Q2 2023 Clearwater Paper Corporation Earnings Call

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Thank you for standing by my name is Dana and I will be your conference operator today at this time I would like to welcome everyone.

He was a clear water paper's second quarter earnings conference call.

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The speaker's remarks, there will be a question.

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If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

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

Thank you Dana good afternoon, and thank you for joining Clearwater paper's second quarter 2023 earnings Conference call. Joining me on the call today are some catch president and Chief Executive Officer, and Becky Barclays Corporate controller, and interim Chief Financial Officer.

Actual results for the second quarter 2023 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 outlook posted in the Investor Relations page on our website at Clearwater paper Dot Com. Additionally, we will be providing certain non-GAAP information in this.

Afternoons 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 the forward looking statements rather than reread. This slide we're going to incorporate it by reference into our prepared remarks and with that let me.

Turn the call over to art.

Yeah.

Good afternoon, and thank you for joining us today.

As you saw in our press release, we had a great second quarter, which was better than we expected driven by strong operational execution lower input costs and improved tissue margins.

Slide three of our supplemental provides a summary of our consolidated results. We reported net sales of $525 million and adjusted EBITDA of $71 million, which is $8 million higher than the second quarter of last year.

Our tissue business drove the improvement by more than doubling its adjusted EBITDA from $19 million in the second quarter of last year to $40 million this year.

Let me share a few more highlights with you.

This increase in both paperboard and tissue as compared to the second quarter of 2022.

Lower input costs benefited both of our businesses as compared to the first quarter of 2023, particularly in fiber energy and transportation.

Operational performance was strong and we balanced supply and demand to manage our inventories.

Tissue private branded share reached an all time high as consumers continue to look for ways to offset inflation.

Our tissue demand remained strong and we delivered outstanding customer service, while improving our supply chain costs.

Paperboard demand remains soft as customers reduced their inventories due to slower consumer spending.

And finally, we reduced our net debt by $25 million and repurchased $8 million of shares during the quarter with $15 million remaining on our buyback authorization.

With that overview, let me turn to each of our segments and provide some additional details.

Let's begin with our paperboard business on slide four.

As we noted last year demands began slowing late in the fourth quarter of last year with that trend continuing through the second quarter of this year.

We believe that this was caused by a slowdown in consumer spending and high inventory levels across the value chain.

Industry data reflected these trends with a seven 1% decrease in operating rates and a 12, 6% decrease in shipments year to date 2023 versus year to date 2022 based on <unk> data.

As further evidence of this trend risi reported at $20 per ton decrease in folding carton prices in July the first decrease in more than three years.

Approximately 35% to 40% of our volume is now indexed to <unk> and it typically takes us up to two quarters for price changes under these contracts to be reflected in our financials.

While demand remained soft at the beginning of the third quarter, we're expecting an improvement in our volumes in the second half.

As I mentioned during our first quarter earnings call, we reduced production in the second quarter to manage our inventories, which resulted in approximately 10% of plant capacity downtime in the second quarter.

Our intent is to continue to balance supply and demand for the remainder of the year to get to our targeted inventory levels.

While the industry is experiencing a slowdown in demand. We continue to believe that paperboard is economically resilient given the end use of the products.

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

We also expect the shift to paper based products to accelerate with consumers seeking more sustainable packaging and foodservice products.

We believe that this should provide us with more opportunities for growth in the long run.

Please turn to slide five for additional comments on tissue.

The performance of our business was very strong with significant improvements in margin driven by higher pricing higher volume and lower costs.

Adjusted EBITDA more than doubled year over year and sequentially to $40 million.

Input costs eased between our first and second quarter of this year, particularly in pulp energy and transportation.

Revenue improved by 9% year over year, driven by higher pricing and higher retail shipments.

Operating performance was also solid leading to great customer service results with an on time performance rate of over 95% and a fill rate of over 99%.

The team delivered these results, while maintaining inventories at targeted levels and lowering our overall supply chain costs.

Let's turn to some broader market data.

Private branded tissue share reached an all time high of 36, 3% in June based on store Cana panel data we.

We believe that consumers are continuing to look for better values and their daily purchases to offset inflation and economic uncertainty.

Based on recent data from a tissue capacity utilization rose to 94, 2%, which we believe to be a healthy level.

We expect continued strength in our tissue business in the coming quarters as we benefit from strong consumer demand lower input costs and continued benefits from previously announced price increases.

Pulp costs had been on a downward trajectory since the first quarter of this year with Risi forecasting a continued decline through the rest of the year and relative stability in 2024.

As a reminder, it takes approximately three months for changes in pulp prices to be fully reflected in our financials.

Transportation availability and costs have also improved greatly since last year with lower line haul rates positively impacting our financials.

With that overview, let me introduce our corporate controller and interim CFO Becky Barclay Becky.

Becky is a key leader in our finance team and has long tenured experienced in the forest products industry.

Thank you Becky for supporting Us during this transition.

With that introduction I will now ask Beckett to discuss our second quarter results in more detail.

Thank you Allison please turn to slide six the consolidated summary income statement shows results for the second quarter of 2023 and 2022.

In the second quarter 'twenty three we recorded net income of $29 7 million net income per diluted share of $1 75, and adjusted net income per diluted share of $1 74.

The corresponding segment results on slide seven.

The key takeaway is that on a consolidated basis, the business performed well with lower cost stronger operating performance driving a healthy improvement in profitability.

Adjusted EBITDA margin rose to 13, 6% in the quarter as compared to 12% last year.

Slide eight is a year over year comparison at the segment income and adjusted EBITDA for our paperboard business on a year over year basis higher pricing offset higher costs.

Lower production volumes impacted cost absorption and our overall cost action.

Slide 14 in the appendix shows the sequential comparison of the second quarter to the first quarter of this year. It reflects a lower sales mix lower production volumes, which flattening cost.

Slide nine is a year over year comparison of segment income and adjusted EBITDA for tissue business.

As <unk> discussed we are benefiting from previously announced price increases higher volume and lower input cost.

It is important to note that significant pulp price increases in 2022 did not impact our financials until the second half of the year, leading to a relatively flat cost comparison between the second quarter of this year to last year.

Slide 15 in the appendix shows the sequential comparison of the second quarter to the first quarter of this year. It reflects the significant benefits that we are seeing some lower input cost, particularly and coke energy and transportation.

Slide 10 outlines our capital structure, our balance sheet remains very strong and our liquidity improved quarter over quarter.

Now totaling 313 million.

During the quarter, we generated $33 million in free cash flow and reduce net debt by $25 million versus the first quarter.

On a year to date basis, we generated $3 million in free cash flow.

As a reminder, we had negative cash flows during the first quarter due to a higher than normal trade payables balance from the fourth quarter of 2022 as well as typical first quarter outflows.

Our net debt to EBITDA ratio was at two one times at the end of the quarter.

We used free cash flow to repurchase $8 million of our stock during the quarter.

That translates into over 250, 260000 shares repurchased at an average price of $31 70 per share we have roughly $15 million left on our share repurchase authorization.

Let's now move to slide 11 for a outlook on the third quarter of 2023 as well as some updates to our full year expectations.

Based on the continued momentum in tissue and moderating input costs, we expect adjusted EBITDA in the range of <unk> $73 million to $83 million sorry, the quarter.

In terms of our full year assumptions, we expect the operating results will be favorable relative to 2022 by $42 million due to fewer major maintenance outages and better operating performance.

Additionally, we now expect a benefit of $15 million to $25 million due to the impact of previously announced price increases and lower input cost.

Lastly, our other key assumptions for the full year remain unchanged.

<unk> expense should be in the 27% to $25 million range, depreciation and amortization expense should be $98 million to $101 million.

Capital expenditures should be between 70, and $80 million, which includes approximately $9 million on our Lewiston recovery boiler tube replacement project and $11 million on the precipitated replacement in Arkansas.

As a reminder, the recovery boiler project will require approximately $40 million in total spend while the precipitate or is projected to require $45 million and finally, our tax rate should be in the mid 20 range.

Let me turn the call back over to arson.

Thanks, Becky I'd like to conclude the call with a brief overview of how we're prioritizing our capital allocation to create shareholder value.

Slide 12 is a framework to our approach.

Our top priority is sustaining the competitiveness of our assets. We believe that this requires an average of $60 million to $70 million annually, excluding large projects such as the recovery recovery boiler work in Lewiston, and the precipitate a replacement in Arkansas.

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

We now have a much stronger balance sheet than we did a few years ago, and we intend to continue to maintain and improve our position.

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

And finally, we will look at various opportunities to create value through return generating investments opportunistic acquisitions and returning capital to shareholders.

Saw us do that in the second quarter by repurchasing $8 million worth of our shares.

We're going to continue to be disciplined allocators of capital and we will seek the right opportunities to create value across both of our businesses.

The team delivered a strong second quarter and we're optimistic about our business in the second half of this year.

Let me close let me close by thanking our people for all that they do to keep our operations running safely and efficiently.

I would also like to thank our customers for placing their trust in us and our shareholders for their continued support.

That we will end our prepared remarks and take your questions.

Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, we will pause for just a moment to compile the Q&A roster.

Your first question comes from Paul Quinn from RBC cap.

Little markets.

Paul Please go ahead.

Yeah, Thanks, very much hey, guys.

Maybe start with.

Your consumer products segment.

The stats.

For the second quarter came out.

Sure it shows pretty lackluster North American.

Tissue production.

And that drop in operating rates, how are you able to it sounds like your tissue is going gangbusters, especially in the second quarter. How are you able to compete the competition right now.

So I think our demand is pretty strong and pretty pretty stable and as I've mentioned previously we have no material.

Contract risks. This this year so private branded share is up our our customers generally speaking are doing well and I think we're doing a really good job at <unk>.

Supporting that so we have we have strong sales and I think the operating rates in the industry.

We're also fairly a fairly high so its for us at least our demand is strong and we're able to we're able to support support that demand.

Okay, and then the slide I think it's.

15 shows sort of the sequential improvement in that $15 million drop in costs is that all to do with Paul.

I think a lot of it is pulp we're also benefiting from transportation and energy as well in tissue sequentially, but pulp as pulp is going to be a big story this year.

Okay, and then <unk> you mentioned that three months lag in pulp to really hit the bottom line. So this is really the drop in pulp prices in Q1 that really comes into factor that $50 million in Q2.

That's part of the story. So if we go back on pulp there's two important points there Paul.

First one is pulp peaked in the second half of last year and.

And as you mentioned takes us approximately three months for that to flow through our our P&L. So actually if you look at the first half of this year versus the first half of last year, our pulp prices are actually slightly higher, but we're seeing a meaningful sequential drop in pulp prices.

Okay, and then if I just switch over to the paperboard side.

You mentioned that drop in folding carton.

Pricing index pricing when you mentioned that your 35% to 40% index to receive is that to that folding carton price or is that too another risi index price.

I think generally speaking, it's folding folding carton and cup I think those are the two prices that we see.

Indexes, so we're depending on depending on the customer and depending on the volume it's one of those.

Okay, and then just on the Capex budget, if you've got I suspect the precipitate or down in Arkansas is.

Kind of a maintenance type thing youre, not expecting to get any kind of lower costs or benefits as a result of that what about the recovery bullard of any pickup in lower cost going forward.

I think generally speaking both of these are maintenance types of types of projects. There is there is probably some mild benefits.

With the precipitate or but we view that as a as largely a replacement project, we're replacing something that's decades old. So there should be some better performance coming out of it and better reliability.

But largely we view those as the replacement projects.

Okay. Then the last question I had just on capital allocation I mean, it looked like your balance sheet is in great shape, why not repurchase a heck a lot more shares and 263 in the quarter.

Okay.

Yes.

Paul.

As I mentioned I mentioned in our framework I think we take a opportunistic approach to our share buybacks.

We increase our purchases one when we see it when we see a better value. So we purchased quite a bit quite a few more shares this quarter than last quarter.

But I'll just I'll just leave it at that.

Well it seems to reckon that given the share price is right about when you purchase shares in Q2, I suspect you've got clear opportunity in Q3 as well.

Well.

We will continue to look at look at that and by buying back shares up our operations.

Yes, you do.

That's all I had.

Thank you Paul.

Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.

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