Clearwater Paper Corporation

Good afternoon. My name is Brianna and I will be your conference operator today. At this time, I would like to welcome everyone to the Clearwater Paper Third Quarter 2023 Earnings Conference Call. Please note that this call is being recorded. All participants are in listen-only mode at this time. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star 1 again. Thank you. I will now turn the call over to Sloan Boland, Investor Relations. Please go ahead.

Thank you, Brianna. Good afternoon, and thank you for joining Clearwater Paper's third quarter 2023 earnings conference call. Joining me on the call today are Arsene Kitsch, President and Chief Executive Officer, and Sherry Baker, Senior Vice President and Chief Financial Officer. Financial results for the third quarter of 2023 were released shortly after today's mark closed, along with the filing of our 10-Q. You'll 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 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. As you saw in our press release, we had an outstanding third quarter driven by good operational execution, lower input costs, and continued strength in our tissue business. Slide three of our supplementals provides a summary of our consolidated results. We reported net sales of $520 million and adjusted EBITDA of $81 million in the quarter, which is at the higher end of our expectations and $3 million higher than the third quarter of last year. Our tissue business drove the improvement by more than doubling its adjusted EBITDA from $21 million in the third quarter of last year to $46 million this year. Our paperboard business delivered 52 million of adjusted EBITDA in the third quarter at a margin of 20%, even with a soft demand that we continue to experience. Let me share a few highlights with you. Prices increased in tissue as compared to the third quarter of 2022 and decreased in paperboard, which reflects market trends as reported by RSEI. Lower input costs benefited both of our businesses as compared to the third quarter of 2022, particularly in fiber, energy, and freight. We had good operational performance across both businesses as we balanced supply and demand to manage our inventories. Issue demand continued to be strong, while paperboard remained soft as destocking continued. We reduced net debt by $69 million in the quarter for a total of $416 million since 2020. Taking that $416 million net debt reduction and dividing it by the current share count equates to approximately $24 per share. We repurchased $5 million of shares during the quarter for a total of $20 million since 2022, with $10 million remaining on our buyback authorization. And finally, last Friday, we started the redemption of our 2025 notes with a combination of a new term loan using cash on hand and drawing on our existing ABL. This further strengthens our balance sheet, creates flexibility, and pushes any material debt maturities out to 2028. With that overview, let me turn to each of our segments and provide some additional details. We continued to be agile and adjusted our production to meet demand and manager inventory levels. We took approximately 10% downtime on our paper machines to balance supply and demand during the quarter. Despite this downtime, the business performed well and generated a 20% adjusted EBITDA margin in the quarter. As we noted over the last several quarters, demand began slowing late last year. That trend continued into the third quarter of this year. We believe that this softness is driven by a combination of a slowdown in consumer demand and inventory destocking across the value chains. Industry data reflects these trends with a 9.7% decrease in operating rates and a 15.7% decrease in shipments year-to-date 2023 versus 2022 as reported by AFMPA. As further evidence of this trend, RSEI has now reported an $80 per ton decrease in folding carton prices in the third quarter, reflecting the first decrease in more than three years. As a reminder, approximately 35 to 40% of our volume is now indexed to RSEI, and it typically takes us up to two quarters for price changes under these agreements to be reflected in our financials. If we apply an $80 per ton decrease across all our tons, the annualized impact could be greater than $60 million. These decreases are being partially offset with lower input costs and improved operational performance. We remain optimistic about the long-term prospects for Paperboard, but given economic uncertainties, we foresee a gradual recovery starting next year. RSEI is forecasting a 10.5% decrease in total SBS production this year versus 2022, followed by a 4.2% increase in 2024 and a 5.3% increase in 2025. Please turn to slide five for additional comments on tissue. The performance of our tissue business was very strong. Revenue improved by 8% year over year, driven by higher pricing and higher retail shipments. Adjusted EBITDA margin improved to 18% due to higher pricing and lower input costs, particularly in pulp, energy, and transportation. With roughly a quarter of our contracted customer volume tied to the RSEI pulp index and with lower pulp costs, we're expecting a $4 to $6 million headwind per quarter moving forward. Even with that impact, we're optimistic that we can retain most of the margin improvement captured as we head into 2024. Let's turn to some industry data. RSEI recently reported that tissue capacity utilization is around 94% so far this year. which we believe represents a healthy supply and demand balance. This supports our view that tissue industry conditions are improving. Let's look at some of the high-level capacity trends that are driving these numbers. Between 2018 and 2020, nearly 450,000 tons of tissue capacity were added, primarily targeting the private branded space. That increased supply outpaced demand growth. Between 2021 and 2023, more than 180,000 tons of capacity were reduced. We now believe that around 300,000 tons of capacity will come online between 2024 and 2026, which roughly matches demand growth over that same time horizon. Given these dynamics, we're optimistic that our tissue business will perform well in the near to medium term. With that overview, let me introduce our new CFO, Sherry Baker, Sherry joined us in August and has hit the ground running. She brings significant experience building and leading finance teams and an extensive background in strategic, financial, and operational decision-making. I'm looking forward to working with Sherry to continue our focus on strengthening our company and creating shareholder value.