Q3 2023 Clearwater Paper Corp Earnings Call
Speaker 1: transcript
Speaker 1: Good afternoon. My name is Brianna and I will be your conference operator today. At this time, I would like to welcome everyone to the Clear Water Paper Third Quarter 2023 Earnings Conference Call. Please note that this call is being recorded. All participants are in listen only mode at this time.
Good afternoon, My name is Brianna and I will be your conference operator today.
At this time I would like to welcome everyone to the Clearwater paper third quarter 2023 earnings Conference call.
Please note that this call is being recorded.
All participants are in listen only mode at this time.
Speaker 1: transcript
Speaker 2: After the speaker remarks, there will be a question and answer session.
After the Speakers' remarks, there will be a question and answer session.
Speaker 1: transcript
Speaker 3: If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star one again.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
To withdraw your question Press Star one again.
Speaker 1: transcript
Speaker 4: I will now turn McCall over to Sloan Bowlin investor relations. Please go ahead.
Thank you.
I will now turn the call over to Sloan Bohlen Investor Relations. Please go ahead.
Speaker 2: transcript
Speaker 5: Thank you, Brianna. Good afternoon and thank you for joining Clearwater Papers third quarter, 2023 earnings conference call. Joining me on the call today are are some catch president and chief executive officer and Sherry Baker, senior vice president and chief financial officer.
Thank you Breanna good afternoon, and thank you for joining Clearwater papers third quarter 2023 earnings Conference call. Joining me on the call today are some catch president and Chief Executive Officer, and Sherri Baker Senior Vice President and Chief Financial Officer financial results for the third quarter of 2023 were released shortly after today's market.
Speaker 2: transcript
Speaker 6: Financial results for the third quarter of 2023 were released shortly after today's Mark Clothes, along with the filing of our 10Q. 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.
Close along with the filing of our 10-Q, you'll 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 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.
Speaker 2: transcript
Speaker 7: Additionally, we will be providing certain non-GAAP information in the Saturday's discussion, a reconciliation of the non-GAAP information to comparable gap 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 for both the statement.
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 rereading. This slide we are going to incorporate it by reference into our prepared remarks with that let me turn the call over to art.
Speaker 2: transcript
Speaker 8: Rather than rereading this slide, we are going to incorporate it by reference into our prepared remarks. With that, let me turn the call over to RC.
Speaker 3: transcript
Speaker 9: Good afternoon and thank you for joining us today. As you saw in our press release, we had an outstanding third quarter driven by good operational execution, lower input costs, and continuous strength in our tissue business.
Good afternoon, and thank you for joining us today as you saw in our press release, we had an outstanding third quarter driven by good operational execution lower input costs and continued strength in our tissue business.
Speaker 3: transcript
Speaker 10: Flight 3 of our supplemental provides a summary of our consolidated results. We reported net sales of 520 million and adjusted EBIT of 81 million in the quarter, which is at the higher end of our expectations and 3 million higher than the third quarter of last year.
Slide three of our supplemental provides a summary of our consolidated results. We reported net sales of $520 million and adjusted EBITDA of $81 million in the quarter, which is at the higher end of our expectations and $3 million higher than the third quarter of last year.
Speaker 3: transcript
Speaker 11: Artichee Business drove the improvement by more than doubling its adjusted EBITDA from 21 million in the third quarter of last year to 46 million this year.
Our tissue business drove the improvement by more than doubling its adjusted EBITDA from $21 million in the third quarter of last year to $46 million this year.
Speaker 3: transcript
Speaker 12: Our paper board business delivered 52 million of adjusted EBITDA in the third quarter at a margin of 20%. Even with a soft demand that we continue to experience.
Our paperboard business delivered $52 million of adjusted EBITDA in the third quarter at a margin of 20% even with the soft demand that we continue to experience.
Let me share a few highlights with you.
Speaker 3: transcript
Speaker 13: Price is increased in tissue as compared to the third quarter of 2022 and decreased in paperboard which reflects market trends as reported by
Prices increased in tissue as compared to the third quarter of 2022 and decreased in paperboard, which reflects market trends as reported by Risi.
Speaker 3: transcript
Speaker 14: lower input costs benefited both of our businesses as compared to the third quarter of 2022, particularly in fiber, energy, and freight.
Lower input costs benefited both of our businesses as compared to the third quarter of 2022, particularly in fiber energy and freight.
Speaker 3: transcript
Speaker 15: We had good operational performance across both businesses as we balance supply and demand to manage our inventory.
We had good operational performance across both businesses as we balanced supply and demand to manage our inventories.
Speaker 3: transcript
Speaker 16: Issued demand continue to be strong, while paperboard remains soft as de-stocking continued.
Issued demand continued to be strong while paperboard remains soft as Destocking continued.
Speaker 3: transcript
Speaker 17: We reduced net debt by 69 million in the quarter for total of 416 million since 2020.
We reduced net debt by $69 million in the quarter for a total of 416 million since 2020.
Speaker 3: transcript
Speaker 18: Taking that 416 million net debt reduction and dividing it by the current share count, it quates to approximately $24 per share.
Taking that $416 million net debt reduction and dividing it by the current share count equates to approximately $24 per share.
Speaker 3: transcript
Speaker 19: We repurchase $5 million of shares during the quarter for a total of 20 million since 2022 with 10 million remaining on our bike bike authorization.
We repurchased $5 million of shares during the quarter for a total of $20 million since 2022 with $10 million remaining on our buyback authorization.
Speaker 3: transcript
And finally last Friday, we started the redemption of our 2025 notes with a combination of a new term loan using cash on hand, and drawing on our existing ABL.
Speaker 3: transcript
Speaker 20: The sputter strengthens our balance sheet, creates flexibility and pushes any material that maturities out to 2028.
This further strengthens our balance sheet creates flexibility and pushes any material debt maturities out to 2028.
Speaker 3: transcript
Speaker 21: With that overview, let me turn to each of our segments and provide some additional details.
With that overview, let me turn to each of our segments and provide some additional details.
Speaker 3: transcript
Speaker 22: We continue to be agile and adjusted our production to meet demand and manage our inventory levels.
We continue to be agile and adjusted our production to meet demand and manage our inventory levels.
Speaker 3: transcript
We took approximately 10% downtime on our paper machines to balance supply and demand during the quarter.
Speaker 3: transcript
Speaker 23: Despite this downtime, the business performed well and generated 20% adjusted EBITDA margin in the quarter.
Despite this downtime the business performed well and generated a 20% adjusted EBITDA margin in the quarter.
Speaker 3: transcript
Speaker 24: As we noted over the last several quarters, demand began slowing late last year. That trend continued into the third quarter of this year.
As we noted over the last several quarters demand began slowing late last year.
That trend continued into the third quarter of this year.
Speaker 3: transcript
Speaker 25: We believe that this softness is driven by a combination of a slow down and consumer demand and inventory destocking across the value chain.
We believe that this softness is driven by a combination of a slowdown in consumer demand and inventory destocking across the value chain.
Speaker 3: transcript
Speaker 26: Industry data reflects these trends with a 9.7% decrease in operating rates and a 15.7% decrease in shipments year to day 2023 versus 2022 as reported by AFNPA.
Industry data reflects these trends with a nine 7% decrease in operating rates and a 15, 7% decrease in shipments year to date 2023 versus 2022 as reported by <unk>.
Speaker 3: transcript
Speaker 27: As further evidence of this trend, Risi has now reported an $80 per ton decreased in folding car prices in the third quarter, reflecting the first decrease in more than three years.
As further evidence of this trend.
He is now reported an $80 per ton decrease in folding carton prices in the third quarter, reflecting the first decrease in more than three years.
Speaker 3: transcript
Speaker 28: As a reminder, approximately 35 to 40% of our volume is now indexed to RISD. And it typically takes us up to two quarters for price changes under these agreements to be reflected in our financials.
As a reminder, 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 agreements to be reflected in our financials.
Speaker 3: transcript
Speaker 29: If we apply an $80 per ton decrease across all our tons, the annualized impact could be greater than a $60 million.
If we apply an $80 per ton decreased across all our tons, the annualized impact could be greater than $60 million.
Speaker 3: transcript
Speaker 30: These decreases are being partially asked that with lower input costs and improved operational performance.
These decreases are being partially offset with lower input costs and improved operational performance.
Speaker 3: transcript
Speaker 31: We remain optimistic about the long-term prospects for paper board, but given economic uncertainties, we foresee a gradual recovery starting next year.
We remain optimistic about the long term prospects for paperboard, but given economic uncertainties, we foresee a gradual recovery starting next year.
Speaker 3: transcript
Speaker 32: Recius forecasting a 10.5% decrease in total SBS production this year versus 2022 followed by 4.2% increase in 2024 and a 5.3% increase in 2025.
Risi is forecasting a 10, 5% decrease in total SBS production this year versus 2020 to.
Followed by four 2% increase in 2024, and a five 3% increase in 2025.
Speaker 3: transcript
Please turn to slide five for additional comments on tissue.
Please turn to slide five for additional comments on tissue.
Speaker 3: transcript
The performance of our tissue business was very strong. Revenue improved by 8% year-over-year, driven by higher pricing and higher retail shipment.
The performance of our tissue business was very strong revenue improved by 8% year over year, driven by higher pricing and higher retail shipments.
Speaker 3: transcript
Adjusted EBITDA margin improved to 18% due to higher pricing and lower input costs, particularly in pulp energy and transportation.
Adjusted EBITDA margin improved to 18% due to higher pricing and lower input costs, particularly in pulp energy and transportation.
Speaker 3: transcript
With roughly a quarter of our contracted customer volume tied to the REC pulp index and with lower pulp costs, we're expecting a 4 to 6 million dollar headwind per quarter moving forward.
With roughly a quarter of our contracted customer volume tied to the risi pulp index and with lower pulp costs, we're expecting a $4 million to $6 million headwind per quarter moving forward.
Even with that impact, we're optimistic that we can retain most of the margin improvement captured as we head into 2020.
Even with that impact we are optimistic that we can retain most of the margin improvement captured as we head into 2024.
Speaker 3: transcript
Let's turn to some industry data. RECI recently reported that Tisha capacity utilization is around 94% so far this year, which we believe represents a healthy supply and demand balance.
Let's turn to some industry data <unk> recently reported that tissue capacity utilization is around 94% so far this year.
Which we believe represents a healthy supply and demand balance.
Speaker 3: transcript
The supports argue that tissue and district conditions are improving.
This supports our view that tissue industry conditions are improving.
Speaker 3: transcript
Let's look at some of the high-level capacity trends that are driving these numbers. Between 2018 and 2020, nearly 450,000 tons of tissue capacity were added, primarily targeting the private branded space. That increased supply out...
Let's look at some of the high level of capacity trends that are driving these numbers.
Between 2018, and 2020, nearly 450000 tons of tissue capacity were added primarily targeting the private branded space.
That increased supply outpaced demand growth.
Speaker 3: transcript
between 2021 and 2023, more than 180,000 tons of capacity were reduced.
Between 2021, and 2023 more than 180000 tons of capacity were reduced.
Speaker 3: transcript
We now believe that around 300,000 tons of capacity will come online between 2024 and 2026, which roughly matches demand growth over that same time horizon.
We now believe that around 300000 tons of capacity will come online between 2024, and 2026, which roughly matches demand growth over that same time horizon.
Speaker 3: transcript
Given these dynamics, we're optimistic that our TUSHIE business will perform well in the near-to-medium term.
Given these dynamics, we are optimistic that our tissue business will perform well in the near to medium term.
Speaker 3: transcript
Without overview, let me introduce our new CFO Sherry Baker.
With that overview, let me introduce our new CFO Sherri Baker.
Speaker 3: transcript
Barry joined us in August and has hit the ground running. She brings significant experience building and leading finance teams and an extensive background in strategic, financial, and operational decision-making.
Gary joined US in August and has hit the ground has hit the ground running she brings significant experience building and leading finance teams and an extensive background in strategic financial and operational decision making.
Unknown Executive: Good afternoon.
Brianna: My name is Brianna and I will be your conference operator today. At this time I would like to welcome everyone to the Clearwater Paper 3rd quarter of 2023 earnings conference call. Please note that this call is being recorded. All participants are in listen only mode at this time. After the speakers remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star one again. Thank you.
Speaker 3: transcript
I'm looking forward to working with Sherry to continue our focus on strength in your company and creating shareholder value.
I am looking forward to working with Sherry to continue our focus on strengthening our company and creating shareholder value.
Speaker 4: transcript
Thank you, Arson. I'm excited to be joining the Clearwater Paper Team and look forward to working with you, our board, and our people to continue improving our performance, growing the business, and creating shareholder value.
Thank you <unk> and <unk>.
Added to be joining the Clearwater paper team and look forward to working with you our board and our people to continue improving our performance growing the business and creating shareholder value.
Speaker 4: transcript
Let's cover our financial performance in the third quarter by turning to slide six. The consolidated summary income statement shows results for the third quarter of 2023 and 2022. In the third quarter of 2023, we recorded net income of 36.6 million net income per diluted share of $2.17 and adjusted net income per diluted share of $2.19. The corresponding segment results are on
Lets cover our financial performance in the third quarter by turning to slide six.
The consolidated summary income statement shows results for the third quarter of 2023 and 2022.
Sloan Bohlen: I will now turn the call over to Sloan Bohlen investor relations. Please go ahead. Thank you, Brianna.
The third quarter of 2023, we recorded net income of $36 6 million net income per diluted share of $2 17 and.
Sloan Bohlen: Good afternoon and thank you for joining Clearwater Paper 3rd quarter of 2023 earnings conference call. Joining me on the call today are Arsen Kitch, President and Chief Executive Officer and Sherri Baker, Senior Vice President and Chief Financial Officer. Financial results for the 3rd quarter of 2023 were released shortly after today's marked close along with the filing of our 10Q. 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.
And adjusted net income per diluted share of $2 19.
The corresponding segment results are on slide seven.
Speaker 4: transcript
The business performs very well on the consolidated basis, with lower input costs and strong operating performance driving a healthy improvement and profitability. Adjusted EBITDA, margin rose to 15.5% in the quarter as compared to 14.3% last year.
<unk> performed very well on a consolidated basis with lower input cost and strong operating performance driving a healthy improvement in profitability adjusted EBITDA margin rose to 15, 5% in the quarter as compared to 14, 3% last year.
Sloan Bohlen: Additionally, we will be providing certain non-gap information in this afternoon's discussion, a reconciliation of the non-gap information to comparable gap 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. We are going to incorporate it by reference into our prepared remarks.
Speaker 4: transcript
Slide 8 is a year-over-year comparison of segment income and adjusted EBITDA for our paperboard business. The business delivered $52 million of adjusted EBITDA in the quarter with a 20% margin. On a year-over-year basis, lower sales and production volumes impacted cost absorption, which was partially offset by lower input costs.
Slide eight is a year over year comparison of segment income and adjusted EBITDA for our paperboard business the business delivered $52 million of adjusted EBITDA in the quarter with a 20% margin on a year over year basis, lower sales and production volumes impacted cost absorption, which was partially offset by lower.
Input cost slide 14 in the appendix shows a sequential comparison of the third quarter to the second quarter of this year. It reflects a lower sales price and mix flattening volumes and reduced costs.
Speaker 4: transcript
Slide 14 in the appendix shows a sequential comparison of the third quarter to the second quarter of this year. It reflects a lower sales price and mix, flattening volumes, and reduced costs.
Arsen Kitch: With that, let me turn the call over to Arsen. Good afternoon and thank you for joining us today. As you saw in our press release, we had an outstanding 3rd quarter driven by good operational execution, lower input costs and continuous strength in our tissue business. Slide three of our supplemental provides a summary of our consolidated results. We reported net sales of 520 million and adjusted EBIT of 81 million in the quarter, which is at the higher end of our expectations and 3 million higher than the 3rd quarter of last year.
Speaker 4: transcript
Slide 9 is a year of your comparison of segment income and adjusted EBIDA for our tissue business.
Slide nine is a year over year comparison of segment income and adjusted EBITDA for our tissue business as <unk> discussed we are benefiting from previously announced price increases higher volumes and lower input cost the business delivered $46 million of adjusted EBITDA in the quarter with an 18% margin.
Speaker 4: transcript
As Arson discussed, we are benefiting from previously announced price increases, higher volumes, and lower input costs.
Speaker 4: transcript
The business delivered 46 million of adjusted EBITDA in the quarter with an 18% margin. As noted on this slide, in the third quarter we saw the benefits from lower PULT price as it flowed through to our income statement.
As noted on this slide in the third quarter, we saw the benefit from lower pulp price as it flowed through to our income statement slide 15 in the appendix shows a sequential comparison of the third quarter to the second quarter of this year. It reflects the benefits that we're seeing from lower input costs, particularly in pulp.
Arsen Kitch: Our tissue business drove the improvement by more than doubling its adjusted EBIT from 21 million in the 3rd quarter of last year to 46 million this year. Our paper board business delivered 52 million of adjusted EBIT in the 3rd quarter at a margin of 20%, even with a soft demand that we continue to experience. Let me share a few highlights with you. Price is increased in tissue as compared to the 3rd quarter of 2022 and decreased in paper board, which reflects market trends as reported by receipt.
Speaker 4: transcript
Flight 15 in the appendix shows a sequential comparison of the third quarter to the second quarter of this year. It reflects the benefits that we are seeing from lower input cost, particularly in poll.
Speaker 4: transcript
Slide 10 outlines our capital structure. Our balance sheet remains very strong and our liquidity improved quarter over quarter, now totaling $370 million. During the third quarter, we generated $74 million in free cash flow and reduced net debt by $69 million versus the second quarter. On a year-to-date basis, we generated $76 million in free cash flow. Since 2020, we have reduced our net debt by over $416 million.
Slide 10 outlines our capital structure, our balance sheet remains very strong and our liquidity improves quarter over quarter now totaling $370 million during the third quarter, we generated $74 million in free cash flow and reduce net debt by $69 million versus the second quarter on a year.
Arsen Kitch: Lower input costs benefited both of our businesses as compared to the 3rd quarter of 2022, particularly in fiber, energy and freight. We had good operational performance across both businesses as we balance supply and demand to manage our inventories. Issued demand continued to be strong, while paper board remains soft as de-stocking continued. We reduced net debt by 69 million in the quarter for total of 416 million since 2020, taking that 416 million net debt reduction and dividing it by the current share count equates to approximately $24 per share.
To date basis, we generated $76 million in free cash flow since 2020, we have reduced our net debt by over $416 million.
Speaker 4: transcript
We announced last Friday the addition of a new revolving term loan with borrowing capacity of $270 million. The initial draw on this facility is $150 million. We will use these funds, along with cash on hand and drawing on our existing ABL, to extinguish our 2025 notes.
We announced last Friday. The addition of a new revolving term loan with borrowing capacity of $270 million. The initial draw on this facility is $150 million. We will use these funds along with cash on hand, and drawing on our existing ABL to extinguish our 2025 notes.
Speaker 4: transcript
This new agreement extends any debt maturities to 2028. Given the redemption process for the existing 2025 notes, we will fully extinguish the 2025 notes in late November . The initial draw on the facility is fixed for one year at 9.13%.
This new agreement extends any debt maturities to 2028 given the.
I'm shim process for the existing 2025 notes, we will fully extinguished the 2025 notes in late November the.
Arsen Kitch: We repurchase $5 million of shares during the quarter for a total of $20 million since 2022 with $10 million remaining on our buyback authorization. And finally, last Friday, we started the redemption of our 2025 notes with a combination of a new term loan using cash on hand and drawing on our existing ABL. The further strengthens our balance sheet, creates flexibility and pushes any material that maturities out to 2028.
The initial draw on the facility is fixed for one year at 913%.
Speaker 4: transcript
The revolving credit covenants are similar to our existing ABL and the loan is secured by plant property and equipment. With this new agreement in place, we have strengthened our balance sheet and improved our financial flexibility.
The revolving credit covenants are similar to our existing ABL and a loan is secured by plant property and equipment with this new agreement in place, we have strengthened our balance sheet and improved our financial flexibility.
Speaker 4: transcript
At the end of the third quarter, our net debt to EBITDA ratio was at 1.8 times. We used free cash flows to repurchase $5 million of our stock during the quarter. That translated into over 150,000 shares repurchased at an average price of $33.36 per share.
At the end of the third quarter, our net debt to EBITDA ratio was at one eight times.
Arsen Kitch: With that overview, let me turn to each of our segments and provide some additional details. We continue to be agile and adjusted our production to meet demand and manager inventory levels. We took approximately 10% downtime on our paper machines to balance supply and demand during the quarter. Despite this downtime, the business performed well and generated 20% adjusted EBITDA margin in the quarter. As we noted over the last several quarters, demand began slowing late last year.
We use free cash flows to repurchase $5 million of our stock during the quarter that translated into over 150000 shares repurchased at an average price of $33 and 36 pence per share.
Speaker 4: transcript
Since we reinstituted the program back in 2022, we have repurchased 614,000 shares at an average price of $32.70 per share. We have roughly $10 million left on our share repurchase authorization.
Since we reinstituted the program back in 2022, we have repurchased 614000 shares at an average price of $32 70 per share we have roughly $10 million left on our share repurchase authorization.
Arsen Kitch: That trend continued into the third quarter of this year. We believe that this softness is driven by a combination of a slowdown in consumer demand and inventory destocking across the value chain. Industry data reflects these trends with a 9.7% decrease in operating rates and a 15.7% decrease in shipments year to day 2023 versus 2022 as reported by AFNPA. As further evidence of this trend, RIC has now reported an $80 per ton decrease in folding car prices in the third quarter, reflecting the first decrease in more than three years.
Speaker 4: transcript
Let's now move to slide 11 for an outlook on the fourth quarter of 2023, as well as some updates to our full year expectations.
Let's now move to slide 11 for an outlook on the fourth quarter of 2023 as well as some updates to our full year expectations.
Speaker 4: transcript
With the expected impact of lower market pricing for paperboard, continued soft paperboard demand and a planned major maintenance outage in our Arkansas mill, we expect adjusted EBITDA and the range of 60 to 70 million in the fourth quarter.
With the expected impact of lower market pricing for paperboard continued soft paperboard demand and a planned major maintenance outage at our Arkansas Mill, we expect adjusted EBITDA in the range of $60 million to $70 million in the fourth quarter.
Speaker 4: transcript
For full year 2023, we expect adjusted EBITDA in the range of 278 to 288 million. This is up from adjusted EBITDA of 227 million in 2022, driven by fewer major maintenance outages, improved operating performance, higher pricing, and lower input costs.
For full year 2023, we expect adjusted EBITDA in the range of $2 78 to 288 million. This is up from adjusted EBITDA of $227 million in 2022, driven by fewer major maintenance outages improved operating performance higher pricing and lower <unk>.
Arsen Kitch: As a reminder, approximately 35% to 40% of our volume is now indexed to RIC. And it typically takes us up to two quarters for price changes under these agreements to be reflected in our financials. If we apply an $80 per ton decrease across all our tons, the annualized impact could be greater than $60 million. These decreases are being partially offset with lower input costs and improved operational performance.
Costs.
Speaker 4: transcript
Lastly, our other key assumptions for the full year remain unchanged. Interest expense should be in the 28-30 million range. Depreciation and amortization expense should be 97-100 million.
Lastly, our other key assumptions for the full year remain unchanged interest expense should be in the $28 million to $30 million range, depreciation and amortization expense should be 97% to $100 million.
Speaker 4: transcript
Capital expenditures should be between $70 and $80 million, which includes approximately $9 million on our Lewis and Recovery Boiler Tube Replacement Project, an $11 million on the Pacifica Replacement in Arkansas.
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 under precipitated replacement in Arkansas.
Arsen Kitch: We remain optimistic about the long-term prospects for paperboard, but given economic uncertainties, we foresee a gradual recovery starting next year. RIC is forecasting a 10.5% decrease in total SBS production this year versus 2022, followed by 4.2% increase in 2024 and a 5.3% increase in 2025.
Speaker 4: transcript
As a reminder, the Recovery Boiler Project will require approximately 40 million of total spend while the precipitator is projected to require 45 million. And finally, our tax rate should be in the mid-20% range. Let me now turn the call back over to Arson.
As a reminder, the recovery boiler project will require approximately $40 million of total spend while the precipitate or is projected to require $45 million and finally, our tax rates should be in the mid 20% range. Let me now turn the call back over to arson. Thanks.
Arsen Kitch: Please turn to slide five for additional comments on tissue. The performance of our tissue business was very strong. Revenue improved by 8% year over year, driven by higher pricing and higher retail shipments.
Speaker 3: transcript
Thanks, Sherry. We have previously discussed our prioritization for capital allocation to create shareholder value.
Thanks, Jerry we have previously discussed our prioritization for capital allocation to create shareholder value.
Speaker 3: transcript
Flight 12 is a framework for our approach. Our top priority is sustaining our assets followed by maintaining a strong balance sheet and finally evaluating value-creating opportunities, including returning capital to shareholders.
Slide 12 is a framework for our approach our top priority is sustaining our assets followed by maintaining a strong balance sheet, and finally evaluating value, creating opportunities, including returning capital to shareholders.
Arsen Kitch: Adjusted EBITDA margin improved to 18% due to higher pricing and lower input costs, particularly in pulp energy and transportation. With roughly a quarter of our contracted customer volume tied to the RIC pulp index and with lower pulp costs, we're expecting a $4 to $6 million headwind per quarter moving forward. Even with that impact, we're optimistic that we can retain most of the margin improvement captured as we head into 2024.
Speaker 3: transcript
I would like to now spend a few minutes sharing some thoughts about the broader strategy for both of our businesses to start operating performance matters greatly in both segments and is critical to meet customer needs. We.
Speaker 3: transcript
We have made significant progress over the past few years, improving our operations, and becoming a more competitive player in both of our business.
We have made significant progress over the past few years, improving our operations and becoming a more competitive player in both of our businesses.
Speaker 3: transcript
But given the capital intensive nature of our industry, we believe that scale is needed to be able to invest and grow.
Arsen Kitch: Let's turn to some industry data. RIC recently reported that tissue capacity utilization is around 94% so far this year, which we believe represents a healthy supply and demand balance. The supports are view the tissue industry conditions are improving.
But given the capital intensive nature of our industry. We believe that scale is needed to be able to invest and grow.
Speaker 3: transcript
In Pay-Pervort, we believe there were uniquely positioned to become a supplier of choice to independent converters across multiple substrates and product categories.
And paperboard, we believe there were uniquely positioned to become a supplier of choice to independent converters across multiple substrates and product categories.
Arsen Kitch: Let's look at some of the high level capacity trends that are driving these numbers. Between 2018 and 2020, nearly 450,000 tons of tissue capacity were added, primarily targeting the private branded space. That increased supply outpaced the mangrove. Between 2021 and 2023, more than 180,000 tons of capacity were reduced. We now believe that around 300,000 tons of capacity will come online between 2024 and 2026, which roughly matches the mangrove over that same time horizon.
Speaker 3: transcript
And do that, we will explore offering additional paperboard products, such as lightweight FB, white top, polypree cup stock, additional recycled rates, and other products that meet the needs of our customers.
To do that we will explore offering additional paperboard products, such as lightweight FTB White top poly pre cup stock additional recycled grades and other products that meet the needs of our customers.
Speaker 3: transcript
We're currently conducting engineering studies to evaluate the feasibility of investing in our existing assets to expand our product offering.
We're currently conducting engineering studies to evaluate the feasibility of investing in our existing assets to expand our product offering.
Speaker 3: transcript
We may also be opportunistic buyers of paperboard mill assets across SBS and other substrates.
We may also be opportunistic buyers of paperboard mill assets across Sps and other substrates.
Speaker 3: transcript
Our long-term goal is to build a scaled, high-performing, and diversified paperboard business that is well matched to the needs of independent paperboard converters in North America.
Our long term goal is to build a scaled high performing and diversified paperboard business that is well matched to the needs of independent paperboard converters in North America.
Arsen Kitch: Given these dynamics, we're optimistic that our tissue business will perform well in the near-to-median term.
Speaker 3: transcript
In tissue, we believe that consolidation is needed given the consolidated customer landscape and the fragmented supplier base. The top three or four retailers in the U.S. now count for more than half of the private branded tissue market.
In tissue, we believe that consolidation is needed given the consolidated customer landscape and the fragmented supplier base.
Arsen Kitch: Without overview, let me introduce our new CFO, Sherri Baker. Sherri joined us in August and has hit the ground running. She brings significant experience building and leading finance teams in an extensive background in strategic financial and operational decision making.
The top three or four retailers in the U S. Now account for more than half of the private branded tissue market.
Speaker 3: transcript
Given the size and demands of these customers, private branded tissue manufacturers need to need scale to deliver the right combination of cost, quality and service.
Given the size and demands of these customers private branded tissue manufacturers need to need scale to deliver the right combination of cost quality and service and.
Sherri Baker: I'm looking forward to working with Sherri to continue our focus on strength in your company and creating sureholder value. Thank you, Arson. I'm excited to be joining the Clearwater Paper team and look forward to working with you, our board, and our people to continue improving our performance growing the business and creating shareholder value.
Speaker 3: transcript
In addition, manufacturers need scale to be able to make sizable long-term investments in your capacity to keep up with the growth of these retailers.
In addition manufacturers need scale to be able to make sizable long term investments in new capacity to keep up with the growth of these retailers.
Speaker 3: transcript
We believe that recent improvements in the tissue industry could facilitate the creation of a scaled private brand tissue manufacturer.
We believe that recent improvements in the tissue industry could facilitate the creation of a scaled private branded tissue manufacturer.
Sherri Baker: Let's cover our financial performance in the third quarter by turning to slide six. The consolidated summary income statement shows results for the third quarter of 2023 and 2022. In the third quarter of 2023, we recorded net income of 36.6 million net income per diluted share of $2.17 and adjusted net income per diluted share of $2.19. The corresponding segment results are on slide seven. The business performed very well on the consolidated basis with lower input cost and strong operating performance driving a healthy improvement and profitability. Adjusted EBITDA margin rose to 15.5% in the quarter as compared to 14.3% last year.
Speaker 3: transcript
As we stated previously, we're willing to participate in this consolidation under the right market conditions and appropriate value.
As we stated previously we are willing to participate in this consolidation under the right market conditions and appropriate values.
Speaker 3: transcript
To be clear, any internal or external investment decisions will be balanced with our goal of maintaining a strong balance sheet and financial flexibility through the cycle.
To be clear any internal or external investment decisions will be balanced with our goal of maintaining a strong balance sheet and financial flexibility through the cycle.
Speaker 3: transcript
We're going to continue to be disciplined allocators of capital and we'll seek the right opportunities to create value across both of our business.
Going to continue to be disciplined allocators of capital and we will seek the right opportunities to create value across both of our businesses.
Speaker 3: transcript
In summary, we have spent significant efforts over the last several years improving our operating performance, especially in areas that matter most to our customers. We have also greatly improved our financial position by focusing on cash flow generation and debt reduction.
In summary, we have spent significant efforts over the last several years, improving our operating performance, especially in areas that matter most to our customers. We have also greatly improved our financial position by focusing on cash flow generation and debt reduction.
Speaker 3: transcript
We are now well positioned to look at all strategic options for our company to grow and create value for our shareholders.
We are now well positioned to look at all strategic options for our company to grow and create value for our shareholders.
Sherri Baker: Slide eight is a year-over-year comparison of segment income and adjusted EBITDA for our paper board business. The business delivered 52 million of adjusted EBITDA in the quarter with a 20% margin. On a year-over-year basis, lower sales and production volumes impacted cost absorption, which was partially offset by lower input cost.
Speaker 3: transcript
Let me close by thanking our people for all that they do to keep our operations running safely and efficiently.
Let me close by thanking our people for all that they do to keep our operations running safely and efficiently.
Speaker 3: transcript
I would also like to thank our customers for placing their trust in us and our shareholders for their continued support.
I would also like to thank our customers for placing their trust in us and our shareholders for their continued support.
Speaker 3: transcript
With that, we will end our prepared remarks and take your questions.
With that we will end our prepared remarks and take your questions.
Sherri Baker: Slide 14 in the appendix shows a sequential comparison of the third quarter to the second quarter of this year.
Speaker 1: transcript
At this time, I would like to remind everyone in order to ask a question, please press star one.
At this time I would like to remind everyone in order to ask a question. Please press star one.
Sherri Baker: It reflects a lower sales price and mix, flattening volumes, and reduced cost.
Speaker 1: transcript
Your first question comes from Matthew McCullough with RBC Capital Markets. Your line is open.
Your first question comes from Matthew Mckellar with RBC capital markets. Your line is open.
Sherri Baker: Slide nine is a year-over-year comparison of segment income and adjusted EBITDA for our tissue business. As arson discussed, we are benefiting from previously announced price increases, higher volumes, and lower input cost. The business delivered 46 million of adjusted EBITDA in the quarter with an 18% margin.
Speaker 5: transcript
All right, thanks very much. Just like to start with the paperboard business, it sounds like you're expecting a gradual recovery in that business, 13, 2024. Maybe you could provide a bit of color on whether that's early in 2024, whether we see that recovery start later in the year. But it sounds like we shouldn't see much of a change in shipments quarter of a quarter in Q4. Can you talk a bit about weather conditions in the paperboard market have sort of improved or worsened through the quarter and into...
Alright, thanks very much.
Just like to start with the paperboard business it sounds like Youre expecting a gradual recovery in that business through 2024.
Maybe you could provide a bit of color on whether that's early in 2024, whether we see that recovery start later in the year, but it sounds like we shouldn't see much of a change in shipments quarter over quarter in Q4.
Sherri Baker: As noted on this slide, in the third quarter we saw the benefits from lower pulp price as it flowed through to our income statement.
Can you talk a bit about weather conditions in the paperboard market of sort of improved or worsened through the quarter and two third.
Speaker 5: transcript
They're progressing through October here. There are any specific areas of strength of weakness by end market you call out. And then what are your customer conversations like at this point? And what gives you confidence in recovery that it starts sort of in 24 years?
Sherri Baker: Slide 15 in the appendix shows a sequential comparison of the third quarter to the second quarter of this year.
Third progressing through October here.
Are there any specific areas of strength or weakness by end market that you call out and then what are.
Sherri Baker: It reflects the benefits that we are seeing from lower input cost, particularly in pulp.
Your customer conversations like at this point and what gives you confidence in the recovery starts sort of in.
Sherri Baker: Slide 10 outlines our capital structure. Our balance sheet remains very strong and our liquidity improved quarter over quarter, now totaling 370 million. During the third quarter, we generated 74 million in free cash flow and reduced net debt by 69 million versus the second quarter. On a year-to-date basis, we generated 76 million in free cash flow. Since 2020, we have reduced our net debt by over 416 million.
24 year. Thanks.
Speaker 3: transcript
Yep, thanks Matthew. So if you look at volume Q2 to Q3, we're flatish, we're actually maybe up slightly in volume. But I think conditions remain stable in Q3 throughout Q3 and we're seeing similar conditions here as we start Q4. We're not seeing immaterial recovery.
Yeah. Thanks, Matthew So if you look at volume Q2 to Q3, where were flattish were actually may be up slightly in volume.
I think conditions remained stable in Q3 throughout Q3, and we're seeing similar conditions here as we as we start Q4, we're not we're not seeing a material recovery.
Speaker 3: transcript
recovery just yet. You know, the market, the SPS production and demand is down, so if you look at, you know, if you look at racing numbers.
Recovery just yet.
The market.
SBS production and demand is down so if you look at.
Sherri Baker: We announced last Friday the addition of a new revolving term loan with borrowing capacity of 270 million. The initial draw on this facility is 150 million. We will use these funds, along with cash on hand, and drawing on our existing ABL to extinguish our 2025 notes. This new agreement extends any debt maturities to 2028. Given the redemption process for the existing 2025 notes, we will fully extinguish the 2025 notes in late November. The initial draw on the facility is fixed for one year at 9.13%. The revolving credit covenants are similar to our existing ABL and the loan is secured by plant property and equipment.
If you look at Risi numbers.
Speaker 3: transcript
You know, they're showing a 10% decline decline this year. We believe that a lot of it is driven by destocking. So at some point the destocking will come to an end and we'll start seeing a gradual recovery back to 2022 levels. If you look at ReC, they're forecasting 4% production increased next year and 5%.
They're showing a 10% decline decline this year, we believe that a lot of that is driven by destocking. So at some point the destocking will come to an end and we'll start seeing a gradual recovery back to 2022 levels. If you look at <unk>. They are forecasting 4% production increase next year and 5% in 2025. So it may take some time to.
Speaker 3: transcript
in 2025. So it may take some time to recover. At this point, we're not prepared to project whether that happens in Q1 or Q2, but we do believe that recovery will start.
Recover at this point, we're not prepared to project whether that happens in Q1 or Q2, but we do believe that recovery will start.
Speaker 3: transcript
We'll start next year. You know, if you look, you know, in the long run, there's some favorable trends in SBS, sustainability trends.
We will start next year.
If you look in the long run there's some favorable trends in SBS sustainability trends the markets are inherently stable. If you look at the at the end use applications. So we do think once we get through this destocking that the market will start recovering gradually in our production and volumes will start gradually recovering in 2024.
Speaker 3: transcript
The markets are inherently stable. And if you look at the end use application, so we do think once we get through this destocking that the market will start recovering gradually and our production and volumes will start gradually recovering in 2024.
Sherri Baker: With this new agreement in place, we have strengthened our balance sheet and improved our financial flexibility. At the end of the third quarter, our net debt to EBITDA ratio was at 1.8 times. We used free cash flows to repurchase $5 million of our stock during the quarter. That translated into over 150,000 shares repurchased at an average price of $33.36 per share. Since we reinstituted the program back in 2022, we have repurchased 614,000 shares at an average price of $32.70 per share. We have roughly $10 million left on our share repurchase authorization.
Speaker 5: transcript
Great, thanks for that. We can stick with paper boards. Is there any additional color you can provide on sort of the timeline and maybe a amount of investments to your contemplating as it relates to the product developments in the paper board business? And then maybe as you think across what could be out there in terms of acquisition opportunities, what might be complementary to your portfolio?
Great Thanks for that.
Maybe we could stick with paperboard.
Is there any additional color you can provide on sort of the timeline and bound of investments youre contemplating as it relates to product development in the paperboard business and then maybe as you think across.
What could be out there in terms of acquisition opportunities.
What might be complementary to your portfolio.
Speaker 3: transcript
Yeah, so we're looking at the independent convert in an independent converter market out there and see what their needs are in the long run.
So we're looking we're looking at the independent converting independent.
Sherri Baker: Let's now move to slide 11 for an outlook on the fourth quarter of 2023, as well as some updates to our full-year expectations. With the expected impact of lower market pricing for paper boards, continued soft paper board demand, and a planned major maintenance outage in our Arkansas mill, we expect adjusted EBITDA and the range of 60 to 70 million in the fourth quarter. For full-year 2023, we expect adjusted EBITDA and the range of 278 to 288 million.
Independent converter market out there and see what their needs are in the long run.
Speaker 3: transcript
not just SBS but other applications, other paperboard applications. So whether it's lighter weight products like FBB, more recycled grades and other products as well. So our aim is to develop...
Not just SBS, but other applications other paperboard application, so whether it's lighter weight products like SBB more recycle grades and other products as well. So are our aim is to develop our products.
Speaker 3: transcript
products that cover the spectrum for those independent converters. We've started the work. The work will continue to next year, so we don't have any definitive time horizons for when we'll make this.
That cover the spectrum for those independent converters. We've started the work the work will continue into next year. So we don't have any definitive time horizons.
For one we will make decisions.
Speaker 3: transcript
And so we're going to continue to work through next year. In terms of potential acquisition targets, as you know, Matthew, these are episodic.
And so we're going to continue to work through through next year in terms of in terms of potential acquisition targets. As you know Matthew These are episodic so what's important to US is the right strategic fit the right quality asset right in the right valuation for those assets. So we'll look at opportunities as they come up but they have to be a good fit for <unk>.
Sherri Baker: This is up from adjusted EBITDA of 227 million in 2022, driven by fewer major maintenance outages, improved operating performance, higher pricing, and lower input costs. Lastly, our other key assumptions for the full-year remain unchanged.
Speaker 3: transcript
So what's important to us is the right strategic fit, the right quality asset and the right.
Speaker 3: transcript
and the right valuation for those assets. So we'll look at opportunities as they come up, but they have to be a good fit for our network. But we do see our-
Work, but we do see ourselves.
Speaker 3: transcript
as a leader in that independent converter market. We want to build a company that provides for the needs of those independent converters. They're an important part of the broader paper board market and it's our intent to be the supplier of choice.
Sherri Baker: Interest expense should be in the 28 to 30 million range. Depreciation and amortization expense should be 97 to 100 million. Capital expenditures should be between 70 and 80 million, which includes approximately 9 million on our Lewis and Recovery Boiler 2 replacement project, an 11 million on the precipitate replacement in Arkansas. As a reminder, the Recovery Boiler project will require approximately 40 million, a total spend, while the precipitator is projected to require 45 million.
As a leader in that independent converter market, we want to build a a company that provides.
Provides provides for the needs of those independent converters. They are an important part of the broader paperboard market and it's our intent to be the supplier of choice.
Okay. Thanks very much.
Speaker 5: transcript
And then just switching over to tissue, you touched on it and we've seen pulp racing come down a lot over the last year and I think you talked about kind of competitive dynamics and what's going on with.
And then just switching over to tissue.
You touched on it we've seen pulp pricing come down a lot over the last year and I think you talked about kind of competitive dynamics and what's going on with that.
Speaker 5: transcript
pricing to some extent there, but any additional color you can provide. And it sounded like you're looking to retain mostly economics you've captured, but just what you're seeing there from competitors and what you expect price to do here if all stays where it is over the next couple of quarters would be great.
Sherri Baker: And finally, our tax rate should be in the mid 20 percent range.
Pricing to some extent there, but any additional color you can provide and it sounded like youre looking to retain most of the economics, Steve captured but.
Arsen Kitch: Let me now turn the call back over to RC. Thanks, Sherry.
Arsen Kitch: We have previously discussed a prioritization for capital allocation to create today. Flight 12 is a framework for our approach. Our top priority is sustaining our assets followed by maintaining a strong balance sheet and finally evaluating value trading opportunities, including returning capital to shareholders.
Just what youre seeing there from competitors and what you expect price to do here if pulp stays where it is over the next couple of quarters would be great. Thanks.
Speaker 3: transcript
We tend to stay away from commenting on pricing projections. What I would tell you is in this market, supply and demand rise.
Hello, Matthew we tend to stay away from commenting on pricing projections, what what I would tell you is in this market supply and demand drives.
Speaker 3: transcript
drive price and as we mentioned in our comments we think there's a good healthy supply and demand balance so that's driving pretty good utilization rates in the industry so if you look back at 2018 through 2020 there's quite a bit of supply added the private branded market which we think outpaced demand growth.
Arsen Kitch: I would like to now spend a few minutes sharing some thoughts about the broader strategy for both of our businesses. To start, operating performance matters greatly in both segments and is critical to meet customer needs. We have made significant progress over the past few years, improving our operations and becoming a more competitive player in both of our businesses.
Drive price.
As we mentioned in our comments.
We think theres, a theres a good healthy supply and demand balance so thats driving pretty good utilization rates in the in.
In the industry. So if you look back at 2018 through 2020, there is quite a bit of supply added to the private branded market, which we think outpaced demand growth.
Speaker 3: transcript
If you look at 21 through 23, there's actually a net reduction in capacity. And then, you know, if you look out over the next three years, we think that the supply additions will roughly match with the mangrove.
Arsen Kitch: But given the capital-intensive nature of our industry, we believe that scale is needed to be able to invest and grow. In paperboard, we believe there were uniquely positioned to become a supplier of choice to independent converters across multiple substrates and product categories. To do that, we will explore offering additional paperboard products, such as lightweight FBB, white top, polyfree cup stock, additional recycled rates, and other products that meet the needs of our customers. We're currently conducting engineering studies to evaluate the feasibility of investing in our existing assets to expand our product offering. We may also be opportunistic buyers of paperboard mill assets across SBS and other substrates.
You look at 'twenty, one through 'twenty three there was actually a net reduction in capacity and then if you look out over the next three years, we think that the supply additions will roughly match with demand growth. So we think we're in a in a different and a better tissue market at this at this point, but I'll refrain from commenting on future pricing in terms of pulp.
Speaker 3: transcript
So we think we're in a different and a better tissue market at this point, but I'll refrain from commenting on future pricing in terms of pulp. We did mention in our prepared remarks that about a quarter of our volume.
We did mention in our prepared remarks that about a quarter of our volume does have a pulp.
Speaker 3: transcript
does have a pulp cost component that's tied to Risi. So we are expecting some headwinds here in the coming quarters, $4 to $6 million per quarter, due to lower pulp costs. But if you look at our margin improvement, over the last several quarters, we believe that we'll be able to retain most of that margin improvement, at least in the near to median terms. So we think the conditions are better.
Cost component, that's tied to risi. So we are expecting some some some headwinds here in the coming quarters $4 million to $6 million per quarter due to lower lower pulp costs, but if you look at our margin improvement.
Over the last several quarters, we believe that we will be able to retain most of that margin improvement at least in the near in the near to medium term. So we think the conditions are better.
Arsen Kitch: Our long-term goal is to build a scaled, high-performing, and diversified paperboard business that is well-matched to the needs of independent paperboard converters in North America.
Speaker 3: transcript
in tissue today than they were over the last several years if you set COVID aside.
Tissue today than they were over the last several years, if you said COVID-19 aside.
Arsen Kitch: In tissue, we believe that consolidation is needed given the consolidated customer landscape and the fragmented supplier base. The top three or four retailers in the U.S, now count for more than half of the private branded tissue market. Given the size and demands of these customers, private branded tissue manufacturers need to need scale to deliver the right combination of cost, quality, and service. In addition, manufacturers need scale to be able to make sizeable long-term investments in your capacity to keep up with the growth of these retailers.
Speaker 5: transcript
Okay, thank you. And then maybe just to drill down on one point there, do you expect a shift in private branded product consumption or sort of the market share there? Do you expect that shift to slow from here given that overall inflationary pressures for consumers seem to have sort of eased? Should we expect that trend to stabilize or do you expect sort of further share gains by private branded products?
Okay. Thank you and then maybe just to drill down on one point there.
Do you expect a shift in private branded product consumption or sort of the market share. There do you expect that shift to slow from here given the overall inflationary pressures for consumers seem to have sort of eased should we expect that trend to stabilize or do you expect sort of further share gains by private branded product from here.
Speaker 3: transcript
You know, we're right around 36% right now, which was roughly the same as we had last quarter. If you go back to 2019, it was less than 32%. And if you go back 10 years.
We're right around 36% right now which was roughly the same as we had last quarter. If you go back to 2000 2019, it was less than 32% and if you go back 10 years, it was quite a bit less than that so we've seen private branded share grow regardless of economic conditions through ups and downs in the.
Arsen Kitch: We believe that recent improvements in the tissue industry could facilitate the creation of a scaled private branded tissue manufacturer. As we stated previously, we're willing to participate in this consolidation under the right market conditions and appropriate values. To be clear, any internal or external investment decisions will be balanced with our goal of maintaining a strong balance sheet and financial flexibility through the cycle. We're going to continue to be disciplined allocators of capital and will seek the right opportunities to create value across both of our businesses.
Speaker 3: transcript
it was quite a bit less than that. So we've seen private branded share.
Speaker 3: transcript
grow regardless of economic conditions through ups and downs in the economic cycle.
<unk> in the economic cycle so.
Speaker 3: transcript
So we do think that there's more runway for private branded share if you look at some European countries there north of 50 percent. We're now at 36 percent.
So we do think that there's more runway for private branded share. If you look at some European countries Theyre North of 50%, we're now at 36%.
Speaker 6: transcript
So, do I think it's going to be consistent growth quarter after quarter? No, but I think if you look at over the long haul, I do think private brands, we believe that private brands will pick up additional share over the next several years.
So do I think it's going to be consistent growth quarter after quarter, no, but I think if you look at over the long haul I do think private brands, we believe that private brands will pick up additional share over the next several years.
Arsen Kitch: In summary, we have spent significant efforts over the last several years improving our operating performance, especially in areas that matter most to our customers. We have also greatly improved our financial position by focusing on cash flow generation and debt reduction.
Okay. Thanks, very much I'll get back in the queue.
Thanks Matthew.
Speaker 1: transcript
Our next question comes from Paul Quinn with RBC Capital Markets. Your line is open.
Our next question comes from Paul Quinn with RBC capital markets. Your line is open.
Arsen Kitch: We are now well positioned to look at all strategic options for our company to grow and create value for our shareholders.
Speaker 7: transcript
Yeah, thanks very much. Good afternoon. I just, I just wanted to tag team off Matt's question on the tissue side. You know, it sounds, sounds decent at 18% EBITDA margin, but is that the best this business can be? I mean, we go back a couple of years, you guys really struggled in the business. And it seems like the pull, you know, now sort of bottoming, turning the other way. You know, you're definitely going to have that cost headwind, just wondering how confident you are of holding that margin.
Yes, thanks, very much good afternoon I.
Arsen Kitch: 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.
I just wanted to tag team on Matt's question on the tissue side.
It sounds sounds decent at 18% EBITDA margin, but is that the <unk> business can be I mean, if we go back a couple of years you guys really struggled in the business and it seems like the pulp now sort of bottoming and turning the other way.
Unknown Executive: 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, please press star 1.
Youre definitely going to have that cost headwind just wondering how confident you are holding that margin.
Speaker 3: transcript
Yeah, so we'll we'll avoid talking about future margin projections, Paul, but I do think that we can retain the bulk of that margin that we picked up here over the last several quarters. If you go back, you know, outside of COVID.
Matthew Mckellar: Your first question comes from Matthew McKellar with RBC Capital Markets. Your line is open. Thanks very much.
Yeah. So we'll avoid talking about future margin projections, Paul but I do think that we can retain the bulk of that margin that we picked up here over the last several quarters. If you go back outside of Covid.
Arsen Kitch: Just like a start with the paperboard business, it sounds like you're expecting a gradual recovery in that business, certain 2024. Maybe you could provide a bit of color on whether that's early in 2024, whether we see that recovery start later in the year. But it sounds like we shouldn't see much of a change in shipments quarter of a quarter in Q4. Can you talk a bit about whether conditions in the paperboard market have sort of improved or worsened through the quarter and to kind of start progressing through October here.
Speaker 3: transcript
You know, we were probably in that and that meant a high single-digit EBITDA margin.
We were probably in that in that mid to high single digit EBITDA margin.
Speaker 3: transcript
You know, we've done a lot of work on our system with our assets and our supply chain.
We've done a lot of work on our system with our assets and our supply chain and our production and our customers. We think we're better positioned operationally.
Speaker 3: transcript
and our production and our customers. We think we're a better positioned operationally.
Speaker 3: transcript
regardless of what happens with full prices, although obviously those are providing a nice tailwind for our margins. You know, the poll is hard to predict, Paul. We've been through, you know, we've talked about this at length over the years. It's hard to predict. We don't see.
Regardless of what happens with pulp prices, although obviously those are providing a nice tailwind for four for our margins.
Pulp is hard to predict Paul we've been through we've talked about this at length over over the years.
Arsen Kitch: Are there any specific areas of strength or weakness by unmarket you call out and then what are your customer conversations like at this point and what gives you confidence in recovery that it starts sort of in 24 year. Thanks. Thanks Matthew. So if you look at volume Q2 to Q3, we're we're flatish. We're actually maybe up slightly in volume. But I think conditions remain stable in Q3 throughout Q3 and we're seeing similar conditions here as we as we start Q4.
It's hard to predict we don't see.
Speaker 3: transcript
You know, global demand fundamentals to drive up pull price here in the near to medium term, although, you know, we've all been wrong. But we do think our business is fundamentally in a much better place than it was a few years ago. And pull prices will do what they do.
Global demand fundamentals to drive our pulp price here in the near to medium term although.
We've all been wrong.
But we do think our business is fundamentally in a much better place than it was a few years ago.
In pulp prices will do what they do.
Speaker 7: transcript
Okay, nature, is there, you know, some product on the tissue side that you're missing or that you'd love to have more of? Is there, you know, just trying to, just figure out your business going for it?
Okay, and then is there.
Some product on the tissue side that that youre missing or that you'd love to have more of it's there.
Arsen Kitch: We're not we're not seeing a material recovery recovery just yet. You know, the market, the SPS production and demand is is down. So if you look at, you know, if you look at VC numbers, you know, they're showing a 10% decline decline this year. We believe that a lot of it is driven by the stocking. So at some point the destocking will come to an end and we'll start seeing a gradual recovery back to 2022 levels.
Just trying to.
Just figure out your business going forward.
Speaker 3: transcript
Yeah, you know, Paul, we cover all quality tiers and products that segments nationally. So that's what makes us somewhat unique in this industry. You know, historically the ultra segment has grown faster than the conventional and the value segments. Our Shelby investment placed to that and we placed a lot of those tons in the ultra space. But I think we're pretty well covered in terms of quality and...
Yes, Paul we cover all quality tiers and product segments nationally. So that's what makes us somewhat unique in this industry historically, the ultra segment has grown faster than the conventional and the value the value segments.
Our Shelby investment place place to that and we've placed.
We placed a lot of those tons in the ultra in the ultra space, but I think we're pretty we're pretty well covered in terms of quality and in products. What I did mentioned in my comments is I think in the long run.
Arsen Kitch: If you look at VC, they're forecasting 4% production increase next year and 5% in 2025. So it may take some time to recover at this point. We're not prepared to project whether that happens in Q1 or Q2, but we do believe that recovery will start. We'll start next year. You know, if you look, you know, in the long run, there's some favorable trends in SPS sustainability trends. The markets are inherently stable. And if you look at the end use application, so we do think once we get through this destocking that the market will start recovering gradually in our production and volumes will start gradually recovering in 2024.
Unknown Executive: Great. Thanks for that.
Speaker 3: transcript
and products. What I did mention in my comments is I think in the long run, what's needed in this industry is that consolidation that is, you know, we're scale players able to invest.
What what's needed in this industry is is that as that consolidation that is.
We're scaled players able to invest in the business in the long run to add capacity to grow low cost capacity, but I think it requires scale. We are a smaller smaller tissue player and those investments are large and.
Speaker 6: transcript
in the business in the long run, to add capacity, to grow low cost capacity. But I think it requires scale. We are a smaller tissue player and those investments are large and they take many years to achieve the kinds of return that we would need to see. So we're not all that well positioned to make those big investments at this point, which is why we think that consolidation is needed. All right.
And they take many years to two two to achieve the kinds of returns that we would need to see so.
All of that well positioned to make those big investments at this point, which is why we think that consolidation is needed.
Unknown Executive: We could stick with paper board.
Arsen Kitch: Is there any additional color you can provide on sort of the timeline and maybe a amount of investments your contemplating is really the product developments in the paper board business. And then maybe as you think across what could be out there in terms of acquisition opportunities. What might be complimentary to your portfolio? Yeah, so we're looking, we're looking at the independent converted market out there and see what their needs are in the long run.
Alright got.
Got it thanks very much best of luck.
Thanks, Paul.
Speaker 1: transcript
There are no further questions at this time. This will conclude our conference call. Thank you for joining us today. You may now disconnect.
There are no further questions at this time this will conclude our conference call. Thank you for joining US today you may now disconnect.
Speaker 8: transcript
Please wait, the conference will begin shortly. The conference will begin shortly.
Please wait the conference will begin shortly.
Okay.
[music].
Okay.
Arsen Kitch: You know, not just SPS, but other applications, other paper board applications, so whether it's lighter weight products like FBB, more recycled grades and other products as well. So our aim is to develop products that cover the spectrum for those independent converters. We've started the work.
Yes.
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Yes.
Okay.
Yes.
Yes.
Arsen Kitch: The work will continue to next year, so we don't have any definitive time horizons for when one will make decisions. And so we're going to continue to work through through next year in terms of in terms of potential acquisition targets as you know, Matthew, these are episodic. So what's important to us is the right strategic fit, the right quality asset and the right and the right valuation for those assets. So we'll look at opportunities as they come up, but they have to be a good fit for foreign network.
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Sure.
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Arsen Kitch: But we do see ourselves as a leader in that independent converter market. We want to build a company that provides provides for the needs of those independent converters. They're an important part of the broader paperboard market and it's our intent to be the supplier of choice.
Unknown Executive: Okay, thanks very much.
Thanks.
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Arsen Kitch: I'm just switching over to tissue. You touched on it and we've seen pulp racing come down a lot over the last year and I think you talked about kind of competitive dynamics and what's going on with phrasing to some extent there but any additional color you can provide and it sounded like you're looking to retain most of the economics you've captured but just you know what you're seeing there from competitors and what you expect price to do here if pulp days where it is over the next couple of quarters it'd be great, thanks.
Yeah.
Yeah.
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Okay.
Arsen Kitch: We tend to stay away from commenting on pricing projections. What I would tell you is in this market supply and demand drives and drive price and as we mention in our comments we think there's a good healthy supply and demand balance so that's driving pretty good utilization rates in the in the industry so if you look back at 2018 through 2020 there's quite a bit of supply added to the private branded market which we think outpaced demand growth.
Yes.
Okay.
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Arsen Kitch: If you look at 21 through 23 there's actually a net reduction in capacity and then you know if you look out over the next three years we think that the supply additions will roughly match with demand growth so we think we're in a in a different and a better tissue market at this point but I'll refrain from commenting on future pricing. In terms of pulp we did mention in our prepared remarks that about a quarter of our volume does have a pulp cost component that's tied to Risi so we are expecting some some some headwinds here in the coming quarters for to six million dollars per quarter due to lower lower pulp costs but if you look at our margin improvement over the last several quarters we believe that we'll be able to retain most of that margin improvement at least in the near in the near to medium term so we think the conditions are better in tissue today than they were over the last several years if you said COVID aside.
Arsen Kitch: Okay thank you and then maybe just to drill down a one point there do you expect a shift in private branded product consumption or sort of the market share there do you expect that shift to slow from here given that overall inflationary pressures for consumers seem to have sort of ease to be expect that trend to stabilize if you expect sort of further share gains by private branded product from here. You know we're we're right around 36% right now which was roughly the same as we had last quarter if you go back to 20 2019 it was less than 32% and if you go back 10 years it was quite a bit less than that so we've we've seen private branded share grow regardless of of economic conditions through ups and downs in the economic in the economic cycle so we do think that there's more runway for private branded share if you look at some European countries there north of 50% we're now at 36% so do I think it's going to be consistent growth quarter after quarter no but I think if you look at over the long haul I do think private brands we believe the private brands will take up additional share over the next several years.
Unknown Executive: Okay thanks very much I'll get back in the queue.
Unknown Executive: Thanks Matt Thank you.
Paul Quinn: Our next question comes from Paul Quinn with our BC Capital Markets. Your line is open. Yeah, thanks very much.
Arsen Kitch: Good afternoon. I just, I just want to tag team up Matt's question on the tissue side. You know, it sounds, sounds decent at 18% even down margin. But is that the best this business can be? I mean, we go back a couple of years. You guys really struggle in the business and it seems like the pulp, you know, now sort of bottoming, turning the other way. You know, you're definitely going to have that cost headwind just wondering how confident you are holding that margin.
Arsen Kitch: Yeah, so we'll, we'll avoid talking about future margin projections, Paul, but I do think that we can retain the bulk of that margin. We picked up your last several quarters. If you go back, you know, outside of COVID, you know, we were probably in that and admit to high single digit EBITDA margin, you know, we we've done a lot of work on our system with our assets and our supply chain and our production.
Arsen Kitch: And our customers, we think we're better positioned operationally, regardless of what happens with pole prices, although obviously those are providing a nice tailwind for for our margins. You know, the pulp is hard to predict fall. We've been through, you know, we've talked about this at length over over the years. It's hard to predict. We don't see, you know, global demand fundamentals to drive up pole price here in the near to medium term, although, you know, we've all been wrong. But we do think our business is fundamentally in a much better place than it was a few years ago. And pole prices will do what they do.
Arsen Kitch: Okay, nature, is there, you know, it's some product on the tissue side that that you're missing or that you'd love to have more of is there, you know, just trying to just figure out your business going forward. Yeah, you know, Paul, we cover all quality tiers and products that segments nationally, so that that's what makes us somewhat unique in this in this industry. You know, historically, the ultra segment has grown faster than the conventional and the value, the value segments.
Arsen Kitch: Our shall be investment place, place to that and we've placed. We've placed a lot of those tons in the ultra in the ultra space, but I think we're pretty, we're pretty well covered in terms of quality and products. What I did mention in my comments is I think in the long run. What's needed in this industry is that consolidation that is, you know, we're a scale players able to invest in the business in the long run to add capacity to grow low cost capacity.
Arsen Kitch: But I think it requires scale. We are a smaller, a smaller tissue player and those investments are large and they take many years to achieve the kinds of return that we would need to see. So we're not all that well positioned to make those big investments at this point, which is why we think that consolidations needed.
Unknown Executive: All right, I get you. Thanks for my special thanks Paul.
Unknown Executive: There are no further questions at this time. This will conclude our conference call. Thank you for joining us today. You may now disconnect.
Unknown Executive: Thank you very much.