Q4 2022 Clearwater Paper Corp Earnings Call

Good afternoon, and welcome to Clearwater paper Corporation's fourth quarter and full year 2022 earnings conference call.

All participants are in a listen only mode. After the speaker's presentation, we will conduct a question answer session.

Ask a question you will need to press star followed by the number one on your telephone keypad.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Sloan Bohlen.

Investor Relations. Thank you. Please go ahead.

Thank you Julien good afternoon, and thank you for joining Clearwater paper's fourth 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 fourth quarter of 2022 were released shortly after today's market close along with the filing of our 10-K you will find the.

<unk> of supplemental information, including a slide providing the company's current outlook 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 supplemental information.

Provided on our website. Please note that slide two of our supplemental information covering the forward looking statements rather than rereading. This slide we were going to incorporate it by reference into our prepared remarks and with that let me turn the call over to art.

Good afternoon, and thank you for joining US today. Please turn to slide three we had a strong year in 2022, but a challenging fourth quarter due to operational and weather related issues.

We reported net sales of $527 million in the fourth quarter and $2 1 billion for 2022.

Adjusted EBITDA was $28 million in the fourth quarter and $227 million for 2022, let.

Let me share a few highlights.

Prices increased in both paperboard and tissue during the quarter and the year.

Private branded tissue share strengthened as consumers sought to offset inflation.

Paperboard demand had a robust year, but moderated late in the fourth quarter due to customers managing inventories and a return to more normal seasonal patterns.

While inflation started to moderate it was still a headwind in the fourth quarter.

We completed a major maintenance outage at our Lewiston site, but experienced several operational and weather related issues during the quarter.

We reduced net debt by $3 million in the quarter and $108 million in 2022 for a total of $377 million reduction since 2020.

And finally, we repurchased $5 million of shares in 2022, but did not buy back shares in the fourth quarter, we have $25 million remaining on our buyback authorization.

With that lets discuss some additional details about both of our businesses.

Yes.

Let's start on slide four with a few comments on our paperboard business. Since early 2021, the industry has experienced high operating rates with strong demand.

As a result, risi reported price increases for the U S market that totaled $500 per ton over the last two years, including a $30 increase in October of 2022.

We continue to implement our previously announced price increases in the fourth quarter.

And based on that we expect sequential improvements into early 2023.

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 product portfolio includes additional grades and price mechanisms that are not reflected in <unk> reporting.

We experienced a moderation in demand late in the fourth quarter, which we believe was due to customers managing inventories after a strong year and a return to more normal seasonal patterns.

Prior to Covid. It was typical to see holiday inventory builds take place earlier in the year with a slowdown in activity during the fourth quarter.

Converters have historically used this slower time of the year to reduce inventories and take holiday related downtime.

We believe that we're seeing a return to these more normal patterns as customers are becoming more comfortable with a certainty of supply.

From a consumer demand perspective, we believe that paperboard is economically resilient given the end use of the products.

Our portfolio in particular, skus more heavily towards consumer applications, such as food packaging pharmaceuticals and cosmetics.

In addition, we expect the shift to paper based products to continue and we're optimistic that demand for paperboard will continue to be healthy.

Let's turn to our operating results in the fourth quarter.

We completed the major maintenance outage at our Lewiston mill.

The good news is that we believe that we will not need to take the next outage until early 2024.

Unfortunately, we experienced several setbacks during the outage and startup that resulted in approximately $5 million of negative impact to paperboard adjusted EBITDA versus our expectations.

Additionally, we experienced other operational and weather related issues, primarily at our Cypress Bend mill that continued into January .

These issues impacted our adjusted EBITDA during the fourth quarter by approximately $19 million.

We have now put these issues behind us and are taking the opportunity to capture lessons learned to improve our processes in the future.

I appreciate our teams are addressing these unexpected challenges under difficult conditions through the holidays.

Now please turn to slide five for some additional comments on our tissue business.

The underlying performance was strong and we continue to observe consumers shifting their demands towards private branded tissue products to help offset the impacts of inflation.

Private branded dollar of that market share.

Share of the market continues to decline and is approaching 36% based on IRI panel that.

We shipped 13 million cases in the fourth quarter, which was 600000 cases higher than the fourth quarter of 2021 and exceeded our third quarter shipments of $12 6 million cases.

The Lewiston Paperboard mill outage issues also negatively impacted tissue adjusted EBITDA by approximately $2 million in the quarter.

As we previously mentioned cost inflation has outpaced price increases in our tissue business over the past two years.

Leading to margin compression.

Our team is focused on recovering margins through cost reduction initiatives and implementing previously announced price increases we.

We did see higher pricing in the fourth quarter and expect additional sequential price benefits into early 2023.

We're encouraged by the trends that we're seeing and expect to continued strengthening of our tissue business. This year.

I will now ask Mike to discuss our fourth quarter results in more detail.

Thank you <unk>.

Please turn to slide six that consolidated company summary income statement shows fourth quarter and full year for 2022 and 2021.

In the fourth quarter 2022, we recorded a net loss of $6 million net.

Net loss per diluted share of <unk> 34.

And adjusted net loss per diluted share was <unk> 30.

Our full year net income was $46 million net income per share diluted share was $2 68.

And adjusted net income per diluted share was $3 63.

Our adjusted net income per share in 2022 represents a 250% increase relative to the $1 <unk> in 2021.

The corresponding segment results are on slide seven.

Slide eight is a year over year segment income and adjusted EBITDA comparison for our pulp and paperboard business in the fourth quarter.

We benefited from our previously announced price increases.

You'll recall in the fourth quarter of 2021, we had no major maintenance outages, whereas in 2022, we experienced a major maintenance outage impact of $28 million comprised of approximately $8 million in volume and $20 million in cost.

Additionally, our $19 million of operational issues impacted volume by $11 million in cost by $8 million.

Costs were also higher due to impacts of raw material freight and labor inflation via.

You can review a comparison of our fourth quarter 2022 performance relative to third quarter on slide 16.

On slide nine we have a comparison of full year 2022 results relative to 2021 for pulp and paperboard.

Pricing and mix had the largest impact.

Operational issues negatively impacted results by $19 million with an additional $7 million impact from major maintenance outages.

Collectively this $26 million impact was made up of $16 million and lower volume and $10 million and higher costs. The.

The remainder of cost changes were primarily driven by raw material freight and labor cost inflation.

Please turn to slide 10, where we provide a year over year comparison for our tissue business in the fourth quarter and.

In addition to the implemented price increases we realized some mix benefit our sales volume of converted products were higher than last year. These.

These benefits were largely offset by higher costs due to inflationary pressures you can review a comparison of our fourth quarter of 2022 performance relative to the third quarter on slide 17.

On slide 11, we have a comparison of full year 2022 relative to 2021 for tissue.

The benefits of price and mix together with higher volumes were largely offset by raw material freight and cost inflation.

Slide 12 outlines our capital structure.

<unk> was $318 million at the end of the fourth quarter.

We've reduced net debt by $3 million in the fourth quarter and $108 million in 2022.

While we did not repurchase shares in the fourth quarter, we repurchased 150000 shares for full year 2022 at an average price just above $33 a share or $5 million, we have approximately $25 million remaining on our share repurchase authorization and expect to continue buying back shares in 2023.

We also expect to continue to pay down our debt.

In the fourth quarter, we continued to improve our financial flexibility and renewed our ABL credit facility, which extended our maturity to November of 2027 and increased the size to $275 million.

Our net debt to adjusted EBITDA at the end of 2022 was to two seven times and net debt was $491 million.

Slide 13 provides a perspective on our first quarter 2023 outlook and building blocks for 2023 full year expectations.

We want to reiterate that price realization inflation will continue to be difficult to predict our.

Our current expectation for the first quarter as adjusted EBITDA of $65 million to $75 million.

The midpoint of that range of $70 million, which is $42 million higher than the fourth quarter of 2022.

The $42 million sequential improvement is primarily driven by the absence of major maintenance outages as well as operational and weather related issues.

Previously announced price increases are expected to largely offset inflation.

We expect that tissue sales volume will be flat to slightly below the fourth quarter.

Now, let me provide some building blocks for 2023 relative to 2022.

Similar to the first quarter outlook, we believe that our operational results will improve by approximately $42 million in 2023, primarily due to lower maintenance outage expenses and improved operating performance.

While it's difficult to predict pricing and inflation, it's our expectation that two will offset each other during the year.

<unk> modest volume growth in tissue.

We are also anticipating the following for 2023 interest expense between 27% and $29 million.

Depreciation and amortization between 98% a $101 million on.

Our capital expenditures, we expect to spend $70 million to $80 million in 2023.

Our Lewiston recovery boiler tube replacement project, which is expected to require a capital expenditure pushing 40 million is expected to occur in early 2024, along with our planned major maintenance outage.

We spent $4 million in 2022 and expect to spend an additional $8 million in 2023 on this project.

<unk> tax rate for the full year is expected to be 25% to 26%.

Based on our current expectations for 2023, our cash tax payments are expected to be similar to our statutory tax estimates.

Assumes that we will utilize our current rebates and refunds to largely offset some timing differences between book and tax depreciation.

<unk> is expected to cause our future cash tax rate to modestly exceed our statutory tax rate.

Let me turn the call back over to <unk>.

Thanks, Mike I want to spend a few minutes discussing our key priorities for shareholder value creation.

Last quarter, we communicated a more formal capital allocation framework, we made some minor minor adjustments to the framework on slide 14 to provide more clarity.

We have prioritized our capital allocation as follows our top priority is to sustain our asset base. We believe that this requires an average of 60% to $70 million of capital expenditures annually, excluding large projects we.

We expect to invest above that targeted level in the near to medium term.

We intend to maintain a balance sheet that provides us with financial flexibility.

While we have a target long term leverage ratio of around two five times, we may continue to deleverage further to create greater financial flexibility.

Our strong balance sheet provides us with the ability to take advantage of investment opportunities, including the potential down cycle.

Third we will look at various opportunities to create value through investments and Opportunistically returning capital to shareholders.

We will evaluate value accretive internal and external investments 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.

We will compare these potential investments relative to Opportunistically, returning capital to shareholders based upon our share price.

We also expect to buy back shares to mitigate the impact of dilution from share grants to our employees.

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.

We had a strong year in 2022 and despite various economic uncertainties, we're optimistic about 2023.

With that we will end our prepared remarks and take your questions.

As a reminder to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again.

For just a moment to compile the Q&A roster.

Our first question comes from Adam Josephson from Keybanc Capital markets. Please go ahead. Your line is open.

Thanks, Good afternoon, Mike Hope you're well.

Good afternoon, Mike.

Yes.

Mike couple of questions about your operational assumptions, and then one or two others. So.

You mentioned that you expect your previously announced price increases in Mexico, largely offset our cost inflation.

I guess that youre expecting inflation to slightly outpace price mix, whereas last year the price mix.

More than offset inflation by about $50 million. So can you just help frame your price cost assumptions for 'twenty three versus what you experienced last year. Obviously, you will have many fewer paperboard price increases and perhaps that's the big difference that anything you can help me with in terms of the year your price and cost.

Options under that relationship this year versus last.

Yes, so Adam it's Ben.

Difficult to predict how price and costs are going to move around.

So I think Youre right last year, we had a bit of a tailwind in terms of price mix less cost inflation. This year, what we're predicting is that theyre roughly offset each other.

And so that's we've looked at a number of different ways and Thats, where we came out that we.

We think that price mix will will largely be offset by that inflation that we're seeing.

That's part of that are you, assuming any future SBS or tissue price changes as part of those 2023 operational functions.

Adam We can't talk about forward looking price increases all we can state is our estimates are based off the previously announced price increases.

Right. Okay. Okay in terms of the SBS demand and backlog moderation late in the fourth quarter.

What are you expecting along those lines for two three years. It sounds like you are expecting stable SBS demand if I heard you correctly.

Can you confirm that.

Help me with what you're expecting for this year, just given what you experienced late in the fourth quarter.

Yeah, Adam if we if we step back we've said this all along we believe that SBS has approximately two thirds recession resilient and our market SKU.

More towards consumer packaging and retail food service so.

Yes, we did see moderation in demand in late Q4, and coincidentally that looks very similar to what we experienced pre COVID-19 in 'twenty and 2019 our January shipments.

<unk> are higher than they've been the last several months are folding customers in particular are telling us to expect a good or good 2023.

And I believe them so were expecting.

At this stage, we're expecting a solid year as solid Europe , and demand and Thats, what were seeing and hearing from our customers.

Got it thanks, Allison and one last one I noticed a new risk factor in your 10-K that you just filed noting the potential adverse impact on your business from the several significant SBS and FCB capacity investments.

That have been announced over the past year or so.

How are you thinking about your competitive position, both domestically and globally.

Given those investments, particularly given that you are not as integrated with some of your domestic peers and that you have not invested been investing hundreds of millions of dollars or more as some of your global peers are doing.

Yes, Adam.

I'll avoid commenting on specifics of what of what they're what they're doing.

These investments are large and they are challenging to implement.

But if you step back and look at.

Potential growth in the SBS market in the U S and you assume.

Low to moderate growth.

There is a need for for capacity in this market to absorb to absorb demand growth. The question becomes what does that supply and demand balance looks like.

Beyond 26, and 27% and Thats still Thats still unclear to me what we are.

We're obviously doing is looking at our strategy to make sure that we retain our position in the market and we retain our margins in the market. So we're obviously working.

Working through it to make sure that we're well positioned.

Three and beyond.

I appreciate it just one how are you thinking about the integration issue Larsen as distinct from.

How do you might have thought about it in years past, particularly just given all of this new supply that's coming both in the U S and elsewhere that will presumably target.

Converters.

Historically, we viewed as being independent is part of our value proposition and we still view it that way.

There is still a large portion of the north American SBS market Thats non integrated and we've been a great supplier to them for many years actually many many decades and our customers saw that over the last few years with with more and more demand and supply in the market and that we have done a great job of taking care of them. So.

So we still view that as a value proposition.

As I mentioned earlier, we're going to continue to look at our strategy to make sure that what we're doing today still makes sense tomorrow, but from where I sit today, we still view that as a.

As part of our value proposition.

Thanks, so much.

Yes.

Our next question comes from Paul Quinn from RBC Capital markets. Please go ahead. Your line is open.

Yes, thanks, very much good afternoon guys.

Question Q4 seemed to come in sort of in line with us on pulp and paper side, but weaker on the tissue side, even giving you that $2 million hit on the outage at Lewiston any particular area. I mean, you described it as a pretty decent quarter, but I sort of expected the previously announced price increases in tissue them.

More than offset inflation and catch up but it doesn't seem to be the case, if I got that right.

So Paul I'll remind you that we still have that lag effect with some of the inflationary pressures that we've seen in the business.

So we'd say it was a good quarter for for tissue in the fourth quarter.

What we're hoping for and expecting that just hadn't seen throughout last year with some sort of relief on some of those raw material inputs, notably pulp.

Okay I hope you get that soon and then I'm trying to reconcile.

Your expectation that you shouldnt have to take a major maintenance outage at Lewiston until early 2004 with the fact that you had all sorts of issues that <unk> been on startup, but it just.

How confident are you that you'll get through 'twenty, three without having to shut down that mill.

So the timing of the 24 outage was.

The timing of the next outage was going to be dependent on the inspections and what we saw in this in this last outage and based on that we're comfortable stating that our intent to take that outages in 2024.

Around around the major projects that we need to do at the same time.

The issues were outage and startup from outage related as you know Paul in these in these types of mills. There is always something we are working on and addressing.

But at this at this point given given what we've seen in this last outage, where we're comfortable saying that the next one is in early 'twenty four.

Let me add to that the outage startup issues power not related to the recovery boiler.

That was the key key piece of equipment that we're examining and this outage. So it's a good question.

Okay. That's helpful. And then just just so I understand this capex you've got Capex at <unk>.

70% to 80 next year, Youre basically 60% to 78, so theres basically 10 million spread youre spending $8 million on an advance on the Lewiston.

Project for 2004, and then basically $2 million on discretionary if I got that.

Okay.

I think there is a blending of discretionary sustaining but yes, you are right to say youre spending $8 million on a project in 2024 and 2023 otherwise here.

At to slightly above the normalized range that you've put out there.

Okay, and then just lastly, youre under your debt leverage target of two and a half.

Lab purchase shares in Q4 as opposed to reduce debt.

Okay.

So Paul it's a good question, we have an active debate internally if Q4 wasn't a great cash flow quarter for us.

And neither will Q1.

And so we ended up just holding on to the cash and liquidity.

We are price sensitive on the share buyback.

And that will continue to examine here in 2023 or some do you want to add to that yes to add to that Paul.

That two and a half.

<unk> is a.

As a cross cycle target.

So we may go meaningfully below that at times.

It makes where it makes sense and we May go higher if we find the right investment opportunities. So to me that around two five times is a <unk> through a cycle target, we will likely to continue to pay down debt here.

In 2023 in addition to looking at opportunities to buy back shares.

Okay. So does that infer that youre youre thinking on that.

The current period right now is below cycle average.

We think at this stage it may given given the environment.

It makes sense for us to continue to pay down our debt below that two five times.

Okay.

That's all I had thanks for your questions.

Yes.

Our next question comes from Adam Josephson from Keybanc Capital markets. Please go ahead. Your line is open.

Partner, Mike Thanks, again for taking my call Mike.

Mike I think you mentioned it in tissue that you are hoping pulp prices would have fallen.

Quite a bit more in the fourth quarter than they did.

Bearing in mind, you by most of the hardwood there is obviously a tremendous amount of new supply coming from South America over the next couple of years.

But at the same time pricing has been stubbornly high for you. So can you just.

Talk to us about what Youre seeing and why do you think prices have been.

Perhaps considerably more resilient than you might have thought.

Your thoughts about the hardwood market at the moment.

Okay.

Adam.

There is a lot of different thoughts around it and what we've seen and you know this from from 2020. If you just look at the index has gone from 900 to.

To over 600, net east I don't know East 20, $30 here recently, if you go back through Covid. It was.

Higher demand supply chain issues, and so on and forth.

At this point, Adam and given given what's coming online it would make sense for us that these that these prices would come down in the coming years.

But I can't give you a good reason beyond what's already written out there in terms of why why these prices are staying stubbornly high.

Got it and just one last one from me Allison on the topic of tissue under private label.

Tissue industry consolidation in North America, you've talked about the need for that on previous calls can you just update us on what youre seeing supply demand wise.

Theres any more or less need for consolidation now than what you thought.

369 months ago.

Yes, it's an interesting question. So as we look out into this year through through 25, According to Risi Theres 220000 tonnes.

Of announced capacity.

About 74000 tons is an unknown location at this stage.

So that is a considerably call it lower forward capacity curve than we've seen.

And we've seen in the past.

I suspect it.

It's a function of the industry margin compression that we've seen along with higher interest rates.

But again.

Our competitors get to make get to make their own decisions on when to invest in new capacity.

We are approaching starting to approach our practical capacity constraints.

So we're working to optimize our product and customer mix.

At this stage.

But stepping back I think if you look over the long run.

Given the given the buyers in this market given the large retailers in the disaggregated.

The disaggregated supplier base, if there is a mismatch.

And consolidation is needed to improve cost structure in.

In the long run and for our suppliers to be better matched up with with the retailers from a scale perspective, so we still think thats needed.

In terms of capacity additions in the next couple of years. It certainly seems like there is a.

There is a slowdown.

Thanks, So much best of luck.

Thank you.

We have no further questions. This will conclude today's conference call. Thank you for your participation you may now disconnect.

Please wait the conference will begin shortly.

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