Clearwater Paper Corporation Price & Performance (CLW)

Good afternoon and thank you for joining Clearwater Papers' Clearwater quarter twenty twenty four earnings conference call. Joining me on the call today are Arson Kitch, President and Chief Executive Officer and Sherry Baker, Senior Vice President and Chief Financial Officer. Financial results for the fourth quarter twenty twenty four were released shortly after today's March 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 Clearwater, Additionally, we will be providing certain non GAAP financial 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 reading this slide, we'll incorporate it by reference into our prepared remarks. And with that, let me turn the call over to Arshan.

Thank you for joining us and good afternoon. I'm going to structure my remarks today across three key areas. First, I'll provide a summary of our major strategic accomplishments in 2024. Next, I'll discuss our fourth quarter performance including our perspective on current industry conditions. And lastly, I will outline our near and long term priorities, including actions that we're taking to reduce our cost structure. Will then turn the call over to Sherry to provide additional details on our fourth quarter and full year results, well as our outlook for 2025. Let's start with an overview of our strategic accomplishments in '24.

We announced the planned acquisition of the Augusta Paperboard facility in February of last year. This was our first major step to transform Clearwater to premier independent paperboard packaging supplier North America. The Agust acquisition increased our paperboard We closed the transaction on May 1, and are well on track to integrate the Augusta Mill into our network. [indiscernible] believe that this acquisition can contribute $140,000,000 to 150,000,000 of annual adjusted EBITDA to Clearwater Clearwater, once we capture volume synergies and assuming the industry returns to normalize cross cycle utilization levels. Within three short months of closing on the Agusta acquisition, we announced the planned sale of our tissue business for $1,060,000,000 Our team worked tirelessly over the last several years to improve our tissue business, leading to this outstanding outcome for Clearwater Clearwater. We completed the sale on November 1, and utilized the net proceeds to significantly delever our balance sheet. These two deals transform Clearwater and position our company for future growth in Paperboard. I'm very proud of our team for these tremendous look forward to the next chapter of our story. Me now turn the focus to our performance in the fourth quarter. We delivered $21,000,000 of adjusted EBITDA across total operations, which included one month of discontinued operations from our tissue business.

The quarter was impacted by Hurricane Helene. Particularly operations at our Augusta facility. The mill suffered some damage, which was then followed by planned major maintenance outage that took place within a few weeks of the hurricane. These events created a very challenging operating environment which led to higher costs and operational disruptions. The Augusta team did an outstanding job of recovering and the mill was back on track as of year end. As we've discussed throughout 2024, while market demand has continued to gradually improve, the industry continued to operate with utilization rates below historical averages.

Resulting in lower market pricing and margin pressure.

Lastly, our Board authorized a new $100,000,000 share repurchase program.

And we repurchased approximately $9,000,000 of our shares through February seven of this year. Let me now provide some comments on market and industry conditions. Let's start with demand.

Based on AFMPA data, industry shipments increased by 4% versus 2023.

Demand is further projected to grow by 3% to 5% in 2025.

Based on various industry publications, returning to pre COVID levels. This supports our view that demand continues to recover and we're optimistic about the long term prospects for paperboard packaging.

Now let's turn to supply. Industry utilization rates improved in 2024 to 85%. Versus 82% in 2023.

Net exports decreased by driven by increased global supply and competition. North American capacity remained largely unchanged in '20 Although new industry capacity is forecasted to be added in 2025, As we've discussed, previously, we believe a balanced market will have utilization rates between ninety percent and ninety five Let me provide you with an overview of the actions that we're taking to drive revenue growth and reduce our cost structure. We recently signed a major long term supply agreement with a customer that should help us fill out our open capacity and capture volume synergies from the Agust acquisition. We expect this volume to gradually ramp over the next several years.

We have incorporated this volume into our twenty twenty five assumptions that shareable discuss in a moment.

In addition, we're taking actions to reduce our cost structure.

We're targeting $30,000,000 to $40,000,000 in cost savings in 2025 across SG and A and operations.

We took a major step in January with a 10% reduction in all positions across the company. [indiscernible] This action eliminated more than 200 positions in salaried and hourly roles. We're also targeting spend reductions in other areas, including contractors, professional services and maintenance. We expect benefits from these initiatives to ramp through the year. We have also incorporated the impact of all these in our 2025 outlook. Finally, we're continuing to explore ways to broaden our product offering to better service our converter customers. We are focused on compostability, increasing the recycled content of our products and lightweighting to name a few. We have product development efforts underway to deliver these solutions to our customers. These are near term initiatives and we expect that they will require modest capital We're also exploring options to diversify into additional paperboard substrates. This may include beverage carrier grades, white top or recycled board. These are larger and longer term investments that will likely take twenty four to thirty six months to execute. We're kicking off market studies as well as engineering efforts to explore these options. Let me conclude my comments by reiterating our view of the industry. We operate in an inherently cyclical industry driven by supply and demand.

With demand being relatively stable, this balance is greatly impacted by changes in supply. And across the cycle, we would expect utilization rates to average around 90% to 95% While in an up cycle, these rates can exceed 95% with increasing margins. SBS is currently in a down cycle, which we believe to be a temporary condition until supply and demand come back into balance. As we navigate the current environment, we're focused on actions that are within our control. Including improving our operational performance, reducing cost, and strengthening our product offering. With that, let me turn the call over to Sherry for a more in-depth review of our financials.

Thank you, Arson.

As Arson mentioned earlier, we delivered $21,000,000 of adjusted EBITDA in the fourth quarter down from $63,000,000 in the previous year. This decline was driven by two fewer months of contributions from the tissue business which we divested on November 1. The other sources of the decline were major maintenance expenses at our Augusta mill and lower paperboard pricing. This was partly offset by higher sales and production volumes from the addition of the Augusta mill and lower input costs. As we turn to the full year 2024, adjusted EBITDA from total operations was $182,000,000 down from $281,000,000 in 2023. The change in year over year results was predominantly driven by a $90,000,000 impact from lower paperboard pricing. Two fewer months of contribution from the tissue business also lowered our results versus 2023. Partly offsetting these headwinds was additional volume as a result of our Augusta position and some input cost deflation. With the completion of the divestiture of our tissue business, we generated significant value. We recognized a gain on the sale of the business of $3.00 $7,000,000 in Q4 contributing significantly to our full year net income. We utilized the approximately $850,000,000 of net proceeds to significantly delever our balance sheet and meaningfully reduce our debt.

For full year 2024, we reduced net debt by $199,000,000 and as of year end, have $275,000,000 of notes outstanding due in 2028 a net leverage ratio of 1.1x. Turning to our outlook for the first quarter of twenty twenty five. In the first quarter, we expect to deliver $20,000,000 to $30,000,000 of adjusted EBITDA.

We will not incur planned major maintenance outage costs in the first quarter and will continue to match supply to meet demand. We expect approximately $4,000,000 to $5,000,000 in higher energy costs in the quarter due to higher seasonal pricing and usage. This will also be our first full quarter as a paperboard only business with no tissue impact. And as Arshan mentioned, we took initial actions to reduce our fixed costs in January, including a 10% reduction in all physicians across the We expect the savings from these actions to ramp throughout the year. For full year 2025, we are making the following assumptions. We expect a continued demand recovery but with utilization rates remaining low as the industry absorbs new capacity beginning in Q2. Our internal utilization rate is projected to be around 85% with expected revenue of approximately 1.5 to $1,600,000,000 as we benefit from a full year of incremental sales volume. We are expecting that improved mill operating performance will We are also expecting less impact from weather related events and other operational disruptions that we experienced in 2024. In addition to improved manufacturing performance, we are targeting $30,000,000 to $40,000,000 of fixed cost reduction with actions that should translate to an overall $40,000,000 to 50,000,000 annual run rate.

As previously announced, we are migrating to an annual major maintenance outage cadence, which we believe will lead to smaller less costly and more predictable outages. We expect to incur $40,000,000 to $50,000,000 of outage costs with the bulk of the cost coming from Lewiston in Q3 and Augusta in Q4.

We expect capital expenditures of $80,000,000 to $90,000,000 which includes our projected $70,000,000 to $80,000,000 of annual maintenance CapEx plus additional carryover spend from our large projects that we will complete this year. As Arsen noted and we stated last quarter, we remain confident in a market cycle recovery and our ability to deliver mid cycle margins in the 13% to 14% range with free cash flow conversion of 40% to 50% would produce more than $100,000,000 in annual free cash flows. I will close with a brief overview of our capital allocation philosophy. Our first goal is to maintain and improve the performance of our assets. Which will require approximately $70,000,000 to $80,000,000 of annual maintenance capital. This excludes large strategic or replacement projects, which could add another $10,000,000 to $20,000,000 per year on average over the long term. Please note that these additional expenditures are episodic and come in large [indiscernible] We will communicate these large projects ahead of time just we did with the recovery boiler project in Lewiston and the emissions project in Cypress, in 2024.

Second, we aim to maintain a strong balance sheet with a net leverage ratio of one to two times through the cycle. We may temporarily go above or below that range to provide us with strategic flexibility Third, we aim to return capital to shareholders when it provides a better return than reinvesting in the business. Let me now turn the call back over to Arson for closing remarks. Thank you, Sherry.

I'll summarize where we are today. We completed two major strategic transactions in 2024 that transformed Clearwater into a paperboard focused company. Now focused on strengthening our position as an independent supplier of paperboard packaging products to North American converters. We will look for opportunities to expand our product offering which may include new applications for existing paperboard as well as new substrates. [indiscernible] have a well invested asset base and a strong balance sheet that will help us weather this part of the industry cycle. We remain optimistic about the medium to long term prospects for our industry and our company.

As a result, we expect strong margins and cash flows through the cycle and aim to strategically deploy capital to create long term shareholder value. Finally, I'd like to thank our people for their efforts to remain focused on operating safely providing excellent service to our customers during this time of the change in transition. I would also like to thank our customers for putting their trust in us. Our shareholders for their continued interest.

Your first question comes from the line of Matthew McElder RBC Capital Markets. Please go ahead. Hi, good afternoon. Thanks for taking my questions. First, starting with Good afternoon, Nelson.

Just starting with the new agreement, you mentioned recognize that it's supposed to ramp over several years, but are you able to help us get a little better sense of how meaningful those incremental volumes could be with time or what the shape of that ramp up curve looks like?

Yes. So we incorporated into our 25 volume assumptions. This was part of our assumption set that we were contemplating, with the Agust acquisition. So it's going to take several years to ramp, but it should provide us with enough volume fill out our open capacity and capture Augusta synergies. And Matthew, if you recall, when we purchased Augusta, the mill was approximately 70% full.

Which provides us with approximately 150,000 tons of open capacity. So I think it provides you a bit of a bit of an idea of what this could look like over the long run.

Okay, that's helpful. And maybe one other kind of clean up just some opening remarks there. You talked about you're expecting improving operating performance to help offset the pricing of inflation headwinds, which your I think initial 2025 assumptions, you kind of dimensionalize this $40,000,000 to $50,000,000 year over year. Just wanted to, I guess, make sure I'm understanding the moving parts here. Are you expecting, I guess, incremental benefits now versus your initial assumptions around how you run your mail system or just wanted to make sure we're thinking about that message in the correct way. I think there's probably three three areas to think about. I think the first area is improving operational performance. As As you mentioned, that should offset those price and cost headwinds. Think we talked about $40,000,000 to $50,000,000 last quarter. The next set of improvement will come from hopefully fewer disruptions due to the major weather events that we experienced in 2024. Hard to predict but it's also hard to imagine having such two large events like we did last year in Lewiston and Augusta. And the third bucket is the $30,000,000 to $40,000,000 of cost reduction that we are that we're pursuing and we took actions here in January to capture some of those savings.

So I think those are the three buckets of of improvement that we're expecting in 2025 versus 2024.

Thank you. That's very helpful. Maybe stick with those headcount reductions and other fixed cost savings, you expecting much benefit from those initiatives in Q1 or does that really start to show up in Q2?

It would be, I'd say, a modest amount that you'll see in Q1. It'll start to ramp more through Q2, but with the I'd say the bulk of the savings really happening in the second half of the year. Great.

Okay. That's helpful. And then just backing up a little bit here. If The U. S. Supplies tariffs to Mexico and Canada and they apply reciprocal tariffs in return, What do you think the impact to the SBS market would be or I mean SBS and the other grades you consider yourself competing against And how would your thinking change if we also see tariffs on the European Union realizers a lot of moving parts there and lot of ambiguity, but just any high level thoughts to be helpful. Thank you.

Yes. So let me talk about how it potentially could impact us We purchased some of our supplies from Canada, chemicals and pulp would be two good examples. We do some export into Mexico and a little bit into Canada. So there would be an impact that we would feel, but it will primarily come from higher costs passed on to us from our chemical suppliers potentially and pulp suppliers. Our goal in that scenario would be to pass on those cost increases to our customers. But it's kind of it's hard to predict how all those all those tariffs and the flows would be impacted by by these tariffs. So that's how we think about impact on Clearwater. It's higher cost to us, which we would pass on to our [indiscernible] Primarily a domestic a domestic supplier, so there could be some impact in the global flow of PayProp, but it's really hard to predict what that would look like.

Okay.

Okay. That's fair. Thank you. And if I could get one more in. Obviously, your balance sheet is in a great place. Now and I recognize there are options in considering that you You could have to put some capital against over the medium term, but where the stock is today, do you think you have more room to get aggressive on the share repurchases versus looking to the $9,000,000 is done since November or how are you thinking about that option for capital allocation?

I think what we said all along is we'd be opportunistic sufficient discount to what we think our intrinsic value is.

Our top priority remains investing in our assets and maintaining a strong balance sheet. And as we see our cash flow generation in 2025, I think we'll make adjustments to to the share buyback program. Again, it's we view this as an investment, but our top two priorities are investing back into our assets to maintain their competitiveness and also to maintain a really strong balance sheet. Okay, that's great. And if I could do one more, just looking at how demand has started the year here versus maybe where where you saw things trend in Q4? Any comments on what you're seeing? Any differences across folding carton versus coming plates? Any other trends to call out here?

Yes, I think this is maybe a little bit anecdotal, but the the conversations we're having with our customers are positive. I think they're expecting '25 to be a to be a better year than '24.

I would also tell you that some of our foodservice demand is more robust than our folding carton. Demanded. In fact, we are on several of our machines, on a couple of our machines, we are close to being sold out, especially what I'd call extruded products, so think cup. We're essentially sold we're essentially being pretty close to being sold out So it really depends on the category, but we're seeing some hopeful signs of demand continue to recover.

Okay, great. Thanks for all the color. I'll turn it back. Great.

Thank you. There are no further questions at this time. And with that, ladies and gentlemen, that concludes your conference call. We thank you for participating and ask that you please disconnect your lines.