Q4 2023 Clearwater Paper Corp Earnings Call

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Clearwater Paper fourth quarter and full year 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.

Ladies and gentlemen, thank you for standing by and welcome to the Clearwater paper fourth quarter and full year 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during that time simply.

Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1. Thank you. As a reminder, today's call is being recorded. I will now hand today's call over to Kyle Nagarkar, Investor Relations. Please go ahead, sir.

Press Star followed by the number one on your telephone keypad.

If you like to withdraw your question Chris Star one.

Thank you as a reminder, today's call is being recorded I would now hand todays call over to Kal Mclaughlin Investor Relations. Please go ahead Sir.

Kyle Nagarkar: Thank you, Operator. Good afternoon, and thank you for joining Clearwater Paper's fourth quarter and full year 2023 earnings conference call. Joining me on the call today are Arsene Kitsch, President and Chief Executive Officer, and Sherry Baker, Senior Vice President and Chief Financial Officer. Financial results for the fourth quarter of 2023 were released shortly after yesterday's market close, along with the filing of our 10-K. 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 Additionally, we will be providing certain non-GAAP information in this afternoon's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release and in the supplemental information provided on our website. Please note slide two of our supplemental information covering forward-looking statements. Instead of re-reading this slide, we are going to incorporate it by reference into our prepared remarks. With that, let me turn the call over to our speakers. Good afternoon, and thank you for joining us today.

Thank you operator, good afternoon, and thank you for joining Clearwater paper's fourth quarter and full year 2023 earnings conference call. Joining me on the call. Today are are some kitch, President and Chief Executive Officer, and Sherri Baker, Senior Vice President and Chief Financial Officer financial results for the fourth quarter 2023 or.

At least shortly after yesterday's market close along with the filing of our 10-K, 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 Clearwater paper Dot Com. Additionally, we will be providing certain non-GAAP information in this afternoons discussion.

A conciliation of the non-GAAP information to comparable GAAP information is included in the press release and in the supplemental information provided on our website. Please note slide two of our supplemental information covering forward looking statements rather than rereading. This slide we are going to incorporate it by reference into our prepared remarks with that let me turn the call.

Over to ours.

Good afternoon, and thank you for joining US today, we will begin today's call with a strategic update and the announcement of our pending acquisition of the Augusta, Georgia Paperboard manufacturing facility from graphic packaging.

Arsene Kitsch: We will begin today's call with a strategic update and the announcement of our pending acquisition of the Augusta, Georgia Paperboard Manufacturing Facility from Graphic Packaging. On our last call, I mentioned that we've made significant progress over the past few years, improving our operations and becoming a more competitive player in both of our businesses. I also mentioned that we believe that scale is needed to be able to invest and grow, especially given the capital-intensive nature of our industry. In Paperboard, we laid out our goal of building a scaled, high-performance, and diversified paperboard business that is well-matched to the needs of paperboard converters in North America.

On our last call I mentioned that we've made significant progress over the past few years, improving our operations and becoming a more competitive player in both of our businesses.

I also mentioned that we believe that scale is needed to be able to invest and grow, especially given the capital intensive nature of our industry.

And paperboard, we laid out at our goal of building a scaled high performing and diversified paperboard business that is wall matched to the needs of paperboard converters in North America.

Arsene Kitsch: The Augusta acquisition is an outstanding strategic fit. It will add significant scale and growth capacity to our paperboard business and strengthen our position as a premier independent supplier of paperboard products to North American converters. We have also stated that we believe in the overall attractiveness of the North American paperboard market. It is a robust 10 million ton market that is growing and well positioned to capitalize on sustainable consumer packaging trends. While demand softened in 2023 and utilization rates fell, this is a cyclical industry, and we expect demand to start recovering in the second half of this year and into 2025. Let me provide you with some additional details regarding the acquisition and synergies. The Augusta site is a well-invested SBS facility with around 600,000 tons of paperboard capacity and about 700 talented employees. With volume upside and cost synergies, we believe that Augusta will contribute $140 to $150 million of adjusted EBITDA by the end of 2026. If realized, we're expecting the post-synergy multiple to approach 4.5 times.

The Augusta acquisition is an outstanding strategic fit it.

We'll add significant scale and growth capacity to our paperboard business and strengthen our position as a premier independent supplier paperboard products to North American converters.

We have also stated that we believe in the overall attractiveness of the North American paperboard market.

It is a robust 10 million ton market that is growing and well positioned to capitalize on sustainable consumer packaging trends.

While demand softened in 2023 and utilization rates fell this is a cyclical industry and we expect demand to start recovering in the second half of this year and into 2025.

Let me provide you with some additional details regarding the acquisition synergies.

The Augustus site is a well invested SBS facility with around 600000 tons of paperboard capacity and about 700 talented employees.

With volume upside in cost synergies, we believe that Augusta will contribute $140 million to $150 million of adjusted EBITDA by the end of 2026.

If realized we're expecting the post synergy multiple to approach four five times.

Arsene Kitsch: The largest component underlying our expected $40-$50 million of annual synergies is volume. We expect the facility to be about 70 to 80 percent utilized in 2024. And assuming a 95 percent long-term utilization rate, we believe that we have up to 150,000 tons of volume upside. Additionally, there are additional cost synergies that we expect to target, including optimizing production across our network, procurement savings, and transportation efficiency. The acquisition is enabled by our strong balance sheet flexibility, resulting from the significant deleveraging that we began in 2020. At the end of 2023, our leverage ratio was around 1.5 times, enabling us to pursue this opportunity. After we complete the acquisition, we expect our leverage ratio to peak between 3.5 and 4 times in the coming quarters. Our top priority will be deleveraging the business toward our normalized goal of 2.5 times during the cycle.

The largest component underlying our expected $40 million to $50 million of annual synergies is volume.

We expect that facility to be about 70% to 80% utilized in 2024, and assuming a 95% long term utilization rate. We believe that we have up to 150000 tons of volume upside.

There are additional cost synergies that we expect to target, including optimizing production across our network procurement savings and transportation efficiencies.

The acquisition is enabled by our strong balance sheet flexibility, resulting from significant deleveraging that we began in 2020.

At the end of 2023, our leverage ratio was around one five times, enabling us to pursue this opportunity.

After we complete the acquisition, we expect our leverage ratio to peak between three five and four times in the coming quarters.

Our top priority will be deleveraging the business toward our normalized goal of two five times through the cycle and we're confident in our ability to do so given our track record of cash flow generation and disciplined capital allocation.

Arsene Kitsch: And we're confident in our ability to do so, given our track record of cash flow generation and disciplined capital allocation. On the tissue side, we have a well-run business with an outstanding team that has a strong track record of performance improvement. The business generated more than $1 billion in sales and $150 million in adjusted EBITDA in 2023. Just like in paperboard, our tissue business needs scale to invest in and grow with our customers. Given the consolidated customer landscape and the fragmented supplier base, we continue to believe that consolidation is needed to build scaled tissue manufacturers that can make sizable long-term investments in capacity to keep up with the growth of these large retailers. Given that industry landscape and our investment in paperboard growth, we will evaluate strategic options for our tissue business. Regardless of the direction that we take, we will remain focused on what's best for our company overall, including our shareholders, customers, and our people. We expect and look forward to completing the Augusta acquisition in the second quarter of this year. The completion of the transaction and timing are subject to regulatory approval.

On the tissue side, we have a well run business with an outstanding team that has a strong track record of performance improvement.

The business generated more than $1 billion in sales and $150 million and adjusted EBITDA in 2023.

Just like in paperboard, our tissue business needs scale to invest and grow with our customers given.

Given the consolidated customer landscape and the fragmented supplier base. We continue to believe that consolidation is needed to build scaled tissue manufacturers that can make sizable long term investments in capacity to keep up with the growth of these large retailers.

Given that industry landscape and our investment in paperboard grow we will evaluate strategic options for our tissue business, regardless of the direction that we take we will remain focused on what's best for our company overall, including our shareholders customers and our people.

We expect and look forward to completing the Augusta acquisition in the second quarter of this year.

The completion of the transaction and timing are subject to regulatory approvals, we will update you on our progress in the coming months.

Arsene Kitsch: We will update you on our progress in the coming months. Now, let's shift our focus to our fourth quarter and full year 2023 results. Please turn to slide six. As you saw in our press release, we had a great year, driven by strong operational execution, lower input costs, and continued strength in our tissue business. We maintained our focus on cash flow generation and reduced our net debt by almost $90 million in 2023. Slide six provides a summary of our consolidated results.

Let's shift our focus to our fourth quarter and full year 2023 results.

Please turn to slide six.

As you saw in our press release, we had a great year, driven by strong operational execution lower input costs and continued strength in our tissue business.

We maintain our focus on cash flow generation and reduced our net debt by almost $90 million during 2023.

Slide six provides a summary summary of our consolidated results.

Arsene Kitsch: We reported net sales of $513 million and adjusted EBIT of $63 million in the quarter, which is within our range and significantly higher than the fourth quarter of last year when we completed our major maintenance at our Lewisman paperboard mill. Our tissue business drove the improvement by more than doubling its adjusted EBITDA from $18 million in the fourth quarter of last year to $46 million this year. Our paperboard business delivered $37 million of adjusted EBITDA in the fourth quarter with continued soft demand and a natural gas disruption that significantly curtailed operations at our Lewiston facility. Let me share a few highlights with you.

We reported net sales of $513 million and adjusted EBITDA of 63 million in the quarter.

Which is within our range and significantly higher than the fourth quarter of last year. When we completed our major maintenance at our Lewiston Paperboard mill.

Our tissue business drove the improvement by more than doubling its adjusted EBITDA from $18 million in the fourth quarter of last year to $46 million this year.

Our paperboard business delivered 37 million of adjusted EBITDA in the fourth quarter with continued soft demand in our natural gas disruption to significantly curtailed operations at our Lewiston facility.

Let me share a few highlights with you.

Arsene Kitsch: Prices increased in our tissue business as compared to the fourth quarter of 2022 and decreased in paperboard, which reflects market trends as reported by RISD. However, lower input costs benefited both of our businesses as compared to the fourth quarter of 2022, particularly in fiber, energy, and freight. We had good operational performance across both businesses as we balanced supply and demand to manage our inventories. Tissue demand continued to be strong, while paperboard demand remained soft.

Prices increased in our tissue business as compared to the fourth quarter of 2022 and decreased in paperboard, which reflects market trends as reported by Risi.

Lower input costs benefited both of our businesses as compared to the fourth quarter of 2022, particularly in fiber energy and freight.

We had good operational performance across both businesses as we balanced supply and demand to manage our inventories.

Tissue demand continued to be strong while paperboard remains soft.

Arsene Kitsch: We reduced net debt by $32 million in the quarter for a total of almost $450 million since 2020. We repurchased $3 million of shares during the quarter for a total of $23 million since 2022, with $7 million remaining on our buyback authorization. With that overview, let me turn to each of our segments and provide some additional details.

We reduced net debt by 32 million in the quarter for a total of almost 450 million since 2020.

We repurchased $3 million of shares during the quarter for a total of 23 million since 2022 with $7 million remaining on our buyback authorization.

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

Arsene Kitsch: Let's begin with our paperboard business on slide eight of our supplemental materials. Then, we will start by focusing on broader industry trends. Based on AFMPA data, shipments were down about 16% full year 2023 versus 2022 and down 15% in the fourth quarter. Operating rates dipped to under 80% in the fourth quarter and were at about 84% for the year. Reflecting these trends, RECI reported price decreases of $80 per ton in the second half of last year and another $40 per ton in February of this year.

Let's begin with our paperboard business on slide eight of our supplemental materials.

Let's start by focusing on broader industry trends based on eighth M. P. A data shipments were down about 16% full year 2023 versus 2022 and down 15% in the fourth quarter.

Operating rates debt to under 80% in the fourth quarter and worried about 84% for the year.

Reflecting these trends, we see reported price decreases of $80 per ton in the second half of last year and another $40 per ton in February of this year.

Arsene Kitsch: While our demand remains soft, we did outperform industry averages with shipments down 9% for the year and flattening in Q4 of 2023 versus Q4 of 2022. We took approximately 15% downtime on our paper machines during the quarter to balance supply and demand. In addition, we also experienced unplanned downtime during the quarter due to a disruption in natural gas supplies to our Lewiston facility in November. That event negatively impacted us by approximately $1 million.

While our demand remains soft we did.

Outperform industry averages with shipments down 9% for the year and flat in Q4 of 2023 versus Q4 of 2022.

We took approximately 15% downtime on our paper machines during the quarter to balance supply and demand.

In addition, we also experienced unplanned downtime during the quarter due to a disruption and natural gas supplies to our Lewiston facility in November.

That event negatively impacted us by approximately $1 million.

Arsene Kitsch: As I mentioned earlier in my remarks, we remain optimistic about the long-term prospects for Paperboard. We're forecasting a gradual, sequential improvement in demand starting the first quarter of this year. We expect a more meaningful recovery in the second half of 2024 and next year. Please turn to slide nine for additional comments on tissue. Let's start with some broader industry trends. Private brand market share remained at a nearly all-time high of 36% based on Cercana panel data.

As I mentioned earlier in my remarks, we remain optimistic about the long term prospects for paperboard.

We're forecasting a gradual sequential improvement in demand starting in the first quarter of this year.

We expect a more meaningful recovery in the second half of 2024 and next year.

Please turn to slide nine for additional comments on tissue.

Let's start with some broader industry trends.

Private brand market share remained at <unk> at a nearly all time high of 36% based on Sir can of panel data.

Arsene Kitsch: Consumers are continuing to shift to private brands due to economic uncertainty and inflation. Utilization rates were at about 94% in Q4, as reported by RISI, which we believe represents a healthy supply and demand balance. As we've discussed previously, more than 180,000 tons of capacity were removed between 2021 and 2023, while more than 350,000 tons of capacity have been announced to be added between 2024 and 2026. All this data supports our view that the tissue industry conditions remain stable.

Consumers are continuing to shift to private brands due to economic uncertainty and inflation.

Utilization rates were at about 94% in Q4 as reported by Risi, which we believe represents a healthy supply and demand balance.

As we've discussed previously more than 180000 tons of capacity were removed between 2021 and 2023.

While more than 350000 tons of capacity had been announced to be added between 2024 and 2026.

All of this data supports our view that the tissue industry conditions remained stable.

Arsene Kitsch: Let's turn to our performance in the quarter. Our business remained very strong, with revenue growing by 3% year over year and adjusted EBITDA more than doubling. Our adjusted EBITDA margin was nearly 17%, driven by higher pricing, lower input costs, and strong operational execution by our team. We remain optimistic that we can retain much of that margin improvement as we head into 2024. With that, I'll turn the call over to Sherry to cover our financial results. Thank you, Arson.

Let's turn to our performance in the quarter, our business remained very strong with revenue growing by 3% year over year and adjusted EBITDA more than doubling.

Our adjusted EBITDA margin was nearly 17%.

Driven by higher pricing lower input costs and strong operational execution by our team.

We remain optimistic that we can retain much of that margin improvement as we head into 2024.

With that I'll turn the call over to Sherri to cover our financial results.

Thank you Carsten.

Sherry Baker: Let's cover our financial performance in the fourth quarter by turning to slide 10. The Consolidated Summary Income Statement shows results for the fourth quarter of 2023 and 2022. In the fourth quarter of 2023, we recorded net income of $17.6 million, net income per diluted share of $1.04, and adjusted net income per diluted share of $1.35. For the full year, we reported net income of $107.7 million, net income per diluted share of $6.30, and adjusted net income of $6.69 per share. The corresponding segment results are on slide 11.

Lets cover our financial performance in the fourth quarter by turning to slide 10.

Consolidated summary income statement results for the fourth quarter of 2023 and 2022.

In the fourth quarter of 2023, we recorded net income of $17 6 million net income per diluted share of $1 four and adjusted net income per diluted share of $1 35.

For the full year, we reported net income of 107 7 million net income per diluted income per share of $6 30.

And adjusted net income of $6 69 per share.

The corresponding segment results are on slide 11, the business performed very well on a consolidated basis with lower input cost and strong operating performance driving a healthy improvement in profitability.

Sherry Baker: The business performed very well on a consolidated basis, with lower input costs and strong operating performance driving a healthy improvement and profitability. Adjusted EBITDA margin rose to 12.3% in the quarter as compared to 5.3% in the fourth quarter of last year, or about 10% if we exclude the impact of the major outage. Slide 12 is a year-over-year comparison of adjusted EBITDA for our paperboard business. The business delivered $37 million of adjusted EBITDA in the quarter with a 15% margin. On a year-over-year basis, lower sales price and mix negatively impacted results, which was more than offset by lower input costs.

Adjusted EBITDA margin rose to 12, 3% in the quarter as compared to five 3% in the fourth quarter of last year or about 10%. If we exclude the impact of the major outage.

Slide 12 is a year over year comparison of adjusted EBITDA for our paperboard business. The business delivered 37 million of adjusted EBITDA in the quarter with a 15% margin on a year over year basis, lower sales price and mix negatively impacted results, which was more than offset by lower input costs.

Sherry Baker: The impact of volume between periods was negligible, as we took market-related downtime in the fourth quarter of 2023 and had our planned major outage in Lewiston in the fourth quarter of 2022. Slide 20 in the appendix shows a sequential comparison of the fourth quarter to the third quarter of this year. It reflects a lower sales price and mix, lower volumes, and higher costs. Slide 13 is a full-year comparison of adjusted EBITDA for our paperboard business. The business delivered $206 million of adjusted EBITDA for the year with a 19% margin. On a full-year basis, higher pricing on paperboard was offset by an unfavorable mix and reduced operating schedules to match supply and demand. These were partially offset by favorable cost inputs, primarily due to freight and energy.

The impact of volume between periods was negligible as we took market related downtime in the fourth quarter at 2023 and had our planned major outage at Lewiston and the fourth quarter of 2022.

Slide 20 in the appendix shows the sequential comparison of the fourth quarter to the third quarter of this year. It reflects a lower sales price and mix lower volumes and higher costs.

Slide 13 is a full year comparison of adjusted EBITDA for our paperboard business the business delivered $206 million of adjusted EBITDA for the year with a 19% margin.

On a full year basis higher pricing on paperboard was offset by unfavorable mix and reduced operating schedules to match supply and demand. These were partially offset by favorable cost inputs, primarily due to freight and energy.

Sherry Baker: Site 14 is a year-over-year comparison of adjusted EBITDA for our tissue business. As Arson discussed, we are benefiting from previously announced price increases and lower input costs. The business delivered $46 million of adjusted EBITDA for the quarter with a 17% margin.

Slide 14 is a year over year comparison of adjusted EBITDA for our tissue business.

As <unk> discussed we are benefiting from previously announced price increases and lower input cost the business delivered $46 million of adjusted EBITDA in the quarter with a 17% margin as noted on this slide in the fourth quarter, we saw the benefit from lower pulp prices as those flowed through to our income.

Sherry Baker: As noted on this slide, in the fourth quarter, we saw the benefit from lower pulp prices as those flowed through to our income statement. Slide 15 is a full year comparison of adjusted EBITDA for our tissue business. The business delivered $151 million of adjusted EBITDA for the year with a 15% margin, which is double that of the prior year on a full-year basis.Increasing pricing, shipments, and production, along with lower freight costs, all positively impacted our results. Slide 21 shows a sequential comparison of the fourth quarter to the third quarter of this year. It reflects the benefits that we are seeing from lower input costs, particularly in pulp, freight, and energy.

Matt.

Slide 15 is a full year comparison of adjusted EBITDA for our tissue business. The business delivered 151 million of adjusted EBITDA for the year with a 15% margin, which is double that of the prior year.

On a full year basis, increasing pricing shipments and production along with lower freight costs all positively impacted our results slide.

Slide 21 shows a sequential comparison at the fourth quarter to the third quarter of this year. It reflects the benefits that we're seeing from lower input costs, particularly in pulp freight and energy.

Sherry Baker: Slide 16 outlines our capital structure. Our balance sheet remains very strong, and our liquidity improved quarter over quarter, now totaling $277 million. During the fourth quarter, we generated $40 million in free cash flow and reduced our net debt by an additional $32 million. On a year-to-date basis, we generated $117 million in free cash flow.

Slide 16 outlines our capital structure, our balance sheet remains very strong and our liquidity improved quarter over quarter now totaling $277 million during the fourth quarter, we generated $40 million in free cash flow and reduced our net debt by an additional $32 million on a year to date basis.

We generated $117 million in free cash flow since 2020, we have reduced our net debt by almost $450 million.

Sherry Baker: Since 2020, we have reduced our net debt by almost $450 million. At the end of the fourth quarter, our net debt-to-EBITDA ratio was approximately 1.5 times. We used free cash flows to repurchase $3 million of our stock during the quarter.

At the end of the fourth quarter, our net debt to EBITDA ratio was approximately one five times, we used free cash flows to repurchase $3 million of our stock during the quarter.

Sherry Baker: That translated into almost 79,000 shares repurchased at an average price of $35.69 per share. We have roughly $7 million left on our share repurchase authorization. We expect to continue to buy back shares to mitigate the impact of dilution from share grants to our employees. We intend to fund the acquisition of the Augusta facility with $490 million of new secured debt, additional draws on our existing ABL and term loan facilities, and cash on hand. Let's now move to slide 17 for an outlook on the first quarter of 2024, as well as some updates to our full year expectations. We experienced a severe weather event at our Lewiston Mill in January that had an estimated $13 million negative impact.

That translated into almost 79000 shares repurchased at an average price of $35 69 per share we have roughly $7 million left on our share repurchase authorization. We expect to continue to buy back shares to mitigate the impact of dilution from share grants to our employees.

We intend to fund the acquisition of the Augusta facility with $490 million of new secured debt additional draws on our existing ABL and term loan facilities and cash on hand.

Let's now move to slide 17 for an outlook on the first quarter of 2024 as well as some updates to our full year expectations. We.

We experienced a severe weather event at our Lewiston mill in January that had an estimated $13 million negative impact that impact is being partially offset.

Sherry Baker: That impact is being partially offset by increasing paperboard demand and production. We are expecting continued strong performance in tissue. With those variables, we expect adjusted EBITDA in the range of 53 to 63 million in the first quarter. For the full year 2024, we expect to maintain strong margins and cash with stable volumes. We also expect a rebound in paperboard demand in the second half of 2024. Our planned major maintenance at Lewiston is expected to negatively impact adjusted EBITDA by $30 to $35 million, and we do expect price and cost to negatively impact us by an additional $40 to $50 million. Finally, our other key assumptions for the full year remain unchanged and do not take into account our announced Augusta acquisition.

By increasing paperboard demand and production.

We're expecting continued strong performance in tissue with those variables, we expect adjusted EBITDA in the range of $53 million to $63 million in the first quarter.

For the full year 2024, we expect to maintain strong margins and tissue with stable volumes. We also expect a rebound in paperboard demand in the second half of 2020 for our planned major maintenance maintenance at Lewiston is expected to negatively impact adjusted EBITDA by 30% to 35 million.

And we do expect price and cost to negatively impact us by an additional $40 million to $50 million.

Finally, our other key assumptions for the full year remain unchanged and do not take into account our announced Augusta acquisition interest expense should be in the $28 million to $30 million range depreciation and amortization expense should be 97 to 100 million.

Sherry Baker: Interest expense should be in the $28 to $30 million range, and depreciation and amortization expense should be $97 to $100 million. Capital expenditures should be between $90 million and $100 million, which includes $26 million for the Lewiston Recovery Boiler Tube Replacement Project and $28 million for the Precipitator replacement in Arkansas. As a reminder, the Recovery Boiler Project will require approximately $40 million in total expenditure, while the Precipitator is projected to require $45 million. And finally, our tax rates should be in the mid-20% range. I will now turn the call back over to Arson.

Capital expenditures should be between 90, and $100 million, which includes $26 million for the Lewiston recover recovery boiler tube replacement project and $28 million for the precipitate or replacement in Arkansas.

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 rate should be in the mid 20% range. Let me now turn the call back over to our city. Thanks Barry.

Arsene Kitsch: Thanks, Sheri. The expected Augusta acquisition is a big strategic step for Clearwater Paper. Upon the expected completion of the transaction, we will welcome the very talented Augusta team to Clearwater Paper. We will focus on successful integration and delivering against our value creation expectations. Our goal is to bring together the best of Augusta and our existing mills to build a stronger paperboard business. Our long-term objective is to build a scaled and diversified paperboard business that meets the needs of our converter customers. We intend to continue to opportunistically look at paperboard assets across multiple substrates.

Expected Augusta acquisition is a big strategic step for Clearwater paper upon the expected completion of the transaction, we will welcome the very talented Augusta team to Clearwater paper.

We will focus on successful integration and delivering against our value creation expectations.

Our goal is to bring together the best of Augusta, and our existing mills to build a stronger paperboard business.

Our long term objective is to build a scaled and diversified paperboard business that meets the needs of our convert converter customers.

We intend to continue to Opportunistically look at paperboard assets across multiple substrates.

We will also continue to evaluate the feasibility of investing in our existing assets to expand our product offering.

Arsene Kitsch: We will also continue to evaluate the feasibility of investing in our existing assets to expand our product offering. While we'll look at additional opportunities in the long run, in the near to medium term, we're going to focus on generating cash flows and deleveraging our balance sheet. We have a proven track record of doing just that, and we expect to be back to our cross-cycle target of 2.5 times by the end of 2026. Let me wrap up by thanking our people for a strong 2023.

While we will look at additional opportunities in the long run in the near to medium term, we're going to focus on generating cash flows and deleveraging our balance sheet.

We have a proven track record of doing just that and expect to be back to our cross cycle target of two five times by the end of 2026.

Let me wrap up by thanking our people for a strong 2023, we delivered outstanding financial results navigated through challenging market conditions and continue to prioritize our customers.

Arsene Kitsch: We delivered outstanding financial results, navigated through challenging market conditions, and continue to prioritize our customers. I would also like to thank our customers for placing their trust in us and our shareholders for their continued support. With that, we will end our prepared remarks and take your questions. At this time, if you would like to ask a question, press star 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 again.

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.

At this time, if you'd like to ask a question press star one on your telephone keypad.

If you'd like to withdraw your question Press Star one again.

Well pause for just a moment to compile the Q&A roster.

Your first question is from the line of Matthew Mckellar with RBC capitals.

Operator: We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Matthew McKellar with RBC Capital. Hi Arsen and Sherry, thanks a lot for taking my call; congrats on the transaction. Maybe to start off, you know, we've seen pricing move a little bit lower for SBS here. Are you able to give us a sense of what the run rate annual EBITDA generation for the Augusta facility would be like based on where SBS prices are today and the utilization rates you're expecting for 24? Listen, we believe that there will be $100 million in EBITDA in 2023. That was, of course, at 2023 prices and volumes. We are expecting a lower carryover in that pricing that you're referring to, but we're expecting a recovery in volume. So the two, in the long run, should offset each other.

Hi, Allison and Sheri. Thanks, a lot for taking my call congrats on the transaction.

Maybe to start off.

We've seen pricing move a little bit lower for SBS here.

To give us a sense of what the run rates annual EBITDA generation for the Augusta facility would be like based on where Sds prices are today and the utilization rates are you expecting for 'twenty four.

We believe that there was a $100 million in EBITDA in 2023.

It was of course, a 2023 prices and in volume, we are expecting a lower carryover and that pricing that you're referring to but we're expecting a recovery in volume.

So the two in the in the long run this should offset each other I think once we complete the transaction will be able to give a better idea of what 2024, it looks like Ed at Augusta.

Arsene Kitsch: I think once we complete the transaction, we'll be able to give a better idea of what 2024 looks like in Augusta. Okay, understood. And then could you give us a bit more color maybe on the cost synergies you expect to achieve on the acquisition by the end of 26, including the cadence of when you'd expect those synergies to be achieved and whether any capex or price increases would be associated with how we bridge to that 26 number? Yeah. So let me let me start.

Okay understood.

And then can you give us a bit more color maybe on the cost synergies you expect to achieve on the acquisition by the end of 'twenty six including the cadence of when you would expect those synergies to be achieved and whether any capex or price increases would be associated with how we bridge to that 26 number.

Yes, So let me let me start let me start with US the bulk of the synergies, we're expecting a really coming from volume.

Arsene Kitsch: Let me start with this. The bulk of the synergies we're expecting are really coming from volume. So we believe the mill is going to be 70 to 80 percent utilized in 2024. In the long run, we should expect to see 95 percent utilization, which is back to historical run rates. So that would imply about 150,000 tons of volume upside that we have at Augusta. So the bulk of those synergies should come from that volume lift. And if you look at historical Clearwater paperboard EBITDA per ton, it's probably in that two to three hundred dollar range, depending on where you are in the cycle.

So we believe the mill is going to be 70% to 80% utilized in 2024 in the long run we should expect to see 95% of utilization, which is back to historical run rates. So that would imply about 150000 tons of volume upside that we have at Augusta. So the.

The bulk of those the bulk of those synergies should come.

From that volume volume lift and if you look at historical Clearwater.

Paperboard EBITDA per ton, it's probably in that two to $300 range, depending on where you are in the cycle.

So the bulk of the synergies I think are going to come from this volume lift.

There is more modest synergies and things like network optimization procurement and transportation, but that I think is secondary to our focus on the commercial side.

Arsene Kitsch: And so the bulk of the synergies, I think, are going to come from this volume lift. There are more modest synergies and things like network optimization, procurement, and transportation. But that, I think, is secondary to our focus on the commercial side. You know, we expect to get these synergies by the end of 2026. We're not prepared to talk about the cadence of, you know, what happens in 25, 26.

We expect to get these to get these synergies by the end of 2026, we're not prepared to talk about the cadence of what happens in 'twenty five 'twenty six I think some of that is going to be dependent on the market recovery that we're expecting but we will have more to say as we as we progressed through the acquisition.

Okay. Thanks for that.

Arsene Kitsch: I think some of that is going to be dependent on the market recovery that we're expecting. But we'll have more to say as we progress through the acquisition. Okay, thanks for that. And just thinking through the utilization projection a bit, where you talked about 70 to 80% in 24, you know, that would be a little bit softer than what you've seen across your own paperboard portfolio, although I think you've performed well in the market recently. But just for completeness, could you give us a bit of color on what's behind those assumptions? Whether there's anything around the relative health of folding cartons versus cup and plates or where you'd expect to concentrate any economic downside given the level of demand you expect in the markets or other factors.

And then just thinking through the utilization projection events, where you talked about 70% to 80% and 24.

That would be a little bit softer than what you've seen across your own paperboard portfolio. Although I think you've outperformed the market recently, but just for completeness could you give us a bit of color on what's behind those assumptions.

Whether there is anything around the relative health of folding carton versus contemplates or where you would expect to concentrate any economic downtime given the level of demand do you expect in the market or the other factors.

Yes, that's a great. It's a great question I think it mostly reversed too to the book of business that we're acquiring with the mill.

So that's so we believe that book of business will will fill the mill up 70% to 80% at the time that we complete the acquisition and enter 2024.

So really that upside is is us capturing additional volume and having some additional wins wins in the market. So it's really more indicative of how the mill is going to be loaded.

Arsene Kitsch: Yeah, that's a great question. I think it mostly refers to the book of business that we're acquiring with the mill. So we believe that the book of business will fill the mill up 70% to 80% at the time that we complete the acquisition into 2024. So really, that upside is us capturing additional volume and having some additional wins in the market. So it's really more indicative of how the mill is going to be loaded and the book of business that we're hoping to retain as part of the acquisition. You're sticking with Augusta.

And in the book of business that that where we're hoping to retain as part of the acquisition.

Sure that makes sense.

Maybe sticking with with Augusta I know you've talked about looking at some additional substrates and paperboard that could add to your customer value proposition I know graphic had done some work historically evaluating the production of folding box board of that facility is that something you'd be at all interested in and then I guess just more broadly can you give us a sense of which substrates you might find.

Arsene Kitsch: I know you talked about, you know, looking at some additional substrates and paperboard that could add to your customer value proposition. I know Graphic had done some work historically evaluating the production of folding box board at that facility. Is that something you'd be at all interested in?

Active are most complementary to your existing portfolio.

Yes.

That's a great question I think what we're going to focus on is what.

What do the what did the converters in North America, what is it that they need and what is it that they're looking for.

In the long run we do believe that there'll be a place in the market for lighter weight paperboard. So we're going to explore those options will also explore other products complementary to SBS that our customers may may need or want in the future beyond beyond SBS, our customers purchase other substrates as well so.

Arsene Kitsch: And then, I guess, just more broadly, can you give us a sense of which substrates you might find attractive or most complementary to your existing portfolio? Yeah, that's a great question. I think what we're going to focus on is what the converters in North America need, and what they're looking for. In the long run, we do believe that there will be a place in the market for lighter weight paperboards, so we're going to explore those options.

We will look at potential acquisitions that makes sense with the other substrates paperboard, but at this point, we are really going to be focusing on on cash flow generation and deleveraging to get us back into a position where.

Arsene Kitsch: We'll also explore other products complementary to SBS that our customers may need or want in the future. Beyond SBS, our customers purchase other substrates as well, so we will look at potential acquisitions that make sense with the other substrates of paperboard. But at this point, we are really going to be focusing on caskwood generation and deleveraging to get us back into a position where we can take advantage of those opportunities. Matthew, this is what we've been saying for the last several years.

Where we can take advantage of those opportunities and Matthew This is what we've been saying for the last several years is the goal of deleveraging is to put us in the spot where we can we can make a transformational.

Acquisition, and our intent is to get us back into that spot that we can continue to grow.

Great that makes sense.

Maybe just zooming out and ticket to your outlook for paperboard more broadly.

It sounds like you've seen a little bit of a pickup in Q1 sequentially here are there any end markets you'd call out as being stronger or weaker meaningfully versus versus Q4.

Arsene Kitsch: The goal of deleveraging is to put us in a spot where we can make a transformational acquisition, and our intent is to get us back into that spot where we can continue to grow. Great, that makes sense. Maybe I can zoom you out and take you through your outlook for paperboard more broadly.

And then maybe.

Can you talk just what's informing your view that we will see improved demand in the second half of the year and whether you would expect imports of folding box board to be a material factor for how you'd expect 24 to play out.

Arsene Kitsch: Sounds like you've seen a little bit of a pickup in Q1 sequentially here. Are there any end markets you call out as being stronger or weaker meaningfully versus? Can you talk about what's informing your view that we'll see improved demand in the second half of the year, and whether you'd expect imports of folding boxboard to be a material factor for how you'd expect 24 to play out? Okay, I think there are three questions there, so I'll try to tackle all three of them. If I miss one, let me know.

Okay, I think there's three questions. There so I'll try to tackle all three of them if I Miss one let me know.

So I think the first one is around which substrate, which which portions of the market are holding up better than others I would say what we've seen in 'twenty three.

As foodservice has held up better than that then folding carton.

That makes it makes sense folding carton is an SBS is used more and higher end applications and I think those have.

Arsene Kitsch: So I think the first one is around which portions of the market are holding up better than others. I would say what we've seen in 23 is food service has held up better than folding carton. That makes sense. Folding carton is, you know, and SBS is used more in higher-end applications, and I think those have had some softness in 2023.

Those have had some softness in 'twenty and 2023.

And in terms of in terms of a demand recovery when we when we say demand, we referred to either consumer demand or our customer converter.

And I think.

That inventory build that we saw in 2022 and into <unk>.

2022 was really substantial and as I have discussions with our customers.

Arsene Kitsch: In terms of demand recovery, when we say demand, we refer to either consumer demand or our customer converter demand. I think that inventory bill that we saw in 2022 was really substantial. And as I discussed with our customers, you know, they still had a hangover of inventory at the end of 2023, but they're working their way through it. And so what we're expecting to happen is a more normalized ordering pattern from our customers as we progress through 2024. We're hoping for some strengthening in consumer demand as well for those higher-end applications of paperboard. So those are the two things that I think will drive a recovery. I think it's gonna be gradual in the next couple of quarters and then strengthen at the end of 2024 and into 2025.

They still have the hangover of inventory at the end of at the end of 2023, but theyre working their way through it.

And so what we're expecting to happen is a more normalized ordering pattern from from our customers as we progressed through through 2024, we're hoping for for some strengthening in consumer demand as well for those higher end applications of paperboard. So those are the two things that I think will drive drive a recovery I think it is.

Going to be gradual and in the next couple of quarters and strengthening into at the end of 'twenty four and into 2025.

Okay, Great and I know, there's a multipart question there I think the last part was just folding.

Folding box board imports are pretty material factor for your outlook in 'twenty four.

What are you seeing on that perhaps.

Thanks, Thanks for reminding me.

So listen if you look at if you look at the data imports in 'twenty, three and we're actually down versus 2022, if you look at Risi data.

Arsene Kitsch: Great, and yeah, I know there's a multi-part question there. I think the last part was just, "I mean, are folding box board imports a pretty material factor for your Outlook in 24?" What are you seeing on that?

They were they were down by almost 20%, 25% year over year, they're projecting that they.

Maybe bump up by 10%.

50, 60000 tons in 'twenty, four and being flat in 'twenty five.

Arsene Kitsch: Thanks for reminding me. So listen, if you look at, if you look at the data, imports in 23 were actually down versus 2022. If you look at RECI data, they were down by almost 20-25% year over year. They're projecting that they, you know, maybe bump up by 10%, or about 50-60,000 tons in 24 and be flat in 25, at right around five, six hundred thousand tons. I mean, those are the historical averages that we've seen.

Right around $5 600000 tons I mean, those are historical averages that we've seen.

And so I know there's been some commentary out there about.

Imports, but from what we're seeing.

Certainly they're here they've been here they've been here for many years in the rate.

The imports is about what we would expect at this time so.

I don't I don't think this is a this is in part driven.

Yeah.

Okay. Thanks, that's really helpful.

Last one on paperboard.

Should we understand I guess your announcement yesterday is essentially confirming that you intend to remain an independent supplier of paperboard.

Arsene Kitsch: And so I know there's been some commentary out there about imports. But from what we're seeing, you know, certainly they're here. They've been here. They've been here for many years.

And by that I mean, you don't see yourself growing into converting operations in a substantial way is is that strategic option pretty firmly off the table at this point.

Arsene Kitsch: And the rate of imports is about what we'd expect at this time. So, you know, I don't I don't think this is import driven. Okay, thanks. That's really helpful. Last one on paperboard.

I think for I think in the near to medium term, that's absolutely right I think we're committed to to.

Two the independent.

Arsene Kitsch: We should understand, I guess, your announcement yesterday is essentially confirming that you intend to remain an independent supplier of paperboard. And by that, I mean, you don't see yourself growing into converting operations in a substantial way. Is that strategic option pretty firmly off the table at this point?

To the converters and worthy independent supplier I think we think it's a it's a great set of customers and we think we have plenty of room.

To grow and Thats been our sweet spot and our value proposition for for many years. So we're going to play to our strengths.

And we think we can be there for those for those customers for those customers in the long run. So yes, our focus has to be that independent supplier.

Arsene Kitsch: I think in the near to medium term, that's absolutely right. I think we're committed to the converters, and we're an independent supplier. I think we think it's a great set of customers, and we think we have plenty of room to grow. And that's been our sweet spot and our value proposition for many years, so we're going to play to our strengths, and we think we can be there for those customers in the long run. So yes, our focus is to be that independent supplier to North American converters. Great, thanks for that. Maybe next time, just switch over to tissue.

A supplier to the North American converters.

Okay, great. Thanks for that.

Maybe next just switching over to tissue.

I'd just like to ask about your process of exploring options there I think.

Previously been pretty candid in reviewing your options for both businesses are able to share at this point, how advanced any proceeds might be for exploring your options for the tissue business.

Even given indication of what your expectations might be for the timeline of value and then any color you could provide on how a sale would work for the Lewiston site in particular, given that mill produces both products.

Arsene Kitsch: I'd just like to ask about your process of exploring options there. I think, you know, you've previously been pretty candid in reviewing your options for both businesses. Are you able to share at this point how advanced any process might be for exploring your options for the tissue business or even give an indication of what your expectations might be for timeline or value, and then any color you could provide on how a sale would work for the Lewiston site in particular given that Mel produces both? Yeah, I think it's a little premature to be jumping to timelines or expectations.

Yes, I think it's a little premature to be to be jumping to timelines or expectations.

We step back.

We talked about our focus on on paperboard growth.

We have a fantastic tissue business, we operate that business really well.

But as I've said before the business does need scale in the industry does need consolidation given the supply and demand landscape.

Arsene Kitsch: If we step back, you know, we talked about our focus on paperboard growth. We have a fantastic tissue business. We operate that business really well. But, as I said before, the business does need scale, and the industry does need consolidation, given the supply and demand landscape.

We'll look at all options and one of those options it may very well be operating the business.

So we'll do the right thing for <unk>.

For our shareholders, we will do the right thing for our customers and our people.

I've said I've said before yes Lewiston.

Lewiston has multiple.

Arsene Kitsch: You know, we'll look at all options. And one of those options could very well be operating the business. So we'll do the right thing for our shareholders. We'll do the right thing for our customers and our people. And I've said I've said before, you know, yes, Lewiston. Lewiston has multiple multiple product categories in there. You know, it's a great site. It's our biggest site, the largest producing site. That site is critical to Clearwater Paper.

Multiple product categories in there.

It's a great site, it's our it's our biggest sites the largest producing site that site is critical to Clearwater paper.

So we're obviously thinking about.

Any implications there, but I think it's premature to be talking about.

Any specific paths.

Sure Okay, that's fair enough.

Last one for me.

Just want to confirm that I heard correctly that the impact from the extreme cold weather events in January was $13 million for the Q1 number.

Arsene Kitsch: So we're obviously thinking about any implications there, but I think it's premature to be talking about any specific path. Sure, okay. Yeah, that's fair enough. One last one for me.

Just want to understand I guess, what but maybe.

Is embedded in that what exactly occurred and whether you might have any business interruption insurance.

Arsene Kitsch: I just want to confirm that I heard correctly that the impact from the extreme cold weather event in January was $13 million for the Q1 number. I just want to understand, I guess, what maybe is embedded in that, what exactly occurred, and whether you might have any business interruption insurance that could be applied against that. So let me start with what's embedded, and Sherry can grab the financial piece. So it's there's a combination of two things. You know, one is equipment damage. So when the freeze happened, it was very cold in Lewiston for an extended period of time. When the mill goes down in that kind of cold, it causes extensive damage.

Could be applied against that in time.

So let me, let me start with what's with some better than Sherry can grab the financial piece. So there's a combination of two things.

One is equipment damage so.

One of the freeze happened it was very cold in Lewiston foreign extended period of time, when the mill goes down.

And that kind of cold that causes extensive damage. So part of it is just equipment damage and repairing equipment. The other part was downtime that we have to take to get the mill back up and running so together that was $13 million and I'm sure. When we can take the insurance question.

Would have a deductible of $4 million that we would have to offset and we have not assumed any recovery in the numbers that we included so any recovery that we would be able to achieve would be an offset to the guidance that we've provided.

Arsene Kitsch: So part of it was just equipment damage and repairing equipment. The other part was downtime that we had to take to get the mill back up and running. So together, that was 13 million dollars.

We've obviously, we were working with our insurance company, So I don't want to imply that.

Sherry Baker: And I'm sure when you take the insurance question. So we would have a deductible of four million dollars that we would have to offset. And we have not assumed any recovery in the numbers that we included. So any recovery that we would be able to achieve would be an offset to the guidance that we provided. And we're obviously working with our insurance companies. So I don't want to imply that, you know, it's 13 minus four is the recovery that we'll see. So we'll have to work through a process with our insurance company and figure out what that recovery would look like. There's both an asset equipment portion of insurance, as well as business center options, so that's what we have to work on.

It's 13 minus four is the recovery that we'll see so we'll have to work through a thorough with our insurance insurance company and figure out what that recovery what would look like.

There is both a an asset equipment portion of insurance as well as business interruption. So that's what we have to work through.

Okay that makes sense. Thanks, very much for that color. That's all for me I'll turn it back thank you.

As a reminder to ask a question.

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Okay.

At this time there are no further questions. Thank you for joining today's call you may now disconnect your lines.

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Sherry Baker: Okay, that makes sense. Thanks very much for that color. That's all for me. I'll turn it back. Thank you. As a reminder, to ask a question... Press Star 1.

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Okay.

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Yeah.

Yeah.

Operator: At this time, there are no further questions. Thank you for joining today's call. You may now disconnect your line.

Yes.

Okay.

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