Clearwater Paper Q2 2025 Earnings Call Transcript

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July 29, 2025

Key Takeaways

  • Positive Sentiment: We delivered $40 million of adjusted EBITDA in Q2, with net sales up 14% year-over-year to $392 million driven by the Augusta acquisition despite a ~3% decline in market pricing.
  • Positive Sentiment: Fixed cost reduction initiatives lowered SG&A to 6.7% of net sales—down nearly 14% versus last year—and the company is on track to achieve $30 million to $40 million in annual savings.
  • Negative Sentiment: Industry conditions remain challenged, with SBS shipments down 4.6% year-over-year, utilization at 83.1%, and continued oversupply anticipated as new capacity ramps up.
  • Positive Sentiment: Strategic expansion plans include converting existing assets to produce CUK grade for $50 million over 18 months, exploring CRB acquisitions, and launching compostable and lightweight products by 2026.
  • Neutral Sentiment: Q3 EBITDA is forecast at $10 million to $20 million due to a scheduled Lewiston outage costing $23 million to $25 million plus 5% lower production, while full-year revenue guidance remains at $1.5 billion to $1.6 billion.
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Earnings Conference Call
Clearwater Paper Q2 2025
00:00 / 00:00

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Operator

Thank you for standing by. My name is Danica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Clearwater Paper Second 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 Thank you.

Operator

I would now like to turn the call over to Sloane Bohlen, Investor Relations. Please go ahead.

Sloan Bohlen
Sloan Bohlen
Investor Relations at Clearwater Paper

Thank you, Danica, and thank you all for joining Clearwater Paper's second 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 second quarter twenty twenty five are released shortly after today's market 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. Additionally, we will be hosting or we will be providing certain non GAAP financial information in this afternoon's discussion.

Sloan Bohlen
Sloan Bohlen
Investor Relations at Clearwater Paper

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 our supplemental information covering forward looking statements. Rather than reading this slide, we will incorporate it by reference into our prepared remarks. With that, let me turn the call over to Arsen.

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

Good afternoon and thank you for joining us today. We delivered a strong second quarter that was in line with our expectations. This was driven by higher production volumes, increased shipments and continued benefits from our fixed cost reduction efforts. Let me share a few highlights before diving into industry conditions and our strategic initiatives. We delivered $40,000,000 of adjusted EBITDA in the second quarter, which was right in the middle of our guidance range of 35,000,000 to $45,000,000 Our net sales were $392,000,000 up 14% versus prior year, primarily driven by the Augusta acquisition and partly offset by lower market driven pricing.

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

Net sales were also up 4% versus the first quarter of this year, primarily driven by increased shipments in our Foodservice business. Pricing remained relatively stable versus the first quarter, but was down approximately 3% versus prior year, reflecting broader market trends. We successfully completed the planned major maintenance outage at our Cypress Bend, Arkansas mill at a cost of approximately $9,000,000 which was in line with our estimates. As part of this outage, we completed the installation of a new emissions control device, replacing the original piece of equipment, which was installed in 1970s. This was a large capital project with a total cost of nearly $45,000,000 We continue to capture benefits from our fixed cost reduction efforts and are on track to deliver a 30,000,000 to $40,000,000 reduction this year versus 2024.

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

SG and A expenses were down nearly 14% versus last year to 6.7% of net sales, within our target range of 6% to 7%. This was driven by our cost reduction initiatives and the completion of the Augusta integration. And finally, we repurchased approximately $4,000,000 of outstanding shares for a total of $15,000,000 since the beginning of this year and $18,000,000 since the new authorization in November. Our team is doing a great job navigating challenging industry conditions by focusing on items within our control, namely driving operational execution, reducing cost and defending our market position. We believe that this discipline will translate to sustained improvements in performance and higher margins upon a recovery in our industry cycle.

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

Next, I'd like to provide some commentary on broader industry conditions. At a macro level, industry shipments of SBS slowed in Q2, decreasing by 4.6% versus the prior year and by 3.4% versus the first quarter based on AS and PA data. While shipments decreased, backlogs increased by 5% versus prior year and 14.2% versus the first quarter. These mixed demand signals are reflective of broader economic uncertainty that is also impacting other industry segments. Now let's turn to supply.

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

Industry utilization rates fell to 83.1% in the second quarter versus 84.7% in the first quarter based on the latest AFNPA data. This likely reflects the startup of new capacity in the second quarter by a competitor. We expect SBS industry utilization rates to remain well below historical norms in the coming quarters as this new capacity ramps up. As a reminder, we believe that in a balanced supply and demand environment, utilization rates should be between 9095%. While demand trends are mixed, we believe that we're in an industry down cycle primarily driven by oversupply.

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

It is difficult to predict when and how the industry will return to a mid cycle utilization level. We believe that there are a few different ways that industry utilization rates can improve in the medium to long term. First, RISI is projecting that net SBS capacity in The U. S. Will decrease by approximately 350,000 tonnes in 2026 versus 2025, which would drive utilization rates to around 91%.

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

This would move the industry back into a more balanced mid cycle position. Second, proposed tariffs, trade investigations and antidumping actions may also impact the viability of imports in our market. We estimate that approximately 700 to 800,000 tons of bleached paperboard and finished goods are imported to The U. S. Annually.

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

The shift to domestic supply by U. S. Customers could improve industry operating rates. We also believe that there's some swing SBS capacity in North America that can move to other grades, which could further alleviate the oversupply position that our industry is facing. A combination of these three variables would help return the industry to more sustainable operating rates and lead to a margin recovery.

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

Finally, we believe that current demand softness is temporary and not a permanent or secular decline. As a reminder, we're targeting 13% to 14% adjusted EBITDA margins across the cycle, which assumes that industry utilization rates recover to 90% to 95%. This would result in more than 1,300,000 tonnes of paperboard volume, which we estimate would translate into approximately 1,800,000,000.0 to $1,900,000,000 of revenue, around $250,000,000 of adjusted EBITDA and more than $100,000,000 of free cash flow per year. Let me take a moment to illustrate the operating and price leverage that exists in our system. A 100,000 ton increase in sales and production volumes would result in more than $50,000,000 of adjusted contribution margin with improved cost absorption.

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

A modest $50 per ton upward price movement would result in more than $60,000,000 of additional adjusted EBITDA. Let's shift gears and discuss our strategic initiatives and potential next steps. As we mentioned previously, we're focused on expanding our product offering to better serve our converter customers. Our goal is to continue to build on our position as a premier independent supplier of paperboard packaging products in North America. Today, we are the third largest producer of paperboard in North America, representing approximately 14% of a 10,000,000 ton market.

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

We are focused on SBS, or bleach paperboard, which makes up approximately half of the total paperboard market. We are looking at opportunities to expand into CUK, or unbleached paperboard, and CRB, or recycled paperboard. We believe that today, independent converters are underserved in these substrates by the large integrated players. We have an opening to participate in wind share in these parts of the market due to our lack of channel conflict and our history of prioritizing independent converters. Let me get a bit more specific on the work that we're doing.

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

We're nearing completion of market and engineering studies on the potential entry into CUK. I expect for us to make a decision regarding this potential investment by year end. At this stage, we're focused on creating CUK capability on one of our existing SBS machines and not expanding our overall capacity. This would enable us to swing production between high quality SBS and CUK on an existing machine based on market demand. This capability would also allow us to better serve our customers' needs, optimize our network and improve utilization across all our assets.

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

While capital estimates have not been finalized, we expect this investment would be in the $50,000,000 range and take around eighteen months to complete. In addition to adding CUK capabilities to an existing asset, we're also considering additional options to broaden our product offering, including entering into CRB. This would likely require an acquisition, either of existing CRB capacity or of a good candidate for conversion. In addition to our focus on these additional substrates, we're continuing to make progress on developing compostable and lightweight products. We received a BPI compostable certification at our Lewiston and Cypress Bend mills that cover most of our folding carton and foodservice grades.

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

In addition, we expect to have a lightweight offering in the market by 2026. We remain optimistic on the long term prospects of paperboard packaging and our position as a premier supplier of these products to North American converters. With that, let me turn the call over to Sherry to review our results in more detail.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

Thank you, Arsen. As we mentioned, we had a strong quarter with consolidated net income from continuing operations of $4,000,000 or $0.22 per diluted share. At the top line, we achieved net sales of $392,000,000 for the quarter, which represents a 4% increase compared to the first quarter of this year and a 14% increase compared to the second quarter of last year. This was driven by contributions from our Augusta acquisition, growth with existing and new customers, partly offset by lower market driven SBS pricing. As to Augusta, this will be the last quarter where year over year comparisons are impacted by the timing of our acquisition.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

As a reminder, we completed the Augusta acquisition on 05/01/2024. Moving to adjusted EBITDA, we delivered $40,000,000 which was at the midpoint of our guidance range of 35,000,000 to $45,000,000 This was up substantially compared to a negative $8,600,000 of adjusted EBITDA last year. The resulting adjusted EBITDA margin was 10.2% in the quarter. Improved cost performance and lower major maintenance expenses more than offset lower pricing and higher input costs. We are well on track to deliver the 30,000,000 to $40,000,000 of cost savings in 2025 as outlined earlier this year.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

As part of those efforts, we reduced our Q2 SG and A as a percent of net sales to 6.7% compared to 8.8% a year ago. We maintain our view that these efforts are sustainable and can produce annualized savings in the range of 40,000,000 to 50,000,000 These efforts, along with the cost and price leverage that exist in our business, drive our conviction in our long term adjusted EBITDA and free cash flow outlook. Shifting now to our balance sheet and capital allocation. Excluding our cash tax payment of $57,000,000 related to 2024, in Q2, we drove approximately $30,000,000 in operating cash flow, which was largely offset by capital spend as part of our projected 80,000,000 to $90,000,000 annual CapEx guidance. In the quarter, we continue to execute against our share buyback authorization of $100,000,000.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

We repurchased $4,000,000 of shares in q two and have repurchased $18,000,000 to date against the full authorization. We view share buybacks as a sound opportunistic investment at times when we believe our shares are undervalued and we are generating sufficient free cash flows. We do not plan to use debt to fund these buybacks because maintaining a strong balance sheet continues to be a top priority. Given the nearly $40,000,000 of planned major maintenance costs that we are anticipating in the second half of this year, continued investments into our assets, it is unlikely that we will generate sufficient free cash flows to fund material share repurchases for the balance of the year. I will close my remarks with an update on our view for 2025, including our forecast assumptions for the third quarter.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

We expect adjusted EBITDA in the range of 10,000,000 to $20,000,000 based on the following assumptions. First, we expect flat paperboard shipments as compared to the second quarter of twenty twenty five. Second, we expect that our Lewiston major maintenance outage will have a direct cost impact of $23,000,000 to $25,000,000 In addition, due to the outage, we will see approximately 5% lower product production volumes versus the first quarter, resulting in lower cost absorption. We expect to see similar benefits from our cost reduction spend that we saw in Q2. For the full year 2025, our key assumptions remain largely unchanged.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

Unchanged. We believe that our demand will be stable and recovering, but utilization rates will continue to be in the mid 80% range. We expect revenue to be in the 1,500,000,000.0 to $1,600,000,000 range. We are executing well against our fixed cost reduction plans and expect to deliver 30,000,000 to $40,000,000 of savings in 2025, resulting in a 40,000,000 to $50,000,000 annual run rate benefit. These cost savings will help to partly offset the expected price inflation headwinds.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

We currently expect full year tariff related impact across our direct and indirect spend of approximately 1,000,000 to $2,000,000 Our full year expectation for capital expenditures continues to be 80,000,000 to 90,000,000 of which we have incurred $56,000,000 year to date. Recall this year's CapEx program is approximately $10,000,000 higher than normal due to carryover spend from large projects being completed this year. Lastly, as I detailed earlier, we expect 45,000,000 to $50,000,000 in direct major maintenance costs across our three mill network. 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're now focused on strengthening our position as an independent supplier of paperboard packaging products to North American converters. We're looking at opportunities to expand our product portfolio, which may include new applications for our 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. And 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. I would also like to thank our customers for putting their trust in us and our shareholders for their continued interest. With that, we'll open it up to your questions.

Operator

Your first question comes from Matthew McKellar with RBC. Please go ahead.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Hi, good afternoon. Thanks for taking my questions. Good afternoon, Matt. Just first here, it looks like you're expecting modest growth at an industry level in 2025, which I guess would imply a better back half for demand. You seeing that year over year improvement in demand in the market today?

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

And is the uptick in unmade NCS orders a signal of that? And then I guess more broadly, I guess the demand outlook has softened a little bit. Your expectations around net import seems to soften a little bit as well. Could you just walk us through what's changed around your outlook at an industry level since your last update? Thanks.

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

That's a great question, Matt. So I think we're getting mixed demand signals in Q2. So if you look at our data, our shipments were up by about 5% versus Q1, and our backlogs are stable. Industry shipments were down sequentially, and they were down year over year, and they're down year to date. But backlogs are up 14% versus the first quarter.

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

So a lot of mixed signals. What we are hearing from our customers that there's there really isn't a serious demand issue. There's just some near term economic uncertainty that that's really hard to, hard to decipher. We're we're we're comfortable with where we are. I know some of the industry forecasts have come down a bit, this year from, call it, you know, maybe mid single digits to to low single digits, maybe even below 1%.

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

But it's it's it's hard for me to point to a to a specific driver of of of these of these forecast, changes. From a, from an import, perspective, you know, as we mentioned before, our our industry, imports about five or 600,000 tons of bleach paperboard and probably another couple 100,000 tons of finished goods and exports over 800,000 tons. You know, I think there is a, there's a scenario where, these tariffs and trade investigations and antidumping duties could could impact that those those imports. That could import it could impact those seven or 800,000 tons of of imports and could drive up domestic capacity utilization.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Are you at all surprised that imports haven't dropped a little further just given how much, you know, change in FX we've seen over the past while here, probably in particular?

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

That so that's so tariffs and and FX changes. So it it I it's it's hard it's hard to tell what's happening in in in those markets. It represents, call it, 10%, and we're just talking bleached paperboard imports. It's it's hard it's hard to know what, what the importers are are thinking and and what what their plans are. But I do think between tariffs and and a and a, an exchange rate, an unfavorable exchange rate for them, I'd be surprised if there is no impact.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Thanks. That's fair. I guess next for me, just thinking sequentially, did $40,000,000 in Q2 for EBITDA. Maintenance costs at Lewiston, $25,000,000 call it. That bridge is into the midpoint of the range.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

You, of course, would have had, I think it was $9,000,000 you called out, maintenance costs at Cypress spend in Q2. I guess I would have thought you'd have a little bit more benefit from cost reduction efforts in the Q3 as well. So just thinking about that Q3 guide, are the other moving parts here just that lower production and fixed cost absorption issue you called out that are in the 23,000,025 million dollars of costs quoted for Lewiston? Or what are the other kind of incremental pressures here on either price or cost that are sort of embedded in your outlook? Thanks.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

Yeah. That's you've you've got it exactly right. So you've got roughly, call it, 15,000,000 of sequential increase in in outage expense. We did not call out the, absorption impact, but we expect to see about 5% lower production volume. So that would be the other piece that you would have to factor in.

Sherri Baker
Sherri Baker
Senior VP & CFO at Clearwater Paper

And then the third piece is a modest amount of tariff impact. So those would be the three big pieces.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Okay. And aside from tariffs, really nothing else around incremental pressure on price or other costs that's worth calling out here?

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

From a price perspective, we saw stable Q1 to Q2 price. We tend not to comment on future looking prices.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Okay. How do you think about the most important swing factors that could either take you to the top or bottom end of that range? Is that is that mostly Lewiston start up, are there other factors you'd be looking to there?

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

I think Lewiston, the the Lewiston outage startup, it's this is a large outage that that, frankly, last year cost us more than more than we expected. So there's a lot of focus on, on executing that outage well and starting up well. You know, demand, where we're counting on demand demand being stable, there's you know, I I don't see I don't see any reason why that would not be, why would why that would not be the case. And, of course, we're still watching the impact of the new capacity coming online from a competitor.

Matt McKellar
Matt McKellar
Vice President at RBC Capital Markets

Great. And then last for me, you're guiding to flat shipments sequentially, but still capacity utilization of around 85% for 2025. I guess based on year to date results of that guide, is it fair for us to assume that shipments could be up a little bit sequentially in Q4?

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

Yes. I think if you look at our capacity utilization, we have two major outages in Q3 and Q4. So I think that drives down capacity utilization. We we built some inventories. You can tell from our balance sheet in in preparation, for for the Lewiston outage.

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

So q two to q three, we're expecting flat. Q four, sometimes there's some seasonality impact, maybe slightly lower shipments, but that's varied over the years.

Operator

Thank you, everyone. That concludes our Q and A. I appreciate you all joining. You may now disconnect.

Executives
    • Sloan Bohlen
      Sloan Bohlen
      Investor Relations
    • Arsen Kitch
      Arsen Kitch
      CEO, President & Director
    • Sherri Baker
      Sherri Baker
      Senior VP & CFO
Analysts
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