Clearwater Paper's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Clearwater Paper (CLW)

Start Time: 17:07

End Time: 17:38

Clearwater Paper Corporation (NYSE:CLW)

Q1 2014 Earnings Conference Call

April 23, 2014 05:00 PM ET


Linda Massman - President and CEO

John Hertz - SVP and CFO

Robin Yim - VP, Investor Relations


James Armstrong - Vertical Research Partners

Steven Chercover - D.A. Davidson


Welcome to Clearwater Paper Corporation's First Quarter 2014 Earnings Conference Call. As a reminder, this conference call is being recorded today April 23, 2014.

I’d now like to turn the conference over to Mr. John Hertz, Chief Financial Officer of Clearwater Paper. Please go ahead sir.

John Hertz

Thank you, Saeed. Good afternoon, and welcome to Clearwater Paper's first quarter 2014 conference call. Before we get started, I wanted to take the opportunity to introduce Robin Yim, our new Vice President of Investor Relations. Robin has over 25 years of experience in industrial relations, treasury, and banking. We are fortunate to have Robin on the Clearwater Paper team and she looks forward to meeting you.

I also want to thank Sean Butson for his four years of investor relations support to Clearwater Paper. We wish him well in his future endeavors. With that, I will now turn the call over to Rob.

Robin Yim

Thank you, John, and good afternoon, everyone. I’m very happy to be here. And while I have the opportunity to meet some of you, I’m definitely looking forward to meeting everyone. So with that, let’s get started.

Our press release this afternoon includes details regarding our first quarter results, and you'll find a presentation of supplemental information posted on the Investor Relations area of our website at

Additionally, we will be providing certain non-GAAP information in this afternoon’s discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release or in the supplemental materials provided on our Web site.

I'd 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, 2013 Any forward-looking statements are made only as of this date and the Company assumes no obligation to update any forward-looking statement.

In addition to John Hertz, Linda Massman, our President and CEO is also on the call today. John will begin with a review of the financial results for the first quarter and Linda will provide an overview of the business environments and our outlook for the second quarter of 2014. And then, we will open up the call for the question-and-answer session.

Now, I’ll turn the call over to John.

John Hertz

Thank you, Robin. Before I get to our first quarter 2014 results, I’ll start with little housekeeping. We are providing both GAAP results and results that are adjusted to exclude certain charges and benefits that we believe are not indicative of our core operating performance.

For the first quarter of 2014, those include $9 million of cost associated with the closure of our Long Island, New York and Thomaston, Georgia, converting facilities and $3 million of expense related to the mark-to market adjustments to our outstanding directors common stock units.

First quarter net sales came in at $485 million. That’s up 3% versus the fourth quarter. That is above our updated outlook that we provided on March 18, due primarily to a stronger than expected 6% increase in paperboard shipment volumes. Excluding pulp sales, consolidated price mix improved slightly while consolidated volumes grew 4%. This is Q1 2013 net sales were up 5% and higher tissue prices and higher paperboard prices and volumes.

First quarter adjusted gross profit of $63 million or a 13% margin, which excludes the Thomaston and Long Island shutdown costs was down 230 basis points from the fourth quarter due primarily to $9 million in higher energy and transportation costs associated with the extremely cold winter in the Midwest and East as well as $3 million of increased external pulp, and wood fiber cost.

Adjusted SG&A expense which excludes the mark-to-market expenses was $30 million or 6.3% of first quarter net sales, which is up approximately $1 million from Q4 ’13 due to higher compensation costs related to 2014 profit dependent accruals.

Adjusted corporate expense -- expenses was $13 million of the SG&A spend in the first quarter and at the high-end of our outlook, and also due to the to higher compensation costs as we discussed.

Adjusted operating income of $33 million or 6% margin was slightly below our updated outlook of 7% as energy and packaging costs were up more than what we expected in March and more than offset the paperboard revenue upside.

Adjusted EBITDA was $55 million. Adjusted EBITDA margin was 11.3% of net sales, compared to 13.9% in Q4. A 260 basis point decline is primarily due to the previously mentioned weather related costs in incremental pulp and wood fiber costs. First quarter 2013 adjusted EBITDA margin was 8.3%. Net interest expense of $11 million was flat with the fourth quarter.

Turning to taxes; on adjusted basis, our Q1 effective tax rate was 36.2% versus 26.6% in the fourth quarter. First quarter 2014 GAAP net earnings were $6 million or $0.29 per diluted share and on an adjusted basis $14 million or $0.66 per diluted share. That is compared to adjusted net earnings of $23 million or $1.09 per diluted share in the fourth quarter and $2.4 million and $0.11 respectively in the first quarter of 2013.

Non-cash expenses in the first quarter of 2014 included $22 million of depreciation and amortization, $5 million of total equity based compensation, $4 million of impairment charges related to the Long Island closure and $3 million of non-cash pension and retiree medical expense. Employee headcount at the end of the first quarter was approximately 3,700 versus 3,816 at the end of 2013.

Now I’ll discuss the segment results. Consumer Products net sales were $287 million for the first quarter of 2014, up 2% compared to the fourth quarter and above our updated outlook of flat to up 1% primarily due to a 2% increase in tissue pricing to 2029 per ton, resulting from a higher than expected pricing mix.

We shift 128,000 tons, down led the 1% versus the fourth quarter which is slightly low our updated outlook of flat due to non-retail tons declining in 2% as some product availability was limited as a result of a planned outage at our Neenah, Wisconsin mill as well as weather related transportation issues.

Retail tons of 71,000 were up slightly from Q4, while converted product case sales volume drove 1% to $13.4 million. Contributions to EBITDA resulting from TAD expansion related shipment were approximately $7 million in Q1, which was flat with Q4. We had expected TAD EBITDA contributions to the $9 million this quarter. But the weather related issues combined with a competitive market did cause volumes and product margins to come in below our expectations.

Consumer products adjusted operating income for the first quarter of 2014 was $9 million or 3% of net sales versus $70 million or 6.2% in the fourth quarter. The decline was primarily due to the weather related costs, higher pulp prices and packaging costs.

Consumer Products Q4 adjusted EBITDA margin of $24 million or 8.4% decline from $34 million or 11.9% in the fourth quarter was even after considering the cold weather impact is well below the 17% divisional objective inherent in our cost cycle financial model. Linda will discuss some of the steps we are taking to improve our margins inline with this objective.

Now turning to the Pulp and Paperboard division. Pulp and Paperboard net sales of $198 million for the first quarter of 2014 were up 6% versus the fourth quarter, due to higher volumes and improved product mix. Paperboard shipment volumes rose 6% to 201,000 tons; we were well above our updated outlook of that 1% as a result of a strong market and certain customers pulling in shipments ahead of pending price increase. Average pricing of $988 per ton was up 1% which was inline with our expectations.

Pulp and Paperboard operating income for the first quarter of 2014 was $37 million or 18.5% of net sales, as compared to $37 million or 20% of net sales in the fourth quarter. The margin decrease versus Q4 was primarily due to seasonally higher wood prices and increased weather related costs. There was no major maintenance in the quarter and our next major plant outage for both Idaho and Arkansas is scheduled for the first half of 2015.

While there won’t be a major outage in 2014, we do have a plan to auto wash at each of those mills in the second quarter. Four boilers will be down for the water wash and we will concentrate on the team maintenance on those boilers into that timeframe. Therefore Q2 maintenance and repair costs will increase approximately $7 million versus the first quarter and we’d expect the maintenance spend to them decline by $6 million in the third quarter.

Pulp and Paperboard Q4 EBITDA margin of 22% was well above the 19% divisional objective inherent across cycle financial model, but down 130 basis points from the record high in Q4.

Now turning to the balance sheet; capital expenditures were $50 million in the first quarter of 2014 and are expected to total approximately $78 million in 2014. Long-term debt outstanding on March 31, 2014 remained unchanged at $650 million.

Turning to the stock buyback program. Through April 22nd, we’ve repurchased 68,000 shares to $43 million and are $100 million share repurchase authorization at an average price of $63.19 per share. And we remain committed to returning at least 50% of discretionary free cash flow to shareholders via share repurchase this year.

As a reminder, we define discretionary free cash flow as cash flow from operating activity minus $50 million of maintenance CapEx. As with the most recent measurement date of December 31, 2013 our Company sponsored pension plans were under funded by approximately $7 million.

We contributed $4 million to those plan in Q1, and expect to contribute an additional $50 million during the remainder of 2014. With regard to our liquidity, we ended the first quarter with $83 million of unrestricted cash and short-term investments. During the first quarter, we generated $35 million of cash from operating activities or 7.3% of net sales.

I’ll now turn the call over to Linda Massman, who will discuss the company's outlook.

Linda Massman

Thanks John. Hello everyone and thanks for joining us today. Our first quarter adjusted operating profit margin of $33 million or 6.7% with roughly inline with the updated outlook that we provided in March. Upside in terms of volume and pricing was fully offset by incremental costs associated with the bad weather experience during the quarter.

As we began the second quarter, so far we’ve seen natural gas prices decline to the mid $4 range, but we’ve not seen reductions in transportation costs due to the tight carrier environment which we expect will continue through the balance of the second quarter.

There were a number of positive sales developments in the quarter. In the consumer products business, we completed negotiations with several key customers. And I’m very pleased to tell you that not only have we solidified long-term supplier positions, we’re partnering closely with our customers to grow private label sales. Additionally, we were awarded business at a number of new customers and are seeing incrementally positive momentum at several customers in non-grocery channel.

On the Pulp and Paperboard side, shipment volumes increased 6.3% quarter-over-quarter to approximately 201,000 tons which is near record level. And the favorable pricing environment continues to hold.

Now I will discuss our view of the market environment and our outlook for each of our business segment starting with the Consumer Products business. According to IRI worldwide data, the total tissue market has measured in cases was down .3% compared to Q4 ’13. Total private label declined by 1.3%.

Clearwater Paper is down 0.8%, while brands grew 0.1% over this period. This trend is inline with an ad tracking database that we subscribe too and their reports show advertising and promotional activity by the brands are up approximately 65% from the prior year.

Our first quarter results for consumer products were negatively impacted by severe winter weather and continued aggressive competition in the market. Looking forward, with the exception of transportation, we expect the weather related issues to abate. However, we do see the competitive environment continuing through the remainder of the year.

We expect to brand, to continue to promote it. The more level to our recent experience and private label competitors with new incremental capacity to competitively pursue new business opportunities, just like we are doing.

Given the current competitive environment, we are a bit puzzled by the new capacity announcements made in the last several months. But I can assure you we’re focused on variable click in our control to mitigate the competitive pressures.

We're focused on running our business as efficiently as possible, with a continued emphasis on EBITDA dollars and margin percentage improvements through further optimization of our manufacturing and distribution network. We see multiple opportunities to improve efficiency across our business. Particularly related to the CPD business, we’re developing strong and lasting customer relationships as a top priority.

We are on solid putting with our core customers, garnering multi -year contract as a key supplier. And we made great progress and further penetrating existing any targeted customers in the non-grocery category. On the cost side, you’ve already taken steps to close high cost converting facilities in Thomaston and Long Island.

We are in the process of installing and implementing phase 1 of an upgraded ERP system and bringing keen focus on efficiently managing our logistics, transportation, and supply chain. We have already embarked the measures to improve operational efficiencies on all levels.

In addition, we’ve set operating margin objectives for each mill, a cumulatively built towards the 17% model EBITDA margin goal for our consumer products business and have established action plans to begin closing the gap.

To the extend we’re unable to execute on those action plans, we will consider all our actions including further network rationalization. Back in 2009, we said out to do the very same thing with our paperboard business. And we are reaping the benefits of those optimization efforts, which coupled with current paperboard market condition, you have that record EBITDA margins in the fourth quarter 2013 and strong performance continuing into 2014.

I’m very proud of our paperboard team and has complete confidence our tissue teams will also be successful as they launch their optimization efforts. Heading to our second quarter outlook for the consumer product business, we’re expecting a 3% to 5% increase in shipment ton compared to Q1 due to higher retail and non-retail volume.

We expect price mix to be flat with the first quarter. As the impact of an increasing mix of TAD tissue will be offset by price declines in certain conventional shipments. We’ve announced and in some cases already implemented price increases on parent rolls which could favorably impact consumer products, price mix for the quarter.

On the cost side of the equation, we expect our cost to be up $5 million to $9 million in total. Pulp costs are expected to be higher due to slightly higher prices combined with higher shipment volume. Chemical, packaging and transportation are also expected to be up as well due to increased volume.

Transportation rates remain unchanged, because we’re not seeing any release in the carrier market, which remained tight in the second quarter. On the positive side we expect energy cost for this division to decline with the weather related issues impacting our business, and we expect both maintenance and SG&A expenses to be flat with the first quarter.

Finally I’d like to provide a status update on our TAD, EBITDA contribution (indiscernible). In first quarter we executed TAD business with about 90% of the customers we believe are necessary to achieve the $12 million target, and we’re actively pursuing the remaining 10%.

However if the promotional activity from the brands as well as historically high pulp cost persist into the third quarter, there is volume of product margin risk to achieving that $12 million target. I would therefore put a range on the third quarter TAD, EBITDA contribution of $10 million to $12 million.

Turning to Pulp and Paperboard, the Paperboard market is seeing strong demand across all product segments and we’re seeing increased market recognition at renewable paper products we offer. The growth in Food Service categories including the recent move away from foam to paper cups is a good example of that trend. As we look into the second quarter we’re seeing the typical seasonal ramp up of business activity with backlogs growing.

Last Friday we see Surprise Watch report confirm that SBS price increase is $40 for folding carton and $50 for cup stock going through. To help you understand the natural impact of those price increases, if we had -- if they had been effective for all of Q1 at the volumes we shift Pulp and Paperboard would have generated approximately $6 million in incremental EBITDA.

We are actively monitoring the China Ivory Board capacity, but we believe that we’re well positioned in our export market mix which is almost entirely to Japan and we don’t believe there is a significant threat in that market from the Chinese Ivory Board for the foreseeable future. The impact to our domestic business continues to be minimal.

Regarding our second quarter outlook for the Pulp and Paperboard segment which is running very well and at historically high productivity levels, we expect shipment volumes to be higher by 2% to 4% and pricing to be 1% to 3% higher as we implement the recent price increase.

On the cost side, in total we expect an increase ranging from $2 million to $5 million compared to Q1 as wood fiber will go up slightly in Q2 and chemicals and transportation are expected to be up due to higher shipment volumes with the partial offset from improving energy costs. Add to that $7 million of external maintenance cost in Q2 that John mentioned and SG&A is expected to remain flat with Q1.

Looking at the consolidated business for Q2 versus Q1, we expect net sales to be up 3% to 5% due to higher volumes and pricing for both divisions and consolidated offering margin to be 7% plus or minus a point.

We expect adjusted SG&A to be up $1 million due to our Phase I ERP implementation which goes live in May. Adjusted corporate spending to be approximately $13 million to $14 million, net interest expense to be about $11 million in Q2. The outlook for our adjusted tax rate for the second quarter is 36% plus or minus 2%.

In summary while we’re pleased with our top line performance and Pulp and Paperboard’s operating margins in the quarter the competitive pressures on the consumer product side remain and make unexpected pricing cost largely due to weather were unfortunate.

All that being said, I’d like to emphasize that there continues to be opportunities for us to simply our consumer products business from our logistics, transportation and supply chain perspective and we’re actively pursuing those opportunities.

We remain focused on achieving our annual adjusted EBITDA target of $300 million based on 2011 pricing and cost input structure and continue to believe that $75 million is achievable in Q3 this year as upside from Paperboard pricing should more than offset any rest of the $12 million TAD, EBITDA contribution target.

In conclusion we’re poised to take advantage of a great Paperboard market and we’re all focused on taking the important steps needed across the company and on the consumer product side in particular to ensure Clearwater Paper performs well strategic and off -- strategically and operationally.

Thank you for listening to the prepared remarks. I’ll now take your questions.

Question-and-Answer Session


Thank you. (Operator Instructions) And our first question comes from James Armstrong from Vertical Research. Your line is open, please go ahead.

James Armstrong - Vertical Research Partners

Good day, and thanks for taking my question.

John Hertz

Hi, James.

James Armstrong - Vertical Research Partners

Hi. My first question is on the Paperboard side, those were -- the shipment levels out of the Paperboard segment continue to be very high. Do you think that those shipment levels are sustainable or said another way; do you believe that you’re -- what is your annual Paperboard capacity?

John Hertz

James, this is John. So, we’re coming off seasonally low first quarter and going into stronger second and third quarter. So for that reason we do expect volumes to continue to go up. The market is very strong. From a capacity standpoint -- from a production capacity standpoint I think 210,000 on a quarterly basis -- on a go forward basis.

James Armstrong - Vertical Research Partners


John Hertz

197, James.

James Armstrong - Vertical Research Partners

So, you’re running slightly above your capacity, so you’re pulling inventory out of the system. Would that be the right way to think about it?

John Hertz


Linda Massman


James Armstrong - Vertical Research Partners

Okay. And then switching gears, what do you think is -- is it just promotional activity that’s causing the private label market share to decline slightly Q1 versus Q4, and do you believe that your retail market penetration will improve as the year progresses?

Linda Massman

Yes, I think it's probably a lot to do with the promotional activity we’re seeing, but keep in mind those market share numbers are going to kind of move around quarter-over-quarter depending on what's going on. I think we’re generally on track with the overall tissue category growth and how much we grow is going to be depending on what happens in the competitive market from a promotional activity.

James Armstrong - Vertical Research Partners

Okay. And then lastly, the sales volumes were down in the quarter and I assume a good chunk of that was due to weather. How much of this do you expect to get back as we go into Q2 and maybe into Q3?

John Hertz

James, I would say just talking about it from a cost side of the equation, so we had about $9 million between energy and transportation. And as Linda said from a transportation standpoint we’re not necessarily seeing that release here in the second quarter yet as they continue -- that kind of have to work through the issues that the cold weather presented. We are seeing the benefit of our decrease in our energy spending. I think with natural gas down at mid $4 per dollar range, so we would expect to probably see $4 million to $5 million of benefit related to the -- on the energy side, but no benefit on the transportation side.

James Armstrong - Vertical Research Partners

Yes. And then on volumes, do you expect any volume recovery that you might have missed because of the heavy snow in the north-east in the first quarter?

Linda Massman

I think we -- having the outlook in our supplemental material on the consumer product side is about 3% to 5% higher on the shipment volumes. Some of that might be kind of getting back some of that volume from the first quarter, but probably not a lot of it.

James Armstrong - Vertical Research Partners

Okay, that helps. Thank you very much.

John Hertz

Thanks, James.


Thank you. Our next question comes from Steven Chercover from D.A. Davidson. Your line is open, please go ahead.

Steven Chercover - D.A. Davidson

Thanks. Good afternoon. I had also two volume related questions. First of all on Paperboard, is part of the reason that the volumes are up year-over-year due to that consignment arrangement that you entered into a year ago?

Linda Massman

No, not really. I would say it's a function of a strong market, but it's also a function of our teams performing very well with regard to Paperboard production. I mean we actually have set some internal records as of late and have the inventory to probably a strong market.

John Hertz

But I would say that, kind of that increment that we saw that was even more than we thought when we updated you in March. A lot of that came from situations where it was consigned inventories, so even in the light of tight transportation, that’s why they were able to. It's going to be up 6% versus the 1%.

Steven Chercover - D.A. Davidson

Okay. The volume in the first quarter is not sustainable. So where do your inventories stand?

Linda Massman

I think we are pretty normal inventory levels and we’re actually expected to go a little bit seasonally higher on shipments in Q2, I mean so that’s expected to go up about 2% to 3%.

John Hertz

We have made in the last quarter, six months pretty significant production efficiency improvement particularly in Arkansas. And so that’s keeping us from being in a tight inventory position on the Paperboard side.

Steven Chercover - D.A. Davidson

Okay. And on tissue, the fact that your volume is down year-over-year, is that a function of cannibalization of your conventional product?

John Hertz

Well I would say one is weather, it’s called a third. Two is, the promotional activity by the brand. And then year-over-year if you go back to last year, we’re actually in a position where the brands was pretty much stepping out of promotional activity and the retailers were asking us to step in, and so we kind of have the opposite happening right now. So, that’s an impact as well. And we had a piece of business in the dollar segment last year that was well contributed to some of the operational issues that we saw that we -- we walked away from that business versus where we are right now.

Steven Chercover - D.A. Davidson

Why do you think that the brands have resumed their promotional activity? Are they just tired of [ph] [receiving] share?

Linda Massman

Yes, Steve I can’t comment on what the brands are doing, but I can tell you that, we have launched a really good private label product that competes well with some of the favored bath and towel products out there.

Steven Chercover - D.A. Davidson

Are you able to divulge any of the new customers that you’ve secured over the last few months?

Linda Massman

Not willing to divulge that, no.

Steven Chercover - D.A. Davidson

All right, well still got to try. Okay, I think that was it. Thank you.

John Hertz

Thank you.


Thank you. (Operator Instructions) Ladies and gentlemen this does conclude our question-and-answer session. At this time I’d like to turn the call over to Ms. Massman for any closing, additional remarks.

Linda Massman

Yes, thank you, Saeed. Well we have many challenges ahead in 2014. We also are very excited about our business prospects and opportunities to increase the level of efficiency in running our business. Thank you for joining us today and for your continued interest in Clearwater Paper. On a final note, we’ll be presenting at the Goldman Sachs, Basic Materials Conference on May 20th in New York and hope to see you there.


Ladies and gentlemen this does conclude Clearwater Paper first quarter 2014 earnings conference call. We do appreciate your participation. You may disconnect and have a wonderful day.

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