WPP plc (WPP) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Wausau Paper 2015 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. And I’d now like to turn the conference over to your host, Mr. Perry Grueber. Please go ahead sir.

Thank you, Brad. Good morning, everyone. Thank you for joining us. 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 20 minutes of prepared remarks this morning, after which we’d be happy to field any questions you have. This call is being webcast and slides have been provided, summarizing key elements of our presentation. Both the presentation deck and today’s release were posted to the Investor Relations site on wausaupaper.com earlier this morning. During the 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 2 of this morning’s presentation. Additionally, our presentation refers to certain non-GAAP financial measures to provide insight. A reconciliation of these measures to GAAP is provided in the appendix and again at the Investor Section of wausaupaper.com. With those formalities out of the way, I’ll now turn the call over to Mike Burandt, Wausau’s Chief Executive Officer. Mike?

Thank you, Perry, and thanks to all of you for joining us this morning. Let me make a few brief comments. We are again pleased to report another good quarter. We finished Q2 with EBITDA of $14.5 million versus the $9.9 million in Q2 last year. This represents a 46% increase over last year and slightly exceeded our guidance of $13 million to $14 million. Our EBITDA margin was 16% versus a 11.1% last year or improvement of nearly 500 basis points. Our gross profit was 19.1% versus 13% last year, an improvement of 600 basis points. These greatly improved results are the reflection of our constant and sustainable improvements in our operating performance from the significant number of margin enhancement initiatives or MEI, that we have from paper making, converting, logistics, and marketing. All areas of our Company are working very cohesively to achieve these results and I’m particularly proud of each team’s efforts and the work they have done and continue to do. Now, I’ll turn it over to Sherri Lemmer, our CFO, for a detailed report of our results.

Thank you, Mike, and good morning. Net sales for the second quarter of 2015 were $90.9 million, an increase of 2% compared to net sales in the second quarter of 2014 of $89.2 million. The improvement in net sales year-over-year was primarily driven by the 2% increase in cases shipped with total volume in the quarter representing a second quarter record of $4.4 million cases for the Company. Improvements and average net selling price period-over-period were offset by the unfavorable change in the Canadian exchange rate. Reported earnings from continuing operations for the quarter were $2.5 million or $0.05 per share compared with a loss of $3.7 million or $0.07 per share in last year’s second quarter. On an adjusted basis, which excludes the pre-tax benefit of $3.5 million on a contract related to a former manufacturing facility, the second quarter was $200,000 or breakeven earnings per share compared to an adjusted net loss of $1.8 million or $0.04 per share in the second quarter of 2014. While a strategic mix of products sold and by strategic products, I mean those products sold in conjunction with proprietary dispensing systems or produced from premium substrate comprise slightly more than 49% of the Company’s sales for the second quarter of 2015. And with similar to the strategic product shipment mix in the prior year quarterly period, the improved margin quality of both strategic and support products shipped drove an improved adjusted EBITDA margin quarter-over-quarter. EBITDA margin after adjusting for the $3.5 million pre-tax benefit on the contract noted a moment ago was 16% on adjusted EBITDA of $14.5 million in the second quarter of 2015. That compares favorably to EBITDA margin after adjusting for special items impacting the prior year second quarter of 11.1% and $9.9 million of adjusted EBITDA. This result demonstrates the operating performance improvements realized through our margin enhancement initiatives. To provide additional insight into our year-over-year adjusted EBITDA improvement, let’s walk through the bridge from $9.9 million to $14.5 million. We received year-over-year benefit from our July 1, 2014 U.S pricing action and our sales to our Canadian customers are price action announced in late March 2015. Those benefits were partially offset by continued pressure from the unfavorable Canadian exchange. The exchange rate impacted our net sales by about $1 million in the second quarter of 2015 compared to the second quarter of 2014. Combined, sales price, improving mix and increased volume accounted for $1.5 million or roughly one-third of the quarter-over-quarter EBITDA improvement we achieved. Operational improvement driven by margin enhancement initiatives including papermaking and converting efficiencies, beneficial fiber substitution, energy usage, and warehousing and logistics drove $4.4 million and year-over-year improvement in the quarter. This improvement is net of the approximate $1.2 million of pre-tax cost incurred for planned routine maintenance outages at both our Kentucky and Ohio papermaking operations in the second quarter of 2015. Selling, general and administrative expenses were $1.3 million higher than the second quarter of 2014 due in part to increases in sales incentive compensation driven by improved year-over-year volume and sales mix improvements and the on boarding of personnel into key sales, marketing and operations leadership role as highlighted in our April 27 announcement. We remain focused on improving liquidity and free cash flow. We had a strong result in this area as we realized net positive cash from operating and investing activities through June 30, 2015 of about $1.5 million, as compared to the approximate $12 million of cash used by operating and investing activities for the first six months of 2014. While improved EBITDA performance was a key driver, more subtly inventory and warehouse management has yielded net $1.3 million of overall inventory reduction benefit and additional operational efficiencies and the rigor around our organization wide capital spending efforts, reduce investment cash spend by more than $5 million. As we look through the second half of 2015, we are confirming our $13 million estimate for total 2015 capital spend. Cash on our balance sheet at June 30, 2015 was $3.4 million in line with March 31 level. Net of the original issued discount totaled debt on our balance sheet at the quarter end was $173.4 million with our cost of debt at about 6.8%. Total borrowings were $176.3 million including $3.5 million drawn against our revolving credit line. At March 31, total borrowings were $182.2 million and included $8.5 million drawn against our revolving credit line. During our first quarter earnings call, I indicated that I expected June debt levels to approximate the March debt level. The better than forecast nearly $6 million reduction in debt from March, 31 was the direct result of working capital discipline, particularly in the area of inventory as we sustain and improve our business processes through our margin enhancement initiative and less than forecasted capital spend in the second quarter as anticipated project start dates are now weighted more heavily to the third and fourth quarters. As indicated during our last quarter earnings call, I expect further progress in our outstanding revolver balance in the second half of the year. And net debt on the balance sheet to be at or below the amount at December 31, 2014 of $170.9 million. With that, I'll turn the call over to Matt. Matt?

Thank you, Sherri. Good morning. Today, I’d like to cover in greater detail our performance in the second quarter. Specifically, I’ll cover some comments on our sales growth, the strengthening of our strategic mix, and progress of our margin enhancement initiative, MEI. I’ll also share a few observations and general industry conditions throughout and close by prepared remarks with the key assumptions for our third quarter outlook. As most of you know, the seasonality of our annual sales curve begins to ramp up in the second quarter. This led to record shipments in the quarter and first half shipments that were up 4.4% compared to 2014. This builds on a first half 2014 growth, up 2.7%, demonstrating our ability to consistently outperform the market. In that time, we have seen little or other -- little other additional papermaking capacity, purposely targeting the U.S away-from-home market. And none and specifically at the premium product subset we addressed with our unique ATMOS papermaking capabilities. First half 2015 strategic product volume growth was strong at 7.1%. Taking a deeper dive, sales of our strongest margin products, those tied directly to proprietary dispensing systems, again rose at a strong rate, up 5.8% year-to-date. As I interact with our distributors, and potential new end users, I’m pleased with the sustained superior manner in which our premium products continue to penetrate the away-from-home market. These differentiated products most often coupled with proprietary dispensing solutions continued to win business for us and our distributor partners. Second quarter premium product shipments increased 10.5% year-over-year. The key driver of our premium product growth continues to be the market receptivity of DublNature launched in midyear 2013. More than 24 months since the launch, DublNature remains a highly successful product line with year-over-year growth of over 20% in the first six months of 2015. Now entering the third year since launch, we expect continued favorable growth in the second half of 2015. Let's move to our margin enhancement initiative. I'm going to build on our internal MEI reporting that we started with last quarter to hopefully give a more insightful summary of this critical all-encompassing initiative. In the first quarter call, we highlighted the improvements in internal base paper costs achieved as a surrogate for the hundreds of operational initiatives underway reducing manufacturing costs within our system. On this slide, we will take that step one deeper, but again this reflects only a small fraction of the initiatives underway. As we began to the first of 2015, we implemented approximately two-thirds of our targeted MEI projects, which will achieve our $18 million 2015 EBITDA objective. Implemented in this case means, at a minimum the wheels are set in motion. In some cases the benefits are immediate, positively impacting current performance or helping to offset persistent market factors like the weakened Canadian exchange rates. Still other actions like SKU rationalization, the benefits will not be seen until inventories are worked through and customers transition to other attractive products in our offering. Two representative indicators of the impact of MEI in our converting operations are base paper costs per case, which in the first six months of 2015 declined 7% and average packaging costs per case which has been reduced during the same period by 6%. This is a result of single sourcing and cost savings reexamination of our carton design to name two initiatives. Like all the examples I’ll speak to you today, these are not one-time reductions, but a permanent shift in our cost structure. At our ATMOS papermaking operation in Kentucky, MEI initiatives has resulted in a 4% improvement in uptime thus far in 2015. For a machine specifically designed to routinely go through multiple grade changes each month, this is an important improvement reflecting efficiency gains and grade changes, quality, and operating speed. In a parallel fashion, important incremental speed gains have been achieved at our well performing Middletown Ohio papermaking facility. As MEI is more than a manufacturing centric program, let's look at warehousing and logistics, both material element costs in our system. MEI initiatives related to scheduling, finished goods, and parallel handling have allowed us to reduce on hand inventories of raw materials, and finished goods. As a result, we had exited several inefficient lease facilities and have achieved an 8% reduction on a per case basis in both warehousing and logistics costs through the first six months of 2015. Finally, we have spoken generally in past calls about portfolio rationalization. Let me frame this initiative with a few details. As we began the investigative stage of the MEI program, we supported 386 individual tissue SKUs in manufacturing, converting, warehousing, and shipping. There are long histories into how some of these SKUs came into being, but critical to us today was the exhaustive work we completed to review the contribution and the volume pull of each SKU and the importance to the customer relationship each represented. That work resulted in a commitment by both Wausau and our distributor partners to eliminate nearly a quarter of our product offering. To put context to this seemingly large piece of our business, these SKUs represent roughly 400,000 of the 17 million cases we shipped last year. But more critical than a smaller product offering was removing the disruptive impact of ensuring short runs into our manufacturing schedule and warehousing. Trading the risk of a small product offering to key customers for the dramatic scheduling improvements and papermaking and converting, we have received a strong favorable distributor response as they benefit from better inventory levels and turns in their warehouses. At this juncture, we’ve completed slightly more than half of the committed SKU eliminations. We expect only modest volume losses from these eliminations as other SKUs have been offered in their place. Let me finish with some thoughts on our third quarter outlook. As the July 2014 price increase has been fully implemented, we don't expect material benefits from pure prize in our third quarter results. However, we anticipate continued strong customer demand for our premium and more broadly strategic products that positively impact mix and as a result average selling price should remain strong. We saw some benefit in Q2 from the March 30 Canadian price increase, but more pragmatically exchange rates today are 15% below third quarter 2014 levels. So perhaps this is our most significant headwind we are facing. Based on early customer shipment patterns in the third quarter, we are maintaining the expectation of above market rate growth. This is despite the SKU rationalization work that will put some pressure on the total cases sold. After a benign period in wastepaper in 2014 and first half 2015, the fiber cost environment is such where we expect costs to slightly increase through the balance of 2015. Finally, as we’ve discussed, our MEI initiatives are gaining momentum. We expect this progress to build in each remaining quarter of 2015 and thus we are confirming our estimate from an $18 million improvement in EBITDA from MEI in 2015. As a result of all these elements, we expect adjusted third quarter 2015 EBITDA to be in the range of $17 million to $18 million. Similar to our second quarter and first half results issued today, that's a marked improvement over 2014 third quarter adjusted EBITDA of $13.8 million. Now I’d like to turn the call back over to Mike. Mike?

Thanks, Matt. So we feel good about our performance in Q2. I believe that our disciplined focus on MEI will continue to provide sustainable improvements in our company along with a continued improvement in our volume, in our makeshift to the higher margin premium products. As Matt indicated, we are providing guidance for Q3 of $17 million to $18 million, which represents an increase of $4.2 million versus Q3 last year at the top end of our range; we are at 30% increase in Q3. The EBITDA margin will be in 18% range versus 15% last year. Our results thus far give us great confidence in our ability to deliver $18 million of EBITDA improvement by the end of fiscal 2015. As a result, for fiscal 2015, we are confirming our full-year adjusted EBITDA guidance in the range of $60 million to $63 million. I’m very bullish about Wausau’s profitable growth capabilities as we continue to execute the MEI process in our Company. It is now embedded in the fundamental way we manage this Company. Thank you all for joining and now I’d like to turn it back to Perry.

Thank you, Mike. Brad, will you poll for any questions, please?

Of course. [Operator Instructions] Our first question today comes from the line of George Staphos with Bank of America. Please go ahead.

Hi, everyone. This is actually John Babcock sitting in for George. How is everything going today?

Thanks, John. Thanks for being here.

Yes, thanks for having us. I just wanted to quickly ask you, with regards to the MEI progress, is there any way to quantify where exactly you stand relative to your guidance for around $18 million in 2015?

As I stated on the call, based on the projects that we have implemented today, approximately two-thirds of our targeted goal, we expect to achieve the full $18 million within the guidance that we provided. And that will provide us then the momentum to work into 2016.

Okay. And then, now what about with regards to selling, general, and administrative costs, just want to get a sense for how much of the decline from the first quarter levels were ultimately from the MEI versus other potential, I guess, areas?

So with respect to SG&A really as we look at it, the impact in Q2 was primarily due to those elements that I referred to on the call with respect to the on boarding of individuals, as well as the sales incentive cost associated.

Okay. And next with regards to recovered paper pricing, how much of a benefit did you get from lower prices during the quarter?

Much of the better fit from fiber price in the quarter, is that the question?

Yes, yes, lower recovered paper prices?

Relative to the past year, the quarter was very flat. We are now recently seeing as we started the third quarter, a slight rise, particularly in the brown grades and we expect that to continue to trickle up in the latter half of Q4. But year-over-year that’s a pretty flat comparison.

Okay, great. Thanks for that. And then just lastly, is it possible to quantify the actual pricing benefit during the quarter? I think you provided a little bit of color there, but just want to see if there is any additional figures you could provide there?

On a general pricing basis, since our broad US-based price increase in 2014 July, we have now really completed that cycle and we are pleased with price and we’ve hit our internal targets of what we are going to achieve. But we don't expect further price gains from that initiative. So I think we will see going in the second half of the year is some additional benefit from our Canadian price increase that we have announced at the end of March.

All right, great. Thanks for your help and I’ll pass it on to the next person. Thank you.

Thanks, John.

And we do have a question from the line of Hamir Patel from RBC Capital Markets. Please go ahead.

Hi, good morning. When I look at your year-to-date case volumes of growth of 4.4%, the latest RISI data would say the industry is only -- it’s been growing at about 2.6% this year on the away-from-home side. Can you maybe speak to where that growth is coming from, like how much of that is growing share with your existing customers? And how much of that is from new customers?

Yes, as we really launched the new substrate and the new products within DublNature and Artisan. That was really focused on creating greater market access with our current distribution. So we’ve stayed through that. We’ve a number of new end users, but our base customer, the distributor, it’s really that same customer base that we’ve had in prior years.

Thanks, that’s helpful. And just a high-level question for the industry as a whole, when you think of supply and demand, I think over the last few months we've seen a couple capacity announcements being unveiled first through the 2017 timeframe. So far they look like they are really aimed squarely at the consumer market, but just wondering how you view the supply-demand balance over the medium to long-term.

In both cases, I’d view it as a very stable market. The capacity that has been announced is coming on its pretty much geared to the at-home private label market. But if you take into account the announced capacities through RISI, and then you take out the unidentified capacity announcements, the industry will operate somewhere between the 94% to 96% range, operating rate over the next several years. And you have to believe that the 150,000 tons of unannounced capacity, or unidentified capacity, would have to come on and if it did come on that would put us at the worst level, which would be at the 94% level. The most likely scenario, I think, by everybody’s estimation is going to be in the 96% operating rate over the next several years, which means a stable market.

Yes, thanks. That’s helpful. And just two final questions for Sherri. With respect to the price hike in Canada, I think Matt mentioned that’s going to flow through over the next quarter as well, how long does that take to fully come in? Will that be about 12 months like a regular away-from-home price hike or is it less than …?

Yes, it will be a similar cycle as to what we experience on a regular price increase.

Okay. And was that initiative matched by any other producers in the Canadian market?

I understand that in the Canadian market there is other providers who have put a price increase in the marketplace.

Okay, thanks. And Sherri, just when we look at CapEx for 2016, I know it’s probably still a bit early to look that far out, but are there any major capital projects under consideration that we should factor in when we think about how ’16 might vary from the $13 million in 2015?

No, we’re not really at the point where we’re providing any guidance with respect to 2016. And I guess I’d go back to what we’ve stated with respect to overall maintenance capital when you’re looking at it in that $8 million to $10 million range and then we would look at other strategic type elements that may fall on top of that. But at this point, for 2015, we’re again confirming the $13 million guidance.

Okay, fair enough. That's all I had. Thanks.

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

Hey, good morning. How are you?

Good.

Appreciate you taking the time. Can you give us a little bit more flavor of what end markets you are seeing the most incremental sell-through of the DublNature? I know last quarter you were able to share with us an exciting new contract in the baseball arena. Just wondering if you have any thoughts here?

We are seeing a lot of gains with the DublNature substrate of our brand with the ATMOS based substrate. In healthcare we’re seeing a quite a number of wins in Class A office space. Those are really the markets that we didn’t quite have the product to go to our distributors with prior to having the new machine and the new capability. That’s very encouraging. We’ve had a couple marquee wins with some very large Fortune 500 companies in terms of their corporate headquarters and some of the related manufacturing facility. So it’s been an encouraging quarter for us with some new opportunities.

That’s excellent. And on the health care, is that like acute care, or is that in nurse’s stations, or where is that?

It’s actually a combination of both. We target both those areas, so the hospitals and then long-term care.

Okay. That’s terrific. And then just wondering your largest distributor being acquired this month, do you have any thoughts there or is it just kind of like wait and see for now?

Interline is our largest customer, and they have been a great partner for us. We view this acquisition or potential acquisition as being very positive and perhaps could give us some access to grow within the [indiscernible] aspects of what a home depot has.

Yes, it definitely looks promising. Okay, that’s it. Thanks a lot. Good luck with the rest of the quarter.

Thanks, Dan.

[Operator Instructions] It does appear at this time there are no further questions from the phone lines. Please continue.

All right. Thanks Brad. We appreciate you taking part in today’s discussion and we thank you for your continued support of Wausau Paper. I want to thank those of you who participated in our recent investor perception work. We are committed to constant improvement in our dialogue with you. We had an active spring with many current and potential investor meetings and discussions. These outreach efforts will continue throughout the balance of the year. On the conference front, we will be attending the ITG Midwest Industrial Conference, in Milwaukee on the 19th of August. The RBC Capital Conference, in Las Vegas, in September and later in December, the Bank of America Conference, in Boston on the 9, and we hope to slot in some other NDRs throughout the fall. Finally, if you should have any follow-up today on our presentation, I’ll be available the balance of the day and the remainder of the week. Thank you very much for participating. Brad?

And ladies and gentlemen, today’s conference will be available for replay after 12 PM today through August 13. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 364614. International participants may dial 320-365-3844. And those numbers again are 1-800-475-6701 and 320-365-3844, again entering the access code 364614. That does conclude you conference for today. Thank you for your participating and for using the AT&T executive teleconference service. You may now disconnect.