coming out the peak like we have right now so I don’t see any major changes in Q4 rather than just what would be seasonal.

Unidentified Analyst

And to what extent that any do you think the pickup in (indiscernible) this year is customer restocking versus underlying demand?

Dan Johansen

Well, that is always the question and we’ll find out in Q4 and Q1 how much of what was restocking, how much or real demand. The demand from what we see has been relatively flat to up a little bit not to the extent that you saw with backlog. The one segment that continues to grow was our paper cups and you continue to hear about either large companies, whether its McDonald’s or whether it’s Jamba Juice or even now there are smaller ones that are changing from foam to paperboard that’s good for the industry obviously, good for us and we make paper cups. So that’s good and you hear more about municipalities that are just outlying foam products and because of landfill was huge and that San Jose I think is the last one that just in the last couple of weeks came out with that. All that probably the biggest needle mover I think for the paperboard side.

Unidentified Analyst

I did have one other question but...

Unidentified Analyst

Now I have a question on bring up buyback in the multiples, you showed that the multiples expand as you know in the range of the paperboard comps or packaging comp. Given that after Shelby sort of fully ramped out the half or two-thirds of the EBITDA generation of the company, when you think of private label tissue business, in terms of the blended multiples should probably be a lot higher than paperboard company, right?

John Hertz

Yeah, we still think there is opportunity for expansion.

Unidentified Analyst

Alright, so in terms of that is just capital allocation are you guys thinking about keeping that in mind and where you guys still have multiple still with the packing comps income so you probably should do another buyback or how you guys…

John Hertz

I mean that we – with definitely further discussion deliberation I mean this is the discussion we have with the Board and from a decision standpoint its kind of the end of year that we would lay decision as it relates to 2014 how we plan to return that cash to shareholders and whether its stock buyback continuation or whether its dividend or a combination or else.

Unidentified Analyst

Going back to paperboard again on your last call you guys made reference to potential that we are seeing impact from Chinese over supply affecting the U.S. market. Is that based on anything intangible you’ve seen or is it just being cautious given the growth rate?

John Hertz

And I think its two things if you just do the math when you have million ton machines coming online just got to go some more right and it is a global business. It’s interestingly we haven’t seen the impact in North America this year to really to any extent most of the products coming in is used in what we call the commercial print market, which are flat sheets used for signage or mailers or those kinds of things. (indiscernible) board in China is not as stiff as SPS and so it really hasn’t found use in making boxes and that’s a big part of our business. So they don’t make nice pharmaceutical box or a nice cosmetic box or something like that, they just don’t have the stiffness to do that. So in this country it hasn’t made in-roads in that part of the market yet. What we do think – what we have seen that’s intangible is that they’ve taken over much of the greater Asia business. And we used to participate in that we don’t – now we moved out of that a couple years ago kind of seeing what was going to happen. But some of our competitors that have a larger position there have been more affected on a day-to-day basis and then you see them coming back to North America trying to find comps for paperboard that they used to sell overseas. So I think that’s the biggest impact we’re seeing right now.

Unidentified Analyst

And then anything you’re seeing on the cost side I guess particularly maybe down (indiscernible) in the third quarter?

John Hertz

We have seeing some higher wood cost. Some of that were offsetting with the higher productivity rates. So I would say there is not best way to put and probably not subsequent there, what you would see that would be material at this point.

Unidentified Analyst

Okay, lower cost inflation standalone must have severe (indiscernible)?

Dan Johansen

It’s basically Southeast issue and you probably heard that from others in the Northwest we actually are enjoying very low wood cost because of the pickup in the lumber industry and the amount of residuals that are available, so for division it sort of offsets that.

Unidentified Analyst

And I guess strategically over the last two years, you have grown both organically in the acquisition, would there be any preference as you look forward, I mean there is someone internally focused, but as you look forward would you think what channel will be a better opportunity for you to grow than the other given the recent experience?

John Hertz

Well, it’s going to depend on that circumstance and it’s going to be net debt trade-offs. I mean, I guess I would say while we are focused internally in the next couple of three years, so that likelihood of that wouldn’t be really very high on the list. Our longer term is to grow efficiently. So couple of years out, we will be thinking about that. And at Shelby we do have the floor space for one more paper machine if we wanted to do it internally. So we potentially look at acquisition.

Unidentified Analyst

Do you have any interest in expanding side of tissue into other products, for instance, would there be kind of some opportunity in that?

John Hertz

I mean, look right now that’s we have kind of looked at other adjacencies like what have you with might make sense. That’s something we would be thinking about where you can make it all.

Unidentified Analyst

If there are questions?

Unidentified Analyst

Yes, on the M&A discussions, given the, I guess the little bit of pickup we have had in the sales process for national players, does it make sense in terms if you think about M&A would a bigger paper company be able to they own these assets be able to make better inroads with these that are including national brand. So guys that already have the relations with them that they hold in your tissue assets let’s say, would they have much better time getting into their product in there?

John Hertz

I don’t know, the way this is played out, I don’t think I have to see. I don’t necessarily think so, but do they think they are not looking for one supplier, right and they are going by distribution, it’s in here, they are going by different products and go forward in it, go around. They make choices in some of these cases going out to player who doesn’t necessarily look like this, but your question whether they have the national distribution capability.

Unidentified Analyst

What sounds like the national distribution capabilities maybe not the effect right?

John Hertz

That’s what I am saying.

Unidentified Analyst

I will just point just declares the one in (indiscernible) and exited private label similar to them, so what was that? So thank you very much for coming today.

John Hertz

You bet. Thank you.

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