WPP plc (WPP) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Wausau Paper 2014 Fourth Quarter and Year End Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Director of Investor Relations, Mr. Perry Grueber. Please go ahead, sir.

Thank you, Tom. Hello, everyone. Thank you for joining us this morning. I’m pleased to be here today with Mike Burandt, Wausau’s Chief Executive Officer; Matt Urmanski, our President and Chief Operating Officer; and Sherri Lemmer, our Chief Financial Officer. We have approximately 15 to 20 minutes of prepared remarks this morning. After which we will be happy to fill any questions you might have for us. This call is being webcast and slides have been provided, summarize the key elements of our presentation. Both presentation deck and today’s release were posted to the Investor Relations site on wausaupaper.com earlier this morning. During this call, we will make forward-looking statements that are subject to known and unknown risks and uncertainties, including but not limited to those outlined and referenced on slide two of this morning’s presentation. Additionally, our presentation refers to certain non-GAAP financial measures provide insights. A reconciliation of these measures to GAAP is provided in an appendix -- in the appendix and again in the Investor section of wausaupaper.com. With those formalities out of the way, I will now turn the call over to Mike Burandt, our Chief Executive Officer. Mike?

Thank you, Perry. And let me echo his comments, welcome you to Wausau’s fourth quarter 2014 earnings call. Let me start by saying, we feel very good about our Q4 performance and the way we finished 2014. Our EBITDA for Q4 was at $14.9 million and on target with our guidance of $15 -- $16 million and it represents a 22% increase over our Q4 2013 performance. Also the $14.9 million includes an unfavorable Canadian exchange rate and some MEI related costs that amount to $1.2 million. Our EBITDA margin for the quarter was $16.6 million -- 16.6%, which compares to only 12.7% 2013. We are making some solid improvement. We continue to experience operational improvements both in paper making and in converting. We finished 2014 with volume growth at twice that of the mark -- of the way from home market. We finished 2014 with EBITDA of $44.2 million, which is a 20% increase over 2013. We are making solid progress on our MEI initiatives and I am going to discuss that in greater detail after Sherri and Matt give you the financial and business highlights. So after a rocky start in 2014, we feel very good about where we finished and when we are headed. So now, Sherri, I will turn it over to you for the financial highlights.

Thank you, Mike. Good morning. Net sales for the fourth quarter of 2014 were $89.9 million versus the prior year fourth quarter of $91.1 million. You may recall that the fourth quarter of 2013 was the first full quarter following the complete launch of our new DublNature family of products and there were significant customer volume and buying under the rebate program in place following the full launch of those products and as 2013 came to a close. Fourth quarter 2014 shipment trends, while particularly strong in our strategic product categories, where shipments were up over 1% compared to the fourth quarter of 2013, return to a more historical seasonality pattern and marked the second highest number of cases shipped for any fourth quarter in the company’s history. For the full year, net sales were $352 million in 2014, compared to $348.6 million for the full year of 2013. Full year shipments were 17 million cases, an increase of 1.6% over the full year 2013 at 16.7 million cases. As Mike noted from an EBITDA perspective adjusting for non-recurring item, we reported results of $14.9 million or 16.6% adjusted EBITDA margins, compared to $11.6 million or 12.7% EBITDA margin in the fourth quarters of 2014 and ’13, respectively. Full year adjusted EBITDA was $44.2 million and $36.9 million in 2014 and 2013, respectively, again a year-over-year improvement of approximately 20%. Bridging the fourth quarter of 2013 to the fourth quarter of 2014, benefits from the July 1st price action and the strategic mix of product sold that exceed 50% for the first time were offset by an unfavorable impact of about $600,000 due to the change in the Canadian exchange rate quarter-over-quarter. As mentioned earlier, sales volume was down quarter-over-quarter about 2.9%, driven by support product category volume. Operationally, as expected, we continue to see improvement in every areas, paper machines to converting, partially offsetting the fourth quarter improvement, our cost associated with margin enhancement initiative projects. Selling, general and administrative expenses were also lower than the prior year, in part due to the unusual pattern of initiatives that occurred in the prior year, following the complete launch of our DublNature products and in part due to lower proxy [defense] [ph] costs. These two elements accounted for about $1.3 million of the quarter-over-quarter benefit. Wages and benefits and other impact due to restructuring and narrowing the focus of our business, offset by cost to support the margin enhancement initiative projects accounted for the balance of the improvement quarter-over-quarter. Turning to adjusted earnings per share, we finished the fourth quarter of 2014 with after tax net earnings from continuing operations of approximately $705,000 or $0.01 per share, compared to an after tax adjusted net loss of approximately $289,000 or breakeven earnings per share for last years fourth quarter. On a full year basis, after tax adjusted net losses were approximately $4.9 million or $0.10 per share and $7.4 million or $0.15 per share in 2014 and 2013, respectively. We reviewed most of the quarter-over-quarter impact at the EBITDA level on the last slide, so now I will focus more on the full year comparison. From a sales price and mix perspective, competitive pricing pressure and the unfavorable impact of the Canadian exchange rate was mitigated by the July 1, 2014 price action and continued improvement in the mix of our product sold with a higher composition of strategic versus support products. As mentioned, full year sales volume improved 1.6% or about twice that of the estimated North American away from home market demand and contributed about $0.02 per share for the full year. Weather related impacts of about $0.01 per share were experienced in the first quarter of 2014. Year-over-year improvement in operations as we gained experience on a new manufacturing and converting asset throughout 2013 and ’14, as well as the strong overall performance and focus on cost containment activities in our Kentucky, Ohio and Wisconsin locations contributed $0.16 per share to our year-over-year improvement. And higher interest expense as a result of higher debt levels and cost of debt following our July 30, 2014 refinancing was unfavorable to year-over-year results by $0.02 per share. In summary, 2014 was certainly a year of change from a financial perspective. We demonstrated sequential quarter-over-quarter financial improvement as we move through 2014 from Q1 to Q4 and delivered a 20% improvement in EBITDA year-over-year. Sales and shipments increased and our operational cost structure improved. We reduced adjusted selling, general and administrative costs by approximately $4 million or about 1% of net sales. We are targeting adjusted SG&A of about 12.5% of net sales and on an adjusted basis we were about 13.2% in SG&A to net sales for the full year 2014. We prudently managed key elements of cash spend including our capital spend. And during 2014, we diligently reviewed projects and project spending. The result was total capital spend of $16.4 million, compared to a third quarter estimate of $23 million and a prior year of $37.5 million, and we refinanced long-term debt structure of the company in mid 2014. With that, I'll turn the call over to Matt. Matt?

Thank you, Sherri. I’d like to first apologize for my voice. I’m a little bit under the weather today, but I’m very excited to talk about the fourth quarter. First, I’d like to really covering greater detail our performance in the fourth quarter, specifically the strengthening of our strategic mix, the growth rates of our premium product offering and progress on net selling price. I will also briefly touch upon the performance of our ATMOS machine in Harrodsburg, Kentucky and conclude with the key assumptions for our first quarter outlook. As mentioned a moment ago, Wausau’s sales volume was down 2.9% in the fourth quarter. This was by design and largely driven by proactive management of the 2014 rebate incentive program. Growth in our strategic product category was up 1.1% in the quarter and finished up 5.1% for the full year. This resulted in a record quarterly strategic mix of over 50%. Strategic products include 100% of our premium product offering and all products sold through proprietor dispensing systems. The key driver of strategic growth has been the re-launch of the DublNature brand in 2013 and the 2014 launch of Artisan towels. Now in our seventh quarter, since the launch of the DublNature product line, the growth rate and market acceptance of this product has been extremely strong. Fourth quarter sales were up approximately 22%. Case volume growth of our true premium Artisan products combined with our virgin DublSoft line grew 23% in the fourth quarter over the year earlier period. As a reminder, the Artisan product line is designed to compete with the most premium products in the away from home market, is uniquely positioned to be the only true premium product that is 100% recycled. Combining all three brands together, we had a growth rate of greater than 25% for the full year. Assisted by the product mix enhancement and the July 2014 market base price announcement, Wausau has seen its third consecutive quarter of improved pricing. Measured against the first quarter of the year, average net selling price is up 3.7% as we concluded the fourth quarter. This increase despite the pressure we have incurred of unfavorable foreign exchange rates with Canada which represents approximately 9% of total sales. Moving to slide 13, we’ve now operated our ATMOS paper machine in Harrodsburg for two to four years. Despite the normal challenges of a significant start-up, not to mention the first of its kind technology installed on a greenfield site, we could be more pleased with the continued improvement in performance. In the first quarter of 2014, we focused on the commercialization of the new Artisan product line. In the second quarter, we focused on optimizing the efficient operations of the machine. That focus continued through the second half of 2014, leading to full year performance measured in convertible tons produced, up 32% over a year ago levels. The production increase has lead to significant improvements in our cost structure. We expect those benefits to continue throughout 2015 as our margin enhancement initiative is targeting our further 7% improvement in cost. Our ATMOS volume continues to ramp up on the expected trajectory, supported by the growing demand we’ve seen from the DublNature in Artisan product lines. Total production of ATMOS-based parent rolls increased 50% during 2014 and today represents approximately 30% of the machine’s total production capacity. At these levels, we have a necessary room to continue to support the growth of the DublNature in Artisan product lines for several years to come. I would now like to share some thoughts on our first quarter outlook. As mentioned earlier, we have good pricing momentum during 2014. We expect that they continue in 2015 driven by the July 1, 2014 price announcement, further mix improvement and the implementation of various tactical margin enhancement projects. Thus far in 2015, we have seen a stronger order pattern. Though recently challenging for parts of the country, weather-related disruptions have not equaled those we experienced in 2014. Combined with the increasing demand for our premium product offering, we again expect above market rate growth in the first quarter. As we began 2015, we have seen a modest increase in cost per waste paper. If annualized, it would amount to about $3 million impact in cost. With an improvement in economy, one should expect this pressure throughout the full year of 2015. Finally, we have spent a last 120 days purposely identifying and in implementing margin enhancement projects. We are off to a great start and are confident in our ability to achieve strong year-over-year EBITDA improvement. Combining all these elements, we expect adjusted first quarter 2015 EBITDA in the range of $10 million to $11 million, approximately a doubling of our financial performance from a year ago level, a strong result given the seasonally weakest quarter in the away-from-home market. Now back to Mike for some final comments.

Thanks Matt. Matt talked about the confidence regarding the MEI initiatives. I’d like to take a few minutes and share some of these projects that we’re working on and the impact that they’ve done. We will discontinue to manufacturing of over 70 SKUs maybe as high as eight. This represents 25% of our product portfolio. The business associated with these SKUs will be transitioned to other SKUs or exited. Reducing the number of SKUs we produce will reduce the number of paper grades we make. It will increase the converting throughput with longer runs on fewer SKUs, fewer schedule breakouts, improved paper machine productivity and decreased inventory of vital supplies. This is a big deal. We will shutdown fourth quarter --fourth quartile converting assets. This will be made possible by efficiency improvements that we’re gaining on our first and second quartile conversion assets. Waste paper and market deemed pulp inventories will be reduced to a two-week level from a 30 plus state level today. We will single source all our shipping cartons and glues. And we will reduce inventories of these shipping cartons to a vendor managed inventory on our key SKUs. This will have an impact to some $1.5 million to $2 million. Some shipping directly from our Harrodsburg manufacturing facility will be restarted. Our objective is 10% by late spring and hopefully, up to 30% by late this fall. This will result in large labor and price savings. Converting assets will be scheduled more efficiently through better use of our SOP software. This structure will be changed significantly. We will enter as we talked about new channels of distribution and the opportunities have been identified and plans for penetration are now underway. Let me give you a specific example of a project. A molding fabric for a particular Ethanol Shredded Paper has been discontinued. Through trials, we found that we can make and create a paper on existing fabric. This results in savings of over a $1 million and a write-off of $260,000 or a cost of $260,000 for a savings of a $1 million. These kinds of trials will continue. Single sourcing will be a major asset -- accomplishment for this company. So with that, I’d like to spring on to the future. Going to Q1, Matt outlined some of the objectives for our first quarter. So, we will deliver our volume growth of 3% to 4% at target margins, while we expect the market to grow at about 1% to 2%. We will deliver EBITDA of $11 million, which compares to $5.6 million for the first quarter of last year. This is a strong first quarter for us because it’s a seasonally slow quarter for the entire industry. We will have strict adherence through our MEI focused initiatives and our principals is that of the major focus for us. Based on the experience to date that we’ve realized with our MEI initiatives, we feel very confident in achieving the run rate, EBITDA by mid-2016 than we projected. Based on that, I feel very confident that on the Q2 earnings call, we will provide EBITDA guidance for the full year. As you know, we moved away from giving annual guidance, I feel now we can return to that practice as we are gaining confidence on our executional capabilities, particularly driven by MEI initiatives. We feel very confident about where Wassau is today and where it is headed. With that, I will turn it back to Perry for Q&A.

Thanks Mike. Tom, would you poll for any questions this morning?

[Operator Instructions] Our first question is from the line of Dan Jacome with Sidoti & Company. Please go ahead.

Good morning. How are you?

Good morning, Dan.

Good. Thanks for taking the question. Just a couple of quick ones here. Nice job on pricing in the quarter. Just kind of thinking about the industry price increase, I guess that’s started last summer. I’m just thinking when do we begin to see that taper off and then also any callouts in sort of what you are seeing in parent roll capacity there?

There is really two basic questions there that I heard and relative to the momentum, I see pricing momentum will grip us all next year. We started implementing the price increase in July of 2014. We really have a four-year cycle to get the full benefit but beyond that, our price is also supported by mix and we see a good mix improvement throughout the course of the year. So base natural price increase in Q1 and Q2, supported by mix improvement, which will lead to good results in Q3 and Q4 on price as well. That’s excluding the very nature of how we are thinking about MEI. Part of the MEI initiative that we have is not just all the business processes but it also includes tactical price increases, looking for those opportunities all the time. When you talk about parent rolls, we still find parent roll pricing very, very low out there and we do find still very competitive spots, particularly on the support category.

Right.

But one of the things that’s been very powerful about the MEI initiative is where does Wassau create value, where does our customers see value in us and finding the right price points to represent that value and we are having very, very good success doing that and I’m encouraged about continued pricing momentum throughout 2015.

Okay. Great. Good to hear. And then speaking of the value -- and just kind of -- can you give us a flavor for, sort of, were you seeing customer discussions in the marketplace? I know in the past thinking about the new product and Artisan and Alliance, it would be pretty good target market, casinos and hospitality entities. Just kind of wondering what you’re seeing out there and kind of what’s going on inside the company that help you guys win more RFPs? Any color there would be great.

Yeah. I think what’s actually really exciting for me is the strength first of DublNature. Remember DublNature was really now our first step into a premium brand and that because of that success, they are now seven quarters in at better than 20%. It is giving us all the credibility to bring the true premium product out there, which is Artisan. We’ve had some very noteworthy successes with some major hospitals, some major amusement parks, I will leave those names off of the call and that’s giving us all the -- really the credibility with this price that they can win in the spots. So it’s an exciting spot to be, Alliance, the new dispenser, the two 1,000 foot roll dispenser that we have out there. It’s been well received. It is early. We are only really now three months since the availability of the product. So we are encouraged about seeing what that activity does for us in Q1 and Q2. But overall, I am very enthused with the continued momentum and support for both DublNature and Artisan here early on.

[Operator Instructions] Our next question is from the line of Stephen Raneri with Lioneye Capital. Please go ahead.

Hi, good morning. My question is about flow through of the MEI benefits. Obviously, a lot of the things you talked about were relating to contracts and suppliers. And I am just wondering how many months it takes for some of those contracts to roll off and when you will actually start to see the MEI benefits scale?

Talk specifically about the single sourcing?

Well, I mean, that’s one of the areas. I guess, I am asking generally about how the MEI benefits will scale over time, but the obvious one is single sourcing?

That on a monthly basis as we procure and what we identified as an annualized impact, but all of these benefits start accruing on a monthly basis. So as I indicated on any one of those initiatives that we’ve got going on, we’ve identified a start date or implementation date as to when that will begin. And now we project that over a 12 or 18 month period as to when it will become fully impactful to the earnings. So everyone of the objectives and implementations that we’ve got from a project standpoint happened to us on a monthly basis. It can takes several months to arrive on what the value really is and understand exactly what we’re going to be doing and then the benefit starts accruing once we’ve identified the implementation date. So at single sourcing as an example begins as we begin producing and buying KDFs and glues and that will happen on a monthly basis. So the $1.5 million starts accruing on a monthly basis and I believe that that actually starts in about a month we start realizing the benefit of that from the negotiations that we have with suppliers.

And our next question is from the line of John Babcock with Bank of America. Please go ahead.

Hi, this is John Babcock. I am just sitting in for Mike Roxland here. I just want to quickly ask you with regards to volumes. I mean, clearly they were a little bit on the weak side and you talked a little bit how about part of that was by intention. I was just wondering if you could provide a little bit more clarity there and also any sort of color you can provide as to where -- what you have seen so far in 1Q?

Yeah, probably two factors there. You recall maybe last year in Q4, we had tremendous growth, 7.4% in that range I believe and we had that in Q3 and Q4. And at that time, we also had a bigger percentage of support product success. And as Sherri colored in, people were ramping up their inventories on the new substrate DublNature. And so we probably add more volume back then and maybe it was a normal flow. It was a good quarter volume, but also more support weighted, support product weighted. When you think about 2-14, we were impacted by weather in Q1 and ultimately working with our distribution and working with our customers. Does it make sense to try and chase rebate? And for us, does it make sense to allow volume to come in, in the support category to pay more rebate dollars in? So we had very proactive conversations with our distributors, making sure that we are doing right by them, creating value for them, at the same time focusing on what we want to do, which is sell more the strategic products and more the products with the higher margin experience. So it’s a combination of few different things there.

Okay. Great. And then, I mean, can you comment at all on what you’ve seen so far in the first quarter?

We are very pleased with a very robust order pattern. We also, even though there was weather that was out there in the Northeast, we don’t feel like that’s going to affect us. And we don’t have any concerns with being at 3% to 4% rate and being two to three times the market growth in Q1.

Okay. Great. And then, as far as the cost you guys incurred during the year fourth quarter there, how does that following on generally with what you’re expecting into the quarter?

I think when we talked about the MEI expense, is that the question?

That’s right. Yes.

I think one of the bigger pieces of the cost within the quarter is what Mike actually referred to is we made a choice on clothing fabric. And to run one plus piece of clothing to save us a million dollars annually going forward. That actually costs us $300,000 because we had to obsolete some old inventory. I would tell you from my perspective, I was a little bit surprised, we didn’t think we are going to have three pieces of fabric to write off. And so at $600, 000 we are probably being at the high end of what our quarterly impact would be, but that would probably be the bigger part of the surprise for the quarter. But we are very encouraged because now going forward we found the way to save a million dollars each and every year.

Okay. Great. Thanks for the color.

Thanks, John.

And we have a follow-up question from the line of Dan Jacome with the Sidoti & Company. Please go ahead.

Just a quick housekeeping. Under the revolver, how much do you have available from off that $50 million? Is it still like $40 million?

It’s around about $37 million as we exited 2014.

Okay. Great. That’s it. Matt, you better. Thank you.

Thank you.

And we also have a follow-up question from the line of Stephen Raneri with Lioneye Capital. Please go ahead.

Let me follow up on the MEI cost last quarter. So if you think the $1.2 million, you take $600,000 out for Canadian FX, you take $300,000 for the write-off, so there is another $300,000 left. I’m curious what generally that is? And going forward, how much incremental cost you see every quarter as the MEI rolls out? For instance, how much of that’s -- how much incremental costs are there in the $10 million to $11 million guidance for instance next quarter?

So on the remaining $300,000, it’s probably a balance of two buckets. One is some consulting support. I think we mentioned earlier that we have some tactical support with some folks who have some great converting and operational experiences that are helping our team internally. The other piece of that is sometimes there is some maintenance dollars to implement projects to assist us with the metering, to assist us with some IT software to monitor the converting assets to drive efficiency. It’s those kind of minor maintenance implementations dollars to support putting a project in place. As I think about the guidance in Q1, the Q1 guidance includes the estimated cost of implementing the projects that we may have -- that we do have coming up in the next three months. So there shouldn’t be a surprise to the $10 million to $11 million with a bunch of extra MEI expenses if I understood your question.

Great. Thank you.

Thanks, Steve.

[Operator Instruction] There are no further questions in queue at this time, please continue.

Thanks, Tom. We appreciate you all taking part in today’s discussion. We want to thank you for your continuing support of Wausau Paper. Finally here, I’ll be available for the balance of today and rest of this week. If you have any other follow-up questions, please don’t hesitate to give me a call. Thanks for joining us. Tom?

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