Clearwater Paper Q1 2025 Earnings Call Transcript

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April 29, 2025
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Operator

Ladies and gentlemen, thank you for standing by. My name is Carmen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Clearwater Paper First Quarter twenty twenty five Earnings 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

Thank you. Would now like to turn the call over to Sloane Bowen, Investor Relations. Go ahead, sir.

Sloan Bohlen
Director at Solebury Strategic Communications

Thank you, Carmen. Good afternoon, and thank you for joining Clearwater Paper's first quarter twenty twenty five earnings conference call. Joining me on the call today are Arsen Kitsch, President and Chief Executive Officer and Sherry Baker, Senior Vice President and Chief Financial Officer. Financial results for the first quarter twenty twenty five were released shortly after today's market close. You will find a presentation of the supplemental information, including a slide providing the company's current outlook posted on the Investor Relations page of our website at clearwaterpaper.com.

Sloan Bohlen
Director at Solebury Strategic Communications

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 Arsen.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

Thank you for joining us today, and good afternoon. I'm going to structure my remarks across three key areas. First, I'll provide a summary of our first quarter results. Next, I'll discuss our perspective on industry conditions and trends. And lastly, I'll provide an update on the key strategic initiatives that we're focused on in 2025 and beyond.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

I will then turn the call over to Sherry to provide additional details on our first quarter performance as well as our outlook for the second quarter. Let's begin with an overview of our first quarter results. We delivered $30,000,000 of adjusted EBITDA during the quarter, which was at the high end of our guidance range. This was driven by strong operational performance, increased production and sales volumes, primarily due to the Augusta acquisition and benefits from our cost reduction work. Our net sales increased 46% to $378,000,000 versus the first quarter of last year, driven largely by the Augusta acquisition.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

We successfully integrated the Augusta mill into our operation and are now working to capture targeted volume and cost synergies by the end of twenty twenty six. We took action to reduce our fixed cost structure by eliminating more than 200 positions across the company, representing around 10% of total roles. We're on track to deliver 30 to 40,000,000 of savings this year versus 2024. Finally, we repurchased approximately $11,000,000 of our shares in the first quarter for a total of approximately 15,000,000 since the new $100,000,000 share buyback authorization in November of twenty twenty four. We're off to a great start in 2025 as a paperboard focused company, and our efforts on managing factors that we can control are paying off as evident in our first quarter results.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

Maintaining cost discipline and strong operational execution remain our top priorities as we continue to navigate a challenging market environment. Next, I'd like to provide some commentary on market and industry conditions. Let's start with demand. Based on AFNPA data, industry shipments increased by 2% in the first quarter of twenty twenty five versus the first quarter of twenty twenty four. Demand is projected to grow by three to 5% in 2025 versus 2024 based on various industry publications, which would result in a return to pre COVID levels of demand by the end of the year.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

Our customers are optimistic about their order books as retailers and quick service restaurants are focusing on driving volume and foot traffic through promotional activity. Based on those trends, we're expecting around 5% volume growth in sales and production sequentially from the first to the second quarter of this year. Now let's turn to supply. Industry utilization rates improved sequentially in the first quarter of twenty twenty five to 88% versus 84% in the first quarter of twenty twenty four. While this is an improvement, our industry remains below a cross cycle average utilization of 90% to 95%.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

New industry capacity is also expected to be added this quarter, which will increase SBS supply by up to 10% once the asset is fully ramped. Let me provide some commentary on tariffs. All of our production is US based, and around 90% of our shipments go to domestic customers. The rest is primarily exported to Japan, Canada, and Mexico. Most of our raw materials are US sourced as well, although some chemicals, pulp, and energy are imported primarily from Canada.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

While it is difficult to predict the impact of tariffs on industry dynamics, we believe that we could be a net beneficiary as domestic customers look for more local supply. Approximately five to 600,000 tons of bleach paperboard is imported to North America annually, primarily from Europe, making up around 10% of total SBS supply. In addition, based on our estimates, around 200,000 tons of paperboard finished goods are imported annually, primarily from Asia. Some examples of these finished goods imports include plates, cups, and food service containers. If a portion of these imports swings to domestic supply, we could see improvement in industry operating rates even as new capacity is added.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

Finally, let me provide you with an update on our key strategic initiatives for 2025. As we mentioned previously, our goal is to strengthen our position as a premier independent supplier of paperboard packaging products to North American converters. We believe that today, we have a strong position in the industry along with a geographically advantaged manufacturing footprint with high quality assets. To remain a preferred supplier to our customers, we're investing in product development efforts to broaden our portfolio. These efforts are split into three categories.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

The first category is compostable food service products, particularly plates. We have BPI certification and expect to be in the market by year end. The second category is lightweight folding carton products that don't sacrifice print quality and strength. We're looking at various options to deliver against this, including paper machine upgrades and using mechanical pulp in our products. We believe that we will have a solution ready in 2026.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

The third category is alternative poly free barrier technologies. We currently have products in the market that meet this need, but they're costly to produce, which limits broader applications. We're continuing to work on additional barrier technologies that can be scaled up in the market at the right cost structure. In addition to these product development efforts, which are largely based on our existing SBS capacity, we're exploring the potential to expand into additional paperboard substrates. These substrates make up approximately 50% of the paperboard market outside of SBS.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

This translates into around 5,000,000 tons of North American demand. We're evaluating these parts of the market as well as our options to more effectively compete. The first substrate is coated on bleach craft or CUK. A common application for the substrate is beverage carriers. This substrate uses a similar manufacturing process, but without the bleaching that is inherent to SBS.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

The other substrate is coated recycle board or CRB, which is used in folding carton applications across a number of consumer good categories. We believe that our customer base needs these products to compete effectively with the large integrated players, and we're looking at options to create this capability. Some of these options are capital driven, while others would involve an acquisition. In addition to looking at new product offerings and expanding into additional substrates, we're intensively focused on continuing taking actions to reduce our overall cost structure. We're targeting 30 to $40,000,000 in cost savings in 2025 across s g and a and operations, which we expect to yield forty to fifty million annual run rate savings.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

We previously announced that we took a major step in January with a 10% reduction in all positions across the company, eliminating more than 200 positions in salaried and hourly roles. We're also targeting spend reductions in other areas, including contractors, professional services, and maintenance, and expect benefits from these initiatives to continue to ramp through the year. Let me conclude by reiterating our view of the industry. We operate in an inherently cyclical industry driven by supply and demand. While we're currently in a down cycle with utilization rates below 90, we believe this to be a temporary condition till supply and demand come back into balance.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

The balanced market would see utilization rates between 9095% with an expected EBITDA margin between 1314%. This could translate to more than 250,000,000 of EBITDA with more than 100,000,000 of free cash flow annually. For now, our primary focus is to improve our overall cost structure while providing high quality products and superior service to our customers. With that, let me turn the call over to Sherry for a more in-depth review of our financials.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

Thank you, Arsen. Before we review our first quarter results in more detail, I want to start with an overview of tariffs and the associated potential cost impacts. We purchased roughly $80,000,000 of energy and other raw materials from Canada. Our Lewiston, Idaho facility is the top destination for these materials due to the mill's proximity to Canadian suppliers. We also source another 20 to 25,000,000 of parts and supplies from outside of The US.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

A hypothetical 25% tariff on all of these items would cost us around 25,000,000 per year. However, we believe that much of our raw material supply from Canada falls under the USMCA umbrella and is not currently subject to tariffs. However, if a meaningful tariff would be imposed, it would be our goal to pass on these cost increases to our customers. Additionally, indirect items such as capital equipment or MRO supplies could see an impact later in the year. We expect that it will take time to gain better visibility into potential impacts, and we have therefore not included any tariff related impact into our q two and full year outlook assumptions.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

In the meantime, we are taking actions to qualify additional suppliers, use leverage where it exists, and mitigate tariff related pass throughs. For now, cost impacts are minimal and manageable, but we will continue to monitor the situation and react appropriately. Turning now to our first quarter results. We had a consolidated net loss of approximately $6,000,000 from continuing operations or $0.36 per diluted share. We delivered net sales of approximately 378,000,000, up 46% versus the prior year.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

The year over year increase is driven by our Augusta acquisition, which closed on May first of last year. We generated approximately $30,000,000 of adjusted EBITDA, up from 14,000,000 in the prior year. The year over year improvement was driven by improved operational performance, the benefits from the Augusta acquisition, and the lack of the Lewiston weather event that impacted us last year. Offsetting these improvements was input cost inflation of approximately 3,000,000 driven by higher fiber and chemical prices. We also continue to see paperboard pricing headwinds, which impacted us by 9,000,000 year over year.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

It is important to note that prices were relatively stable quarter over quarter. The good news is that we are generating sufficient operational improvements, cost savings, and synergies to more than offset these pricing and input cost headwinds year over year. As Arsen mentioned, we've begun taking steps to reduce our overall fixed cost structure, and you're seeing these actions flowing through our financials. As we look at s g and a, we have taken steps to reduce headcount across our organization in addition to removing portions of our stranded overhead cost due to our tissue divestiture last November. While s g and a is essentially flat year over year, as a percent of sales, it declined from 10.9% to 7.6%.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

As a reminder, we are targeting six to 7% of s g and a as a percent of sales this year and believe that we will get there by year end. In the first quarter, we repurchased approximately $11,000,000 of our stock for a total of approximately $15,000,000 since the new $100,000,000 share buyback authorization on November first of twenty twenty four. We continue to believe that these buybacks generate a positive return for our shareholders, and we will continue to consider share repurchases as a part of our capital allocation strategy when we generate sufficient free cash flow after investing in our assets. Turning to our outlook for the second quarter of twenty twenty five. In the second quarter, we expect to deliver 35 to 45,000,000 of adjusted EBITDA, which excludes any potential impacts from tariffs.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

We expect approximately 5% growth in sales and production volumes versus the first quarter. Raw material costs are expected to be stable with a $6,000,000 decrease in seasonal energy costs versus the first quarter. We expect to incur planned major maintenance outage cost of 7 to 9,000,000 at our Cypress Bend facility, and we expect savings from our fixed cost reduction initiatives to continue to ramp in the second quarter. For the full year 2025, our assumptions remain largely unchanged. We expect a continued demand recovery, but with utilization rates remaining low as the industry absorbs new capacity that is forecasted to come online beginning this quarter.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

Our internal utilization is projected to be around 85% with expected revenue of approximately 1.5 to 1,600,000,000.0 as we benefit from a full year of incremental Augusta sales volume. We expect improved mill operating performance will offset pricing and inflation headwinds. In addition to improved manufacturing performance, we are targeting 30 to 40,000,000 of fixed cost reduction with actions that should generate an overall 40 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 approximately 45 to 50,000,000 of total direct outage cost this year, including 22 to 24,000,000 in Lewiston in q three and 15 to 17,000,000 in Augusta in q four.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

We expect capital expenditures of 80 to 90,000,000, which includes our projected 70 to 80,000,000 of annual maintenance CapEx plus additional carryover spend from two 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%, which produced 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 to 80,000,000 of annual maintenance capital. This excludes large strategic or replacement projects, which could add another 10 to 20,000,000 per year on average over the long term.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

Please note that these additional expenditures are episodic and come in large increments. We will communicate these large projects ahead of time just like we did with the recovery boiler project in Lewiston and the emissions project in Cypress Bend 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 or during industry down cycles. Third, we aim to return capital to shareholders when it provides a better return than reinvesting in the business.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

As I shared earlier, we repurchased approximately $11,000,000 of our shares in the first quarter to generate additional shareholder value. Let me now turn the call back over to Arsen for closing remarks.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

Thank you, Sherry. I'll summarize where we are today. We transformed Clearwater into a paperboard focused company with two major strategic actions in 2024. We are 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 portfolio, which may include new applications for existing paperboard as well as new substrates.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

We have a well invested asset base and a strong balance sheet that will help us persevere through 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 and providing excellent service to our customers during this time of change and transition. I would also like to thank our customers for putting their trust in us and our shareholders for their continued interest.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

With that, we'll open it up to your questions.

Operator

Your first question comes from the line of Matthew McKellar with RBC Capital Markets. Matthew, please go ahead.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Hi, good afternoon. Thanks for taking my questions. Afternoon. I guess I'm just asking a couple. Good afternoon, Arsen.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Just a couple of questions around kind of tariffs and related issues. Maybe first of all, I guess, what's your sense of what's happening with FPB imports here just over the last month or two? And then second, the 20,000,000 to $25,000,000 of purchases, I think you've mentioned, would be from outside The US and Canada. Do have a rough geographic split there? And in particular, is there any exposure to to China that could be particularly challenging?

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

Yeah, Matt. Let me let me start with, with imports and and exports. I mean, I I think looking at monthly data is is probably too noisy. What I would tell you is imports were up in 2024, and exports were down in in in 2024. And if you look at what's being forecasted by RISI in 2025 is for imports to actually decrease by 5% and for exports to increase by 1%.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

I I suspect that's gonna be a pretty dynamic number as as as tariffs are are are felt across, across the across the industry. Like we mentioned in our comments, now a % of everything we make and more than 90% of everything we sell is is domestic in in in The US. And, and I suspect that we will have domestic customers looking, for local supply, during this during this time of uncertainty around tariffs. And and if anything, we could potentially benefit from, from from those, from those dynamics. So I think that's that's the first piece.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

The second piece around tariffs, just to clarify, we import about a hundred million. About 80,000,000 of that is from Canada. It's it's chemicals and pulp and some energy. The other, the other 20,000,000 comes from other parts of of of the world. I don't have a specific breakdown by country, but I do suspect that some some some supplies may come from from from China, whether they're MRO maintenance supplies.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

So that's that's the portion that we're we're we're watching and and making sure that we either have alternative supplies or or we negotiate very hard to mitigate those, those those cost increases.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Great. Thanks for that color. Next for me, just looking at Slide 16, it looks like there is a reasonably significant shift in paperboard sales quarter over quarter in terms of mix with folding carton up, foodservice down. Is that mostly a seasonal shift? Or were there some customer kind of wins and losses in there?

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Any kind of color would be helpful. And then as we think about the demand progression into q two, were you expecting volumes to be up? Any significant differences between folding carton and food service, outlooks to to call out there? Thanks.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

Yeah. I think the biggest driver there I'm assuming you're looking at q one of twenty four versus q one of twenty five. The big the big difference there is the inclusion of Augusta. And and so you then you can you can see that you can see the mix shift as Augusta was added to to to our to our fold. And so that's that's really the the the delta that you're seeing from from q one to q one.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Sorry. I just wanted to clarify. I was looking at, q four twenty four versus q one twenty five.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

Yep. I I see that. Okay. Got it. I don't have a particular so let's see here.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

We had a small decrease in sales. Looks like folding carton was relatively flat, and looks like, food service was, was was down. I suspect we had some pretty robust shipments at the end of the year, with with our food service customers. I there's not nothing in particular that would indicate any, any significant market related slowdown.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Okay. Thanks for that. Next for me, just regarding your exploration of options to expand your product offering, maybe starting with CRB, what would be your criteria for evaluating m and a if that's the road you choose to go down there?

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

Yeah. I mean, I I I I think more more broadly speaking, I think it has to be a good strategic fit. They have to be good good quality good quality assets that are a good fit for for our network. I I think most importantly, we we have to we have to believe that we can win in that space, that we have a right to win in that space. And so we'll be looking at both the market as well as any potential assets that that that may be available in the future.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Okay. And just around the lightweight folding carton product under development, What kind of costs would be associated with the paper machine upgrades you mentioned? And how should we think about that product and its share of your overall volumes, call it, late twenty twenty six or into 2027? Would you be targeting mostly existing customers with that product, or are there some new opportunities you could be chasing?

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

Yes. I I think any of those changes will be on our existing machines. We we're still working on on on potential projects on the way to get there, so I don't have a good, a good estimate for you in terms of capital required. May maybe more more broadly speaking, we we believe that, any any capital would would largely fit within our, within our stated capital range that we that we discussed previously, and this would be on our existing equipment with existing capacity. So this is more of a a a mix, a mix shift versus versus, versus incremental revenue growth.

Arsen Kitch
Arsen Kitch
CEO, President & Director at Clearwater Paper

So we would obviously be targeting working with our existing customers where they have a need for this type of product, and obviously, and obviously looking for for new customers that may be buying this product somewhere else.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Great. Thanks. And then, just a couple of cost related questions to finish. How significant would you expect the impact of cost savings to be sequentially in q two? Or maybe put differently, what kind of run rate of cost savings would you expect to exit the quarter at?

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

And then just around the synergies from Augusta, I recognize a big portion of that 40,000,000 to $50,000,000 is capturing volume and cost synergies there. But how much of of that 40 to 50 have you achieved today just given that the mill is now integrated into your system?

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

So I'll I'll take the first one, Matt. So I'd say for on a sequential basis, we'll see probably roughly two x the amount of savings in the second quarter that we saw in the first quarter. That's just more from a timing and execution of of the various initiatives across the organization. You'll see, some additional incremental benefit on a sequential basis as you're getting into the back half, and then it should probably start to plateau as you're exiting the year. That would be how I would think about, the ramp of of the fixed cost savings.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

That would be the the first one. And on the second piece, the the 40 to 50,000,000 on Augusta, it is by far volume synergies. Keep in mind that that assumption also is based off of what we'll call normalized EBITDA margins. So we are certainly seeing a good chunk of the benefit of the volume so far, but we also need to get back to what we'll consider a cross cycle margin in order to achieve that 40 to 50,000,000 of of synergies.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Great. Very helpful. Thanks for all the color. I'll turn it back.

Operator

Thank you. This does conclude today's conference call. You

Executives
    • Arsen Kitch
      Arsen Kitch
      CEO, President & Director
    • Sherri Baker
      Sherri Baker
      Senior VP & CFO
Analysts
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Key Takeaways

  • Clearwater delivered $30 million of adjusted EBITDA in Q1—at the high end of guidance—and saw net sales rise 46% to $378 million, driven by the Augusta acquisition and operational improvements.
  • The company eliminated over 200 positions (≈10% of roles) and is targeting $30–40 million of cost savings in 2025, with a 40–50 million annual run-rate and SG&A expected to drop to 6–7% of sales.
  • Industry shipments grew 2% in Q1, with demand forecast to rise 3–5% in 2025 and utilization improving to 88% (still below the 90–95% cross-cycle average); Clearwater expects ~5% sequential volume growth in Q2.
  • Strategic initiatives include launching BPI-certified compostable foodservice products by year-end, developing lightweight folding carton solutions by 2026, advancing poly-free barrier technologies, and evaluating expansion into CUK and CRB substrates.
  • Capital allocation priorities feature Q2 adjusted EBITDA guidance of $35–45 million, full-year revenue of $1.5–1.6 billion, total CapEx of $80–90 million, ongoing share repurchases ($11 million in Q1), and a target net leverage ratio of 1–2×.
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Earnings Conference Call
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