Clearwater Paper Corporation

Thank you for standing by. My name is Danica and I will be your conference operator today. At this time, I would like to welcome everyone to the Clearwater Paper Second Quarter 2025 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, press star 1 again. Thank you. I would now like to turn the call over to Sloan Bolin, Investor Relations. Please go ahead.

Thank you, Danica, and thank you all for joining Clearwater Paper's second quarter 2025 earnings conference call. Joining me on the call today are Arson Kitsch, President and Chief Executive Officer, and Sherry Baker, Senior Vice President and Chief Financial Officer. Financial results for the second quarter of 2025 are released shortly after today's market close. 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 financial information in this afternoon's discussion. 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 reading this slide, we will incorporate it by reference into our prepared remarks. And with that, let me turn the call over to Arsene.

Good afternoon, and thank you for joining us today. We delivered a strong second quarter that was in line with our expectations. This was driven by higher production volumes, increased shipments, and continued benefits from our fixed cost reduction efforts. Let me share a few highlights before diving into industry conditions and our strategic initiatives. We delivered $40 million of adjusted EBITDA in the second quarter, which was right in the middle of our guidance range of $35 to $45 million. Our net sales were at $392 million, up 14% versus prior year, primarily driven by the Augusta acquisition and partly offset by lower market-driven pricing. Net sales were also up 4% versus the first quarter of this year, primarily driven by increased shipments in our food service business. Pricing remained relatively stable versus the first quarter, but was down approximately 3% versus prior year, reflecting broader market trends. We successfully completed the planned major maintenance outage at our Cypress Bend, Arkansas mill at a cost of approximately 9 million, which was in line with our estimates. As part of this outage, we completed the installation of a new emissions control device, replacing the original piece of equipment which was installed in 1970s. This was a large capital project with a total cost of nearly $45 million. We continue to capture benefits from our fixed cost reduction efforts and are on track to deliver a $30 to $40 million reduction this year versus 2024. SG&A expenses were down nearly 14% versus last year to 6.7% of net sales within our target range of 6% to 7%. This was driven by our cost reduction initiatives and the completion of the Augusta integration. And finally, we repurchased approximately $4 million of outstanding shares for a total of $15 million since the beginning of this year and $18 million since the new authorization in November of last year. Our team is doing a great job navigating challenging industry conditions by focusing on items within our control, namely driving operational execution, reducing cost, and defending our market position. We believe that this discipline will translate to sustained improvements in performance and higher margins upon a recovery in our industry cycle. Next, I'd like to provide some commentary on broader industry conditions. At a macro level, Industry shipments of SBS slowed in Q2, decreasing by 4.6% versus the prior year and by 3.4% versus the first quarter based on ASNPA data. While shipments decreased, backlogs increased by 5% versus prior year and 14.2% versus the first quarter. These mixed demand signals are reflective of broader economic uncertainty that is also impacting other industry segments. Now let's turn to supply. Industry utilization rates fell to 83.1% in the second quarter versus 84.7% in the first quarter based on the latest AFNPA data. This likely reflects the startup of new capacity in the second quarter by a competitor. We expect SPS industry utilization rates to remain well below historical norms in the coming quarters as this new capacity ramps up. As a reminder, we believe that in a balanced supply and demand environment, utilization rates should be between 90 and 95%. While demand trends are mixed, we believe that we're in an industry down cycle primarily driven by oversupply. It is difficult to predict when and how the industry will return to a mid-cycle utilization level. We believe that there are a few different ways that industry utilization rates can improve in the medium to long term. First, RECEI is projecting that net SBS capacity in the U.S. will decrease by approximately 350,000 tons in 2026 versus 2025, which would drive utilization rates to around 91%. This would move the industry back into a more balanced mid-cycle position. Second, proposed tariffs, trade investigations, and anti-dumping actions may also impact the viability of imports in our markets. We estimate that approximately 700,000 to 800,000 tons of bleached paperboard and finished goods are imported to the U.S. annually. The shift to domestic supply by U.S. customers could improve industry operating rates. We also believe that there's some swing SBS capacity in North America that can move to other grades, which could further alleviate the oversupply position that our industry is facing. A combination of these three variables would help return the industry to more sustainable operating rates and lead to a margin recovery. Finally, we believe that current demand softness is temporary and not a permanent or secular decline. As a reminder, we're targeting 13 to 14% adjusted EBITDA margins across the cycle, which assumes that industry utilization rates recover to 90 to 95%. This would result in more than 1.3 million tons of paperboard which we estimate would translate into approximately $1.8 to $1.9 billion of revenue, around $250 million of adjusted EBITDA, and more than $100 million of free cash flow per year. Let me take a moment to illustrate the operating and price leverage that exists in our system. A 100,000-ton increase in sales and production volumes would result in more than $50 million of adjusted contribution margin with improved cost absorption. A modest $50 per ton upward price movement would result in more than 60 million of additional adjusted EBITDA. Let's shift gears and discuss our strategic initiatives and potential next steps. As we mentioned previously, we're focused on expanding our product offering to better serve our converter customers. Our goal is to continue to build on our position as a premier independent supplier of paperboard packaging products in North America. Today, we are the third largest producer of paperboard in North America, representing approximately 14% of a 10 million ton market. We are focused on SBS, or bleached paperboard, which makes up approximately half of the total paperboard market. We are looking at opportunities to expand into CUK, or unbleached paperboard, and CRB, or recycled paperboard. We believe that today, independent converters are underserved in these substrates by the large integrated players. We have an opening to participate in one share in these parts of the market due to our lack of channel conflict and our history of prioritizing independent converters. Let me get a bit more specific on the work that we're doing. We're nearing completion of market and engineering studies on the potential entry into CUK. I expect for us to make a decision regarding this potential investment by year end. At this stage, we're focused on creating CUK capability on one of our existing SBS machines and not expanding our overall capacity. This would enable us to swing production between high-quality SBS and CUK on an existing machine based on market demand. This capability would also allow us to better serve our customers' needs, optimize our network, and improve utilization across all our assets. While capital estimates have not been finalized, we expect this investment would be in the $50 million range and take around 18 months to complete. In addition to adding CUK capabilities to an existing asset, we're also considering additional options to broaden our product offering, including entering into CRV. This would likely require an acquisition, either of existing CRV capacity or of a good candidate for a conversion. In addition to our focus on these additional substrates, we're continuing to make progress on developing compostable and lightweight products. We received BPI compostable certification at our Lewiston and Cypress Bend mills that cover most of our folding carton and food service grades. In addition, we expect to have a lightweight offering in the market by 2026. We remain optimistic on the long-term prospects of paperboard packaging, and our position as a premier supplier of these products to North American converters. With that, let me turn the call over to Sherry to review our results in more detail.