Clearwater Paper Corporation

Good day. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Clearwater Papers first quarter 2022 earnings conference 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 Bolin, Investor Relations. You may begin your conference.

Thank you, Emma. Good afternoon, and thank you for joining Clearwater Papers' first quarter 2022 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 2022 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 on this afternoon's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release and in the supplemental information provided on our website. Please note slide two of our 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 Arsene. Good afternoon, and thank you for joining us today. Please turn to slide three. As you saw from our press release, we had an outstanding first quarter that exceeded our original expectations. On a consolidated basis, we reported net sales of $488 million, which was 15% higher than prior year. Adjusted debt income was $18 million, and adjusted EBITDA was $59 million. A few highlights to mention. Strong paperboard demand continued, and prices increased. Tissue demand was stable, while prices increased. Inflation continued to be a headwind across most of our input costs, particularly pulp, chemicals, energy, and freight. We continue to focus on offsetting inflation with price increases and better operating performance in both businesses. And finally, we reduced net debt by $31 million in a quarter. As a result of our strong first quarter performance and our improved outlook for the year, we're now anticipating achieving our debt leverage target sooner than anticipated and are resuming our previously authorized share buyback program. The program has approximately $30 million remaining With that, let's discuss some additional details about both of our businesses. Please turn to slide four for a few comments on our paperboard business. The industry continues to experience strong demand across various end markets, even with higher SBS pricing as reported by RSEI. Since the beginning of 2021, RSEI reported price increases for the U.S. market that total $400 per ton. $250 of that was in 2021, $100 in the first quarter of 2022, and an additional $50 per ton in April of 2022. As a reminder, it typically takes us up to two 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 of pricing later in our comments. Please turn to slide five for some additional comments on our tissue business. Demand was stable, and we believe that we're beyond the impact of COVID, barring the effects of any future waves. We're starting to see signs of inflation and economic uncertainty impact consumer buying patterns. As an example, private-branded share climbed to a high of 34.5% in Q1, which we believe is an indication that consumers are prioritizing value to offset inflation. We will follow these trends closely in the coming quarters. Our shipments were in line with industry trends. We shipped 12 million cases in the first quarter, higher than the 11.7 million cases shipped in the first quarter of 2021, which included approximately 400,000 cases of away-from-home sales. a business which we have exited. Sales were slightly down from the 12.4 million cases which we sold in the fourth quarter. We entered 2022 with what we believe to be the right inventory levels after carefully managing production in 2021. As a result, we were able to achieve good capacity utilization during the quarter. Improved pricing and better fixed cost absorption led to adjusted EBITDA for CPD that more than doubled versus the fourth quarter. Both of our businesses continue to experience substantial inflation across most cost categories. In addition to price increases, we continue to focus on improving operating and supply chain performance to maintain margins. Our operating performance improved versus previous periods, despite the well-known supply challenges. Our focus on internal initiatives is delivering and helping offset some of the headwinds that we cannot control. We will discuss the impacts of these later during our call. I will now ask Mike to discuss our first quarter results in more detail. Thank you, Arson. Please turn to slide six. The consolidated company summary income statement shows first quarter for 2022 and 2021. In the first quarter of 2022, our net income was $17 million, diluted net income per share was $0.97, and adjusted net income per share was $1.03. The corresponding segment results are on slide seven. Slide eight is a year-over-year adjusted to comparison for our pulp and paperboard business in the first quarter. We benefited from our previously announced price increases, which were partly offset by higher inflation across most of our spend categories. Please recall that we were impacted by a freezing weather event in the first quarter of last year that did not repeat in 2022. This was partly offset by a capital project installation and related maintenance outage in this quarter. In the total, the paper board business delivered adjusted EBITDA of $60 million. You can review a comparison of our first quarter 2022 performance relative to fourth quarter on slide 14 in the appendix. Please turn to slide 9, where we provide a year-over-year comparison for our tissue business in the first quarter. We implemented previously announced price increases and realized some mixed benefit in the quarter. Our volume improved versus prior year when the market was experiencing COVID pantry destocking. You can review a comparison of our first quarter 22 performance relative to our fourth quarter on slide 15 in the appendix. Slide 10 outlines our capital structure. Our liquidity was $283 million at the end of the first quarter, We reduced net debt by $31 million with our free cash flow in the quarter. We utilized free cash flow to reduce our term loan balance to $30 million. Maintenance financial covenants do not present a material constraint on our financial flexibility, and we do not have any near-term debt maturities. Our net debt to adjusted EBITDA at the end of the first quarter of 2022 was 3.1 times. We continue to make progress on our targeted net debt to adjusted EBITDA ratio of 2.5 times, which we now expect to achieve this year. Effective after this earnings announcement, we have decided to resume repurchases under our existing share buyback program, which has $29.8 million outstanding. As we approach our target leverage ratio, we expect to begin communicating our longer-term capital allocation strategies and priorities. Slide 11 provides a perspective on our second quarter 2022 outlook with key drivers and some assumptions for the rest of 2022. Our expectations assume that we continue to operate our assets without significant COVID-related or other supply chain-related disruptions. While supply chain issues manifested themselves as higher costs during recent quarters, there are concerns about certainty of supply of raw materials that may not be solved by paying higher prices or using substitutes and could impact production or ability to ship products in a timely fashion. We want to reiterate that our price realization and cost inflation will continue to be difficult to predict. Our current expectation for the second quarter is adjusted EBITDA of $54 to $64 million. The midpoint of the range for the second quarter is similar to the first quarter adjusted EBITDA of $59 million, with price increases largely offsetting inflation with the following details. Previously announced paperboard and tissue pricing are expected to positively impact us during the quarter by $12 to $16 million in total. Paperboard's impact could be $10 to $12 million, and tissue's impact could be $2 to $4 million. We expect volumes to increase in paperboard. We expect continued inflation, particularly in fiber, chemicals, energy, and freight, to cost us an additional $14 to $17 million. We want to comment on some of the key operational assumptions 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 a full-year benefit of $200 to $230 million, with $170 to $190 million in paperboard and $30 to $40 million in tissue. This represents an increase from our prior guidance based upon continued strength in paperboard and some momentum in tissue pricing. We expect growth in converted tissue volume, but the benefits will largely be offset by higher supply chain costs. We do have new contractual wins and are working through our renewals later in the year. Cost inflation, including pulp, fiber, freight, chemicals, and energy, is expected to be $150 to $170 million. which is also significantly higher than previous expectations. We also expect some labor inflation net of cost mitigation efforts, which we estimate to be a $10 million headwind. In our paperboard business, planned major maintenance outages are expected to have a similar financial impact as in 2021. In total, our outlet for price realization from previously announced increases net of inflation is $45 million. at the midpoint and reflects a $20 million improvement relative to our prior estimates for the year. We'd like to reiterate that volatility in our markets has also increased. For the full year 2022, we're also anticipating the following, interest expense between $35 and $37 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 have moved out of 2021 to 2022 due to some timing issues. We and our vendors continue to experience some supply chain issues, which may cause further delays. And our effective tax rates would be 26% to 27%, which is an increase in past expectations as a result of a state income tax law change, and we expect to be a cash taxpayer in 2022. In last quarter's earnings call, we mentioned that we have a larger than normal maintenance outage in 2023 at our Lewiston mill to address our recovery boiler screen tubes, which are at the end of their useful life. Our maintenance, major maintenance outage EBITDA impact estimates for 2023 remain unchanged on slide 20. The replacement will also require additional capital expense, which will likely exceed $30 million. The timing of this outage may also be impacted by the availability of supplies and contract labor. We look forward to updating you on timing, cost, and capital later this year. Let me turn the call back over to Arson. Thanks, Mike. Our ability to offset inflationary pressures is key to our success in 2022. We have successfully offset these pressures in our paperboard business with a combination of previously announced price increases and operating improvements. While we have not been able to fully offset inflation in our tissue business, we're starting to see some progress. We implemented a tissue price increase late last year and announced another price increase on April 1st of this year, which we're currently implementing. In addition to these price increases, we're also desheeting our products to offset inflation. We expect that these actions will have an annualized run rate benefit in the mid to high single digits with a full implementation by the third quarter. As I mentioned last quarter, we have some significant tissue customer agreements up for renewal in 2022. We're focused on these renewals as well as pursuing new volume opportunities. Our discussions with key customers are progressing, and we also experienced new wins that should improve our sales volumes later this year. We will continue to update you on our progress. Finally, there was a capacity reduction announcement in the tissue industry. RECEI has reported that the facility to be closed has 154,000 tons of conventional tissue capacity. As I conclude my prepared remarks, I wanted to emphasize some of our key priorities for Clearwater Paper shareholder value creation. Our free cash flow generation is essential for shareholder value creation. To drive cash flow generation, we're focused on commercial, operational, and supply chain improvements in both of our businesses. We're doing this through an intense focus on internal improvement efforts and capital investments to maintain and improve the cost position of our asset. We believe that these actions will continue to demonstrate a compelling free cash flow story for our investors. Our current capital allocation focus remains the reduction of our net debt to improve financial flexibility. We demonstrated this by reducing our net debt by nearly $300 million in the last two years. This has allowed us to improve our liquidity and largely pay down our term loan. As we mentioned previously, given our size and the cyclicality of our business, we believe that our target leverage ratio of two and a half times is a good point from which to communicate longer-term capital priorities. These priorities will include a balanced and opportunistic approach to return capital to our shareholders, possible M&A, tropical capex, and further deleveraging. As mentioned earlier in the call, we're moving forward with resuming share buyback under our existing program. This decision reflects our improved outlook for the business and robust cash flow generation. We look forward to communicating a more comprehensive capital allocation plan with you later in the 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. In particular, I would like to thank our team for coming up with clever solutions to some very challenging supply chain issues to continue running our assets and service 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.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question today comes from the line of Adam Josephson with KeyBank Capital Markets. Your line is now open.