Clearwater Paper Q2 2023 Earnings Report

Clearwater Paper EPS Results

• Actual EPS: $1.74
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Clearwater Paper Revenue Results

• Actual Revenue: $524.60 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Clearwater Paper Announcement Details

• Quarter: Q2 2023
• Date: 8/1/2023
• Time: N/A
• Conference Call Date: Tuesday, August 1, 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 Q2 2023 Earnings Call Transcript

[Operator]

Thank you for standing by. My name is Dina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Clearwater Papers Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

[Operator]

Followed by the number 1 on your telephone keypad. I would like to turn the call over now to Sloane Boland, Investor Relations. Sloane, please go ahead.

[Speaker 1]

Thank you, Dina. Good afternoon, and thank you for joining Clearwater Paper's Q2 2023 earnings conference call. Joining me on the call today are Arson Kitsch, President and Chief Executive Officer and Becky Barclay, Corporate Controller and Interim Chief Financial Officer. Financial results for the Q2 of 2023 were released shortly after to today's market close 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 in the Relations page on our website at clearwaterpaper.com.

[Speaker 1]

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 2 of the supplemental information covering the forward looking statements. Rather than reread this slide, we are going to incorporate it by reference into our prepared remarks. And with that, let me turn the call over to Arsen.

[Speaker 2]

Good afternoon and thank you for joining us today. As you saw in our press release, We had a great second quarter, which was better than we expected, driven by strong operational execution, lower input costs and improved tissue margins. Slide 3 of our supplementals provides a summary of our consolidated results. We reported net sales of 525,000,000 and adjusted EBITDA of $71,000,000 which is $8,000,000 higher than the Q2 of last year. Our tissue business Drove the improvement by more than doubling its adjusted EBITDA from $19,000,000 in the Q2 of last year to $40,000,000 this year.

[Speaker 2]

Let me share a few more highlights with you. Prices increased in both paperboard and tissue as compared to the Q2 of 2022. Lower input costs benefited both of our businesses as compared to the Q1 of 2023, particularly in fiber, energy and transportation. Operational performance was strong and we balanced supply and demand to manage our inventories. Tissue private branded share Reached an all time high as consumers continue to look for ways to offset inflation.

[Speaker 2]

Our tissue demand remains strong and we delivered to standing customer service while improving our supply chain costs. Paperboard demand remains soft as customers reduce their inventories due to slowed consumer spending. And finally, we reduced our net debt by $25,000,000 and repurchased $8,000,000 of shares during the quarter with $15,000,000 remaining on our buyback authorization. With that overview, let me turn to each of our segments and provide some additional details. Let's begin with our paperboard business on Slide 4.

[Speaker 2]

As we noted last year, demand began slowing late in Q4 of last year, with that trend continuing through the Q2 of this year. We believe that this was caused by a slowdown in consumer spending and high inventory levels across the value chain. Industry data reflected these trends with a 7.1% decrease in operating rates and a 12.6% decrease in shipments year to date to 2023 versus year to date 2022 based on AFMPA data. As further evidence of this trend, RISI reported a $20 per ton decrease in folding carton prices in July, the first decrease in more than 3 years. Approximately 35% to 40% of our volume is now indexed to RISI and it typically takes us up to 2 quarters for price changes under these contracts to be reflected in our financials.

[Speaker 2]

While demand remains soft at the beginning of the Q3, we're expecting an improvement in our volumes in the second half. As I mentioned during our Q1 earnings call, we reduced production in the Q2 to manage our inventories, which resulted in approximately 10% of planned capacity downtime in the Q2. Our intent is to continue to balance supply and demand for the remainder of the year to get to our targeted inventory levels. While the industry is experiencing a slowdown in demand, we continue to believe that paperboard is economically resilient given the end use of the products. Our portfolio in particular skews more heavily towards consumer necessities such as food packaging, pharmaceuticals and cosmetics.

[Speaker 2]

We also expect the shift to paper based products to accelerate with consumers seeking more sustainable packaging and food service products. We believe that this should provide us with more opportunities for growth in the long run. Please turn to Slide 5 for additional comments on tissue. The performance of our business was very strong with significant improvements in margin driven by higher pricing, higher volume and lower input costs. Adjusted EBITDA more than doubled year over year and sequentially to $40,000,000 Input costs eased between the 1st and second quarter of this year, particularly in pulp, energy and transportation.

[Speaker 2]

Revenue improved by 9% year over year, driven by higher pricing and higher retail shipments. Operating performance was also solid, leading to great customer service results with an on time performance rate of over 95% and a fill rate of over 99%. The team delivered these results while maintaining inventories at targeted levels and lowering our overall supply chain costs. Let's turn to some broader market data. Private branded tissue share reached an all time high of 36.3% in June based on SARCANNA panel data.

[Speaker 2]

We believe that consumers are continuing to look for better values in their daily purchases to offset inflation and economic uncertainty. Based on RISI data from May, tissue capacity utilization rose to 94.2%, which we believe to be a healthy level. We expect continued strength in our tissue business in the coming quarters as we benefit from strong consumer demand, lower input costs and continued benefits from previously announced price increases. Pulp costs have been on a downward trajectory since the Q1 of this year with RISI forecasting a continued decline through the rest of the year and relative stability in 2024. As a reminder, it takes approximately 3 months for changes in pole prices to be fully reflected in our financials.

[Speaker 2]

Transportation availability and costs have also improved greatly since last year, with lower line haul rates positively impacting our financials. With that overview, let me introduce our Corporate Controller and Interim CFO, Becky Barclay. Becky is a key leader in our finance team and has long tenured experienced in the Forest Products Industry. Thank you, Becky, for supporting us during this transition. With that introduction, I will now ask Becky to discuss our Q2 results in more detail.

[Speaker 3]

Thank you, Arsen. Please turn to Slide 6. The consolidated summary income statement shows results for the Q2 of 20232022. In the Q2 of 2023, we recorded net income of $29,700,000 net income per diluted share of 1 point $75 and adjusted net income per diluted share of $1.74 The corresponding segment results are on Slide 7. The key takeaway is that on a consolidated basis, the business performed well with lower cost, stronger operating performance driving a healthy improvement in profitability.

[Speaker 3]

Adjusted EBITDA margin rose to 13.6% in the quarter as compared to 12% last year. Slide 8 is a year over year comparison of the segment income and adjusted to EBITDA for our paperboard business. On a year over year basis, higher pricing offset higher cost, while lower production volumes impacted cost absorption and our overall cost structure. Slide 14 in the appendix to the sequential comparison of the Q2 to the Q1 of this year. It reflects a lower sales mix, lower production volumes with flattening costs.

[Speaker 3]

Slide 9 is a year over year comparison of segment income and adjusted the EBITDA for our tissue business. As Arsen discussed, we are benefiting from previously announced price increases, higher volume and lower input cost. It is important to note that significant pulp price increases in 2022 did not impact our financials until the second half of the year, leading to a relatively flat cost comparison between the Q2 of this year to last year. Slide 15 in the appendix shows a sequential comparison of the Q2 to the Q1 of this year. It reflects the significant benefits that we are seeing from lower input to the cost, particularly in Polk, Energy and Transportation.

[Speaker 3]

Slide 10 outlines our capital structure. Our balance sheet remains very strong and our liquidity improved quarter over quarter, now totaling $313,000,000 During the quarter, we generated $33,000,000 in free cash flow and reduce net debt by $25,000,000 versus the Q1. On a year to date basis, We generated $3,000,000 in free cash flow. As a reminder, we had negative cash flows during the Q1 due to a higher than normal trade payables balance from the Q4 of 2022 as well as typical to 1st quarter outflows. Our net debt to EBITDA ratio was at 2.1 times at the end of the quarter.

[Speaker 3]

We used free cash flow to repurchase $8,000,000 of our stock during the quarter. That translates into over to 160,000 shares repurchased at an average price of $31.70 per share. We have roughly $15,000,000 left on our share repurchase authorization. Let's now move to Slide 11 for an outlook on the Q3 of 2023 as well as some updates to our full year expectations. Based on the continued momentum in tissue and moderating input cost, we expect to adjusted EBITDA in the range of $73,000,000 to $83,000,000 for the quarter.

[Speaker 3]

In terms of our full year assumptions, we expect that to our operating results will be favorable relative to 2022 by $42,000,000 due to fewer major maintenance outages and better operating performance. Additionally, we now expect a benefit of $15,000,000 to $25,000,000 due to the impact of previously announced price increases and lower input cost. Lastly, our other key assumptions for the full year remain unchanged. Interest expense should be in the $27,000,000 to $25,000,000 range. Depreciation and amortization expense should be $98,000,000 to $101,000,000 Capital Expenditures should be between $70,000,000 $80,000,000 which includes approximately $9,000,000 on our Lewiston Recovery boiler to replacement project and $11,000,000 on the precipitator replacement in Arkansas.

[Speaker 3]

As a reminder, The recovery boiler project will require approximately $40,000,000 in total spend, while the precipitator is projected to require $45,000,000 And finally, our tax rate should be in the mid-twenty range. Let me turn the call back over to Arsen.

[Speaker 2]

Thanks, Becky. I'd like to conclude the call with a brief overview of how we're prioritizing our capital allocation to create shareholder value. Slide 12 is a framework to our approach. Our top priority is sustaining the competitiveness of our assets. We believe that this requires an average of $60,000,000 to $70,000,000 annually, excluding large projects such as the recovery boiler work in Lewiston and the precipitator replacement in Arkansas.

[Speaker 2]

2nd, we intend to maintain a balance sheet that provides us with financial flexibility. We now have a much stronger balance sheet than we did a few years ago, and we intend to continue to maintain and improve our position. A strong balance sheet provides us with the capacity to take advantage of investment opportunities, including in the potential down cycle. And finally, we will look at various opportunities to create value through return generating investments, opportunistic acquisitions and returning capital to shareholders. You saw us do that in the Q2 by repurchasing $8,000,000 worth of our shares.

[Speaker 2]

We're going to continue to be disciplined allocators to Mystic about our business in the second half of this year. Let me close by thanking our people for all that they do to keep our operations running safely and efficiently. I would also like to thank our customers for placing their trust in us and our shareholders for their continued support. With that, We will end our prepared remarks and take your questions.

[Operator]

Thank you. At this time, We will pause for just a moment to compile the Q and A roster. Your first question comes from Paul Quinn from RBC Capital Markets. Paul, please go ahead.

[Speaker 4]

Yes, thanks very much. Hey, guys. Just maybe start with your Consumer Products segment. The staff for the Q2 came out this morning and sort of shows pretty lackluster North American tissue production and drop in operating rates. How are you able to it sounds like your tissue is going gangbusters, especially in the Q2.

[Speaker 4]

How are you able to compete the competition right now?

[Speaker 2]

I think our demand is pretty strong and pretty stable. And as I've mentioned previously, we have no material contract risks this year. So private branded shares up. Our customers, generally speaking, are doing well and I think we're doing a really good job of supporting them. So we have strong sales and I think the operating rates in the industry are also fairly high.

[Speaker 2]

So it's for us at least our demand is strong and we're able to support that demand.

[Speaker 4]

Okay. And then slide, I think it's 15 shows sort of sequential improvement in that $15,000,000 drop in costs. Is that all to do with pulp?

[Speaker 2]

A lot of it is pulp. We're also benefiting from transportation and energy as well in tissues sequentially. But pulp is going to be a big story this year.

[Speaker 4]

Okay. And then, Arntzen, you mentioned that 3 month lag in pulp To really hit the bottom line. So this is really the drop in pulp pricing in Q1 that really comes into factor that $15,000,000 in Q2?

[Speaker 2]

That's part of the story. So it's if we go back on pulp, there's 2 important points there, Paul. The first one is pulp peaked in the second half of last year. And as you mentioned, takes us approximately 3 months for that to flow through our P and L. So actually, if you look at the first half of this year versus to the first half of last year, our pulp prices are actually slightly higher, but we're seeing a meaningful sequential drop in pulp prices.

[Speaker 4]

Okay. And then if I just switch over to the paperboard side, you mentioned that drop in folding carton pricing, Index pricing, when you mentioned that your 35% to 40% index to RISI, is that to that folding carton price or is that to another

[Speaker 2]

I think generally speaking, it's folding carton and cup. I think those are the 2 prices That RISI indexes. So we're depending on the customer and depending on the volume, it's one of those.

[Speaker 4]

Okay. And then just on the CapEx projects you've got, I suspect the precipitator down in Arkansas is Kind of a maintenance type thing, you're not expected to get any kind of lower costs or benefits as a result of that. What about the recovery boiler? Any pickup in lower costs going forward?

[Speaker 2]

I think generally speaking, both of these are maintenance types of projects. There's probably some mild benefits with the precipitator, But we view that as largely a replacement project. We're replacing something that's decades old, so there should be some better performance coming out of it and better reliability. But largely we view those as the replacement projects.

[Speaker 4]

Okay. Then the last question I had just on capital allocation. I mean, it looked like your Balance sheet is in great shape. Why don't you repurchase a heck lot more shares than 263 in the quarter?

[Speaker 2]

Paul, as I mentioned in our framework, I think we take an opportunistic approach to our share buybacks. So We increase our purchases when we see a better value. So we purchased quite a bit quite a few more shares this quarter than last quarter, but I'll just leave it at that.

[Speaker 4]

Well, it seems to reckon that given the share price is right about when Purchased the shares in Q2. I suspect you've got quite an opportunity into Q3 as well.

[Speaker 2]

Well, and we'll continue to look at that and buy back shares of our opportunistically, Paul.

[Speaker 4]

I see. Yes, you do. That's all I had. That's all I wanted to say.

[Speaker 2]

Thank you, Paul.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now