Clearwater Paper Q1 2023 Earnings Report

Clearwater Paper EPS Results

• Actual EPS: $1.47
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Clearwater Paper Revenue Results

• Actual Revenue: $525.40 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Clearwater Paper Announcement Details

• Quarter: Q1 2023
• Date: 5/2/2023
• Time: N/A
• Conference Call Date: Tuesday, May 2, 2023
• Conference Call Time: 5:00PM ET

Clearwater Paper (NYSE:CLW) manufactures and supplies bleached paperboards, and consumer and parent roll tissues in the United States and internationally. It operates through Pulp and Paperboard, and Consumer Products segments. The Pulp and Paperboard segment manufactures and markets bleached paperboard; Solid Bleached Sulfate paperboard that is used to produce folding cartons, liquid packaging, cups and plates, blister and carded packaging, and top sheet and commercial printing items; and hardwood and softwood pulp, as well as offers services that include custom sheeting, slitting, and cutting. It sells its products to carton converters, folding carton converters, merchants, and commercial printers. The Consumer Products segment provides a line of at-home tissue products, including bath tissues, paper towels, facial tissues, and napkins; recycled fiber value grade products; and away-from-home tissues. This segment sells its products to retailers, including grocery, club, mass merchants, and discount stores. The company was incorporated in 2005 and is based in Spokane, Washington.

Clearwater Paper Q1 2023 Earnings Call Transcript

[Operator]

I will now turn the conference over been open to Sloane Bolen, Investor Relations. Please go ahead.

[Speaker 1]

Thank you, Sarah. Good afternoon and thank you for joining Clearwater Paper's Q1 2020 recorded during the quarter are Arsen Kitsch, President and Chief Executive Officer and Mike Murphy, Chief Financial Officer. Financial results for the Q1 of 2023 were released shortly after today's market close along with the filing of our 10 Q. You will find a presentation of supplemental information, including a provided in 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 discussing.

[Speaker 1]

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 2 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 Arsen.

[Speaker 2]

Good afternoon and thank you for joining us today. Please turn to Slide 3. Been recorded. We had a solid Q1 in 2023 with better results as compared to the Q1 of 2022. Been recorded.

[Speaker 2]

We reported net sales of $525,000,000 and adjusted EBITDA of $66,000,000 Let me share a few highlights. Been. Prices increased in both paperboard and tissue as compared to the Q1 of 2022. Private branded tissue shares strengthened as consumers start to offset inflation. Paperboard demand softened as customers manage down their inventories.

[Speaker 2]

Been We resolved the operational issues that we experienced in the Q4 of last year. Inflation moderated as compared to the 4th quarter, particularly in pulp, energy and transportation. And finally, we repurchased $1,700,000 of shares during the quarter and have $23,000,000 remaining on our buyback authorization. With that, let's discuss some additional details about both of our businesses. Been Let's start on Slide 4 with a few comments on our paperboard business.

[Speaker 2]

In 2021 2022, The industry experienced high operating rates with strong demand. As a result, RISIA reported price increases recorded for the U. S. Market that totaled $2.50 per tonne in 2022. Based on our previously announced price increases, been we expect year over year improvements to carry into 2023.

[Speaker 2]

As previously noted, We experienced a softening in paperboard demand late in Q4. That trend continued in the Q1 of 2023 and into April. Been. We believe that this is due to customers reducing their inventories as well as the slowdown in consumer spending. Based on the most recent AFMPA data, the softening has resulted in lower backlogs and operating rates across the industry.

[Speaker 2]

Been Our backlogs also fell and our inventories increased in the Q1. As a result, we reduced production in the Q2 to manage our inventory levels. Been. It is our intent to balance supply and demand for the remainder of the year and normalize inventory levels. Been While we're experiencing a softening in demand, we continue to believe that paperboard is economically resilient given the end use of our products.

[Speaker 2]

Been. Our portfolio skews more heavily towards consumer applications such as food packaging, pharmaceuticals and cosmetics. Been. In addition, we expect the shift to paper based products to continue and we're optimistic that demand for paperboard will improve in the second half of this year. Been Operationally, our performance improved in the Q1 with a major maintenance outage and operational issues experienced in the Q4 now behind us.

[Speaker 2]

Been. Please turn to Slide 5 for additional comments on our tissue business. The underlying performance of the business was strong. We continue to see consumers shift their demand to private branded tissue products to help offset the impact of inflation. Private branded share of the market approached 35% in March based on IRI panel data.

[Speaker 2]

We shipped 12,700,000 cases in the Q1, which was 700,000 cases higher than the Q1 of 2022 and slightly lower than our 4th quarter shipments of 13,000,000 cases. As we previously mentioned, cost inflation has outpaced price increases in our tissue business over the past 2 years, leading to margin compression. Been. Our team has focused on recovering margins through cost reduction initiatives and implementing the previously announced price increases. Been recorded.

[Speaker 2]

As a result, we saw higher pricing in the Q1 and expect additional sequential price benefits in the Q2. Been. With pulp prices and other input costs decreasing, we expect to see further margin recovery in the coming quarters. Been We are encouraged by the trends and expect a strengthening of our tissue business this year. I will now ask Mike to discuss our Q1 results in more detail.

[Speaker 2]

Been open.

[Speaker 3]

Thank you, Arsen. Please turn to Slide 6. The consolidated company summary income statement shows recorded in the Q1 of 2023, we recorded a net income of $24,000,000 been recorded and net income per diluted share was $1.40 and adjusted net income per diluted share was $1.47 been recorded. The corresponding segment results are on Slide 7. Slide 8 is a year over year segment income and adjusted EBITDA comparison for our Pulp been recorded and paperboard business in the Q1.

[Speaker 3]

We benefited from our previously announced price increases, which were partly offset by higher raw material costs, You can also review a comparison of our Q1 2023 performance relative to the Q4 on Slide 14. Please turn to Slide 9, been recorded, where we provide a year over year comparison for our tissue business in the Q1. In addition to the implemented price increases, we also realized some mix benefits. Been. Our sales volumes of converted products were higher than last year as well.

[Speaker 3]

These benefits were largely offset by higher relative to the Q4 on Slide 15. Slide 10 outlines our capital structure. Liquidity was $288,000,000 at the end of the Q1. We did not generate free cash flow during the quarter. Been recorded.

[Speaker 3]

This was due to typical large first quarter cash outflows, including semiannual cash interest payments on our bonds been reported and annual incentive payouts as well as payments related to our 4th quarter major maintenance outage. Our inventories also increased posted on the call for the Q1, notably in paperboard, which negatively impacted cash flows. We intend to manage our inventories by balancing supply with demand recorded and expect net working capital to be a source of cash in the coming quarters by over $10,000,000 We also repurchased 51,000 shares at an average price of just above $34 per share for a total of $1,700,000 in the quarter. We have approximately $23,000,000 remaining on our share repurchase been placed on the been EBITDA of $58,000,000 to $68,000,000 That midpoint of the range is $63,000,000 and assumes the following relative to the Q1. Been margin improvement in tissue from previously announced price increases and lower input costs, lower paperboard volumes as we balance our supply with demand and address inventory.

[Speaker 3]

Following our billing blocks for 2023 relative to 2022. We believe that our operational results will improve by approximately $42,000,000 in the range of 2023 primarily due to lower major maintenance outage expenses and improved operating performance. As anticipated, we are seeing sequential quarterly declines in pulp prices. As a reminder, it takes us approximately 3 months to realize these benefits in our earnings. As a result, these decreases should be more beneficial in the second half of twenty twenty three relative to the first half.

[Speaker 3]

Been Currently, the strength that we're seeing in tissue is mitigating some of the demand softness in paperboard. We expect another strong year overall and we'll update you on our in the coming quarters. We're also anticipating the following for 2023. Interest expense between $27,000,000 $29,000,000 depreciation and amortization between $98,000,000 $101,000,000 On capital expenditures, we expect to spend $70,000,000 to $80,000,000 in 2023. Been.

[Speaker 3]

Our Lewiston Recovery Boiler Replacement project, which is estimated to require capital expenditure approaching $40,000,000 is expected to be completed in early 2024 been concurrent with our planned major maintenance outage. We spent $4,000,000 in 2022 and expect to spend an additional $8,000,000 of the estimated cost in 2023 on this project. In addition to the Lewiston project, we are also expecting to spend a total of approximately $45,000,000 in capital on a been planned precipitator replacement project to be installed at our Cypress Bend Mill in 2025. This is an important emissions control device that is approaching the end of its live. Approximately $8,000,000 of that spend is expected this year and is included in our total 2023 capital expectations.

[Speaker 3]

Been. Our effective tax rate for the full year is expected to be 25% to 26%. Based on current expectations for 2023, our cash tax payments are expected slightly higher than our effective tax estimates. This assumes that we will utilize our current rebates and refunds to largely offset some timing differences between book and tax depreciation, which is expected to cause our future cash tax rate to modestly exceed our effective tax rate. Been open.

[Speaker 3]

Let me turn the call back over to Arson.

[Speaker 2]

Thanks, Mike. I want to spend a few minutes discussing our key priorities for shareholder value creation. As shown on Page 12, we have prioritized our capital allocation as follows. Our top priority is to sustain the competitiveness of our asset base. Been We believe this requires an average of $60,000,000 to $70,000,000 of capital expenditures annually, excluding large projects.

[Speaker 2]

Been we expect to invest above that target level in the near to medium term in projects such as the recovery boiler to be placed in Lewiston and the precipitate replacement in Cypress Bend. 2nd, we intend to maintain a balance sheet that provides us with financial flexibility. Been While we have a target long term leverage ratio around 2.5 times, we may continue to deleverage further to create greater financial flexibility. Been. A strong balance sheet provides us with the ability to take advantage of investment opportunities, including in a potential down cycle.

[Speaker 2]

Been. 3rd, we will look at various opportunities to create value through investments and opportunistically returning capital to shareholders. Been We will evaluate value accretive internal and external investments. Given the current business environment, We're likely to prioritize incremental cost reduction projects and add on acquisitions versus large greenfield or brownfield capacity expansions. Been we will compare these potential investments relative to opportunistically returning capital to shareholders based upon our share price.

[Speaker 2]

Been. We also expect to buy back shares to mitigate the impact of dilution from share grants to our

[Speaker 3]

employees. Been we

[Speaker 2]

were active again in the Q1 buying back shares. I would like to emphasize that we will continue to be disciplined allocators of capital closed in 2023 despite a slower start in the Q1. 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

[Operator]

been been. Your first question comes from the line of Paul Quinn with RBC Capital Markets. Please go ahead.

[Speaker 4]

Been Yes. Thanks. Good afternoon. Thanks, guys. Just maybe start on the pulp side.

[Speaker 4]

That 3 month delay in sort of realizing lower pulp pricing, can you remind us how much you're buying in pulp? Been is it 100% on the hardwood side? And did you see any benefit to that in Q1?

[Speaker 3]

Been So Paul, we buy almost 300,000 tons a year of pulp on the open market. Been. The vast majority of that is hardwood based and we have been We've seen a little bit of a downtick in the P and L of late, but I think we're going to see more pronounced benefits been both in the Q2 and more importantly, the Q3. So as you saw prices drop in pulp in February March timeframe, been That kicks in a little bit at the end of the second quarter, but really will positively impact us in the Q3.

[Speaker 2]

Paul, to add to that, pulp prices were increasing throughout last year. So if you look at, for example, eucalyptus went from 12.45 to 16.10 been between January December and it started falling here largely in Q1. So we expect to start seeing these benefits playing themselves out here later in the year.

[Speaker 4]

Yes. No, I expect that as well. So if we were trying to look at a benchmark Hardwood, great for you. Is that in eucalyptus? You buy a lot more eucalyptus than you buy North American

[Speaker 2]

been I think that's the right way to think about it. We do use North American hardwood as well, but eucalyptus is the grade that's primarily used in the tissue market been for Bath primarily.

[Speaker 3]

And Paul to add to that, there's a list price and a spot price. I think there is no secret on the list price. Most buyers buy at a substantial discount to the list price. The spot price might be closer to been Maybe where the market is. So as you're looking at the changes, I think look a little bit more towards that spot price versus the list price.

[Speaker 1]

Been

[Speaker 4]

Yes. I think I figured that out over the last 30 years. So, yes, I think I've got that one. Maybe just been The paperboard downtime that you've taken in Q2 here, how material is that? And what have you sort of baked into your been

[Speaker 2]

Q2 guidance. We haven't I don't think we're prepared to share what that downtime is. I think What we said in our comments is, it's our intent to balance supply and demand here for balance of the year. Been There is we're also going to manage inventories. And I think what we said is we have we grew our inventories and we expect for net working capital to be a source of cash for balance of the year, but I think we're going to stay away from commenting on specific tons.

[Speaker 4]

Been Okay. So maybe you can comment on just your expectation or what's the confidence behind your expectation that people will really improve in the second half?

[Speaker 2]

Been Yes. I think here's what we think is happening. There's a few pieces moving around. So I think the first one been customers are managing their inventories as supply has become more available. And that's what we're hearing in the market is been inventories are were quite high, heading into the end of last year and they remained high and customers are managing those inventories down.

[Speaker 2]

I think that's the first piece. Been The second piece is there is some softening in consumer spending happening that's probably having an impact. And we're also seeing been in pockets of increased import activity and penetration in our markets, and that's probably due to Some of the supply constraints that we saw last year and customers seeking out alternative sources of supply. Been So from where we stand today, we think those three pieces will sort themselves out and we believe we'll have a been Demand will start recovering in the second half, but certainly we've seen softness here in Q1 as well as in April.

[Speaker 4]

Been Okay. And then just on consumer products, I noticed that price is up kind of almost 12% year over year from Q1 This year, Q1 last year, but you're now given sort of pulp prices are falling to, been Your costs are coming down. How much of that increase that you got over the last year do you expect to give up or do you expect to give up any going forward here?

[Speaker 2]

Been I think we'll start with this. In both markets, including tissue, I think supply and demand will ultimately been drive that price. So as you saw here over the last couple of years, we were not able to pass through been the cost increases into price and tissue, and our margins were compressed. So we're in the process of recovering margins been to more healthy levels. So I don't think it's a direct correlation between price going up been a price going down on pulp and price falling in the market.

[Speaker 2]

I think ultimately it's going to be supply and demand driven. And we think demand is strong. And if you look at RISI data, supply additions have slowed. And so it's I think operating rates been are going up in tissue and we are approaching some of our constraints in our tissue production as well. Been.

[Speaker 2]

I think that will conclude our call.

[Operator]

Thank you everyone for joining. You may now disconnect your line.