Clearwater Paper Corporation

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Clearwater Paper 4Q21 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Sloan Boland, Investor Relations. You may begin your conference.

Thank you, Emma. Good afternoon, and thank you for joining Clearwater Papers' fourth 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 fourth quarter 2021 were released shortly after today's market close, along with the filing of our 10-K. 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. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release and the supplemental information provided on our website. Please note slide two of the supplemental information covering forward-looking statements. Rather than rereading this slide, we are going to incorporate it by reference into our prepared remarks. With that, let me turn the call over to Arshin. Good afternoon, and thank you for joining us today. Please turn to slide three. As you saw from our press release, our financial performance was at the high end of our expectations for the fourth quarter. On a consolidated basis, the company reported fourth quarter net sales of $490 million, adjusted net income of $9 million, and adjusted EBITDA of $56 million. For the full year 2021, we delivered net sales of nearly $1.8 billion, adjusted net income of $17 million, and adjusted EBITDA of $175 million. A few highlights to mention. Strong demand continued in our paper board business. Based on that demand, we implemented previously announced price increases across our SBS portfolio. Demand in our tissue business stabilized with volume in the fourth quarter similar to the third quarter. We're implementing previously announced price increases across our tissue business to recover some of the cost inflation that we're experiencing. While poll prices showed modest easing, we continue to experience inflation across most of our other input costs. We're focused on operating and supply chain efficiencies, along with price increases, to help offset these headwinds. We received net proceeds of $13 million from the sale of our closed Neenah, Wisconsin, tissue site and related assets. And finally, we maintained ample liquidity of $265 million at quarter end and reduced net debt by another $37 million in the quarter, which included proceeds from asset sales. For the year, we reduced our net debt by a total of $69 million. As noted previously, we remain focused on our top priorities during COVID, the health and safety of our people, and operating our assets to serve as customers. We saw spiking cases and absences starting in December. The team did an outstanding job managing to keep our most critical assets running, but we did experience some downtime on our tissue converting lines. We implemented weekly COVID testing for all our people last year and secured a regular supply of tests from a major manufacturer. Our goal is to identify COVID cases early and limit the risk of spread within our facilities. Regular testing, along with our other safety precautions, has enabled us to mitigate risk and minimize business impact. One additional note before turning to our business performance, we updated our investor handout in November, which is located on our website, with some refreshed information on Clearwater Paper and the industries in which we compete. There were several relevant industry announcements in late December, which I will speak to at the end of my prepared remarks. With that, let's discuss some additional details about both of our businesses and their performance in the fourth quarter. Please turn to slide four for a few comments on our paperboard business. The industry continues to experience strong backlogs, even with higher SBS pricing as reported by Fast Markets RISI. Since the beginning of 2021, RISI reported price increases for the U.S. market that totaled $300 per ton in folding card and cup stock. with $250 per ton occurring in 2021 and another $50 per ton in January of 2022. We'll continue to see strong demand from both our folding carton and food service customers. As a reminder, it typically takes us a couple of quarters for price changes to be reflected in our financials. It is also worth noting that our portfolio includes additional grades and price mechanisms that are not reflected in RSEI's reporting. We will discuss the estimated impact pricing later in our comments. We executed the head box installation project at our Lewiston Idaho mill in January. This project was previously deferred due to strong demand. Our team did an excellent job in executing this outage under difficult COVID conditions. My thanks to our Lewiston team, our vendors and our contractors who completed the work safely on time and on budget. On slide five, I want to highlight our track record of product innovation and sustainability in our paperboard business as we continue to focus on meeting the needs of a circular economy. First, we achieved the Sustainable Forestry Initiative and Forest Stewardship Council certifications for sustainably sourced fiber nearly a decade ago. In fact, we believe that we were the first North American paperboard company to dual certify our products with both SFI and FSC. These certifications help ensure the sustainability and integrity of our supply chain. We're now focused on bringing sustainable products to the market that meet the needs of our customers. In the last couple of years, we launched Nuvo Cuffstock and Reimagine Folding Card brands, both containing post-consumer recycled content that meets FDA compliance with direct food contact. In January of this year, we launched BioPBS coating on our Cuffstocks. The coating can be used in hot cup applications as an alternative to low-density polyethylene, enabling the cup to be compostable. When applied to our NuvaCup stock, which contains up to 35% post-consumer recycled fiber, we're offering a unique, environmentally friendly solution. We believe that innovations like these will help drive incremental domestic demand for SBS products due to their inherent sustainability benefits. For both businesses, we're committed and focused on developing products for a sustainable circular economy to meet the needs of our customers. Please turn to slide six with some additional comments on our tissue business. The tissue market environment continues to be challenging. Let me describe our point of view. According to RISI, the size of the U.S. market was 10.6 million tons in 2020, with approximately 70% in the at-home market. Using that math, the at-home market is approximately 7.6 million tons, of which approximately two-thirds is branded and one-third is private branded. We operate in a private branded market, which is approximately 2.5 million tons and has grown more quickly than the branded market. In terms of the retailer environment, the two key trends have been industry consolidation and share gains by club and mass at the expense of the grocery channel. Today, Only one of the top five retailers is a grocer and those top five retailers now make up nearly 70% of all private branded tissue demand. The supplier base, on the other hand, has been deconsolidating and adding capacity that exceeds demand growth. Due to this, we believe that private branded manufacturers will operate at depressed capacity utilization levels in the next several years. In terms of recent trends, based on our experience in Q4 and early 2022, demand patterns of our retail customers and consumers have stabilized. We shipped 12.4 million cases in the fourth quarter, slightly higher than the 12.3 million cases shipped in the third quarter, which was in line with our guidance for flat tissue volumes quarter over quarter. We continue to experience significant inflation in the fourth quarter, and as a result, we announced and began implementing tissue price increases in addition to other actions, helping us to recoup some of the margin lost due to inflation. Based on previously announced price increases, we're expecting low single-digit price impact across our retail business in 2022. We're also working with our customers on product changes to reduce costs. With that, I'll turn it over to Mike to discuss our fourth quarter results. Thank you, Arson. Please turn to slide seven. The consolidated company summary income statement shows fourth quarter and full year comparisons for 2021 and 2020. In the fourth quarter of 2021, our net income was $9 million, diluted net income per share was $0.54, and adjusted net income per share was $0.82. The corresponding segment results are on slide eight. Slide 9 is a year-over-year adjusted EBITDA comparison for pulp and paperboard business in the fourth quarter. We benefited from our previously announced price increases, favorable mix improvement, and slightly higher sales volume. Our costs were impacted by higher inflation, particularly in energy, chemicals, and freight. This resulted in adjusted EBITDA of $61.9 million, which represents a quarterly adjusted EBITDA record for our paperboard division. You can review a comparison of our fourth quarter 2021 performance relative to third quarter on slide 17 in the appendix. On slide 10, we compared the full year 2021 performance to 2020 for paperboard with adjusted EBITDA similar in 2021 relative to 2020. We implemented substantial price increases that were largely offset by significant cost inflation. That cost category had a $27 million impact associated with the planned major maintenance outages in 2021, whereas we had no major maintenance outages in 2020. Please turn to slide 11, where we provide a year-over-year comparison for our tissue business in the fourth quarter. We implemented previously announced price increases, in addition to realizing some mixed benefits in the fourth quarter. our pricing impact was significantly below inflation as we've struggled to maintain our margins due in part to the supply and demand dynamics in tissue. Relative to last year, our sales and production volumes were significantly lower as the impact from COVID drew in buying lessons. As you'll recall, in the second quarter, we announced the closure of our NENA site, which helped mitigate both volume and cost pressures during that year. and was the final step in realizing the operational and supply chain benefits from our Shelby investment. Additionally, we have been working to reduce our inventory by reducing production. We are now at our targeted inventory levels and expect to match production to demand in 2022. On slide 12, we compare our year-over-year performance. Price and mix were small factors. Our sales and production sales volumes were down substantially in a business that has significant fixed cost leverage. Our cost inflation, which was significant, was partially offset by the closure of our NENA Wisconsin facility. You can review a comparison of our fourth quarter 2021 performance relative to third quarter on slide 18 in the appendix. We also have other operational and financial data on a quarterly basis on slide 19 for both businesses. Slide 13 outlines our capital structure. Our Likua DB was $265 million at the end of the fourth quarter. Our free cash flow in the quarter was $37 million, bolstered by asset sales, including our NENA Wisconsin site of $13 million. The asset sale proceeds, which were realized in the fourth quarter, largely offset our cash closure and related costs associated with the NENA site in the second and third quarters. Our full-year free cash flow generation was $69 million. We utilize free cash flow to reduce our term loan balance to $50 million. Maintenance financial covenants do not present a material constraint on our financial flexibility, and we do not have near-term debt maturities. Our net debt to adjusted EBITDA at the end of 2021 was 3.4 times. We continue to make progress on our targeted net debt to adjusted EBITDA ratio 2.5 times. for around $500 million of net debt, which we expect to achieve both by 2023. Slide 14 provides a perspective on our first quarter 2022 outlook, the key drivers, and some assumptions for the rest of 2022. Our expectations assume that we continue to operate our assets without significant COVID-related disruptions. We want to reiterate that inflation and other supply chain disruptions continue to be difficult to predict. Our current expectation for the first quarter is adjusted EBITDA of 48 to 56 million. Let me walk you through the buildup to that range from our fourth quarter adjusted EBITDA of 56 million. Previously announced paperboard and tissue pricing are expected to possibly impact us during the quarter by 10 to 14 million in total. Paperboard's impact could be $9 to $11 million, and tissue's impact could be $1 to $3 million. We had strong shipments in paperboard in the fourth quarter and expect to have lower shipments in the first quarter as we rebuild inventory. Tissue sales are expected to be flat quarter over quarter. Implemented price increases are largely being offset by inflation in fiber, chemicals, and energy, which is expected to negatively impact us by $5 to $7 million. We have three to 4 million planned major maintenance outages compared to no major maintenance outages in the fourth quarter. We continue to experience some supply chain difficulties and COVID related absenteeism in the start of the quarter impacting our cost structure. We wanted to comment on some of the key annual drivers for 2022 to provide you with a framework to think about our potential performance. If our previously announced paperboard and tissue prices remain at current levels throughout 2022, we would expect an annual pricing benefit of $120 to $140 million in total, $110 to $120 million in paperboard, and $10 to $20 million in tissue. We expect growth in converted tissue volume, but the benefits will largely be offset by higher supply chain costs. In 2022, we also have some larger tissue agreements up for renewal, which could create uncertainty both in terms of price and volume. Cost inflation, including pulp, fiber, freight, chemicals, and energy is expected to be $90 to $100 million. We also expect some labor inflation net cost mitigation efforts, which could be approximately a $10 million headwind. In our paper board business, Planned major maintenance outages are expected to have a similar financial impact as 2021. For the full year 2022, we are also anticipating the following. Interest expense between $33 and $35 million. Depreciation and amortization between $101 and $104 million. Capital expenditures of approximately $60 to $70 million, in line with our historical average excluding extraordinary projects, and some projects that moved out of 2021 to 2022 due to some timing issues. And our effective tax rate is to be between 22% and 23%. We expect to be a cash taxpayer. We mentioned last quarter we expect to have additional major maintenance outages in 2023. And while our estimates are not complete and subject to change, We believe that those outages can impact our 2023 adjusted EBITDA by 35 to 40 million or 10 million higher than in 2022. We have included these estimates on slide 23. The primary driver for the outage is work that we need to do on a recovery boiler at Lewiston, Idaho mill. In addition to the operating expenses that we are likely to incur, the capital required for this work will likely exceed $30 million. but the majority of that occurring in 2023. We do not have an estimate for full year 2023 capital spending at this time, but we expect it to exceed our normalized expected spend of $60 million per year. Let me turn the call back over to Arsene. Thanks, Mike. First, I want to thank our people for their focus on safety and serving our customers throughout 2021, as well as a strong finish to the year. As Mike mentioned, the inflation that we saw in 2021 is expected to carry over into 2022, and we expect the tissue demand volatility will be greatly reduced. As we mentioned previously, we think that supply and demand drive near- to medium-term pricing and margins in both of our businesses. Our paperboard business is benefiting from favorable market dynamics. In tissue, we had some success on announcing and implementing price increases in the fourth quarter, but the supply and demand dynamics remain challenging. We continue to work on efforts to improve our cost positions to offset margin compression, which is a recurring theme. I want to share some perspectives with you regarding some recent industry headlines as well as some larger contract renewals in tissue that could impact future performance. In December, the European company announced the acquisition of a U.S.-based printing and writing grade company in its intention to convert two paper machines to a primarily folding box board or FBB grade. The announced timeline for the conversion of the first machine is in 2025, and the second machine is in 2029. The two machines are expected to have a combined capacity of over 1 million tons. Let me share some perspectives related to this announcement. RISI and other industry sources report the domestic consumption of SBS is 4.1 million tons, with an additional 400,000 tons of FEV imports. Demand is expected to grow by 1% to 2% per year, or 50,000 to 100,000 tons, or a total of 4,000 to 800,000 tons by the end of the decade. A domestically produced FDB would likely partially offset imported FDB due to the supply chain advantages. It is our belief that SDS continues to be a preferred product based on operational economics and end-use requirements. We also believe that in today's market, demand exceeds supply, and the long-term case for paperboard products remains strong due to its inherent sustainability advantage. These conversions are complex, expensive, and initial assumptions about project feasibility often change over time. So while we will continue to evaluate this situation as it unfolds, we do not believe that this changes our long-term positive outlook on the industry and our business. In tissue, we have some significant customer agreements up for renewal later in 2022. We're focused on these renewals as well as pursuing new opportunities to fill out our capacity. There were also two additional tissue capacity announcements that are expected to come online in 2024 with a total of over 100,000 tons targeting the at-home market. We continue to evaluate our tissue acid footprint to ensure that we are cost competitive. While there are several moving pieces in our industries, let me remind you of why I think these businesses are well positioned in the long run. For our paper board division, we believe that the key strengths of this business are the following. First, we operate well invested assets with a geographic footprint enabling us to efficiently service our customers. We have a diverse customer base which serves end markets that have largely stable demand. Second, not being vertically integrated enables us to focus on independent customers with unparalleled service and quality commitment. Third, we believe through product and brand development the business is well positioned to take advantage of trends towards more sustainable packaging and food service products. Lastly, our favorable business has demonstrated an ability to generate good margins and solid cash flows. Our consumer products division is a leader within the growing private branded tissue market. From our vantage point, we believe the key strengths of this business are the following. First, we have a national footprint with an ability to supply a wide range of product categories and quality tiers, which is an attractive sales proposition to our customers. Our expertise in manufacturing, supply chain, and transportation is a key differentiator. Second, there are long-term trends away from branded products to private brands. Private branded tissue share in the U.S. rose to over 30% recently, up from 18% in 2011. While these trends are impressive, we're still a long way from where many European countries are, in which private brands represent over half of total tissue share. Lastly, tissue is an economically resilient and an essential need-based product. Historically, demand has not been negatively impacted by economic uncertainty. We're optimistic that this business will generate meaningful cash flows over the long run. We're entering 2022 as a better and stronger operation than where we started in 2021. In addition to appropriately sustaining our asset base, our capital allocation plan is focused on paying down debt and improving our cost structure and operating performance. We continue to work with our board on a range of value-creating capital allocation options. We expect to share our long-term strategic capital allocation priorities when we approach our target debt levels later this year. In closing, I would like to thank our people for all that they do to keep our operations running safely and efficiently and for servicing our customers. I also want to thank our shareholders for their continued support and our customers for choosing us. With that, we will end our prepared remarks and take your questions.

Thank you. Your first question today comes from the line of Mark Wilde with BMO Capital Markets. Your line is now open.