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Wausau Paper Corp (WPP) Q2 2008 Earnings Call July 29, 2008 11:00 am ET

Executives Perry Grueber - Director of IR Tom Howatt - President and CEOScott Doescher - CFO

Dan Trettin - SVP - Printing and Writing Analysts Mark Wilde - Deutsche Bank Jonathan Lichter - Sidoti & Company Presentation Ladies and gentlemen thank you and welcome to the Wausau Paper 2008Second Quarter Results Conference Call.Now would like to turn the conference over to the Director ofInvestor Relations Perry Grueber. Perry GrueberThank you, Liya. Good morning, everyone. Thank you for joining usfor the Wausau Paper second quarter 2008 analyst and investor call.I am pleased to be here today with Tom Howatt, President and ChiefExecutive Officer of Wausau Paper and Scott Doescher, our ChiefFinancial Officer. I would also like to welcome Dan Trettin, ourSenior Vice President of Printing and Writing.This morning we will be discussing Wausau Paper second quarterfinancial results, which we announced yesterday afternoon. Tom willprovide a few opening remarks relating to the performance of thecorporation and initiatives in each of the three business units.Then we will ask Dan to provide commentary on the progress Printingand Writing is making against its profit recovery plan and uncoatedfree sheet market conditions in general.

Scott will then provide a summary of financial review and touch onoften asked for data points. Tom will then conclude our preparedremarks with a review of our outlook for the third quarter of 2008,after which we would be happy to address any questions you mighthave.

As usual, I would like to inform you that statements made duringthis conference call, other than those that refer to past eventsand results are forward-looking statements made pursuant to theSafe Harbor provisions of the Securities Reform Act of 1995. Suchstatements including those relating to expectations concerningearnings and price increases involve risks and uncertainties thatmay cause results to differ materially from those set forth duringthis discussion. Among other things, this risks and uncertaintiesinclude the risks and assumptions described in Item 1A and Item 7of the companys Form 10-K for the year ended December 31, 2007.The company assumes no obligation to update or supplementforward-looking statements that become untrue because of subsequentevents.Now over to Mr. Tom Howatt. homas HowattHi, good morning. Second quarter results for Wausau Paper werereflective of the broadly weakening domestic economy and generallydifficult demand characteristics that each of the company businesssegments faces.

Away-from-home tissue market demand was essentially flat over thefirst half of the year, while uncoated free sheet volume wasreported to have declined by more than 7%. While public industriesare generally available for Specialty Products markets it is ourbusiness that most significantly impacted by economic cycles.Demand in core markets such as release liners and tape has beenfalling substantially under recessionary or near recessionarybusiness conditions.

Second quarter results also reflect this years surge in energycosts unprecedented levels with dramatic impact on freight,chemicals, boiler fuel and other input costs, while these costincreases are pressured margins in the short-term. Our continuedfocus on strategic markets coupled with actions we have taken overthe last several quarters to address underperforming areas of thebusiness, have set the tone for significantly improved futureresults.

The move away from commoditized grades in Specialty and Printingand Writing, combined with industry capacity closures, has resultedin solid pricing leverage in some markets with customers becomingmore concerned about lining with well positioned suppliers likeWausau Paper to ensure reliable supply.While the benefits of our strategic initiatives have been masked byeconomic weakness and cost pressures, our confidence in ourstrategy has reflected in our outlook for much improved thirdquarter earnings over second quarter levels with a potential foreach of our three businesses to be profitable during the quarter.For example, margins at our Towel and Tissue business increasedfrom first quarter level to nearly 10% in the second quarter,despite unrelenting increases in wastepaper, freight and parentrolls cost. We expect our third quarter price increase and therebuild of our toweling machine at Middletown delivered improvementin operating margins over the next several quarters.At Specialty Products, our growing presence in the higher marginfood service and food packaging markets coupled with reducedexposure to the commoditized segments of the release liner marketwill drive margin gains as the economy improves. Printing andWriting, will continue executing our profit recovery plan with agoal of achieving cost-of-capital returns by the end of 2009.

The initial phase of Printing and Writing s recovery plan sawcapacity reduction well executed by the business and has deliveredthe desired mix up upgrade with the elimination of commodity gradesand much improved pricing for the balance of our portfolio. We areon track to achieve breakeven results for the third quarter of thisyear as expected, and Dan Trettin is here today to comment further.Dan TrettinThank you, Tom. It’s a pleasure to be with you this morning. Iwill cover highlights of Printing & Writing’s financialperformance for the quarter and then provide some additional detailon success we are having related to our profit recovery planinitiated last year.Second quarter shipments up 66,000 tons were 29% below prior yearlevels. The result of anticipated volume reductions associated withGroveton mill closure.Net sales were $95.6 million compared with a $114.2 million lastyear, while average selling price improved 19% reflecting thesignificant product mix improvement and price increases achieved inrecent months. Input costs continued to climb with second quarterfiber and energy cost increasing $7.5 million as compared with lastyear.Printing and Writing recorded an operating loss excluding Grovetonclosure charges of $2.8 million as compared to $2.3 million lastyear and $4.9 million in the first quarter. The $2.1 millionsequential improvement reflects progress made with our profitrecovery plan and was achieved despite the execution of annualmaintenance outages at both mills in the quarter.

As you may remember, we announced the three-part profit recoveryplan last October. The three elements of that plan were to minimizeour exposure to the commodity segments of the uncoated free sheetmarket, bring singular focus to our core products and brands andsystematically infuse capital into our ongoing manufacturingsystem, to enhance operational efficiency and improve theprofitability of these assets.

In December, we closed Groveton, a high cost facility therebyreducing our paper making capacity by 28%. Now properly sizedrelative to our markets, we selectively exited a substantial volumeof non-core lower margin business that was detrimentally affectingprofitability.

The second part of our recovery continues today. Our sales andmarketing teams are enhancing margin contribution from our premiumbrands such as Astrobrights, Royal and Exact to enhance branddevelopment and customer segmentation. Market response to-date hasbeen favorable and supportive of our efforts to refocus ourbusiness around recognized core competencies.

We are particularly encouraged by the improved pricing environmentfor uncoated free sheet papers, even though the industry demandacross the entire spectrum of grades has declined. One data sourcereports North American shipments declining 8% to the first fivemonths of 2008.

Currently, beginning the historically strongest quarter of theyear, we remain confident in our earlier guidance of achievingprofitability for the third quarter of 2008. The first initiativerelated to the investment phase of our profit recovery plan is theBrokaw dry fiber handling project. The anticipated returns of thisproject well exceed the corporations capital return threshold.This investment will reduce cost and improve both efficiency andsafety at the mill. As you know, the goal of the profit recoveryplan is returning this business to earning its cost to capital bythe end of 2009. We remain confident in our ability to do so. Iappreciate the opportunity to share a few comments with you. Wewill be more than happy to address specific questions during thequestion-and-answer session.Scott Doescher will now continue our presentation with a corporatefinancial review.Scott DoescherThank you, Dan. During the second quarter, we reported a grossprofit of $21.8 million or 7% of net sales, compared to a grossprofit of $32 million or 10% of net sales last year. Included incurrent quarter cost of sales were $1.2 million of charges relatedto closure of the Groveton mill and roll wrap operations inColumbus, Wisconsin and Jackson Mississippi.

Profit margins remained under pressure from escalating input costsas year-over-year fiber prices increased more than $14 millionincluding market pulp price increases of $8.8 million or 13%.Purchase Towel & Tissue parent roll price increases of $3.1million or 17% and wastepaper price increases of $1.6 million or30%. In addition, year-over-year energy prices increased $7 milliondriven by a $2.4 million or 43% increase in natural gas, a $2.6million or doubling the fuel surcharges on outbound transportationand an $800,000 or 50% increase in fuel oil costs.

The second quarter included $13.8 million of pre-tax chargesrelated to the December 2007 closure of the Groveton mill with $1.1million reflected in cost of sales and $12.7 million as arestructuring line item. The restructuring charges can be largelyattributed to expenses associated with utility agreements at thenow closed facility.

Yeah, okay, alright. And can you just, when you talk about theprofit improvement plan and you want to get the cost-of-capitalreturns by the end of '09. I think one of the key questions for alot of shareholders is, when you do that is that a plan, which hasyou sustainably it cost-of-capital returns going forward in thebusiness, because it’s really been a business is underperformedhere for several years?

Tom Howatt

Well, Mark, I’d say that's certainly our expectation. And I thinkif you take a look at the improvements is occurring at thatbusiness and presuming we would be able to achieve that. We"ve infact would have been able to accomplish it during perhaps in themost difficult of circumstances imaginable with energy costs atunprecedented levels, even since the recovery plan announcementlast October, natural gas, which impact this business unit has goneup dramatically.

I think when you look at the combination of declining marketplacein the current year coupled with those energy costs, those types ofheadwinds, I think being able to achieve the result we've targetedat this point in time would suggest that we have a solid businessmodel at this point.

Ultimately, I think what's important though, is to be able tocontinue to grow at the premium side of the business. That includessustaining a solid position with the merchant distributioncommunity and commercial print markets coupled with further successin some of the new channels that we are focusing on such as [endleaf]; scrap booking and various other similar type markets.

So, I think a way of gauging our progress and the sustainability,this is going to be our ability to penetrate those markets anddrive that premium paper growth.

Mark Wilde - Deutsche Bank SecuritiesOkay. And Dan just also on Printing and Writing, I noticed that theindustry statistics for June in uncoated free sheet were quite abit better than we haven’t seen for last few months. Have youseen any real change in market trends that would tie-up with that?DanTrettinMark, this is Dan. Our volume is really been at expectation ormaybe better than expectations, really in the months of June andJuly. So, yes, I think that the performance has been better thanmaybe what has been earlier than year.Mark Wilde - Deutsche Bank SecuritiesOkay. And then just turning over to Specialty, I noticed you'vementioned in the release that you've taken some downtime at Otisand I wondered if you could give us a little color on that. Andthen maybe also just give us a sense of kind of the specific typesof products out of Specialty that really have been hit hardest. I'massuming part of this is some of the Specialty tape products andthings?

Dan TrettinYes, and let me take them in the order that you described them. Wedid take some market related downtime at the Otis facility in thesecond quarter, that amount to approximately 2500 tons of capacityfor the period. And quite frankly what we are simply doing ismatching up the capacity, that facility with the demand for coreproducts. The cost structure that facility is relatively high, itsfuel oil hired. So, we were really not in a position of consideringwhat I characterize is more commodity oriented fill-type grades.So, we have really controlled capacity to meet demand in coremarkets of that facility.With respect to the grades that are being most significantlyimpacted by the economic downturn. Clearly both of our largestmarkets, release liner and tape are under the rest during thisperiod. As you know, we have perhaps the emphasized release linermarket in favor of food service and food packaging grade, so we areseeing a decline in that market in part due to that reason, butthere is still weakness in those markets.Perhaps more significantly though is the weakness in tape marketsand we saw this is the time with last economic downturn at thebeginning of this decade, where this Specialty tape grades itcarried a highest margins in fact declined quite significantly andthat relates to the industrial economy, weakness in the automotivesector as well as than other grades within Specialty that are tiedto housing and other related construction markets.

Mark Wilde - Deutsche Bank SecuritiesOkay. And then Tom, if we could on Specialty that the guys at Boisehad put in that on that machine conversion over into release linerjust recently, have you seen much impact from that in yourbusiness. I know you planned a slightly different chunk of themarket?Tom Howatt Yes, and most certainly that capacity has shown up in the morecommoditized segments of the release liner market. And in fact,that's in part the reason for our strategy to move away from thosemore commoditized segments of the release liner markets, wherethere is limited price leverage despite the input cost increasesand again refocusing that capacity on food service and foodpackaging grades.Mark Wilde - Deutsche Bank Okay, very good. Thanks.Scott Doescher Thanks Mark.Operator And next we go to line of Jonathan Lichter from Sidoti &Company. Please go ahead. Jonathan Lichter - Sidoti & Company Good morning, guys.

Tom HowattGood morning, Jonathan.Scott DoescherGood morning, Jonathan.

Jonathan Lichter - Sidoti & CompanyWas there any growth in product that you still sold there in Q2?Tom HowattYes, there would been product that we had in our warehouse thatwould have been part of corestock business, Jonathan.Jonathan Lichter - Sidoti & CompanyDo you have any idea how much in terms of tonnage or any othermetric?<BR>Tom Howatt

No. I really don’t know how much of that specifically was groupedin product.Jonathan Lichter - Sidoti & Company Okay. And then on the Towel and Tissue side, the tonnage gain isthere, is that new products that you're selling or are you gainingshare?Scott Doescher Right, I think it’ s fair to say that there is a modest share gainassociated with that 3% year-to-date volume increase, given thatthe fact that the market is relatively flat. We continue to havegood success with new product introductions, but I’d say themagnitude of that volume gain over the first half of that yearwould suggest there is some slight share gain.Jonathan Lichter - Sidoti & Company Okay. And how confident are you that the August price, increase inSpecialty Products will be enough to get to breakeven orprofitability in the later half of the year?Scott DoescherThere is a rather substantial as you might imagine, cost push inthe industry that’ s I think causing many competitors to look forways to move price. So, I think that there is fairly broad support,quite frankly across all three of our businesses at this time forimproved pricing.Based on our early read of the situation and the discussions we hadwith customers so far, we are quite confident of the August priceincrease and the fact that, we will have a profitable third quarterin Specialty Products.

Jonathan Lichter - Sidoti & CompanyAnd then finally just, when could be the share repurchases start upagain? Would it be after you completed the CapEx?Tom Howatt

Yes, maybe I’ll comment first and then Scott can perhaps addfurther comment. But as you know, when we have talked about use ofcash on long-term basis, we have always said that our focus is onprofitably growing the corporation and that’s really our numberone priority and in recent times absent and lack of good investmentalternatives, we have look to return value to shareholders throughthat share repurchase plan.

On a more near-term basis, we have a couple of very sound capitalprojects that we are focused on, whether there will be additionalcapital projects identified and approved, I think really isuncertain at this point in time. So, I think over the short-term you’ d see us likely suspending that repurchase program.Scott anything further or?Scott DoescherNo. I think you have covered at well, Tom. What I would also noteJonathan is that, over the last three years, we have spent betterthan $32 million on that share buyback program and we’ve reallydone that without increasing the leverage on our balance sheet.So, as Tom mentioned our focus now and our priority always has beenthe profitable growth of our businesses and our step away from therepurchase program in the near-term it just a reflection of thatpriority.Jonathan Lichter - Sidoti & Company Okay, thank you.Operator  (Operator Instructions) And we have a follow-up from Mark Wilde.Please go ahead. Mark Wilde - Deutsche Bank Yes, Scott I wonder if you can help us understand the carryover ofso many growth and charges into the second quarter. I know it wasreally close I think at the end of last year?Scott DoescherYes, Mark, that’s a very good question. What we did see isoperations at the mill in terms of the paper machines in Decemberof last year. But we continue to operate certain equipment as wesupported distribution from that facility. So, there were assetcosts that remained and continued into 2008, Mark, and those wentdown during the course of the first and the second quarter. And asa result, as part of our guidance and as part of our footnotesyou'll see that we just expect about $2 million, $2.1 million ofadditional closure costs through the balance of 2008.Mark Wilde - Deutsche Bank Okay. Very good, thanks.Operator And gentlemen we have no further questions at this time. You maycontinue.Tom Howatt As we begin the third quarter, we are confident that our focus onstrategic markets and product innovation, and our disciplinedapproach to operations, has positioned us for solid recovery overtime. We look forward to reporting our continuing progress againstthe goals we have established.We appreciate your taking part in today's discussion and yourinterest in Wausau Paper. We plan to release third quarter 2008results on Monday, October 27th. Our next scheduled conference callis slated for 11:00 a.m. Eastern Time on Tuesday, October 28th.Thank you for your participation.Operator Ladies and gentlemen this conference is available for replay after12:00 p.m. Central Time today through August 5th at midnight. Youmay access the AT&T replay service at any time by dialing1800-475-6701 and enter the access code of 930808. Once again thatnumber is 1800-475-6701 with the access code of 930808 and it isavailable after 12:00 p.m. Central Time today through August 5th atmidnight. That does conclude your conference for today. Thank youfor your participation and for using AT&T ExecutiveTeleconference. You may now disconnect.

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