Clearwater Paper Corporation

Good day, and thank you for standing by. Welcome to the Clearwater Paper 1Q20 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Sloan Bullen, Investor Relations.

Thank you, Christine. Good afternoon, everyone, and thank you for joining Clearwater Papers' first quarter 2021 earnings conference call. Joining me on the call today are Arsene Kitsch, President and Chief Executive Officer, and Mike Murphy, Chief Financial Officer. Financial results for the first quarter 2021 were released shortly after today's market close, along with the filing of our 10Q. You will find a presentation of supplemental information, including a slide providing the company's current outlook posted on the investor relations page of our website at clearwaterpaper.com. Additionally, we will be providing certain non-GAAP information in this afternoon's discussion. The reconciliation of the non-GAAP information to comparable GAAP information is included in the press release or in the supplemental information provided on our website. Please note slide two of our supplemental information covering forward-looking statements. rather than rereading the slide, we are going to incorporate it by reference into our prepared remarks. And with that, let me turn the call over to Arson.

Good afternoon, and thank you for joining us today. Please turn to slide three. As you saw from our press release, the financial performance for the first quarter was strong, despite some challenges impacting both of our businesses. On a consolidated basis, the company reported net sales for the first quarter of $426 million and adjusted EBITDA of $54 million. A few highlights to mention. Our paperboard business continued to experience strong demand, particularly in our folding carton segment. Based on that strong demand, we announced and began to implement price increases across our SBS product portfolio. Our operations were affected by the February cold weather event in the south. Natural gas curtailments impacted production and increased energy prices. Collectively, this negatively impacted our adjusted EBITDA by approximately $6.5 million. Our tissue business saw lower orders and shipments, reflecting overall market trends. IRI market data showed a nearly 20% decline in overall tissue dollar sales in the first quarter of 2021 as compared to the fourth quarter of 2020. Consumers were destocking their pantries and retailers were working through elevated inventory levels. With a decrease in demand, our production outpaced sales, resulting in above target inventory levels. We're taking downtime on our assets to reduce and manage inventories. particularly with today's elevated poll prices. With regards to our balance sheet, we used the free cash flows generated during the first quarter to reduce our net debt by $21 million. We're experiencing significant cost inflation and a temporary decrease in tissue demand. Mike and I will discuss both in detail later in our prepared remarks, including actions we're taking to address these market-driven headwinds across our businesses. As noted over the previous quarters, we remain focused on our top priorities during COVID, the health and safety of our people and safely operating our assets to service customers. Our people's focus has been key to our success and will continue to be so. In partnership with local health agencies, we have offered onsite COVID vaccinations across several of our facilities, and we're continuing to offer a $200 incentive to each employee to become vaccinated. Let's discuss some additional details about both of our businesses. Please turn to slide four so that I can share a few comments on our paperboard business. As you recall, we estimate that approximately two-thirds of paperboard demand is derived from products that are more recession resilient, and one-third is driven by more economically sensitive or discretionary products. We continue to observe strength in demand from our folding card customers and are starting to see a recovery in food service segments. Demand for food packaging products and retail paper plates has remained healthy throughout the pandemic. We're also pleased with the market reception of our sustainability-focused brands of Nuvo Cup and Reimagine folding carton. Both are playing a role in our favorable market position. Our strong order book, which predates industry supply disruptions, continues to be robust. We are diligently working to implement the previously announced price increases. Fast Markets Recy, a third-party industry publication, has recognized a $50 per ton increase in folding carton and a $20 per ton increase in food service grades in its March and April publications. During our fourth quarter earnings call, we noted that the cold weather event in the south impacted operations at our Cypress Bend, Arkansas mill. This resulted in a $6.5 million direct impact to our adjusted EBITDA. I want to again thank our team for their actions to minimize the impact at our mill and for quickly resuming operations to service our customers. While the weather event primarily impacted the first quarter, other potentially longer lasting impacts on input costs are included separately in our revised inflation expectations. As you're aware, we scheduled our largest planned maintenance outage for 2021 during the second quarter at our Lewiston, Idaho mill. We recently completed that work and are back up and running. We would like to thank our Lewiston team for safely completing this important outage on time and on budget. The overall economic impact from this outage to our adjusted EBITDA in the second quarter is projected to be between 21 and $24 million as originally expected. Please turn to slide five with some additional comments on the tissue business. Our industry view remains largely the same, but I wanted to discuss the inventory overhang from 2020 and the expected temporary impact on volume in 2021. The market for tissue in the US is traditionally two-thirds at home and one-third away from home, with around 10 million tons per year of total demand. As consumers spent more time at home in 2020, There was a shift towards at-home consumption. Throughout the pandemic, we witnessed consumer pantry loading and retailers responding by placing higher orders with existing suppliers and seeking out tertiary suppliers, both domestic and international, to meet demand. It is difficult to estimate the level of inventory overhang with our consumers and customers as there is no third-party data available for this metric. Based on re-sea tissue shipment data for 2020 and some assumptions on consumption trends, we estimate that the industry is currently faced with more than a month of excess inventory between consumers and retailers. While it is difficult to predict the timing for the resolution of the inventory overhang, it is likely that both consumers and retailers are working through much of the excess inventory during the first and second quarters of this year. We have entered a new phase of the pandemic with consumers starting to return to more normal lifestyles. This may involve increased away-from-home consumption of tissue and destocking of consumer pantries. Based on IRI market data, consumer purchases of tissue slowed considerably in the first quarter, but have now started to recover to pre-pandemic levels. Retailers have responded to these trends by managing down their higher inventory levels, reducing their orders to suppliers like us. This is likely a temporary adjustment after a very robust 12 months of pandemic-driven demand. While the inventory adjustment is temporary, it may result in at-home industry tissue shipments dropping to below 2019 levels in 2021. With that said, we expect long-term consumption growth to continue between 1% to 2% per year with private brands continuing to gain share. Our tissue volume trends in the first quarter and heading into the second quarter appear to reflect these industry dynamics. We sold 11.7 million cases in the first quarter, which was down around 23% and 16% compared to the first and fourth quarters of 2020 and down 5% relative to the first quarter of 2019, sales of 12.3 million cases. We're continuing to closely monitor channel and customer trends to ensure that we're aligned with areas in the market with the highest growth prospects. Let's turn to our production and inventory levels. While we did take some asset downtime in the first quarter, our production exceeded sales and inventory levels increased. We're taking more substantial downtime in the second quarter to reduce inventory levels to get closer to our targets. While this will have a negative impact on our fixed cost absorption, it will help us avoid producing excess inventory at today's elevated market pull prices, as well as increased supply chain costs. As Mike and I discuss our outlook for the second quarter, we will go into some additional detail on actions that we're taking as we face a normalization in tissue demand and significant cost inflation. With that, I'll turn it over to Mike to discuss our first quarter results.