Clearwater Paper Corporation (NYSE:CLW) Q1 2016 Earnings Conference Call April 28, 2016 5:00 PM ET
Robin Yim - Vice President, Investor Relations
Linda Massman - President and Chief Executive Officer
John Hertz - Senior Vice President, Finance and Chief Financial Officer
Paul Quinn - RBC Capital Markets
James Armstrong - Vertical Research Partners
Steven Chercover - D. A. Davidson & Co.
Welcome to Clearwater Paper Corporation's First Quarter 2016 Earnings Conference Call. As a reminder, this call is being recorded today, April 28, 2016. I would now like to turn the conference over to Ms. Robin Yim, Vice President, Investor Relations of Clearwater Paper. Please go ahead.
Thank you, Chrystal. Good afternoon and thank you for joining Clearwater Paper’s first quarter 2016 earnings conference call. Joining me on the call today are Linda Massman, President and Chief Executive Officer; and John Hertz, Chief Financial Officer.
Financial results for the first quarter were released shortly after today’s market close. You will find presentation of supplemental information, including an updated outlook slides providing the company’s current expectations and estimates as to certain costs, pricing, shipment, production and other factors for the second quarter of 2016 posted on the Investor Relations page of our website at clearwaterpaper.com
Additionally, we will be providing certain non-GAAP information in this afternoon’s discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release or in the supplemental materials provided on our website.
I would like to remind you that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements are based on current expectations, estimates, assumptions, and projections that are subject to change, and actual results may differ materially from the forward-looking statements.
Factors that could cause actual results to differ materially include those risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2015. Any forward-looking statements are made only as today's date, and the company assumes no obligation to update any forward-looking statements.
John Hertz will begin today’s call with a review of the financial results for the first quarter and Linda Massman will provide an overview of the business environment and our outlook for the second quarter of 2016. And then we’ll open up the call for the question-and-answer session.
Now I’ll turn the call over to John.
Thank you, Robin. I am pleased to report a very good quarter which came in at the high end of our Q1 EBITDA outlook rate. Before I get to the results, I'd like to preface my comments by stating that throughout the rest of my remark, I'll be distinguishing between GAAP and non-GAAP or adjusted results. The adjusted results exclude certain charges and benefits that we believe are not indicative of our core operating performance. The reconciliation from GAAP to adjusted results is provided in our press release and supplemental materials posted on our website.
For the first quarter of 2016 those items netted to a $1.2 million charge and include approximately $750,000 from the mark-to-market adjustments to our outstanding directors' common stock unit and approximately $450,000 associated with the closed Long Island New York facility.
So with that let's get to our results. Our first quarter net sales came in at $437 million, up 1.3% versus the fourth quarter. That is just about the high end of the outlook range of flat to up 1% that we provided in our Q4, 2015 earnings call. Tissue shipment volumes increased 3.4% versus Q4. The impact of that volume increase was partially offset by a lower paperboard average sales price versus Q1, 2015 net sales were up 70 basis points.
First quarter adjusted gross profit of $69 million, or 15.8% margin was up 20 basis points from fourth quarter due to a lower input costs for transportation and energy and better absorption of fixed cost on higher production volume, which was partially offset by a planned water wash at our Lewiston pulp and paperboard facility.
Adjusted SG&A expense was $30 million or 6.9% a first quarter net sales which was flat with Q4, 2015. Adjusted corporate expense was $15 million of the SG&A spent in the first quarter, up approximately $1 million versus Q4 due primarily to higher travel in the quarter and expenses related to selecting and on boarding our two new directors.
Adjusted operating income of $39 million, or 8.9% margin came in above the high end of our outlook of 7% to 8.5%. Adjusted EBITDA was $60 million, or 13.7% of net sales and at the high end of the adjusted EBITDA outlook of $52 million to $60 million. This compares to $59 million or 13.6% in Q4. First quarter 2015 adjusted EBITDA margin was 8.7%. Net interest expense were approximately $8 million was flat with Q4.
Turning to taxes. On adjusted basis our Q1 effective tax rate was 38.7% versus 54.4% in the fourth quarter which is slightly lower than outlook of 40%. A full year 2016 tax rate outlook remains unchanged at 37% plus or minus couple points.
First quarter 2016 GAAP net earnings were $18 million or $1.05 per diluted share. And on adjusted basis $19 million or $1.09 per diluted share. That compares to adjusted net earnings of $30 million, or $0.75 per diluted share in the fourth quarter and $7 million and $0.36 in the first quarter of 2015.
Non cash expenses in the first quarter of 2016 included $20 million of depreciation and amortization, $2 million of total equity based compensation expense and $1 million of net non cash pension and retire medical expense.
Employee headcount at the end of the first quarter was approximately 3,300.
Now, I will discuss the segment results. Consumer Products’ net sales were $245 million for the first quarter of 2016, up 2.8% compared to the fourth quarter due to 3.4% higher shipment volumes including a 2.9% increase and converted case shipments and 5.6% growth in non retail term which includes parent rolls. This is well above the high end of our outlook for shipment volumes flat to up 1% due to strengthen position at our top four customers which resulted in higher than expected shipment levels.
Total tissue average sales price declined $15 per short term or 60 basis points to $2,464 which is below our Q1 outlook of flat to up 1%. Average non retail prices improved by 2% while retail pricing declined by 70 basis points resulting from customer mix.
Consumer Products’ adjusted operating income for the first quarter of 2016 was $19 million or 7.7% of net sales versus $11 million or 4.8% in the fourth quarter. Improvement was the result of $6.4 million total reduction cost due primarily to one, lower transportation cost resulting from network efficiency improvement and favorable carrier rates. Two, lower prices for external hard wood pulp and three, improved absorption of wages and benefits and higher production volumes.
CPD adjusted EBITDA of $33 million increased 27% from $26 million in Q4. The adjusted EBITDA margin improved 256 basis points to 13.3% from 10.7% in Q4.
Now, turning to the Pulp and Paperboard division. Net sales of $192 million for the first quarter of 2016 were down 60 basis points versus the fourth quarter due to a 40 basis points decrease in average sales price despite a better product mix of prime paperboard and relatively flat shipment volumes. Paperboard shipment volumes of 201,000 short tons was stable with Q4 and came in at low end of our outlook of flat to up 1%. Average pricing of $952 per ton was down $4 per ton or 40 basis points which was slightly weaker than our outlook of a flat price mix in the quarter.
Pulp and Paperboard’s adjusted operating income for the first quarter of 2016 was $35 million or 18.3% of net sales as compared to $40 million or 20.5% of net sales in the fourth quarter. The margin decrease versus Q4 was mainly due to a $3 million increase in plant maintenance cost for schedule water wash of Lewiston boiler and elevated regional wood prices due to high demand in the Pacific Northwest which was modestly offset by lower natural gas cost.
Paperboard's Q1, 2016 adjusted EBITDA margin was 21.6% compared to 23.9% in the fourth quarter.
Now turning to the balance sheet, capital expenditures were $26 million in the first quarter of 2016, of which $18 million was spent on strategic and other ROI positive projects. Our expected total CapEx for the year remains unchanged at approximately $155 million, of which $90 million is for strategic projects and $60 million is for maintenance.
We have $6 million of borrowing outstanding under our revolver at quarter end. Long-term debt outstanding on March 31, 2016 remains unchanged at $575 million.
Turning to the stock buyback program. Through March 31, we have repurchased approximately 709,000 for $28 million under our $100 million share repurchase authorization at an average price of $38.99 per share. And through 2016 we remain committed to returning at least 50% discretionary free cash flow to shareholders via share repurchases. As a reminder, we defined discretionary free cash flow, cash flow from operating activities minus standard maintenance of CapEx of $50 million.
With regard to our liquidity, we ended the first quarter with $2 million of unrestricted cash and we have $113 million available under the revolver. During the first quarter, we generated $49 million of cash from operating activities, or 11.2% of net sales.
That concludes my remarks. And I'll now turn the call over to Linda Massman who will discuss company's outlook.
Thanks, John. Hello, everyone. And thanks for joining us today. I am also very pleased with our strong start to 2016 with consolidated first quarter results that were across the board at the high end of our outlook ranges for the quarter. Our consumer products business continue to improve, shipment volumes picked up and more importantly operating efficiency and profitability continually strengthened through the first quarter.
The quarterly adjusted EBITDA margin of $13.3% is a highest in more than three years. For the Pulp and Paperboard business, shipment volumes remain solid and as expected pricing through the first quarter were lower than average 2015 level. Our Paperboard backlogs are similar to levels at this time last year which includes the seasonal pickup as we enter the second quarter.
We've made excellent progress with our strategic capital investments in the first quarter. The multi-year pulp digester and optimization project remain on schedule and within budget. The excavation is completed and the foundation is under construction. Our engineering team recently inspected the digester vessel which is under construction and progressing within inspect.
Regarding warehouse automation. Installation and startup at our Shelby, North Carolina facility is on schedule and made a modest contribution to our operating efficiency gains in the quarter. The laser guided vehicles are up and running 24x7 and fully operational in paper handling, storage and retrievable.
Work is also well underway on our next step to automate our case storage and shipping operation. Warehouse automation installation for our Las Vegas plant is also on schedule with phase implementation to begin in the latter half of the second quarter. We also completed installation of our high -speed bath and towel converting equipment in Las Vegas which did start up on April 1 as planned and it is exceeding start up expectation.
I am very proud of the Clearwater Paper team whose hard work and relentless drive to deliver operational and sales and marketing efficiencies resulted in $7 million of EBITDA improvement in the first quarter. Since the inception of our three years strategic plan in the first quarter of 2015, we've delivered $19 million EBITDA improvement. We are laser focused on executing our strategic initiative and everyone across the company is engaged and invested in this effort.
Now I'll just set our view the market environment and our outlook for both business segments starting with consumer products. According to IRI data as of March 31, the total US tissue market as measured in dollar sales was up 2.4% compared to the fourth quarter of 2015. The brands grew 3.3% in the first quarter and outpaced private label in the quarter which declined by 60 basis points. We believe primarily as a result increased branded digital and in-store promotional activity. The good news is Clearwater Paper outperformed the private label competitors with growth of approximately 6.7%. While all other private label declined 3.9% over that period.
At the end of the first quarter private label market share is approximately 23% total tissue according to IRI. Clearwater Paper share of private label is 33.1% in Q1 of 2016, up from 30.9% in the fourth quarter of 2015. According to the ad tracking service that we use, traditional and commercial print ad by the brands declined 6% quarter-over-quarter, but we believe that was augmented with digital and in-store promotions which drove growth for the brand in Q1. Competitive pressures in tissue remain, so we will continue to focus on delivering superior product quality and excellent customer service to differentiate ourselves from the competition.
RISI's forecast for net new North American retail tissue capacity of 388,000 tons remains unchanged which yield an operating rate of 96% through the end of 2016.
Turning to Pulp and Paperboard. The near-term risk continues to be the strength of the US dollar. So far the impact continues to affect the commodity grade of SPS replace stock in some food service folding carton. Pricing on the lower end grade remain competitive. The SPS market remains balanced with modestly improving demand. Food service and cup stock demand remains healthy and folding carton orders are strengthening which is in line with normal seasonal demand pattern.
Since the beginning of the year order backlog reported by AF and PA have improved and are up 19% but are still approximately 15% lower than the levels reported during the same period last year.
Now getting to our second quarter outlook. For the Consumer Products business, we are expecting shipment volumes to be down due to lower shipments of parent rolls in Q2. We expect that this will negatively impact EBITDA by 2% to 4% compared to Q1. The price mix is expected to improve with a higher level of retail shipments and we expected positive impact to EBITDA of 3% to 5%. We expect input costs for pulp, chemicals, operating and packaging supplies, transportation, energy and maintenance and repairs to remain stable in Q2. SG&A is expected to increase slightly due to timing of profit depended accruals.
Turning to the second quarter outlook for our Pulp and Paperboard division. We expect to see shipment volumes up modestly compared to the first quarter. We expect that will positively impact EBITDA by 1% to 3% which will be offset by modestly lower SPS pricing which we expect will negatively impact EBITDA by 1% to 3%. The input cost for chemicals, operating supplies and transportation are expected to remain stable. However, wood fiber costs are expected to be slightly higher due to market conditions in the Pacific Northwest. Along with higher maintenance cost related to water wash of boiler in Arkansas and some maintenance in Lewiston that was pushed from Q1 to Q2.
Note that we are not providing a quarterly forecast of total paperboard maintenance expense for 2016, on page 14 of our supplemental deck. On the positive side, energy costs are expected to be lower due to lower hedge natural gas prices.
Looking at the consolidated business for Q2 versus Q1, we expect net sales to be up 1% to 3%. Consolidated adjusted operating margin to be in the range of 8% to 9.5%. And adjusted tax rate of 37% plus or minus two percentage point. All these variables combined are expected to result in a Q2 EBITDA range of $56 million to $64 million. The key variables that we see determining where we land in that range are changes in paperboard market conditions, pulp and wood fiber prices, brand promotional activities and changes in customer and consumer demand.
I'd like to wrap up with the remarks by thanking our employees for their hard work and dedication which contributed to the improved efficiencies in our operations and produced strong results in the first quarter. I'd also like to thank our customers for putting their trust in us to produce and deliver high quality products. With the continued support of our shareholders.
Thank you for listening to the prepared remarks. We'll now take your questions.
And our first question comes from Paul Quinn from RBC Capital Markets. Your line is now open.
Yes. Thanks very much and good afternoon. Just curious as to what the real difference between your guidance. It looks like your higher than expected tissue shipments and you cited the increased volume to your four biggest customers. Do you think that was -- that volume got actually sold by the customers in the quarter or you are going to see a push back in Q2 from that?
No. I think it will be sold by the customers.
Okay. And then just on the negatives on the tissue price mix. Why was that down quarter-over-quarter versus a guide that was positive?
There was couple of elements to that. One is the mix of parent rolls. We had more parent rolls, there is higher or lower price putting on that. And then within the retail cases a mix kind of to some of our higher volume customers where there is volume discount pricing.
Okay. And then just asking question on around the brand promotion. Just so I understand that it sounds like the brands gain market share in Q1 here and you are siding really on the digital side to get your ad track and you are showing the promotional on I guess ad volume could be down. How do you track that digital and what would you say -- so the breakdown in term of brand and promotional dollars between normal ad and digital ad?
Yes. So Paul I'd say it is a lot easier to track the traditional ad that you would see in printed form. And so when we refer to the in-store promotion that is really more anecdotal given how often we are out in the field and in the store and see what's being promoted. So we rely heavily on our sales team to report back to us as to what they are seeing out in the stores.
Okay. And then just lastly you mentioned looks like higher maintenance in Q2 but I think you said it pushing out some of the stuff in Lewiston to Q2. Why was it move to Q2?
We just got -- we had a couple things we are doing in Lewiston in operationally because what happen if we go on at this stage didn't make sense to actually do that in the first quarter and we simply going to do that in the second quarter.
Thank you. And our next question comes from James Armstrong from Vertical Research Partners. Your line is now open.
Good afternoon. Thanks for taking my question. First on the branded tissue, to dig into that a little more. Is there any evidence of anything more than just heavy promotional activity at/or is it just promotion and it doesn't seemed to be moving much on price?
I think I'll characterize it as promotion and ways of driving some marketing to get consumers to try the branded product. I am not seeing a lot on price. I mean ultimately all ends up in price but I'd say it's more driven by promotion.
Okay. That helps. And then switching to bleached board. There is a lot of worry in the market right now. What are you seeing in terms of imports or further competition in your bleached board business?
Yes. I would say with regard to the market, general market conditions the market is okay, not overly robust but fairly stable and with regards specifically to imports, I don't think we have much of an update above and beyond what we've been talking about for the last couple of quarters. We are seeing a bit of ivory board out west, we are seeing a little bit of Scandinavian board out east. Nothing is having a material impact. I say it is just consistent with what we've been expecting.
Okay. And then lastly with all the projects going on do you believe working capital will be a source or a use to fund this year?
I think with the initiatives we have around -- we have strong initiatives around the payable side of the equation and now we have got stronger initiatives around inventory. So and planning on working capital be in source at the end of the year.
Thank you. And our next question comes from Steven Chercover from D. A. Davidson. Your line is now open.
Thanks. And forgive me if these are kind of along the same line of questioning. But so would you say then that your increased sales of jumbo rolls are a function of your productivity outpace in the demand through the current channels?
Well, no, I think I mean there are always opportunities to sell the parent rolls and we had stronger productions so we had more parent rolls available. So I don't think it's really anything more in that.
So you are doing well with your top four customers. So I guess you can't pressure them if you are already happy with their off tick.
Okay. So the parent rolls are basically early felt?
Yes. Exactly. I mean it's kind of opportunistic and depends on facts and circumstance which quarter is to whether we are up or down.
And we indicated all kind of come back in balance in Q2 with more so --
The jobbers who take this I mean do they turn around and kind of undermine your own markets in due course?
I would say that there is always possibility but I would say our sales team is pretty careful about where we are placing those parent rolls so that we can try to minimize that impact as much as possible. But ultimately papers going to get where it is going to go so we don't kill too many brains deals on that one.
And I'd say the large majority of our parent rolls sales are undervalue into the segment. So I guess that's lesser the concern on our part for that segment.
Okay. And it's probably way premature to start thinking of tissue the way people have been harping on container board but there is also some new machines on the horizon. Do you ever get to the point where you will consider even throttling back your production just sort of to sure that it doesn't undermine price?
I say that we keep a pretty tight look at our supply chain and from time to time we will do that to keep everything in balance and order. But overall I think what we said we release the balance of this year. The capacity coming online really should be pretty balanced market.
And one this comment is primarily focused on the converting Cyprus paper machine.
Got it. Okay. Thanks. And then the paperboard and the questions been somewhat asked but your current guidance, does that reflect a $20 per ton drop in pulp and paper we just published.
Yes. It does.
Ladies and gentlemen, that does conclude our question-and-answer session. At this time, I'll turn the call over to A Ms Massman for any closing or additional remarks.
Thank you. We believe another strong quarter is underway. And I'd like to thank you for joining us today and for your continued interest in Clearwater Paper. On a final note, we will be at the following conference in the second quarter. Goldman Sach's leveraged Finance Conference in California on May 16. And their Basic Materials Conference on May 18 in New York. We will be at the Macquarie's, Emerging Leaders Conference on June 2 in New York. Deutsche Bank Industrial and Materials Summit on June 8 in Chicago. And Citibank Small and Mid-Cap Conference on June 9 in New York. And we hope to see you there. Thank you.
Ladies and gentlemen, that does conclude the Clearwater Paper first quarter 2016 earnings conference call. We do appreciate your participation. Thank you and have a great day.
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