Q4 2024 Clearwater Paper Corp Earnings Call
Kelvin: Good afternoon, ladies and gentlemen, and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the Clearwater Paper fourth quarter and full year 2024 earnings call.
Kelvin: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star button followed by the number one on your telephone keypad.
Speaker Change: If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Sloan Bohlen, Head of Investor Relations. Please go ahead.
Thank you, Tony.
Sloan Bohlen: Good afternoon and thank you for joining Clearwater Papers' fourth quarter 2024 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.
Speaker Change: Financial results for the fourth quarter of 2024 were released shortly after today's market close. 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.
Speaker Change: Additionally, we will be providing certain non-GAAP financial 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 2 of the supplemental information covering forward-looking statements.
Speaker Change: Rather than reading this slide, we'll incorporate it by reference into our prepared remarks. And with that, let me turn the call over to Arsen.
Arsen Kitch: Thank you for joining us and good afternoon. I'm going to structure my remarks today across three key areas. First, I'll provide a summary of our major strategic accomplishments in twenty twenty four.
Arsen Kitch: Next, I'll discuss our fourth quarter performance, including our perspective on current industry conditions. And lastly, I will outline our near and long-term priorities, including actions that we're taking to reduce our cost structure.
Arsen Kitch: I will then turn the call over to Sherri to provide additional details on our fourth quarter and full year results, as well as our outlook for 2025.
Arsen Kitch: Let's start with an overview of our strategic accomplishments in 2024. We announced the planned acquisition of the Augusta paperboard facility in February of last year.
Arsen Kitch: This was our first major step to transform Clearwater to Premier Independent Paperboard Packaging Supplier North America.
Arsen Kitch: The Augusta acquisition increased our paperboard capacity by around 70% and improved our geographic footprint.
Arsen Kitch: We closed the transaction on May 1st and are well on track to integrate the Augusta Mill into our network.
Arsen Kitch: We believe that this acquisition can contribute $140 to $150 million of annual adjusted EBITDA to Clearwater once we capture volume synergies and assuming the industry returns to normalized cross-cycle utilization levels.
Arsen Kitch: Within three short months of closing on the August acquisition, we announced the planned sale of our tissue business for $1.06 billion.
Arsen Kitch: Our team worked tirelessly over the last several years to improve our tissue business, leading to this outstanding outcome for Clearwater.
Arsen Kitch: We completed the sale on November 1st and utilized the net proceeds to significantly deliver our balance sheet.
Arsen Kitch: These two deals transform Clearwater and position our company for future growth and paperboard. I'm very proud of our team for these tremendous accomplishments in such a short period of time and look forward to the next chapter of our story.
Arsen Kitch: Let me now turn the focus to our performance in the fourth quarter.
Arsen Kitch: We delivered $21 million of adjusted EBITDA across total operations, which included one month of discontinued operations from our tissue business.
Arsen Kitch: The quarter was impacted by Hurricane Helene, particularly operations at our Augusta facility.
Arsen Kitch: The mill suffered some damage, which was then followed by a planned major maintenance outage that took place within a few weeks of the hurricane.
Arsen Kitch: These events created a very challenging operating environment, which led to higher costs and operational disruptions.
Arsen Kitch: The Augusta team did an outstanding job of recovering, and the mill was back on track as of year-end.
Arsen Kitch: As we've discussed throughout 2024, while market demand has continued to gradually improve, the industry continued to operate with utilization rates below historical averages, resulting in lower market pricing and margin pressure.
Arsen Kitch: Lastly, our board authorized a new $100 million share repurchase program, and we repurchased approximately $9 million of our shares through February 7th of this year.
Arsen Kitch: Let me now provide some comments on market and industry conditions. Let's start with demand. Based on AFMPA data, industry shipments increased by 4% in 2024 versus 2023.
Arsen Kitch: Demand is further projected to grow by 3-5% in 2025, based on various industry publications, returning to pre-COVID levels.
Arsen Kitch: This supports our view that demand continues to recover, and we're optimistic about the long-term prospects for paperboard packaging.
Arsen Kitch: Now let's turn to supply. Industry utilization rates improved in 2024 to 85% versus 82% in 2023.
Arsen Kitch: Net exports decreased by approximately 250,000 tons in total, driven by increased global supply and competition.
Arsen Kitch: North American capacity remained largely unchanged in 2024, although new industry capacities forecasted to be added in 2025.
Arsen Kitch: As we've discussed previously, we believe a balanced market will have utilization rates between 90 and 95 percent.
Arsen Kitch: Let me provide you with an overview of the actions that we're taking to drive revenue growth and reduce our cost structure.
Arsen Kitch: We expect this volume to gradually ramp over the next several years.
Arsen Kitch: We have incorporated this volume into our 2025 assumptions that Sherri will discuss in a moment.
In addition, we're taking actions to reduce our cost structure.
Arsen Kitch: We're targeting $30 to $40 million in cost savings in 2025 across SG&A and operations.
Arsen Kitch: We took a major step in January with a 10% reduction in all positions across the company.
Arsen Kitch: This action eliminated more than 200 positions in salaried and hourly roles.
Arsen Kitch: We're also targeting spend reductions in other areas, including contractors, professional services, and maintenance.
Arsen Kitch: We expect benefits from these initiatives to ramp through the year.
Arsen Kitch: We have also incorporated the impact of all these actions in our 2025 Outlook.
Arsen Kitch: Finally, we will continue to explore ways to broaden our product offering to better service our converter customers.
Arsen Kitch: We're focused on compostability, increasing the recycled content of our products, and lightweighting, to name a few.
Arsen Kitch: We have product development efforts underway to deliver these solutions to our customers.
Arsen Kitch: We're also exploring options to diversify into additional paperboard substrates. This may include beverage carrier grades, white top, or recycled board.
Arsen Kitch: These are larger and longer term investments that will likely take 24 to 36 months to execute.
Arsen Kitch: We're kicking off market studies as well as engineering efforts to explore these options.
Arsen Kitch: Let me conclude my comments by reiterating our view of the industry.
Arsen Kitch: We operate in an inherently cyclical industry driven by supply and demand.
Arsen Kitch: With demand being relatively stable, this balance is greatly impacted by changes in supply.
Arsen Kitch: Across the cycle, we would expect utilization rates to average around 90 to 95 percent.
Arsen Kitch: While in an up cycle, these rates can exceed 95% with increasing margins.
Arsen Kitch: SBS is currently in a down cycle, which we believe to be a temporary condition until supply and demand come back into balance.
Arsen Kitch: As we navigate the current environment, we're focused on actions that are within our control, including improving our operational performance, reducing cost, and strengthening our product offering.
Arsen Kitch: With that, let me turn the call over to Sherri for a more in-depth review of our financials.
Thank you, Arsen.
Arsen Kitch: As Arsen mentioned earlier, we delivered $21 million of adjusted EBITDA in the fourth quarter, down from $63 million in the previous year. This decline was driven by two fewer months of contributions from the tissue business, which we divested on November 1st.
Arsen Kitch: The other sources of the decline were major maintenance expenses at our Augusta Mill and lower paperboard pricing. This was partly offset by higher sales and production volumes from the addition of the Augusta Mill and lower input costs.
Arsen Kitch: As we turn to the full year 2024, adjusted EBITDA from total operations was $182 million, down from $281 million in 2023. The change in year-over-year results was predominantly driven by a $90 million impact from lower paperboard pricing.
Arsen Kitch: Two fewer months of contribution from the tissue business also lowered our results versus 2023. Partly offsetting these headwinds was additional volume as a result of our Augusta acquisition and some input cost deflation.
Arsen Kitch: With the completion of the divestiture of our tissue business, we generated significant value.
Arsen Kitch: We utilize the approximately $850 million of net proceeds to significantly de-lever our balance sheet and meaningfully reduce our debt.
Arsen Kitch: For full year 2024, we reduced net debt by $199 million. And as of year-end, we have $275 million of notes outstanding due in 2028 and a net leverage ratio of 1.1 times.
Turning to our outlook for the first quarter of 2025.
Arsen Kitch: In the first quarter, we expect to deliver $20 to $30 million of adjusted EBITDA. We will not incur planned major maintenance outage costs in the first quarter and will continue to match supply to meet demand.
Arsen Kitch: We expect approximately $4-5 million in higher energy costs in the quarter due to higher seasonal pricing and usage. This will also be our first full quarter as a paperboard only business with no tissue impact.
Arsen Kitch: And as Arson mentioned, we took initial actions to reduce our fixed costs in January, including a 10% reduction in all positions across the company. We expect the savings from these actions to ramp throughout the year.
For full year 2025, we are making the following assumptions.
Arsen Kitch: We expect a continued demand recovery, but with utilization rates remaining low as the industry absorbs new capacity that is forecasted to come online beginning in Q2.
Arsen Kitch: Our internal utilization rate is projected to be around 85%, with expected revenue of approximately $1.5 to $1.6 billion as we benefit from a full year of incremental Augusta sales volume.
Arsen Kitch: We are expecting that improved mill operating performance will offset pricing and inflation headwinds.
Arsen Kitch: We are also expecting less impact from weather-related events and other operational disruptions that we experienced in 2024.
Arsen Kitch: In addition to improved manufacturing performance, we are targeting $30 to $40 million of fixed cost reduction with actions that should translate to an overall $40 to $50 million annual run rate.
Arsen Kitch: As previously announced, we are migrating to an annual major maintenance outage cadence, which we believe will lead to smaller, less costly, and more predictable outages.
Arsen Kitch: We expect to incur $40 to $50 million of outage costs with the bulk of the costs coming from Lewiston in Q3 and Augusta in Q4.
Arsen Kitch: We expect capital expenditures of $80 to $90 million, which includes our projected $70 to $80 million of annual maintenance capex, plus additional carryover spend from our large projects that we will complete this year.
Arsen Kitch: As Arsen noted and we stated last quarter, we remain confident in a market cycle recovery and our ability to deliver mid-cycle margins in the 13 to 14 percent range with free cash flow conversion of 40 to 50 percent, which would produce more than $100 million in annual free cash flows.
Arsen Kitch: I will close with a brief overview of our capital allocation philosophy.
Arsen Kitch: Our first goal is to maintain and improve the performance of our assets, which will require approximately $70 to $80 million of annual maintenance capital. This excludes large strategic or replacement projects, which could add another $10 to $20 million per year, on average, over the long term.
Arsen Kitch: Please note that these additional expenditures are episodic and come in large increments. We will communicate these large projects ahead of time, just like we did with the Recovery Boiler Project in Lewiston and the Emissions Project in Cypress Bend in 2024.
Arsen Kitch: We may temporarily go above or below that range to provide us with strategic flexibility. Third, we aim to return capital to shareholders when it provides a better return than reinvesting in the business. Let me now turn the call back over to Arsen for closing remarks.
Arsen Kitch: Thank you, Sherri. I'll summarize where we are today. We completed two major strategic transactions in 2024 that transformed Clearwater into a paperboard-focused company.
Arsen Kitch: We're now focused on strengthening our position as an independent supplier of paperboard packaging products to North American converters.
Arsen Kitch: We will look for opportunities to expand our product offering, which may include new applications for existing paperboard as well as new substrates.
Arsen Kitch: We have a well-invested asset base and a strong balance sheet that will help us weather this part of the industry cycle.
Arsen Kitch: We remain optimistic about the medium to long-term prospects for our industry and our company.
Arsen Kitch: As a result, we expect strong margins in cash flows through the cycle and aim to strategically deploy capital to create long-term shareholder value.
Arsen Kitch: Finally, I'd like to thank our people for their efforts to remain focused on operating safely and providing excellent service to our customers during this time of change and transition.
Arsen Kitch: I would also like to thank our customers for putting their trust in us and our shareholders for their continued interest.
With that, we'll open it up to your questions.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. At this time, I would like to remind everyone to ask a question. Press the star button followed by the number one on your telephone keypad. We will pause just for a moment to compile the Q&A roster. One moment please for your first question.
Speaker Change: Your first question comes from the line of Matthew McKellar, RBC Capital Markets. Please go ahead.
Matthew Mckellar: Hi, good afternoon. Thanks for taking my questions. Maybe first starting with...
Matthew Mckellar: Good afternoon, Arson. Just starting with the new agreement you mentioned, I recognize that is supposed to ramp over several years, but are you able to help us get a little better sense of how meaningful those incremental volumes could be with time or what the shape of that ramp up curve looks like?
Matthew Mckellar: Yeah, so we incorporated into our 25 volume assumptions. This was part of our assumption set that we were contemplating with the Augusta acquisition.
Matthew Mckellar: So it's going to take several years to ramp, but it should provide us with enough volume to fill out our open capacity and capture Augusta synergies.
Matthew Mckellar: And Matthew, if you recall, when we purchased Augusta, the mill was approximately 70% full, which provides us with approximately 150,000 to 200,000 tons of open capacity. So I think it provides you a bit of an idea of what this could look like over the long run.
Speaker Change: Okay, that's that's helpful. Maybe one other kind of clean up just me opening remarks there.
You talk about
Speaker Change: You're expecting improving operating performance to help offset the pricing and inflation headwinds, which in your, I think, initial 2025 assumptions, you kind of dimensionalize is 40 to $50 million.
year over year, just wanted to, I guess,
Speaker Change: Make sure I'm understanding the moving parts here. Are you expecting, I guess, incremental benefits now versus your initial assumptions around how you run your mail system?
Speaker Change: or just wanted to make sure we're thinking about that message in the correct way.
Speaker Change: I think there's probably three areas to think about. I think the first area is improving operational performance. As you mentioned, that should offset those price and cost headwinds. I think we talked about $40 million to $50 million last quarter.
Speaker Change: The next the next set of improvement will come from hopefully fewer disruptions due to the major weather events that we experienced in 2024. Hard to predict, but it's also hard to imagine having.
Speaker Change: that we are that we're pursuing and we took actions here in January to capture some of those savings. I think those are the three buckets of improvement that we're expecting in 25 versus versus 2024.
Speaker Change: Thank you. That's very helpful. Maybe sticking with those headcount reductions and other fixed cost savings.
Speaker Change: Are you expecting much benefit from those initiatives in Q1 or does that really start to show up in Q2?
Speaker Change: It would be, I'd say, a modest amount that you'll see in Q1. It'll start to ramp more through Q2 with, I'd say, the bulk of the savings really happening in the second half of the year.
Great. Okay. That's helpful.
And then just backing up a little bit here.
Speaker Change: If the US applies tariffs to Mexico and Canada and they apply reciprocal tariffs in return
Speaker Change: What do you think the impact of the SPS market would be or, I mean, SPS and the other grades you consider yourself competing against, and then how would your thinking change if we also see tariffs on the European Union? I realize there's a lot of moving parts there and a lot of ambiguity, but just any high-level thoughts would be helpful. Thank you.
Speaker Change: Yeah, so let me let me talk about how it potentially could impact us. You know, we we purchased some of our supplies from from Canada, chemicals and pulp would be two, two, two good examples.
Speaker Change: We do do some export into Mexico and a little bit into Canada, so there would be there would be an impact that we would feel, but it would primarily come from.
Speaker Change: Higher costs passed on to us from our chemical suppliers potentially and pulp suppliers.
Speaker Change: Our goal in that scenario would be to pass on those cost increases to our customers.
Speaker Change: But it's hard to predict how all those tariffs and the flows would be impacted by these tariffs. So that's how we think about impact on clear water. It's higher cost to us, which we would then pass on to our customers.
Speaker Change: We're primarily a domestic supplier, so there could be some impact in the global flow of paperboard, but it's really hard to predict what that would look like.
Okay, okay, that's fair. Thank you.
And if I could, if I get one more in.
Speaker Change: You know obviously your balance sheet's in a great place now and I recognize there are options you're considering that you
Speaker Change: You could have to put some capital against over the medium term, but for the stockists today, do you think you have more room to get aggressive on the Sherri purchases versus $9 million since November? Or how are you thinking about that option for capital allocation? Thanks.
Speaker Change: You know, I think what we said all along is, is we'd be opportunistic buyers of our shares, you know, when they traded at a sufficient discount to what we think our intrinsic value is.
Speaker Change: to maintain their competitiveness and also to maintain a really strong balance sheet.
Speaker Change: Okay, that's great. And if I could do one more, just looking at how demand has started the year here versus maybe where you saw things trend in Q4. Any comments on what you're seeing? Any differences across, you know, folding carton versus common plates? Any other trends to call out here? Thanks.
Speaker Change: Yeah, I think this is maybe a little bit anecdotal, but the conversations we're having with our customers are positive. I think they're expecting 2025 to be a better year than 2024.
would also tell you that.
Speaker Change: Some of our food service demand is more robust than our than our folding carton Demanded in fact we are on several of our machines on a couple of our machines. We are close to being
Speaker Change: to being sold out, especially on what I call extruded products. So think cup, we're essentially being pretty close to being sold out. So it really depends on the category, but we're seeing some hopeful signs of demand continue to recover.
Speaker Change: Okay, great. Thanks for all the color. I'll turn it back.
Speaker Change: There are no further questions at this time. And with that, ladies and gentlemen, that concludes your conference call. We thank you for participating and ask that you please disconnect your lines.