Clearwater Paper Corporation

like to turn the conference over to Sloan Bolin, Investor Relations. Please go ahead.

Thank you, Brianna. Good afternoon, and thank you for joining Clearwater Papers' first quarter 2024 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 first quarter of 2024 were released shortly after today's market closed, along with the filing of our 10-Q. 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 in 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 Arsene.

Good afternoon, and thank you for joining us today. As you saw from our press release, we had a great first quarter driven by the continued outstanding performance of our tissue business and lower input costs. We also generated strong cash flows and reduced our net debt by an additional $33 million during the quarter. This resulted in 1.38 times leverage ratio at the end of the quarter. Slide 3 of our supplementals provides a summary of our consolidated results. We reported net sales of $496 million and adjusted EBITDA of $62 million, which is at the higher end of our expectations. Our tissue business drove the improvement by more than doubling its adjusted EBITDA from $19 million in the first quarter of last year to $46 million this year. Our paperboard business delivered 34 million of adjusted EBITDA in the first quarter, at a margin of 14%, even as the business was significantly impacted by a severe weather event that disrupted our Lewiston operations in January. Let me share a few highlights with you. Issue demand remained strong, and we saw an improvement in customer demand for paperboard, with higher order entry and growing backlogs. Pricing per paperboard decreased by 11% as compared to a year ago, which reflects market conditions and pricing trends as reported by RSEI. Both businesses experienced favorable input costs as compared to the first quarter of 2023, particularly in wood fiber, pulp, energy, and freight. We estimate that the Lewiston weather event impacted us by $15 to $17 million during the quarter. primarily in our paperboard business. We repurchased $1 million of our stock with the goal of offsetting shareholder dilution due to employee stock grants. Finally, we have made significant progress on our planned acquisition of the Augusta, Georgia Paperboard Manufacturing Facility from Graphic Packaging. We believe that we've cleared regulatory hurdles and expect to complete the acquisition shortly. We're looking forward to welcoming the Augusta team to Clearwater Paper and building a scaled, high performing and diversified paperboard business that is well matched to the needs of paperboard converters in North America. With that, let's review each of our segments and provide some additional details. Let's begin with our paperboard business on slide four of our supplemental materials. The most recent AFMPA data has shipments up 7.1% and production up 10.5% in the first quarter of this year versus the fourth quarter of last year. Operating rates also rose to 88.3% in the first quarter versus 79.3% in the fourth quarter. This aligns with our view that customer demand is improving and that inventory destocking is now largely behind us. In terms of pricing, RECI reported the $40 per ton decrease in February for a total of $120 per ton since the middle of last year. This also aligns with our experience as softening demand drove prices lower in 2023. Our volume was mostly flat in the first quarter of this year compared to the first and fourth quarters of last year. While customer orders and backlogs grew, our volumes were negatively impacted by lost production during the January weather event in Lewiston. As I mentioned previously, we have strong conviction about the long term prospects for our paperboard business and maintain our outlook for gradual improvement and demand in 2024 and 2025. Sherry will provide additional details for our second quarter outlook later in our prepared remarks, but we expect roughly 35 to $40 million in additional maintenance costs in Q2 versus Q1 due to the planned major maintenance outage in Lewiston. as well as additional scheduled maintenance work at our other sites. In addition to the normal outage work being completed in Lewiston, we will also be replacing the recovery boiler tubes in the lower furnace, which is a $40 million capital project, of which approximately $28 million is being spent this year. Our team has done a great job preparing for this extended outage to complete all the necessary work, as well as to continue servicing our customers. Please turn to slide five and let me provide you with a brief update on our tissue business. Let's start with some broader industry trends. Private branded market share held steady at 36%, according to the latest CERCANA panel data. As we've noted in the past, consumers are continuing to embrace private brands due to economic uncertainty and inflation. Industry utilization rates rose to around 96% in January and February, according to RISI. which we believe reflects strong market conditions. As we mentioned previously, more than 200,000 tons of net capacity were removed between 2021 and 2023, which is driving the high industry utilization rates. Looking forward, approximately 370,000 tons of capacity have been announced to be added between 2024 and 2026, and we believe that normal demand growth will absorb these additional tons And we continue to expect industry tissue industry conditions to remain positive in the near to medium term. Let's turn to our performance in the quarter. Revenues grew by 2% year over year and adjusted EBITDA more than doubled. Our adjusted EBITDA margin was at 18% compared to 8% in the first quarter of 2023. This was driven by strong operating performance, lower input costs and continued robust demand. We expect to continue these strong levels of operating performance as we move through 2024. With that, I'll turn the call over to Sherry to cover our financial results.

Thank you, Arson. Let's cover our financial performance in the first quarter by turning to slide six. The summary income statement shows our first quarter results for 2024 and 2023. In the quarter, we earned net income of $17 million, net income per diluted share of $1.02, and adjusted net income per diluted share of $1.43. As Arson noted, the quarter was negatively impacted by the January weather event at our Idaho Paperboard facility. Despite that headwind, our consolidated results came in at the higher end of our expectations for the quarter, and we believe we are well positioned for a strong 2024. Our corresponding segment results can be on slide 7. As noted, our consolidated adjusted EBITDA came in at the higher end of our guidance range, but slightly below last year and the previous quarter. Adjusted EBITDA margins remain stable at around 12%. As we turn to slide 8, we can see the year-over-year comparison of adjusted EBITDA for our paperboard business. The segment produced $34 million of adjusted EBITDA at a margin of 14%. On a year-over-year basis, lower sales prices negatively impacted results, which was partially offset by lower input costs. The impact of volume between periods was heavily influenced by the downtime caused by the severe weather event in January. Slide 13 in the appendix shows a sequential comparison of the first quarter of this year to the fourth quarter of last year. It reflects a negative price and mix impact, relatively stable volumes, and lower costs. On slide 9, we bridged the year-over-year comparison of adjusted EBITDA for our tissue business. We saw some price erosion due to index pricing mechanisms tied to pulp in the first quarter of 2024 versus 2023. We continue to benefit from lower input costs as well as high levels of capacity utilization, but we expect higher pulp prices to negatively impact us in upcoming quarters. Even with higher pull prices, we expect to maintain much of the margin improvement that we achieved in 2023. Turning to our capital structure on slide 10, our balance sheet continued to strengthen, driven by strong profitability and cash efficiency. Our liquidity currently stands at $312 million. In the quarter, we generated $41 million of free cash flow and reduced our net debt by an additional $33 million. We also repurchased about $1 million in stock to offset dilution of our employee stock plans with approximately $6 million left under our authorization. Lastly, please turn to our outlook for the second quarter on slide 11. As Arson mentioned, we are starting to see recovery in our paperboard demand and continue to see strong demand in tissue. Paperboard pricing will be impacted by the decrease as reported by RSEI. As a reminder, 35 to 40% of our paperboard volume is tied to movement in the RSEI price index. We are also expecting some headwinds from higher pulp prices impacting our tissue business. We are projecting an additional 35 to 40 million in higher planned maintenance expenses in the quarter, primarily driven by the planned major maintenance outage at our Lewiston facility, as well as additional maintenance at other sites. We also expect to realize some insurance recovery related to the severe weather event from Q1. With all those variables, we expect adjusted EBITDA for the second quarter in the range of $23 to $33 million. For the full year, our key operational assumptions remain largely the same. We expect improvements in paperboard volumes, stability in tissue, lower input costs with offsets in higher major maintenance expenses and lower pricing. Our cash flow assumptions also largely remain the same, with $90 to $100 million of capital expense driven by major repair and maintenance projects at our paperboard facilities. The detailed list of these assumptions can be found on page 11 of our supplementals. Please note that these assumptions do not include any impact from the planned Augusta acquisition. As we previously stated, the book of business that we are acquiring from Graphic Packaging delivered approximately $100 million of adjusted EBITDA in 2023. We expect that run rate to be impacted by lower pricing carrying into 2024 with offsets in increasing volumes and improved operating rates at the facility. We expect to provide additional commentary about the financial performance of Augusta in upcoming quarters as we begin to operate the site as part of the Clearwater Paper Network. Let me now turn the call back over to Arson. Thanks, Sherry.

I'm pleased with our first quarter performance and remain optimistic about our prospects for the full year as we see signs of recovering paperboard market conditions and continued strength in tissue. I'm also looking forward to completing the Augusta acquisition and welcoming the Augusta team to Clearwater Paper. As I mentioned on our last call, our long-term objective is to build a scaled and diversified paperboard business that meets the needs of our converter customers. The Augusta acquisition is a big strategic step for Clearwater Paper, and we intend to continue to opportunistically look at other paper assets as we execute our strategy. We will also continue to evaluate the feasibility of investing in our existing assets to broaden our product offering. While we look at additional opportunities in the long run, our near-term focus is on capturing value from the Augusta acquisition, generating cash flows, and deleveraging our balance sheet. We have a proven track record of deleveraging and expect to be back to our cross-cycle target of 2.5 times by the end of 2026. Let me wrap by thanking our people for a strong start to 2024. We delivered a strong quarter even as we managed through some very difficult operating conditions caused by the weather event at our Lewiston facility during the quarter. And as always, I would also like to thank our customers and shareholders for their continued support and for placing their trust in us. With that, we will end our prepared remarks and take your questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. To withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from Matthew McKellar with RBC Capital Markets. Please go ahead.

Hi, Arson and Sherry. Good afternoon. Thanks for taking my questions. I'd like to start just asking a couple of questions around your guidance. I know you spoke to the idea that you'd provide more information with coming quarters, but can you give us a sense of how we should expect maintenance capex at Augusta to sort of trend on a run rate basis? And then, to any degree, you could quantify the partial insurance recovery for the event at Lewiston. That would also be helpful. Thanks.

Let me start with the Augusta question and Sherry will take the insurance question. So at this point, we are looking forward to closing here very shortly. And once we get in there, we'll have a much better idea of how this fits into Clearwater and the financials. So it's a little premature for us to be providing any kind of guidance. for balance of the year around Augusta, but I think we'll provide more information in upcoming quarters. Sherry, you want to take the insurance question?

Sure. So, Matt, of the $15 to $17 million, that was the full impact that we saw in Q1. That is the full amount of the claim. We do have a $4 million deductible, and we expect to see some partial recovery in the second quarter. So that process is still ongoing with the insurance carrier, but we do expect to see some funds flow within the second quarter.

Okay, thanks for that. I'll be shifting over next to tissue pricing. It looked like prices slipped a bit quarter over quarter. Can you just clarify at all whether that was a mix issue or if you saw some compression on a like-for-like basis? And then how are you expecting pricing to trend, I guess, you know, go forward here, given that operating rates seem pretty solid and that we have, you know, rising pulp prices, which could maybe support taking some price as well?

Yeah. So, listen, we'll avoid commenting on future pricing, but in terms of just sequential, the slight the slight drop that we saw. It's really largely around that, you know, about a quarter of our volume and has a, is under contract that's tied to a, partially tied to a receipt pull-up index. I know poll prices are going up, but just the way it's measured, poll prices were coming down through most of last year. So I think the bulk of that price decrease that we're seeing is related to that. I think the rest can be chalked up to some mixed issues. I think fishing market conditions remain strong. Utilization rates are high. We're operating really, really well. And I think you saw that in our quarterly EBITDA results.

Great. That makes sense. Thank you. Maybe sticking with Paul Price's, can you just remind us, is it still fair to think of there as being about a three-month lag in terms of how that flows through to your results? And then, you know, given that rising trend, is it still fair to think that you're expecting your leverage to peak out at three and a half to four times following the Augusta acquisitions?

Yeah, I think 90 days is three months is a good rule of thumb, kind of give or take, just the way pulp moves through our manufacturing process and inventory. So if you look at pulp prices, they have increased sequentially quarter over quarter, and they just, I think just now, if you just look at the indices, are right to where they were on average in 2023. So there's There's some interesting timing trends. The pulp prices were falling through 2023. I think they hit their bottom somewhere in that Q3 time range. And then they started slowly creeping back up and obviously a greater impact here in the first quarter. You know, pulp, if you look at softwood versus hardwood, you know this, Matthew, you know, there have been a number of closures in softwood in North America. I think that's tightening up capacity. I think in the long run, if you look at hardwood and you look at the forecasts that are out there beyond the next couple of quarters, they indicate a lower hardwood, especially eucalyptus pull prices as capacity comes online globally.

And then on your second piece, Matt, the expectation is still that there would be a peak leverage between that three and a half and four times. That is still correct?

Great. That's helpful. Thank you. Maybe one on your cost of fiber more generally. We've seen a few softwood lumber mill closures in Montana over the past few months here. Do you expect any impact to your cost of residuals for Lewiston? I would expect that's probably outside your procurement radius, but just wanted to confirm.

You know, I don't have those numbers at the tip of my fingers, but generally speaking, I think you're right. So in the Northwest, in the Northwest, it's largely a residual market where higher operating rates at the lumber mills are beneficial to us. And in the Southeast, it's a whole log market. So I don't have specific information around some of the impact of some of the closures that we've seen. But just overall, I think we expect In total, across the company, we expect wood to be a net positive this year versus last year, especially in the first half of this year versus the first half of last year. So that's across Arkansas and Idaho. We expect for wood to be a good guy.

Okay, great. Thanks. Maybe just focusing in on the paperboard market a little bit. It sounds like that market is firming up and you're seeing better trends there. Can you talk about what you may be seeing to start Q2 and maybe call it any pockets of strength and weakness by end market that you might be seeing?

No specific comments on end markets. I think we're seeing a nice recovery happening. You saw it in the FNPA data utilization rates were up, shipments were up in Q1 versus Q4. So we're seeing those same trends, and customers have positive outlooks here for the balance of 2024. We're expecting at this point from where we sit to be running full for balance of the year. We do have a major outage, which will have some impact on our production. But outside of that, our expectation is to run full this year for the remainder of the year.

Great, thank you. And maybe the last one for me, and please correct me if I'm wrong, but I think your collective bargaining agreement at Cypress Bend for hourly employees would expire in July. Can you talk about that event and tone of discussions you've been having so far and maybe what we should expect just given a sort of general inflationary environment for labor?

I think I'll stay away from commenting on expectations. I think generally speaking, we have very good expectations relationship with our unions, and I think we're looking forward to good constructive dialogue as we have had historically in Arkansas.

Great. Fair enough. That's all from me. I'll turn it back. Thanks.

Seeing no further questions at this time, this will conclude today's conference call. Thank you all for your participation. You may now disconnect.