|Shares Out. (in M):||24||P/E||0.0x||0.0x|
|Market Cap (in M):||936||P/FCF||0.0x||0.0x|
|Net Debt (in M):||467||EBIT||0||0|
Clearwater Paper (“CLW” – $39.50)
A spinoff from Potlatch Corp in 2008, CLW is a leading producer of private label at-home tissue and bleached paperboard in theU.S.We believe CLW’s tissue business is being priced by the market well below its fair value. In addition, we believe we are getting its paperboard business for free. Investors have overlooked this high quality business because of its limited history as an independent company, its aggressive capital spending and a dilutive acquisition. However, we believe market perception is about to change as CLW is approaching an inflection point in its earnings, management quality and capital allocation. We believe the stock could be worth as much as $85 per share on a sum of the parts basis.
The Consumer Products segment is a growing operation in a secularly expanding industry. CLW is a leading supplier of high value private label tissue mainly to grocery stores (71% of mix) and to big-box retailers (16% of mix). Over the last 15 years, demand for tissue in theU.S.has grown at an average rate of 2% annually and private label suppliers have taken significant market share from branded producers in every meaningful category. CLW has a 64% share of private label tissue products sold in grocery stores across the U.S.The tissue business will contribute approximately 80% of CLW EBITDA less Maintenance CapEx in 2013.
The Pulp & Paperboard segment produces solid bleach sulfate paperboard (“SBS”), which is then converted by its customers into high quality food packaging, premium commercial printing, and ultra-smooth folding carton products. Unlike other SBS producers, CLW does not manufacture the packaging end product. This creates a competitive advantage in that CLW is not simultaneously a supplier and competitor to its customers. Essentially all of the pulp produced by CLW is consumed internally (~75% to produce SBS and ~25% to produce tissue products).
Having captured 96% and 72% of the private label markets in the Western U.S. and Midwest, CLW aimed to grow its 36% share of the Eastern U.S.market. This mission propelled the company in 2010 to announce 1) the construction of a new $275m facility inShelby,North Carolina and 2) the $500m purchase of CelluTissue (“CLU”). However, investors frowned upon the idea of leveraging the balance sheet to pursue these endeavors.
Capital allocation by the management team appeared to be ill-advised. CLW’s tissue business was underappreciated and it seemed illogical to double down on it. To add insult to injury, the CLU deal transformed CLW’s 100% pulp-integrated tissue business into one that requires CLW to source one-third of the requisite raw material externally. Due to elevated pulp prices at the time, the deal actually dragged down tissue profits for the first several quarters after the transaction closed. As such, the market perceived management was not working to create shareholder value.
Recent Developments & Outlook
On May 1, 2012 SAC Capital entered the picture after filing a Form 13D. With a 7% stake in the company, SAC is seemingly having an impact on the culture at CLW. Not only has management been more transparent since the 13D filing, but the Board has also hired a new CEO (internal promotion) and a new CFO. We view SAC’s involvement as an inflection point in the focus of management from targeting expansion to being concentrated on shareholder value. For an example, see slide 30 of the company’s September 2012 investor presentation, entitled “…And Drive Value Creation for Shareholders.”
We also believe that due to the upcoming opening of the Shelby facility and the relatively low price of pulp, CLW is on the verge of a ramp in profits that is not fully appreciated by sell-side analysts. Results should also be boosted by the capture of synergies from the CLU deal, which continue to come in above original management guidance. We believe CLW can achieve almost $300m of EBITDA in 2013 (and more in 2014), yet analyst estimates remain at $255m. Our view is that the company should be able to beat expectations in the coming years and that ramping free cash flow generation could be funneled to shareholders through stock repurchases and/or dividends. Management also has the opportunity to enhance earnings and cash flow by refinancing $150m worth of debt currently paying almost 11% interest annually. With a very good business, a good balance sheet (1.6x Net Debt/2013 EBITDA), growing cash flow generation, and a motivated management team, we believe CLW represents excellent risk/reward at the current price.
At today’s stock price, CLW is trading for less than 8x 2013 Consumer Products Segment EBITDA less Maintenance CapEx. Our view is that the Consumer Products business is worth 12x 2013 EBITDA less Maintenance CapEx. That multiple is in line with a set of publicly-traded companies in the private label sector. We value the Pulp & Paperboad segment at 7x 2013 EBITDA less Maintenance CapEx, similar to/below other companies in the packaging space. Given SAC’s involvement and recent management commentary, we expect executive decision-making going forward to be focused on realizing the true value of CLW’s stock.
|($ in millions)||EBITDA|
|less MCapEx *||Multiple||Ent Val|
|Consumer Products (incl Corp.)||$181||12.0x||$2,173|
|Pulp & Paperboard (incl Corp.)||45||7.0x||312|
|less: Net Debt||(467)|
|Value per Share||$85.13|
|Premium to Current||115.5%|
|* Note: corporate expense of $50m was split evenly between the 2 segments.|
|Entry||12/19/2012 05:33 AM|
Thanks for the writeup - I had a couple of questions:
1. How are you calculating the net debt? Looks like you are taking the LT debt and then subtracting the cash and securities - but IIRC there is a reasonable unfunded pension liability. Given the amount of upside you contemplate, don't think it torpedos the case, but seem to remember it is something like 200m unfunded i.e. the best part of $9/share. I might be wrong on this.
2. What are your thoughts on maintenenance capex? Think D&A was something like 77m in 2011, then obviously you have Shelby coming online which probably adds some more maintenance - so call it 85m. If I add that to your divisional forecasts in the SOTP, which include the overhead, I get to 311m of EBITDA. I only see a few estimates on my Bloomberg terminal, but even for 2014, by which point Shelby should be fully ramped up, the estimare only seems to be 287m. Not saying a value investor should spend all of his or her time reconciling their estimates with street consensus - but all the same, do you have any thoughts on the discrepancy. Even in the company's quite aggressive presentation, they only seem to be targetting "300+"...kind of getting into semantics but just wondering how much you really need to lean into what they are guiding and how much of it is just "easy" benefits like synergies, Shelby ramp up, etc?
3. Any thoughts on the pulp price? Stock seems to be quite correlated (inversely) with prices...if I look at FOEXUSNB on Bloomberg - that is up about $40 from the lows. Any idea what is happening there and what we can expect going forward? Can that kill the earnings growth story? Am I even looking at the right input?!
4. Besides SAC, what type of investor do you think is in this right now? The reason I ask is that I read a report from a broker a couple of months back listing consensus small to mid cap overweights amongst hedge funds in the US, and this company featured. Do you think there is much risk that people are already quite full of it and there's not really an incremental buyer? The SAC thing typifies it to me - two 13Ds in three months?
5. On the capital allocation point - is that a 2013 thing do you think? I just look at the debt and wonder if they would prefer to pay some of that down before returning capital to shareholders. Of course, given the mix shift to more stable business lines, the net debt (even with the pension liabilities) is manageable if they hit the run rate EBITDA you contemplate, but given the trailing EBITDA is still some way below the scenario they lay out in the presentation, I wonder if we will have to wait a while for capital returns.
6. Any sense you have on a home for those Shelby volumes? They seem to be quite confident that there will be zero problems finding customers, but just wondering if you had a sense who who exactly, given I think this is their first foray into the very premium part of the market as far as I am aware?
7. Any thoughts on the most recent interims? Stock seemed to react horribly to them (okay it had had a great run into the event). I just worry that the old problem of them not communicating well with investors isn't really behind them (in the past it had been to do with the transmission mechanism of raw materials through the P&L - now it seems to be volumes falling short IIRC). Any sense you had here of what went wrong in Q3 when the wind appeared to be at their back would be great.
I think it's an interesting idea FWIW - seems to be one of those cases where you can kind of easily lay out the building blocks for earnings to be much higher and the valuation to be quite low if everything works out. Agree that the SAC thing seems to have focused them a bit also - I was actually quite surprised that their lawyers allowed them to lay out the upside case so explicity in the presentation. I just worry a bit about the execution risks on Shelby, balance sheet, quality of shareholder base, earnings volatility generated by pulp price fluctuations, etc.
|Subject||RE: Few Questions|
|Entry||12/19/2012 12:59 PM|
1) we are calculating net debt as Debt less Cash/Equivs... the pension is underfunded by $90m as of 12/31/11 and CLW has spent $30m on contributions to it over the last 2 years... given the underfunded status is not very onerous and can swing quickly with a slight uptick in interest rates, we have chosen to exclude it in our net debt assumptions...
2) the company projections were not aggressive - the pro forma guidance of "$300m+" was in a slide showing a bridge vs 2011 adjusted EBITDA... what the slide leaves out is the effect of pulp prices, which are down significantly from 2011 levels (could be a $50m tailwind in 2013 vs 2011)... we think EBITDA in 2013 approaches $300m driven by lower pulp and 2 quarters of Shelby benefits, offsetting lower Paperboard EBITDA due to slightly lower pricing...
3) you're looking at the right ticker for pulp pricing... our sense (we're not experts on pulp however) is that pricing is up because there was some supply set to come to market that got delayed, but given significant supply is coming on in 2013, prices should probably begin to gradually drop next year... we're asssuming it stays flat at $870/ton
4) our view is that liquidity in the stock isn't great and therefore some funds can't buy more and others won't even look at it... if management starts announcing shareholder friendly capital programs, not only will the stock price start moving but the float will improve, giving more funds the ability own it and improving the sentiment around the management team, and it's hopefully a virtuous cycle...
5) we think the company will generate ~$100m in FCF in 2013 and growing from there - so management could pay down some debt and still return $3/shr in cash to shareholders through dividends and/or buybacks... if it's all dividends it would be an 8% yield on today's stock price for a high quality and stable private-label tissue business and it's a double-whammy if they are simultaneously deleveraging... we also believe there should be a healthy amount of debt on the balance sheet for this business, Tissue alone will do over $200m in EBITDA in 2013 (excl Corp.) - 2x leverage on Tissue is fine given the quality of the business... so we do think management could start returning cash to shareholders in 2013
6) Shelby will produce the highest quality private label tissue... we have no specific data points on who is buying the tons, but our guess would be the same folks that are already buying CLW's higher value tissue...
7) as we have argued in other cases, when calculating EBITDA in order to value a company, it is incorrect to include start-up costs for a facility that is not contributing any revenues... the EBITDA generated by CLW's current asset base (ie, excl Shelby) was $62m not $59m (and above $60m consensus)... we were very surprised the stock was down after earnings and viewed it as a buying opportunity... you have valid concerns about management communication, but they appear to be improving in that regard
We typically look for good businesses going through this type of inflection point in earnings - whether EBITDA comes in at $290m or $275m in 2013, we think the ramp vs 2012 will push the stock higher, allow for better capital allocation, cause a re-rate in the multiple, etc etc etc
|Subject||RE: RE: Few Questions|
|Entry||12/19/2012 01:10 PM|
Thanks so much for coming back to me so quickly.
|Subject||RE: A few questions|
|Entry||12/26/2012 10:59 AM|
Thank you for your interest. You have asked a few good questions, but I view this as one issue so I will answer with that in mind (but not necessarily in the order submitted):
In CLW's September investor presentation (referenced in our write-up), slide 31 has an interesting bullet. In order to drive shareholder value, the slide offers 6 ideas including to "Continually analyze all opportunities to create shareholder value." Since its spinoff, CLW has done nothing but raise debt to grow - historically, it doesn't seem as if management is truly considering all options. In a discussion with the new CEO and new CFO, we got the sense that it's unlikely we'll see another big growth investment in the near/medium term as the company has a lot on its plate (integrating CLU, new machine start-up, etc). That leaves debt paydown, buybacks/dividends, and cash hoarding as the remaining options. It sounds like they have no desire to hoard cash and do not view the B/S as over-leveraged. I'm not saying they won't pay down any debt, but net debt/consolidated ebitda is below 2x on 2012 numbers and will drop to 1.5x on 2013 numbers (for a very good business, it's an appropriate amount of debt and I don't believe they disagree).
So we expect/hope management will start returning cash to shareholders. We believe a dividend is viable given the quality of the cash flows. But, a buyback would be great at these levels given the fact that if the company executes and grows EBITDA at the rate we expect, the stock will be materially higher in a year. But the float issue is a valid one. Buybacks hurt float all things being equal, but in this case we think it would bring incremental smart investors to the table. and volumes could improve as well.
We also think management is highly incentivized to return cash to shareholders / drive stock value. The company's LTIP includes performance shares based on total stockholder return over a 3-year period. Additionally, there is a clawback mechanism whereby the Board can adjust/cancel equity awards. 100% of the CEO's long-term incentives program bonus is in the form of these performance shares (as oppose to other employees who are awarded a portion of the bonus in RSU's). In 2011, the old CEO received 50% of his total compensation in performance shares. Long story short, CEO-to-be Linda Massman will be highly incentivized to drive high total returns on the stock.
|Subject||Capacity Utilization at plants|
|Entry||12/26/2012 12:06 PM|
Thanks Ruby for the interesting idea.
Can you speak to capacity utilization at their plants? How much incremental capacity can they add on should they get new accounts without having to build new plants. We have heard in the past that they won accounts (at the likes of Target; not sure if that ever came to reality). Question though was to what extent they could absorb new accounts within existing infrastructure (enabling capex light growth + added benefit of fixed cost overhead leveraging leading to higher margins).
|Subject||RE: Capacity Utilization at plants|
|Entry||12/27/2012 02:28 PM|
Thanks for your question.
While I do not have any data points on specific customers, based on the conference calls it appears that CLW has increased its potential growth opportunities from big box retailers as a result of the CLU deal. So it is true that CLW is seeing good demand dynamics and could possibly supply more tissue.
The machines have been running essentially at full capacity (production has run at 96%+ of total capacity as of the most recent 10k). And in terms of Shelby, initial indications are that its high value TAD tissue production will be easily sold at attractive prices for CLW. Our sense is that demand for this high value TAD tissue far outweighs current supply.
But there is some headroom for CLW to supply more of its tissue. In the CLU deal, CLW acquired some converting lines that were under-utilized. So CLW could choose to purchase parent rolls externally and convert those to tissue to meet incremental demand. However, as mentioned, the TAD market is so tight that there are zero TAD parents rolls being sold (they are all being converted to TAD tissue). Regular/lower value parent rolls can be purchased. Long story short: CLW could better optimize its assets if there's incremental demand by converting all of its internally produced TAD parent rolls, then convert the internaslly produced regular parent rolls, and then buy more regular parent rolls and convert them if the economics make sense.
But in order to supply more TAD tissue CLW would have to spend more capital. The good news is that it would cost them less than $100m to do that (vs the $275m in capital needed to build Shelby). The Shelby facility was built from scratch (including the leveling of significant forest land). The actual TAD machine was less than $100m. But I should reiterate that our sense from management is that they are not looking to spend capital to grow anytime soon.
|Subject||RE: RE: Capacity Utilization at plants|
|Entry||12/27/2012 02:31 PM|
I will just add that the company left empty space at the Shelby facility just in case it chose to buy another machine in the future.
|Entry||01/17/2013 10:13 AM|
The CLW Board announced this morning that it has authorized a $100m share repurchase program ($109m including what was left on the previous program as of Q3 earnings). We believe this is not only a great use of capital with the stock in the low 40's, but it confirms that management is very confident in the ramping free cash flow and the quality of the business.
It is also worth highlighting as well that the Board added 2 directors last week. One of them, Kevin Hunt of RAH (also a private label company), has proven in his career to be a value creator through share buybacks, divestitures, acquisitions, spinoffs, and ultimately selling his company to CAG.
|Entry||01/17/2013 10:28 AM|
CLW also announced this morning that it will raise $250m worth of senior notes. The proceeds will be used to redeem the $150m 10.625% coupon debt currently on the B/S and will also be used in the buyback.
|Subject||Insider Buying / 5x 2014 guidance|
|Entry||09/18/2013 11:10 AM|
I like this one and have bought it today. Came up on insider buying screen as the CFO just bought $200k worth of stock on August 1st at $49.35, significantly above the current price.
Great investor presentation here from September 10th http://files.shareholder.com/downloads/ABEA-23EJ0Z/2690679758x0x689825/adf6431d-1016-4eaa-985d-f13bec6e2cd4/September%202013%20Presentation%20Final%209-9-13.pdf. Page 17 shows bridge to their guidance of $300mm+ EBITDA run-rate in 2014, which puts the stock at just over 5x TEV/EBITDA.
I agree with Ruby that the Consumer Products business is a gem and is worth a big multiple.
Stock should work very well from here.
|Subject||RE: 11.5% FCF yield|
|Entry||10/11/2013 01:27 PM|
Thanks Cuyler. And yes we are still closely following CLW. The company's high quality private label tissue business is grossly undervalued by the public market - which is why the stock buyback program is such a great use of cash in 2013. We expect that as CLW begins to show its EBITDA ramping and announces either another buyback program or a regular dividend as the primary use of cash in 2014, the stock will be meaningfully higher. And to your other point, we have always believed that there are probably strategic and financial buyers who would be interested in these assets. We think that over the next 12 months you'll see a 50%+ move higher in the stock, especially if the company is acquired.