Clearwater Paper Corporation (NYSE:CLW) Q4 2023 Earnings Call Transcript

Clearwater Paper Corporation (NYSE:CLW) Q4 2023 Earnings Call Transcript February 21, 2024

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Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Clearwater Paper Fourth Quarter and Full Year 2023 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 Instructions] As a reminder, today's call is being recorded. I will now hand today's call over to Kyle Nagarkar, Investor Relations. Please go ahead, sir.

Unidentified Company Representative: Thank you, operator. Good afternoon, and thank you for joining Clearwater Paper's Fourth Quarter and Full Year 2023 Earnings Conference Call. Joining me on the call today are Arsen Kitch, President and Chief Executive Officer; and Sherri Baker, Senior Vice President and Chief Financial Officer. Financial results for the fourth quarter of 2023 were released shortly after yesterday's market close, along with the filing of our 10-K. 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 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.

Arsen Kitch: Good afternoon, and thank you for joining us today. We will begin today's call with a strategic update and the announcement of our pending acquisition of the Augusta, Georgia paperboard manufacturing facility from Graphic Packaging. On our last call, I mentioned that we've made significant progress over the past few years, improving our operations and becoming a more competitive player in both of our businesses. I also mentioned that we believe that scale is needed to be able to invest and grow, especially given the capital-intensive nature of our industry. In paperboard, we laid out our goal of building a scaled, high-performing and diversified paperboard business that is well matched to the needs of paperboard converters in North America.

The Augusta acquisition is an outstanding strategic fit. It will add significant scale and growth capacity to our paperboard business and strengthen our position as a premier independent supplier of paperboard products to North American converters. We have also stated that we believe in the overall attractiveness of the North American paperboard market. It is a robust 10 million-ton market that is growing and well positioned to capitalize on sustainable consumer packaging trends. While demand softened in 2023 and utilization rates fell, this is a cyclical industry, and we expect demand to start recovering in the second half of this year and into 2025. Let me provide you with some additional details regarding the acquisition and synergies. The Augusta site is a well-invested SBS facility with around 600,000 tons of paperboard capacity and about 700 talented employees.

With volume upside and cost synergies, we believe that Augusta will contribute $140 million to $150 million of adjusted EBITDA by the end of 2026. If realized, we're expecting the post-synergy multiple to approach 4.5 times. The largest component underlying our expected $40 million to $50 million of annual synergies is volume. We expect the facility to be about 70% to 80% utilized in 2024 and assuming a 95% long-term utilization rate, we believe that we have up to 150,000 tons of volume upside. There are additional cost synergies that we expect to target including optimizing production across our network, procurement savings and transportation efficiencies. The acquisition is enabled by our strong balance sheet flexibility resulting from significant deleveraging that we began in 2020.

At the end of 2023, our leverage ratio was around 1.5 times, enabling us to pursue this opportunity. After we complete the acquisition, we expect our leverage ratio to peak between 3.5 times and 4 times in the coming quarters. Our top priority will be deleveraging the business toward our normalized goal of 2.5 times through the cycle, and we're confident in our ability to do so given our track record of cash flow generation and disciplined capital allocation. On the tissue side, we have a well-run business with an outstanding team that has a strong track record of performance improvement. The business generated more than $1 billion in sales and $150 million in adjusted EBITDA in 2023. Just like in paperboard, our tissue business needs scale to invest and grow with our customers.

Given the consolidated customer landscape and the fragmented supplier base, we continue to believe that consolidation is needed to build scaled tissue manufacturers that can make sizable long-term investments in capacity to keep up with the growth of these large retailers. Given that industry landscape and our investment in paperboard growth, we will evaluate strategic options for our tissue business. Regardless of the direction that we take, we will remain focused on what's best for our company overall, including our shareholders, customers and our people. We expect and look forward to completing the Augusta acquisition in the second quarter of this year. The completion of the transaction and timing are subject to regulatory approvals. We will update you on our progress in the coming months.

Let's shift our focus to our fourth quarter and full year 2023 results. Please turn to Slide 6. As you saw in our press release, we had a great year, driven by strong operational execution, lower input costs and continued strength in our tissue business. We maintain our focus on cash flow generation and reduced our net debt by almost $90 million during 2023. Slide 6 provides a summary of our consolidated results. We reported net sales of $513 million and adjusted EBITDA of $63 million in the quarter, which is within our range and significantly higher than the fourth quarter of last year when we completed our major maintenance at our Lewiston paperboard mill. Our tissue business drove the improvement by more than doubling its adjusted EBITDA from $18 million in the fourth quarter of last year to $46 million this year.

Our paperboard business delivered $37 million of adjusted EBITDA in the fourth quarter with continued soft demand and a natural gas disruption to significantly curtailed operations at our Lewiston facility. Let me share a few highlights with you. Prices increased in our tissue business as compared to the fourth quarter of 2022 and decreased in paperboard, which reflects market trends as reported by RISI. Lower input costs benefited both of our businesses as compared to the fourth quarter of 2022, particularly in fiber, energy and freight. We had good operational performance across both businesses as we balance supply and demand to manage our inventories. Tissue demand continued to be strong, while paperboard remained soft. We reduced net debt by $32 million in the quarter for a total of almost $450 million since 2020.

We repurchased $3 million of shares during the quarter for a total of $23 million since 2022 and with $7 million 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 8 of our supplemental materials. Let's start by focusing on broader industry trends. Based on AF&PA data, shipments were down about 16% full year 2023 versus 2022 and down 15% in the fourth quarter. Operating rates dipped to under 80% in the fourth quarter and were at about 84% for the year. Reflecting these trends, we see reported price decreases of $80 per ton in the second half of last year, and another $40 per ton in February of this year. While our demand remains soft, we did outperform industry averages with shipments down 9% for the year and flat in Q4 of 2023 versus Q4 of 2022.

We took approximately 15% downtime on our paper machines during the quarter to balance supply and demand. In addition, we also experienced unplanned downtime during the quarter due to a disruption in natural gas supplies to our Lewiston facility in November. That event negatively impacted us by approximately $1 million. As I mentioned earlier in my remarks, we remain optimistic about the long-term prospects for paperboard. We're forecasting a gradual sequential improvement in demand starting in the first quarter of this year. We expect a more meaningful recovery in the second half of 2024 and next year. Please turn to Slide 9 for additional comments on tissue. Let's start with some broader industry trends. Private brand market share remained at a nearly all-time high of 36% based on Circana panel data.

A mobile crane moving a shipment of bulk pulp & paper product.

Consumers are continuing to shift to private brands due to economic uncertainty and inflation. Utilization rates were at about 94% in Q4 as reported by RISI, which we believe represents a healthy supply and demand balance. As we've discussed previously, more than 180,000 tons of capacity were removed between 2021 and 2023, while more than 350,000 tons of capacity have been announced to be added between 2024 and 2026. All this data supports our view that the tissue industry conditions remain stable. Let's turn to our performance in the quarter. Our business remained very strong with revenue growing by 3% year-over-year and adjusted EBITDA more than doubling. Our adjusted EBITDA margin was nearly 17%, driven by higher pricing, lower input costs and strong operational execution by our team.

We remain optimistic that we can retain much of that margin improvement as we head into 2024. With that, I'll turn the call over to Sherri to cover our financial results.

Sherri Baker: Thank you, Arsen. Let's cover our financial performance in the fourth quarter by turning to Slide 10. The consolidated summary income statement shows results for the fourth quarter of 2023 and 2022. In the fourth quarter of 2023, we reported net income of $17.6 million, net income per diluted share of $1.04 and adjusted net income per diluted share of $1.35. For the full year, we reported net income of $107.7 million, net income per diluted income per share of $6.30 and adjusted net income of $6.69 per share. The corresponding segment results are on Slide 11. The business performed very well on a consolidated basis with lower input costs and strong operating performance driving a healthy improvement in profitability.

Adjusted EBITDA margin rose to 12.3% in the quarter as compared to 5.3% in the fourth quarter of last year or about 10% if we exclude the impact of the major outage. Slide 12 is the year-over-year comparison of adjusted EBITDA for our paperboard business. The business delivered $37 million of adjusted EBITDA in the quarter with a 15% margin. On a year-over-year basis, lower sales price and mix negatively impacted results, which was more than offset by lower input costs. The impact of volume between periods was negligible as we took market-related downtime in the fourth quarter of 2023 and had our planned major outage in Lewiston in the fourth quarter of 2022. Slide 20 in the appendix shows the sequential comparison of the fourth quarter to the third quarter of this year.

It reflects a lower sales price and mix, lower volumes and higher costs. Slide 13 is a full year comparison of adjusted EBITDA for our paperboard business. The business delivered $206 million of adjusted EBITDA for the year with a 19% margin. On a full year basis, higher pricing on paperboard was offset by unfavorable mix and reduced operating schedules to match supply and demand. These were partially offset by favorable cost inputs, primarily due to freight and energy. Slide 14 is the year-over-year comparison of adjusted EBITDA for our tissue business. As Arsen discussed, we are benefiting from previously announced price increases and lower input costs. The business delivered $46 million of adjusted EBITDA in the quarter with a 17% margin.

As noted on this slide, in the fourth quarter, we saw the benefit from lower pulp prices as those flow through to our income statement. Slide 15 is a full year comparison of adjusted EBITDA for our tissue business. The business delivered $151 million of adjusted EBITDA for the year with a 15% margin, which is double that of the prior year. On a full year basis, increasing pricing, shipments and production along with lower freight costs, all positively impacted our results. Slide 21 shows a sequential comparison of the fourth quarter to the third quarter of this year. It reflects the benefits that we are seeing from lower input costs, particularly in pulp, freight and energy. Slide 16 outlines our capital structure. Our balance sheet remains very strong, and our liquidity improved quarter-over-quarter, now totaling $277 million.

During the fourth quarter, we generated $40 million in free cash flow and reduced our net debt by an additional $32 million. On a year-to-date basis, we generated $117 million in free cash flow. Since 2020, we have reduced our net debt by almost $450 million. At the end of the fourth quarter, our net debt-to-EBITDA ratio was approximately 1.5 times. We used free cash flow to repurchase $3 million of our stock during the quarter. That translated into almost 79,000 shares repurchased at an average price of $35.69 per share. We have roughly $7 million left on our share repurchase authorization. We expect to continue to buy back shares to mitigate the impact of dilution from share grants to our employees. We intend to fund the acquisition of the Augusta facility with $490 million of new secured debt, additional draws on our existing ABL and term loan facilities and cash on hand.

Let's now move to Slide 17 for an outlook on the first quarter of 2024 as well as some updates to our full year expectations. We experienced a severe weather event at our Lewiston mill in January that had an estimated $13 million negative impact. That impact is being partially offset by increasing paperboard demand and production. We are expecting continued strong performance in tissue. With those variables, we expect adjusted EBITDA in the range of $53 million to $63 million in the first quarter. For the full year 2024, we expect to maintain strong margins in tissue with stable volumes. We also expect a rebound in board demand in the second half of 2024. Our planned major maintenance at Lewiston is expected to negatively impact adjusted EBITDA by $30 million to $35 million and we do expect price and cost to negatively impact us by an additional $40 million to $50 million.

Finally, our other key assumptions for the full year remain unchanged and do not take into account our announced Augusta acquisition. Interest expense should be in the $28 million to $30 million range, depreciation and amortization expense should be $97 million to $100 million. Capital expenditures should be between $90 million and $100 million which includes $26 million for the Lewiston recovery boiler tube replacement project and $28 million for the precipitator replacement in Arkansas. As a reminder, the recovery boiler project will require approximately $40 million of total spend, while the precipitator is projected to require $45 million. And finally, our tax rate should be in the mid-20% range. Let me now turn the call back over to Arsen.

Arsen Kitch: Thanks, Sherri. The expected Augusta acquisition is a big strategic step for Clearwater Paper. Upon the expected completion of the transaction, we will welcome the very talented Augusta team to Clearwater Paper. We will focus on successful integration and delivering against our value creation expectations. Our goal is to bring together the best of Augusta and our existing mills to build a stronger paperboard business. Our long-term objective is to build a scaled and diversified paperboard business that meets the needs of our converter customers. We intend to continue to opportunistically look at paperboard assets across multiple substrates. We will also continue to evaluate the feasibility of investing in our existing assets to expand our product offering.

While we look at additional opportunities in the long run, in the near to medium term, we're going to focus on generating cash flows and deleveraging our balance sheet. We have a proven track record of doing just that and expect to be back to our cross-cycle target of 2.5 times by the end of 2026. Let me wrap up by thanking our people for a strong 2023. We delivered outstanding financial results, navigated through challenging market conditions and continue to prioritize our customers. 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: [Operator Instructions] Your first question is from the line of Matthew McKellar with RBC Capital.

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