Oct 22, 2014
Executives
Robin Yim – VP, IR John Hertz – SVP and CFO Linda Massman – President and CEO
Analysts
James Armstrong – Vertical Research Partners Paul Quinn – RBC Capital Markets Steven Chercover – D. A.
Davidson & Co.
Operator
Welcome ladies and gentlemen to Clearwater Paper Corporation’s Third Quarter 2014 Earnings Conference Call. As a reminder this conference is being recorded today, October 22, 2014.
I would now like to turn the conference over to Ms. Robin Yim, Vice President, Investor Relations of Clearwater Paper.
Please go ahead, ma’am.
Robin Yim
Thank you, Saeed. Good afternoon and thank you for joining Clearwater Paper’s third quarter 2014 earnings conference call.
Joining me on the call today are Linda Massman, President and Chief Executive Officer; and John Hertz, Chief Financial Officer. Financial results for the third quarter were released shortly after today’s market close.
Posted on the Investor Relations page of our website at clearwaterpaper.com, you will find both the earnings press release and the presentation of supplemental information including an updated outlook slide providing the company’s current expectations and estimates as to net sales, operating margin, adjusted EBIDTA, certain cost, pricing, shipment, production and other factors for the fourth quarter of 2014. Additionally we will be providing certain non-GAAP information in this afternoon’s discussion.
A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release or in the supplemental material provided on our website. I would like to remind you that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.
These forward-looking statements are based on current expectations, estimates, assumptions and projections that are subject to change and actual results may differ materially from the forward-looking statements. Factors that could cause actual results to differ materially include those risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2013 and Form 10-Q for the quarters ended March 31 and June 30, 2014.
Any forward-looking statements are made only as of this date and the company assumes no obligation to update any forward-looking statement. John Hertz will begin today’s call with a review of the financial results for the third quarter and Linda Massman will provide an overview of the business environment and our outlook for the fourth quarter of 2014 and then we will open up the call for the question-and-answer session.
Now I’ll turn the call over to John.
John Hertz
Thank you Robin. Before I get into our third quarter 2014 results I will start with a little housekeeping.
We are providing both GAAP results and results that are adjusted to exclude certain charges and benefits that we believe are not indicative of our core operating performance. For the third quarter of 2014, there was a net charge of $30 million which includes a $24 million charge related to the early retirement of the $375 million notes, $5 million of cost associated with the prior closure of our Long Island, New York converting facility, $1 million in severance and other expenses associated with the Specialty Paper optimization within our consumer products division and lastly the mark-to-market impact from directors cash settled stock unit was a $200,000 benefit in the third quarter.
Let me start by saying that I’m very pleased to report that Clearwater Paper had a milestone quarter and in the process hit many new record highs which Linda will cover in more detail. We delivered $72 million in adjusted EBITDA, a record quarter for the company and at the midpoint of our outlook of $68 million to $76 million.
We estimate that the number would be $80 million if pricing and input costs were similar to those seen in 2011, which was the baseline of our $75 million EBITDA per quarter objective. So with that I’ll turn to the quarterly results.
Net sales came in at $511 million, that’s up 2.5% from Q2 and in line with our outlook for the quarter of up 2.4%. On the paperboard side we saw a 3% increase in paperboard shipments, as the paper machine in Arkansas recovered from its Q2 operational issues and resumed normal production levels.
On the tissue side we saw a 2% increase in case shipment volumes accompanies by a 2% average price increase as through-air-dried, or TAD product shipment continued to grow as a percentage of our total tissue sales. Versus Q3, 2013 net sales were up 5% primarily due to higher prices and volumes in both paperboard and tissue.
Third quarter adjusted gross margin of $81 million or 15.8% which excludes the Long Island shut-down costs was up 240 basis points from the second quarter. On the paperboard side we saw lower operational and maintenance cost at Arkansas mill as operations improved there and there was no boiler maintenance in the quarter as well as seasonally lower energy usage.
On the tissue side we had a 2% increase in average pricing and hardwood pulp prices were down from last quarter. Those improvements were partially offset by higher transportation cost due to some short term tissue converting capacity constrain, which caused an increase in the number of miles travelled as well tight fleet supply nationwide.
In addition we saw higher wood fiber prices due to strong demand and wet weather in the south limiting supply. Versus Q3, 2013 gross margin was nearly 6% points higher due to strong paperboard pricing and volumes, higher average tissue prices, the absence of major maintenance cost as well as savings from facility closures.
Adjusted SG&A expense was $31 million or 6% of third quarter net sales which was down approximately $1 million from Q2. Q3 ‘13 adjusted SG&A was 5.6% of net sales.
Adjusted corporate expense was $40 million of the SG&A spend in the third quarter or 2.7% of net sales and was also 2.7% of net sales in Q2. Adjusted operating income of $50 million or 9.7% margin came in at the midpoint of our third quarter outlook of 9% to 10.5% and up from 17.1% in Q2.
Versus Q3 ‘13 adjusted operating income more than doubled and adjusted operating margin percentage improved by 5.4 percentage points primarily due to a 14 percentage point operating margin gain in our pulp and paperboard division due to higher prices and volume shift and in the absence of major maintenance in Q3 of ‘14. Adjusted EBITDA were $72 million or 14.1% of net sales which is 90 basis points below our cross cycle margin target.
When compared to Q2 at 11.5% in Q3 of 2013 at 8.8% our operating leverage in PPD continues to strengthen and operating efficiency in CPD is modestly improving. Net interest expense was $10 million which excludes early debt retirement cost of $24 million.
Turning to taxes, on an adjusted basis our Q3 effective tax rate was 36% and in line with our outlook of 36% plus or minus 2% and down from 38% in the second quarter. Third quarter 2014 GAAP net earnings were $6 million or $0.31 per diluted share and on an adjusted basis $26 million or a record $1.28 per diluted share.
That is compared to adjusted net earnings of $15 million or $0.74 per diluted share in the second quarter and $6 million or $0.29 per diluted share in the third quarter of 2013. Non-cash expenses in the third quarter of 2014 included a $22 million of depreciation and amortization, a $5 million of write-off of unamortized deferred debt issuance cost, $2 million of non-cash pension and retiree medical expense and $2 million of equity-based compensation.
Employee headcount at the end of the third quarter was approximately 3,700. Now I’ll get to the segment results.
Consumer products net sales were $306 million for the third quarter of 2014 up 2.3% versus the second quarter and 130 points better than our outlook of up 100 basis points due to a richer product mix and [paper] pricing was up 2%. We shipped just over a 135,000 tons which was essentially flat with the second quarter and in-line with our stable outlook for the quarter.
Case shipments were up again by 2% to a new record 14.4 million cases shift in the third quarter. Contributions to EBITDA resulting from pad expansion related to shipments came in as expected at $12 million up from $9 million in Q2.
Consumer products adjusted operating income for the third quarter of 2014 was $80 million or 6% of net sales versus $50 million or 5% in the second quarter. The improvement was primarily due to the higher case shipments and tissue pricing as well as lower hard wood pulp prices.
These improvements were partially offset by higher costs in the persistently tight transportation market and increased transportation requirements associated with our short term converting constraints in the quarter. There was also increased chemical usage associated with investments in product quality enhancements and the ultra-tier household held categories and the maintenance was higher than anticipated.
Consumer products’ Q3 adjusted EBITDA and margin increased $3 million to $33 million or 11% of sales from $30 million or 10% in the second quarter that remains below our CPD model of 17%. Linda will further discuss the progress of our initiatives to improve operating to EBITDA margins with CPD.
Now turning at the pulp and paperboard division. Pulp and paperboard net sales of $205 million for the third quarter of 2014 were up 3% versus the second quarter.
With the exception of the recovery boiler Arkansas was fully recovered from the second quarter operational issues and together with our Idaho mill achieved a record production quarter of 197,000 tons and another new record shipment quarter of 202,000 tons which was at the low end of our outlook range of up 3% to 5%. Average pricing of 1000 and $16 per ton was flat with Q2 and lower than our outlook of 1% price increase as the increase associated with the full effect of the Q2 price increase was offset by a mix shift to a higher percentage of lower priced non-extruded and non-prime board.
Pulp and paperboard’s Q3 adjusted operating income was $46 million or 22% of net sales as compared to $34 million or 16.8% of net sales in the second quarter. The significant margin percentage improvement versus Q2 was due to the absence of all of that $1 million of the $9 million cost headwinds from Arkansas’ operational issues as well as no boiler maintenance in the quarter.
Pulp and paperboard’s record Q3 adjusted EBITDA margin of 25% remains above the 19% divisional objective inherent in our cross cycle financial model. Now turning to the balance sheet.
Capital expenditures were $26 million in the third quarter and are now expected to total approximately $95 million in 2014. Better that from our prior outlook of $78 million as we are accelerating action on warehousing converting and distribution efficiencies and other optimization related activities.
Long-term debt outstanding on September 30, 2014 decreased from $650 million to $575 million. In the quarter we refinanced our $375 million, seven and an eighth notes with $300 million nine a half year notes at 5% and 3% and paid down $75 million of long-term debt can currently with the combination of cash with the balance sheet and our secured revolver.
At the end of the quarter we had $47 million outstanding under our $125 million revolver, we incurred early debt retirement cost totaling $24 million of which $19 million was for the make whole premium and the remaining $5 million was a non-cash charge for unamortized deferred issuance cost related to the 2018 notes. This timely refinancing helped us reduce our weighted average cost of capital from 6.5% at the end of 2013 to 4.9% today.
Turning to the stock buyback program, in Q3, we completed the $100 million share buyback authorization. This year we repurchased a total of 1.6 million shares under that authorization at an average price of $63.50 per share.
Since the inception of our buyback program in 2012, we have repurchased 4.5 million shares for $230 million or $51.13 per share. Looking forward, we remain committed to returning of these 50 % of discretionary free cash flow to shareholders through 2015.
As a reminder we define discretionary free cash flow as cash flow from operating activities minus $50 million of maintenance CapEx. As at the most recent measurement date of December 31, 2013 our company sponsored pension plans were under funded by approximately $7 million.
We have contributed $60 million to those plans through Q3 of 2014 and an additional $1 million here in the third quarter. With regard to our liquidity, we ended the first quarter with $40 million of unrestricted cash and $70 million available under our revolver.
During the third quarter we generated $7 million of cash from operating activities while 1% net sales down from 12% in Q2 and well below our cash flow model of 11% to 13%. Operating cash flow in third quarter was impacted by the $19 million make-whole payment, a seasonal inventory build in pulp plugs and some opportunistic spot buys of hard wood pulp and then timing of receivable collections.
Our focus is on driving shareholder value through a combination of focused efforts to improve operating efficiency and strong management of the balance sheet and capital structure. We continue to improve the spread between our return on invested capital and a weighted average cost of that capital from 11.8 percentage points at the end of Q2 to 12.3% percentage points in Q3.
We examined all options available to maximize shareholder value and to that end we have been evaluating the applicability of the [inaudible] to limited partnership structure to our business. Our time spent over the last three months have shown some potential applicability to parts of our business.
This is a complex undertaking with long term ramifications. While we continue to analyze the structure I would characterize our status of evaluation as in the early innings.
I will now turn the call over to Linda Massman who will discuss the company’s outlook.
Linda Massman
Thanks John hi everyone thanks for joining us today. I’m extremely pleased to report on a record quarter for Clearwater paper.
I’d like to thank our entire team of employees for their hard work and dedication which helped us reached this milestone in the company’s history. It was a great quarter in which we topped many historical records.
In the quarter we’ve reached record revenues on a consolidated basis of $511 million record consolidated adjusted gross operating and EBITDA margin. Record adjusted EBITDA of $72 million which as John mentioned we estimate to be $80 million in 2011 cost structure terms which was the base line on which we initially set the goal for Clearwater paper.
While we’ve had a tailwind from a healthy pulp and paperboard market over the period since 2011 we have faced significant headwinds from decreases in conventional tissue pricing and input cost inflation purchased in our [external] pulp, natural gas and chemicals. In light of these challenges, this is an outstanding accomplishment by the team.
Record adjusted EBITDA margin of $52 million or 25% in our pulp and paperboard division with record production levels in both Arkansas and Idaho. This was the second highest quarterly shipment level for the division with 202,000 tons shipped.
Record net sales in consumer product with a record 14.4 million cases shift in the quarter. Record TAD product shipment which grew another 8.5% in Q3 resulting from growing customer adoption of our private label TAD products despite continued heavy promotions by the brand and we achieved our full TAD expansion EBITDA run-rate of $12 million in the quarter.
While we take this time to acknowledge our achievements recognized that we still have significant work ahead of us to achieve to our cost cycle margin model particularly in the consumer products’ division. And more importantly we are confident in our strategy and ability to get there.
The progress we made this quarter is further evidence that the steps we are taking to improve operating efficiencies are materializing. I would still consider this to be the early stages of our planned improvements.
To that end last quarter I announced the creation of our cross divisional supply chain function to improve and streamline our purchasing and supply management while driving our cost system wide to achieve greater operational efficiencies and improve customer service performance. Our supply chain team has completed an optimization study identifying potential savings of 3% to 5% within our CPD warehouse and transportation operations.
Our new service model provides optimal finished goods sourcing while improving production flow. These changes will require minimal capital and early projected benefits are expected to begin in Q2 of ‘15.
In parallel with our new service model we are quickly developing key concepts with collaboration with our 3PL partners. This is expected to improve our overall inventory management while delivering exceptional service performance for our customers.
In addition we also announced last quarter the formation of our specialty products’ group within our consumer products’ business comprised of our non-retail tissue products such as parent rolls machine glazed and other specialty papers. The change has made to date that had positive impact on these mills by increasing production levels while lowering operating costs.
Now I will discuss our view as a market environment and our outlook for each of our business segments starting with the consumer products’ business. Growth in the North American consumer tissue market is tracking as expected at approximately 1% and we are confident in our ability to grow with our retail customers, even in the midst of historically high levels of promotional activity from key branding manufacturers.
We have currently seeing and expect a continued trend for expansion and focus on private label products by our customers across all channels. Based on data provided by IRI year-to-date through quarter three Clearwater paper is outperforming the competition in both private label and the brands.
The brands were down nearly 2% while private label was up 2.6% and Clearwater paper is up 3.6%. We believe this reflects a growing consumer trend and acceptance of quality and value proposition of private label products with Clearwater paper of leading the way.
All that being said, the North American tissue market does remain competitive with continued verification and increasing tissue capacity expected to come online in 2015 through 2016. We’re making good progress on several of our other optimization and efficiency projects which will help us to get to our target EBITDA margin of 17% in CPD.
Here are few of those examples. In an effort to standardize our maintenance procedures and adopt a uniform engineering practice we are in the process of installing new equipment to allow us to standardize several parts of our converting equipment.
This should improve operating and packaging efficiencies and also reduce our spare parts inventory. With elevated production volume and converting activity well above historic norms, we have instituted new scheduling initiatives to optimize utilization rates of our equipment.
To reduce waste in converting supplies we utilize lean manufacturing tools to lower inventories and waste in our complex packaging process across the large number of customers and their scale. We continually look for opportunities to further leverage our purchasing power and consolidate the procurement of pulp chemical packaging operating supplies and capital equipment wherever possible.
And other projects such as SKU rationalization and pulp optimization are ongoing. Getting to our fourth quarter outlook for the consumer products business we are expecting shipment tons to decrease in Q3 due to normal seasonality.
Our outlook is for a 3% to 6% decline in shipment tons which is in line with the average Q3 to Q4 seasonal change in volumes. By achieving our TAD shipment expansion goal in the third quarter we expect price mix to be stable in the fourth quarter.
On the cost side of the equation we expect to see external hard wood pulp prices stabilize as demand has kept pace with new capacity coming online. Chemicals, operating and packaging supply costs, maintenance, transportation and SG&A are also expected to remain stable.
Turning to pulp and paperboard, in Q3 we saw our average price ton for SPS flatten for the first time in six consecutive quarters which is primarily due to a mix shift in product. Our outlook for the fourth quarter is a seasonal decline in volumes of 4% to 8% coming off record high volume production and near record shipments volumes in Q3.
Our outlook for pricing is stable to up 1% as we return to more normal product mix. Our backlogs are currently in the three to four week range which is above average for this time of the year.
The growth drivers in SPS are still coming from food service categories, particularly in cup and to a less extent plate driven by the trend away from foam for environmental reasons. Certain cost in pulp and paperboard will be higher in the fourth quarter starting with wood fiber, costs are expected to be up in Idaho and Arkansas.
Our regional wood basket in the Southeast continues to be negatively impacted by persistently wet weather conditions and our outlook is for a price increase of 3% to 4%. We scheduled $6 million to $7 million in plant maintenance for the quarter relating to a water wash at a boiler in Arkansas and the rebuild of cogeneration turbine in Idaho that was originally planned for Q2 but was delayed to fourth quarter.
The downtime of the cogeneration turbine will drive an increase in purchased energy for the quarter. The good news is our outlook for cost of chemicals, operating and packaging supplies and transportation is stable.
Looking at the consolidated business for Q4 versus Q3 we expect net sales to be lower by 4% to 7% due to seasonality together with the relatively stable price mix for both divisions. The outlook for our consolidated operating margin is in the range of 7% to 8.5%.
In addition, we expect adjusted SG&A to be flat with Q3; adjusted corporate spending to $13 million to $14 million; net interest expense to be about $8 million and adjusted tax rate of 36% plus or minus 2 percentage points. All these variables combined are expected to result in the Q4 EBITDA range of $56 million to $64 million.
The key variable we see determining where we land in that range are pulp and wood fiber prices, brand promotional activities, any changes in consumer demand and actual maintenance expenditures. In conclusion we remain well positioned in both our pulp and paperboard and consumer products’ businesses.
We will continue our sharp focus on increasing operational efficiencies company wide. And finally, I’d like to thank our employees for an outstanding quarter and for their loyalty and commitment to Clearwater paper’s success.
Thank you for listening to our prepared remarks and we will now take your questions.
Operator
(Operator Instructions). And our first question comes from James Armstrong from Vertical Research Partners.
Your line is open, please go ahead sir.
James Armstrong – Vertical Research Partners
Good afternoon.
John Hertz
Hi James.
James Armstrong – Vertical Research Partners
My first question is going to be the obligatory MLP question. Your pulp and paper side of the business may qualify for MLP status but do you think anything on the tissue side would qualify?
John Hertz
I think it’s still being looked into that but I’d put a potentially on the paper machine assets within tissue.
James Armstrong – Vertical Research Partners
Okay, it’s so just for paper machine assets, that’s helpful. And then switching gears you saw your average price rise during the quarter as you sold more of your capacities as TAD but at least one of your branded competitors has said that consumer tissues margins are the near-term high watermark could you comment on what you are seeing in terms of the pricing environment and specifically what you are seeing on TAD pricing versus away from home pricing?
Linda Massman
Yes, I would say competitively we have seen trends that would indicate through 2014 we have definitely seen and we’ve talked about this, an increase in promotional activity during the vast majority of 2014 by a few key competitors. I think our expectation is given that commentary from earlier this week that we would expect continued competitive marketplace and that coupled with some of the new capacity coming online would indicate that we need to continue to sharpen our pencils on the efficiency side and the optimizing our profitability side which is what we are focused.
James Armstrong – Vertical Research Partners
Okay, that helps. And then I will ask one more before I get in queue.
During the quarter you attempted a bleached board price increase that at least according to what we see didn’t go through, could you talk about the drivers behind the need to hold pricing steady and do you believe that on the margin there was some switching down from bleached board to like the CNK grades in the U.S.?
Linda Massman
Well I would say our experience was price increase is different than what price watch described. So consistent with, I’d just say our outlook for Q4 we think we are going to have either flat to slightly up pricing in fourth quarter.
James Armstrong – Vertical Research Partners
Okay. But do you think there is any switching during the quarter between grades in the overall market in your opinion?
Linda Massman
Not that we saw.
James Armstrong – Vertical Research Partners
Okay, that helps. Thank you.
Operator
Thank you. Our next question comes from Paul Quinn from RBC Capital Markets.
Your line is open, please go ahead.
Paul Quinn – RBC Capital Markets
Yes, thanks very much and congratulations on the record results. Just couple of questions one on it sounds like you are worried about pulp and fiber what are driving those the expected increase in those areas?
John Hertz
On the fiber side I think it’s – the biggest piece of it is weather down in the south and just being able to get the supply and then that’s exacerbated by strong demand from pulp producers.
Paul Quinn – RBC Capital Markets
Okay. And then in terms of pulp pricing itself I mean we sort of saw it looks like anyways a bottoming in hardwood prices in the summer, do you expect those prices to rise going forward?
And if so you expect at some point an increase in tissue price to offset that?
Linda Massman
I would say with regard to pulp at least in the Q4 we say it’s looking fairly stable, probably have seen kind of stabilization in hardwood much further up and I think it’s hard to predict pulp. VC has their prediction out there we’ve looked at it.
I think it’s kind of hard to balance what’s going on in the marketplace with all the supply coming online. Clearly demand is keeping up pretty well but I think it’s a fairly stable pulp market for at least a while.
Paul Quinn – RBC Capital Markets
Okay. And in terms of just big goals that you have got it looks like you have reach your $300 million EBITDA goal based on the 2011 pricing what’s next for the company?
Linda Massman
Well our focus is really going to be turning toward ensuring that we optimize our business and generating additional free cash flow as we talked about and our main areas of focus are on how we standardize our business, how we tend to streamline some of our processes and take some cost out and then focusing on selling our product to optimize our mix.
John Hertz
And so I would say as we get through the end of 2015 the real focus is more on that margin model and getting to the 15% and the opportunity we see there is obviously within consumer side of the business.
Paul Quinn – RBC Capital Markets
Okay. So on the consumer side of the business that 3% to 5% cost that you outlined in our model we have about $1 billion in cost in that segment on the year-to-date basis sorry on a LTM basis so is that can we translate that in a $30 million to $50 million cost savings?
John Hertz
No, I think you need to apply that 3% to 5% to as more on call it purchasing supply chain related cost which is kind of more in $125 million area.
Paul Quinn – RBC Capital Markets
Okay, all right that’s all I had, thanks very much.
Operator
Thank you. And our next question comes from Steven Chercover from Davidson.
Your line is open, please go ahead.
Steven Chercover – D. A. Davidson & Co.
Thank you, good afternoon everyone.
John Hertz
Hey Steve.
Steven Chercover – D. A. Davidson & Co.
So I was hoping we can kind of instead of calibrating off of 2011 if we were look at that 15% EBITDA objective off of what the current run rate, would that get towards something in the vicinity of $325 million in EBITDA?
John Hertz
Well, I think if you look at the revenue we did in the third quarter that sounds probably about right.
Steven Chercover – D. A. Davidson & Co.
Okay, that’s kind of what I thought. And then maybe I am way too far out of business school but I was looking at slide 13 where you show your weighted average cost of capital at 4.9% I mean you just issued debt at five and three-eighths which is terrific but I going to read about what is your cost of equity then?
John Hertz
I mean inherent in that cost of equity is around I think about 5.5%, memory there is a tax shield on the debt, so that might be where you are.
Steven Chercover – D. A. Davidson & Co.
Yes, that seems like an extremely low weighted average cost of capital but clearly your earning’s well in excess so that’s terrific.
John Hertz
You can look that up on Bloomberg too.
Steven Chercover – D. A. Davidson & Co.
So okay and I guess just one other question can you give us a sense of how you are outperforming the market in private label, I mean obviously you are just better but are there any big wins that you could point to? Are you growing with bigger customers than your competitors?
Linda Massman
Steve, I would say our sales team on the CPD side has been working extremely hard to take care of our current customers and then it put a lot of effort into expanding our customer base within grocery retailing but also in additional channels and they have done a nice job of ensuring we understand the needs of the customer and delivering the right product to those customers and we’re focused now on making sure our service levels are where they need to be to satisfy our customer demand.
Steven Chercover – D. A. Davidson & Co.
Okay and I don’t want to take this down the wrong direction but are you sold out in through air dried product and if so I mean I hope you are not contemplating new capacity?
Linda Massman
Sold out I think we have reached our targeted financial metrics as it related to TAD but we continually work on how to get more capacity out of all of our equipment we – with our TAD capacity as well.
Steven Chercover – D. A. Davidson & Co.
All right sounds like there is a fire somewhere out.
Linda Massman
Yes, not here.
Steven Chercover – D. A. Davidson & Co.
Go back in the queue, thank you.
John Hertz
Thanks Steve.
Operator
Thank you. (Operator Instructions) We do have a follow up from James Armstrong from Vertical Research.
Your line is open, please go ahead.
James Armstrong – Vertical Research Partners
Thanks for taking my follow up. The first one I have is on capital allocation.
With the expansion projects pretty much done and running on track could you rank your priority between acquisitions, share repurchases, and dividends as we go forward? And on acquisitions if you do acquire would you prefer to acquire in the paper or tissue space?
John Hertz
I think we have been consistent with our messages over the last couple of years that through 2015 our first priority is returning the 50% free cash flow to shareholders that has been by share buyback as we look forward into 2015 we have got our board meeting in December with our Board of Directors where we have those discussions and everything is on the table. I think through 2015 as well we are more focused on capital expenditures that can really drive margin expansion and free cash flow.
And so I guess number three down that list then is acquisition.
James Armstrong – Vertical Research Partners
Okay, that’s really helpful. And then just real quick could you update us on your maintenance schedule at the paper mills should we still expect most of the maintenance to come in the first half of 2015?
John Hertz
Yes, we have got our Idaho mill in the first quarter and we’ve got our Arkansas mill in the second quarter.
James Armstrong – Vertical Research Partners
Perfect, thank you very much.
Operator
Thank you. And ladies and gentlemen this concludes our question-and-answer session.
At this time I will turn the call over to Ms. Massman for any closing or additional remarks.
Linda Massman
Great, thank you everybody for joining us I appreciate everybody’s attention and look forward to the continued progress of optimizing our businesses. Thank you.
Operator
Ladies and gentlemen this concludes Clearwater Paper’s third quarter 2014 earnings conference call. We appreciate your participation.
You may all disconnect. And have a wonderful day.