Q3 2022 Clearwater Paper Corp Earnings Call
Yeah.
Good afternoon. My name is Dennis and I will be your conference operator today at this time I would like to welcome everyone to the Clearwater paper third quarter 2022 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.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad to withdraw your question Press Star one again.
I would now like to turn the conference over to Sloan Bohlen Investor Relations. Please go ahead.
Thank you Dennis good afternoon, and thank you for joining Clearwater papers third quarter 2022 earnings Conference call. Joining me on the call today are some catch president and Chief Executive Officer, and Mike Murphy, Chief Financial Officer financial results for the third quarter 2022 were released shortly after today's market closed along with the filing of our 10-Q.
You will find a presentation of supplemental information, including a slide providing the company's current outlet posted on the Investor Relations page of our website at Clearwater paper Dot 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.
All information provided on our website.
Please note slide two of our supplement supplemental information covering forward looking statements rather than rereading. This slide we are going to incorporate it by reference in our prepared remarks with that let me turn the call over to art.
Good afternoon, and thank you for joining us today before reviewing our third quarter earnings I wanted to wish everyone, a safe and enjoyable Halloween.
Now please turn to slide three we had a great third quarter, which exceeded our expectations on a consolidated basis, we reported net sales of $539 million, which was 20% higher than prior year.
Adjusted net income was $31 million and adjusted EBITDA was $77 million.
Let me share a few highlights.
Both paperboard and tissue demand were strong with increased pricing in both businesses.
<unk> remained a headwind across most of our input costs, particularly in pulp fiber chemicals and energy.
In addition to price increases we continue to improve our operating performance to help mitigate the impact of rising costs.
We reduced net debt by 6 million in the quarter and $106 million in the first nine months of the year.
We also repurchased $25 million of our outstanding notes due in 2025.
And finally, we repurchased $1 million of shares during the quarter for a total of $5 million in the first nine months of the year.
We have $25 million remaining on our buyback authorization.
With that lets discuss some additional details about both of our businesses.
Let's start on slide four with a few comments on our paperboard business.
The industry continues to experience strong demand with higher SBS pricing as reported by Risi.
Since the beginning of 2021 Risi has reported price increases for the U S market that totaled $500 per ton.
250 of increases were reported in 2022, including $20 per ton in September and $30 in October .
As a reminder, it typically takes us up to two quarters for price changes to be reflected in our financials.
It is also worth noting that our portfolio includes additional grades and price mechanisms that are not reflected in <unk> reporting.
We're monitoring economic trends given concerns about a global economic slowdown.
Our backlogs remained stable with continued strong demand.
Even with the economic uncertainty we continue to believe that the overall industry demand is robust as evidenced by Risi reported price increases a few weeks ago.
Now please turn to slide five for some additional comments on our tissue business.
The underlying operating performance of our tissue business was very strong and we continue to observe consumers shifting their demand to where private branded tissue products to help offset inflation.
Private branded dollar share of the tissue market climbed to over 35% in September which is an all time high.
We shipped $12 6 million cases in the third quarter matching our second quarter shipments and slightly above the third quarter of last year.
We believe that we're well positioned to support our customers and their shoppers during this time of economic uncertainty.
We recognize that inflation has outpaced price increases in tissue in 2021, and 2022 and were diligently working to recover our margins were.
We're implementing the recently announced price increases that will provide additional benefits in 2023.
And are working diligently to continuously lower our cost position.
As discussed in previous quarters, both of our businesses continued to see substantial inflation in the third quarter.
In addition to price increases we continued to focus on improving the operating and supply chain performance.
Our focus on pricing and productivity is helping to offset the inflationary headwinds that we cannot control.
I'll now ask Mike to discuss our third quarter results in more detail.
Thank you Erickson.
Please turn to slide six.
The consolidated company summary income statement shows third quarter for 2022 and 2021.
In the third quarter 2022, our net income was $20 6 million.
Net income per diluted share was $1 21.
And adjusted net income per diluted share was $1 83.
We exceeded our third quarter adjusted EBITDA expectations with solid operating performance strong pricing lower than anticipated natural gas prices and deferred maintenance expenses.
In the third quarter, we effectively settled and open IRS audit, which resulted in the reversal of certain net tax credits related to our Lewiston pulp investment from five years ago, and increasing our taxes by approximately $8 million in the quarter.
The corresponding segment results are on slide seven.
Slide eight is the year over year adjusted EBITDA comparison for our pulp and paperboard business in the third quarter.
We benefited from our previously announced price increases, which were partially offset by higher inflation across most of our spend categories.
You will recall in the third quarter of 2021, we took a major maintenance outage that impacted adjusted EBITDA by $5 million.
There was no outage in the third quarter of 2022.
You can review a comparison of our third quarter 2022 performance relative to our second quarter on slide 14.
Please turn to slide nine where we provide a year over year comparison for our tissue business in the third quarter.
In addition to the implemented price increases.
We realized some mixed benefit in the quarter.
Our production was higher than last year, when we were curtailing production to reduce inventory and meet demand and our sales were modestly higher than last year. These.
These benefits were largely offset by higher costs due to inflationary pressures.
You can review a comparison of our third quarter 2022 performance relative to the second quarter on slide 15.
Slide 10 outlines our capital structure.
Our liquidity was $297 million at the end of the third quarter, we reduced net debt by $6 million with our free cash flows in the quarter.
We utilized free cash flows and liquidity to repurchase $25 million of our notes that mature in 2025, reducing that principal amount to $270 million.
Additionally, we used approximately $1 million to repurchased 30000 shares for approximately $34 a share.
This increases the total repurchased under our existing stock repurchase program in 2022, approximately $5 million.
With 150000 shares purchased at an average price just about $33 per share.
We have $25 million remaining on the authorization.
We updated our target capital expenditures to $60 million to $70 million per year absent major projects to reflect the impacts of inflation.
Our net debt to adjusted EBITDA at the end of the third quarter of 2022 was two eight times and net debt was 494 million.
<unk> S&P raised our outlook from stable to positive during the third quarter.
Slide 11 provides a perspective on our fourth quarter 2022 outlook and the resulting full year guidance.
Our expectations assume that we continue to operate our assets without significant disruptions.
We want to reiterate that our price realization and inflation will continue to be difficult to predict.
Our current expectation for the fourth quarter as adjusted EBITDA of 38 million to $48 million the midpoint of that range for the fourth quarter is $34 million lower than the third quarter adjusted EBITDA of $77 million.
This is largely due to our planned major maintenance outage as a reminder, we had no major maintenance outages and paperboard in the third quarter and expect that the fourth quarter outage will impact adjusted EBITDA by 21% to $25 million.
This is modestly higher impact than previous expectations.
Previously announced price increases are expected to possibly impact us during the quarter by $5 million to $9 million.
We expect inflation, particularly pulp fiber chemicals and energy to cost us an additional 7% to $11 million.
We experienced production issues at our paperboard mills in October reducing both our pulp and paperboard production and impacting EBIT by approximately $5 million.
Additionally, the fourth quarter tends to be seasonally soft for tissue volumes with retailers focusing on holiday items in their stores.
Our adjusted EBITDA for the first three quarters of 2022 was $199 million and when combined with our fourth quarter guidance.
We expect the full year, adjusted EBITDA to be $237 million to $247 million significantly higher than our adjusted EBITDA of $175 million in 2021.
Here are some of those building blocks to compare expected 2022 performance relative to last year.
We expect our full year pricing benefit of 274 $278 million.
This is near the high end of our prior guidance.
Modest cost inflation, including pulp fiber freight chemicals, and energy is expected to be 187% to $191 million, which is at the low end of our previous expectations.
We expect labor inflation net of cost mitigation efforts to be approximately $10 million.
We expect growth in converted tissue volume however, the volume benefits will largely be offset by higher supply chain costs.
In our paperboard business planned major maintenance outages or expect to have a slightly higher financial impact.
We're also anticipating the following for 2022 interest expense between $34 million to $36 million depreciation and amortization between 101% to $104 million.
Capital expenditures of around $30 million to $40 million. This is lower than our expected targeted expenditure levels of $60 million to $70 million.
Over the last three years, we've cumulatively underspent, our target by over $60 million and you should expect that we will spend over the next several years above that targeted $60 million to $70 million range.
We expect to update you during the fourth quarter earnings call on the timing at the Lewiston recovery boiler tube replacement project, which is expected to require a capital expense approaching $40 million.
And an estimated adjusted EBITDA impact of $30 million.
We expect to spend $5 million out of the $40 million capital expenditures in 2022.
Our effective tax rate for the full year is expected to be 34% versus the typical rate of 26% to 27%.
That rate is being impacted by the reversal of next net tax credits taken in 2017 through 2019. Additionally.
Additionally, our current cash expectations for future years assumes that cash taxes will exceed our statutory taxes test we benefited from accelerated depreciation related to the Shelby expansion and Lewiston pulp optimization projects let.
Let me turn the call back over to Arthur Thanks, Mike I want to spend a few minutes discussing our key priorities for shareholder value creation since.
Since becoming CEO in 2020, we are focused on generating free cash flow deleveraging, our balance sheet and improving financial flexibility.
We have recently achieved our leverage target and believe that now is a good time to share our capital allocation framework.
This framework has been shaped by investor and analyst and put together with a robust dialogue with our board.
Slide 12 offers a visual depiction of our framework, which is prioritized from top to bottom.
Our first priority is to sustain our asset base, which we believe requires an average of $60 million to $70 million of capital expenditures annually, excluding large projects.
We expect to invest above that target level in the near to medium term.
We intend to maintain a balance sheet that provides us with financial flexibility.
While we believe that our long term leverage ratio of two five as appropriate. We may continue to deleverage further to create greater financial flexibility to take advantage of investment opportunities that will create shareholder value in a potential down cycle.
Third we will evaluate value accretive internal and external investments these investments should be strategic in nature, and clearly add value by realizing near term cash flow benefits.
Given the current business environment, we're likely to prioritize incremental cost reduction projects and add on acquisitions versus large greenfield or brownfield capacity expansions.
Fourth we expect to buy back shares to mitigate the impact of dilution from share grants to our employees.
We will also be opportunistic with additional share repurchases, depending on our share level of share price levels.
I would like to emphasize that we will continue to be disciplined allocators of capital and we will seek out the right opportunities to create value across both of our businesses.
In closing I would like to thank our people for all that they do to keep our operations running safely and efficiently and for servicing our customers I also want to thank our shareholders for their continued support and our customers for placing their trust in us.
With that we will end our prepared remarks and take your questions.
At this time I would like to remind everyone in order to ask a question simply press Star then the number one on your telephone keypad.
Your first question is from the line of Adam Josephson with Keybanc capital markets. Please go ahead.
Our said, Mike good afternoon, and congratulations on another really good quarter.
Thank you.
At our center, Mike just on the third third quarter performance. Obviously, you topped your EBITDA guidance I assume that was mostly or entirely related to higher paperboard prices and demand and I assume the same goes for the implied full year guidance going up by call. It 10 ish million.
Right in thinking that or or if not what were the sources of upside relative to your EBITDA guidance in the quarter.
So it was a range of things Adam.
First and foremost we had really good operational performance relative to our expectations.
Tissue performed very well from a production standpoint, and paperboard did as well so I'd say that was the biggest lever relative to guidance.
Pricing across the portfolio was probably the second biggest lever for the outperformance.
Third one was natural gas prices, which has been pretty difficult to predict at three months ago.
Ford curves looked pretty ugly.
It came down since then that would have been the third lever and then we also noted that we deferred some of our planned maintenance expenses in the quarter to the future. So those would be the four primary buckets Adam.
Where we beat relative to our guidance.
Thank you Mike I appreciate that the production issues in October you mentioned, the pulp and paperboard can you be any more specific as to what that was and I assume that youre not expecting those to persist into November .
And we're going to we're not going to get into the details, but they impacted both mills.
Production in one of the mills in paperboard production at the other mill.
We're still frankly working through those issues. So $5 million is an impact that we expect.
Across across the quarter, although we think the majority of that impact happened in the month of in the month of October we're working through them.
Something we'll get through and we will get back on get back on track, but we thought it was important to call. It out here early as it is having an impact on our quarter.
I appreciate that are just a couple more from me one is.
Towards the end you mentioned youre not inclined toward any large greenfield capacity additions as part of your.
Cap allocation strategy.
Thanks to the obvious question now you are pretty much at capacity in your paperboard business. I mean, you are producing 800000 tons a year, which is precisely what your paperboard capacity is.
If youre not going to invest in new capacity.
Would you be able to grow I mean, where do you have the capability to grow in your paperboard business or you add capacity, how do you think about growing that business in the future absent any major capacity additions.
Saddam Youre right.
We've been at capacity and we've been operating full for a while.
Two ways two ways to do that in paperboard I think the first one is making I would say medium sized investments in the mills.
Two to improve throughput and increase increase production thats not any paper machine, that's incremental production to to drive some to drive some growth and then we'd be looking externally for acquisition opportunities and we're not going to get into a lot of details of what those look like.
We certainly see potential in some options on the horizon for us to pursue growth through through acquisitions.
I appreciate that and just one last related one which is that theres been a lot of talk about all the STB capacity additions that have been announced in Asia, and Europe and in the U S for that matter and even some of the U S. Producers are running FPP trials, how are you thinking about.
The growth in SPD import stay FCB capacity additions that have been announced and what long term impact that might have on your domestic SBS business.
There has been a lot of discussions about Feba recently, so FTB has been in this market for for many years. We believe there is about <unk> 5 million tons of imports and thats been relatively stable for some for some period of time.
Through this through this last couple of years, a lot of our customers recognize the benefits of having a domestic supply chain. So I think that's part of that's part of the answer and the second part is <unk>.
This is still predominantly an SBS market.
And.
Phebe applications require different type it require different converting processes and for converters to change a change they run their around their operations. So at least I think in the near to medium term.
Don't know exactly how those how the capacity additions will impact.
Imports into the U S, but they've been around for a while I think domestic FTB production potentially offset some of those some of those imports, but we're working through various scenarios and planning for how we would react and what we would do.
Okay. Thanks, so much Harrison.
Your next question is from the line of Paul Quinn with RBC. Please go ahead.
Yes, thanks, very much guys.
Wondering about in terms of your Q4 guidance have you got.
Are you assuming that the price increases that youre seeing on both the paperboard and theyre in the tissue side are going to offset the contemplation youre, saying.
No I think we have a little bit of a timing issue call. So thats a good question our price increases are going to be just below what we think our raw material cost inflation is going to be.
So pricing give you a range and this is sequential.
$5 million to $9 million, and then from a raw material and freight inputs, that's going to be up 7% to $11 million. So a mild margin compression that we're going to see from the third quarter to the fourth quarter.
Okay. That's helpful. And then and then on the cost of sales are you seeing any relief on freight yet.
Great Yes.
We saw that a little bit in the third quarter heading into the fourth quarter.
So I think Thats one area that.
We're seeing a positive comparison at least on a sequential basis.
And with the SEC you are starting to see something on pulp, but nothing on energy yet.
Yes, I think on pulp it's.
It's a tough one because thats.
But we saw a little bit of easing on softwood very minor.
Im here into October .
Eucalyptus is holding is holding pretty firm.
I think if you look back at to forecast into the second half of this year.
The forecast for indicating an easing in pulp prices.
We obviously haven't seen that.
If you look at the forecast into 'twenty three I think most of them are assuming.
Decreases in pulp pricing, but at this point I think we've been wrong for several years, but we're.
At least as good to see some easing on softwood, we're hoping we're at peak and we will see some relief in the coming quarters.
Okay, and then just one major maintenance I mean, you'll see that sort of that slide at the end I'm, saying $35 million to $40 million in 'twenty three but it could also be postponed postponed due to 24, how are you thinking about 'twenty four.
Or are we due for another zero zero ultra maintenance a year.
Sure. Good question, Paul So slide 20, just to clarify.
Two separate potential outages in 2023.
So we've called out one thats in the fourth quarter Thats about a $5 million outage.
The other one and this is related to Lewiston and this is the screen tube replacement project.
On this front, Paul we need to get into our outage in Lewiston for the fourth quarter here of 2022, which is going to commence in about a week.
And as we finish up that outage will be in a much better position to choose what timeframe, we're going to take the 2023 or 'twenty four outage. So this is either late in 2023 or early in 2024, depending upon.
Both the state of the screen tubes availability of contractors and the availability of materials.
Okay. That's great. So assuming that you are.
Youre going to put through to the screen Tees in 'twenty three what is the preliminary 24 look like does that cover off limits in for a year and then youre back just basically on cyber threat.
Too early to speculate pilot that we will anticipate your question when we're ready to give you a guidance on the next outage at Lewiston once we get through this one here in November .
Okay Fair enough, that's all I had thanks.
Thanks.
Your next question is from the line of Mark <unk> with BMO capital markets. Please go ahead.
Thanks, Good morning, or good afternoon, Harrison and Mike.
Good afternoon.
Kind of a detail question.
On slide number 11.
Got it.
A major maintenance outage at Lewiston.
Listed as is 19% to $23 million during the commentary I heard that number go up by a couple of million Bucks can you just.
Can you help us with that.
Yeah. Good question, there I would have it at the higher end they are closer to that 23 of the major maintenance outage.
Okay.
Right and then.
I think you've already talked about sort of what we should expect in pricing in terms of kind of $5 million to $9 million quarter to quarter is that correct across both of the businesses.
Correct.
Okay and is there anything Mike outstanding right now Michael worsen in terms of any contract renewals that you are working on.
Alright, I think we've got through the material ones in 'twenty two I think.
As you look at as we look at 'twenty three it's a more normal year for us.
So.
Normal risk that we have going into any year and frankly, we feel pretty good about about next year I think we have opportunities to <unk>.
To both optimize and grow our grow our business in tissue.
Okay.
Over the last couple of years, you've been quite clear about sort of the the need for kind of change in the tissue market.
Essentially some consolidation what's your what's your read on the situation right now.
Okay.
We still stand by those comments.
We still live in consolidation is still needed to improve.
<unk> scale and cost and returns.
From our from our standpoint.
We want to make sure we have a strong balance sheet.
So we can.
We can play whatever role we need to play in that consolidation.
Right now margins are margins are depressed.
And the tissue business and capital markets are somewhat turbulent.
I think we're well positioned to play to play a role in that in that consolidation.
On both sides.
Okay, Alright, and then last one for me just when you talked about sort of.
Investing kind of incrementally on the two sides of your business, how do you think about sort of <unk>.
<unk> versus packaging.
And then in packaging.
You've historically been non integrated in that business, maybe just any thoughts about it.
Investing downstream in packaging.
So the first part of your question I think we will will be.
<unk> bye bye value creation, and we will be opportunistic. So I think we're willing to invest in both sides of our business. If we can create value.
In terms of packaging, you're right we've been we've been independent.
That's part of our value proposition to our customers is that we are focused on them.
Through through the ups and downs of the.
The paperboard market.
We have and will continue to evaluate if thats still the right strategy and in the long run, but thats. The strategy that we've had now for since we've since we've become a public company.
In 2000, 2008, and Thats part of our value proposition, but certainly we've been looking at all options in the coming years to make sure that all of our strategies don't make sense.
Okay and that hurts.
Just finally, you talked about the potential to look at kind of medium sized boats on the mill side in SBS.
Would it be fair to assume that that could involve sort of.
Mills that are.
Could undergo conversions or might be kind of in the midst of conversions.
No I think we'll be open minded and we will look at opportunities, where where we think we can strategically makes sense for us.
The quality of the asset is there or has the potential to be there.
And the third part is creating optionality for us down the line to create a I would say a more scaled.
And a better paperboard business, that's more relevant to our customers.
Okay, Alright sounds good I'll turn it over thank you.
Today's final question is a follow up from the line of Adam Josephson with Keybanc capital markets. Please go ahead.
Thanks, Mike I appreciate it just to follow up on one of Mark's questions about.
In which segment you'd be more inclined to invest in the years to come.
I understand looking at value awesome, but all else equal would you be more inclined to invest in paperboard just.
Given the superior market structure or.
Not necessarily for any number of reasons.
So Adam it's a good question I think there's a number of factors involved I mean, the first obvious one is value creation potential right.
And then looking at strategic fit looking looking at quality of assets.
It's hard to say that we can find more opportunities on one side of the business or the other I think it's going to be situation specific.
As we look at potential as we look at the potential for growth you are absolutely right.
We've enjoyed.
Great.
We've enjoyed good paperboard margins over the years and tissue tissues more challenged but I think each situation is going to be it's going to be unique I think will continue to be opportunistic and we'll look at this.
Both sides of the business.
No I appreciate that Mike in terms of the Capex you mentioned that in the next few years, you'll be spending above that 60% to $70 million just Kevin.
The degree to which you've Underspent in recent years can you give me some order of magnitude you rough expectations over the next 234 years, whatever you might be thinking along those lines.
I think the right way to model. It Adam is just on average to be in that $60 million to $70 million Zip code.
Second the understand over the last few years you project that forward is something.
That will be a bit higher.
When you look at a company like ours were rather small and so things become a little more episodic. So as an example, the recovery boiler number five at Lewiston that project, that's going to add to that regular way capital expenditures that we have and thats something that you should incorporate into your models here for the next couple of years.
Yes, no I appreciate that Mike and just thinking about next year, obviously, we don't know the timing.
Of the major maintenance next year, whether it'll be all next year or in 2024.
That aside is there anything that we ought to be aware of as we're thinking about <unk>.
<unk> 23 versus <unk> 22 at this admittedly early stage.
So we want to shy away from giving guidance for 2020, I think what we'll look to do at the year end earnings call in February it start, giving you those building blocks like we have customarily done but well.
I'll hold off until then.
Yes, no sorry, and just one last point.
A clarification on the price mix guidance for the year. The increase of I think it went up by $11 million was that all paperboard and was that all the.
The September October SBS increase or was that also partly related to two previous price increases.
So it's both businesses were implementing our previously announced price increases in both tissue and paperboard timing, we mentioned on the call. We'll see we'll see benefits from from the tissue price increases going into going into next year. I think if you look at the average selling price on tissue that has.
<unk> been on an upswing. So we are we're optimistic in our ability to recover those those margins from from inflation.
Tissue, although we still have we still have a ways to go.
Yes.
And actually one last one before I, let you go as you mentioned private brand market share is now above 35% and obviously consumer buying behaviors being affected can you just give us a little more.
Insight into what you see happening and how high perhaps that private brand market share could go given the.
Pressure that some consumers are under.
Yes, so we've seen some we've seen private brands gained share even when the economy was was in really good shape.
And so but we do think there is an acceleration that's happening here with that with inflation and the economic uncertainty and what we've said previously if you look at some some European markets private Bryan shares north of 50% and there are categories in the North American markets.
On the grocery aisles that are north of north of 50% as well.
Do I think we'll get to 50% here in the near term.
A bit of a stretch, but I think there's still plenty of runway to gain for private brands for private brands to gain share. We have also noticed consumers.
Gravitating towards <unk>.
Lower cost items smaller smaller pack sizes. So some of that is happening.
But I think that remains to be seen exactly how consumers behave.
And heading into next year.
Thanks, so much Harrison.
Thank you all for joining this does conclude today's conference call you may now disconnect.
Please wait the conference will begin shortly.
Okay.
Sure.
Okay.
Yes.
Understood.
Yes.
Okay.
Okay.
Yes.
Okay.
Yes.