Q1 2025 Clearwater Paper Corp Earnings Call
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Carmen: Ladies and gentlemen, thank you for standing by my name is Carmen and I will be your conference operator today.
At this time I would like to welcome everyone to the Clearwater paper first quarter 2025 earnings call.
Carmen: Lines have been placed on mute to prevent any background noise.
Carmen: After the Speakers' remarks, there will be a question and answer session.
Carmen: If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Speaker Change: I would like to withdraw your question Press Star one again, thank you I would like now like to turn the call and purchase loans Bowen Investor Relations go ahead Sir.
Speaker Change: Thank you Carmen good afternoon, and thank you for joining Clearwater paper's first quarter 2025 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 first quarter of 2025 were released shortly after today's market close if you will.
Speaker Change: 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 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 info.
Speaker Change: <unk> provided on our website. Please note slide two of the supplemental information covering forward looking statements rather than reading. This slide will incorporate it by reference into our prepared remarks, and with that let me turn the call over to <unk>.
Speaker Change: Thank you for joining us today and good afternoon, I am going to structure my remarks across three key areas first I will provide a summary of our first quarter results next I'll discuss our perspective on industry conditions and trends and lastly, I'll provide an update on the key strategic initiatives that we're focused on in 2025 Mb.
Speaker Change: <unk>.
Speaker Change: I will then turn the call over to Sherry to provide additional details on our first quarter performance as well as our outlook for the second quarter.
Sherry: Let's begin with an overview of our first quarter results.
Sherry: We delivered $30 million of adjusted EBITDA during the quarter, which was at the high end of our guidance range.
Sherry: This was driven by strong operational performance increased production and sales volumes, primarily due to the <unk> acquisition and benefits from our cost reduction work.
Sherry: Our net sales increased 46% to $378 million versus the first quarter of last year, driven largely by the Augusta acquisition.
Sherry: We successfully integrated the Augusta mill into our operation and are working to capture targeted volume and cost synergies by the end of 2026.
Sherry: We took action to reduce our fixed cost structure by eliminating more than 200 positions across the company representing around 10% of total rolls.
Sherry: We're on track to deliver $30 million to $40 million of savings this year versus 2024, finally, we repurchased approximately $11 million of our shares in the first quarter for a total of approximately $15 million since the new $100 million share buyback authorization in November of 2024.
We're off to a great start in 2025 as the paperboard focused company and our efforts on managing factors that we can control are paying off as evidenced in our first quarter results.
Sherry: Maintaining cost discipline and strong operational execution remain our top priorities as we continue to navigate a challenging market environment.
Next I'd like to provide some commentary on market and industry conditions.
Sherry: Let's start with demand base.
Sherry: Based on <unk> data industry shipments increased by 2% in the first quarter of 2025 versus the first quarter of 2024.
Sherry: Demand is projected to grow by 3% to 5% in 2025 versus 2024 based on various industry publications, which would result in a return to pre COVID-19 levels of demand by the end of the year.
Sherry: Our customers are optimistic about their order books as retailers and quick service restaurants are focusing on driving volume and foot traffic through promotional activity.
Sherry: Based on those trends, we're expecting around 5% volume growth in sales and production sequentially from the first to the second quarter of this year.
Sherry: Now, let's turn to supply industry utilization rates improved sequentially in the first quarter of 2025 to <unk>, 88% versus 84% in the first quarter of 2024.
Sherry: While this is an improvement our industry remains below our cross cycle average utilization of 90% to 95%.
Sherry: New industry capacity is also expected to be added this quarter.
Sherry: Which will increase SBS supply by up to 10% once the asset is fully ramped.
Let me provide some commentary on tariffs.
Sherry: All of our production is U S based and around 90% of our shipments go to domestic customers.
Sherry: The rest is primarily export to Japan, Canada and Mexico.
Sherry: Most of our raw materials are U S sourced as well, although some chemicals pulp and energy are imported primarily from Canada.
Sherry: While it is difficult to predict the impact of tariffs on industry dynamics, we believe that we could be a net beneficiary as domestic customers look for more local supply.
Sherry: Approximately five to 600000 tons of bleach paperboard is imported to North America annually, primarily from Europe, making up around 10% of total SBS supply.
Sherry: In addition, based on our estimates around 200000 tons of Paperboard finished goods are imported annually primarily from Asia.
Sherry: Some examples of these finished goods imports include plates cups and foodservice containers.
Sherry: If a portion of these imports swings to domestic supply we could see improvement in industry operating rates, even as new capacity is added.
Sherry: Finally, let me provide you with an update on our key strategic initiatives for 2025.
Sherry: As we mentioned previously our goal is to strengthen our position as a premier independent supplier of paperboard packaging products to North American converters.
Sherry: We believe that today, we have a strong position in the industry.
Sherry: Along with a geographically advantaged manufacturing footprint with high quality assets.
Sherry: To remain a preferred supplier to our customers, we're investing in product development efforts to broaden our portfolio.
Sherry: These efforts are split into three categories.
Sherry: The first categories compulsory both foodservice products, particularly plates, we have BPI certification and expect to be in the market by year end.
Sherry: The second category is lightweight folding carton products that don't sacrifice print quality and strength.
Sherry: Looking at various options to deliver against this including paper machine upgrades and using mechanical pulp in our products.
Sherry: We believe that we will have a solution ready in 2026.
Sherry: The third category is alternative poly free barrier technologies.
Sherry: We currently have products in the market to meet this need but they are costly to produce which limits broader applications.
Sherry: We'll continue to work on additional barrier technologies that can be scaled up in the market at the right cost structure.
Sherry: In addition to these product development efforts, which are largely based on our existing SBS capacity.
Sherry: We're exploring the potential to expand into additional paperboard substrates.
Sherry: These substrates makeup approximately 50% of the paperboard market outside of SBS.
Sherry: This translates into around 5 million tons of North American demand.
Sherry: We're evaluating these parts of the market as well as our options to more effectively compete.
Sherry: So first substrate is coated unbleached Kraft or C. U K a common application for the substrate is beverage carriers.
Sherry: This substrate uses a similar manufacturing process, but without the bleaching that is inherent to SBS.
Sherry: The other substrate is coated recycled board, our CRB, which is used in folding carton applications across a number of consumer goods categories.
Sherry: We believe that our customer base needs. These products to compete effectively with the large integrated players and we're looking at options to create this capability.
Sherry: Some of these options are capital driven while others would involve an acquisition.
Sherry: In addition to looking at new product offerings and expanding into additional substrates. We are intensively focused on continuing taking actions to reduce our overall cost structure.
Sherry: We're targeting $30 million to $40 million in cost savings in 2025 across SG&A and operations, which we expect to yield $40 million to $50 million annual run rate savings.
Sherry: We previously announced that we took a major step in January with a 10% reduction in all positions across the company.
Sherry: Eliminating more than 200 positions and salaried and hourly roles.
Sherry: We're also targeting spend reductions in other areas, including contractors professional services and maintenance and expect benefits from these initiatives to continue to ramp through the year.
Sherry: Let me conclude by reiterating our view of the industry, we operate in an inherently cyclical industry driven by supply and demand.
Sherry: While we're currently in a down cycle with utilization rates below 90%. We believe this to be a temporary condition until supply and demand come back into balance.
Sherry: A balanced market would see utilization rates between 90, and 95% with an expected EBITDA margin between 13 and 14%.
Sherry: This could translate to more than $250 million of EBITDA with more than $100 million of free cash flow annually.
Sherry: For now our primary focus is to improve our overall cost structure, while providing high quality products and superior service to our customers.
Sherry: With that let me turn the call over to Sherry for a more in depth review of our financials.
Thank you Marshall.
Speaker Change: Four we review our first quarter results in more detail I want to start with an overview of tariffs and the associated potential cost impacts.
Speaker Change: We purchased roughly $80 million of energy and other raw materials from Canada, Our Lewiston, Idaho facility as the top destination for these materials due to the proximity to Canadian suppliers.
Speaker Change: Also source, another $20 million to $25 million of parts and supplies from outside of the U S. A hypothetical 25% tariffs on all of these items would cost us around $25 million per year. However, we believe that much of our raw materials supply from Canada falls under the U S MCA umbrella and us.
Speaker Change: Not currently subject to tariffs however, if a meaningful tariff would be imposed it would be our goal to pass on these cost increases to our customers.
Speaker Change: Additionally, indirect items, such as capital equipment or MRO supplies could see an impact later in the year.
Speaker Change: We expect that it will take time to gain better visibility into potential impacts and we have therefore not included any tariff related impacts into our Q2 and full year outlook assumptions and.
Speaker Change: In the meantime, we are taking actions to qualify additional suppliers.
Speaker Change: Leverage where it exists and mitigate tariff related pass throughs for now cost impacts are minimal and manageable, but we will continue to monitor the situation and react appropriately.
Speaker Change: Turning now to our first quarter results, we had a consolidated net loss of approximately $6 million from continuing operations were <unk> 36 per diluted share. We delivered net sales of approximately $378 million up 46% versus the prior year.
Speaker Change: The year over year increase is driven by our Augusta acquisition, which closed on may 1st of last year.
Speaker Change: Generated approximately $30 million of adjusted EBITDA up from $14 million in the prior year the.
Speaker Change: The year over year improvement was driven by improved operational performance the benefits from the Augusta acquisition and the lack of the Lewiston weather event that impacted us last year.
Speaker Change: Setting these improvements was input cost inflation of approximately $3 million driven by higher fiber and chemical prices.
Speaker Change: We also continue to see paperboard pricing headwinds, which impacted us by $9 million year over year.
Speaker Change: It is important to note that prices were relatively stable quarter over quarter.
Speaker Change: Good news is that we are generating sufficient operational improvements cost savings and synergies to more than offset these pricing and input cost headwinds year over year.
Speaker Change: As Arthur mentioned, we've begun taking steps to reduce our overall fixed cost structure and youre seeing these actions flowing through our financials.
Speaker Change: As we look at SG&A, we have taken steps to reduce head count across our organization. In addition to removing portions of our stranded overhead cost due to our tissue divestiture last November.
Speaker Change: SG&A is essentially flat year over year as a percent of sales declined from 10, 9% to seven 6%.
Speaker Change: As a reminder, we are targeting 6% to 7% of SG&A as a percent of sales this year and believe that we will get there by year end.
Speaker Change: In the first quarter, we repurchased approximately $11 million of our stock for a total of approximately $15 million since the new $100 million share buyback authorization on November one of 2024.
Speaker Change: We continue to believe that these buybacks generate a positive return for our shareholders and we will continue to consider share repurchases as a part of our capital allocation strategy, when we generate sufficient free cash flow after investing in our assets.
Speaker Change: Turning to our outlook for the second quarter of 2025.
Speaker Change: In the second quarter, we expect to deliver $35 million to $45 million of adjusted EBITDA, which excludes any potential impacts from tariffs, we expect approximately 5% growth in sales and production volumes versus the first quarter.
Speaker Change: Raw material costs are expected to be stable with a $6 million decrease in seasonal energy costs versus the first quarter.
Speaker Change: We expect to incur planned major maintenance outage costs of $7 million to $9 million at our Cypress Bend facility and we expect savings from our fixed cost reduction initiatives to continue to ramp in the second quarter.
Speaker Change: For the full year 2025, our assumptions remain largely unchanged, we expect to continue demand recovery, but with utilization rates remaining low as the industry absorbs new capacity that is forecasted to come online beginning this quarter.
Speaker Change: Our internal utilization is projected to be around 85% with expected revenue of approximately one 5% to $1 6 billion as we benefit from a full year of incremental Augusta sales volume.
Speaker Change: We expect improved mill operating performance will offset pricing and inflation headwinds.
Speaker Change: In addition to improved manufacturing performance, we are targeting $30 million to $40 million of fixed cost reduction with actions that should generate an overall, 40% to $50 million annual run rate.
Speaker Change: 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.
Speaker Change: Expect to incur approximately $45 million to $50 million of total direct outage cost this year, including $22 million to $24 million and Louis than in Q3, and $15 million to $17 million and Augusta in Q4.
Speaker Change: We expect capital expenditures of $80 million to $90 million, which includes our projected $70 million to $80 million of annual maintenance Capex plus additional carryover spend from two large projects that we will complete this year.
Speaker Change: As Arthur noted and we stated last quarter, we remain confident in our market cycle recovery and our ability to deliver mid cycle margins in the 13% to 14% range with free cash flow conversion of 40% to 50%, which should produce more than $100 million annual free cash flows.
Speaker Change: I'll close with a brief overview of our capital allocation philosophy.
Speaker Change: Our first goal is to maintain and improve the performance of our assets, which will require approximately $70 million to $80 million of annual maintenance capital.
Speaker Change: This excludes large strategic or replacement projects, which could add another $10 million to $20 million per year on average over the long term.
Speaker Change: Please note that these additional expenditures are episodic and common 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 Cyprus spend in 2024.
Speaker Change: Second we aim to maintain a strong balance sheet with a net leverage ratio of one to two times through the cycle we.
Speaker Change: We may temporarily go above or below that range to provide us with strategic flexibility or during industry down cycles.
Speaker Change: Third we aim to return capital to shareholders. When it provides a better return than reinvesting in the business as I shared earlier, we repurchased approximately $11 million of our shares in the first quarter to generate additional shareholder value let.
Speaker Change: Let me now turn the call back over to <unk> for closing remarks. Thank you Sherry I'll summarize where we are today, we transformed clearwater into a paperwork focused company with two major strategic actions in 2024.
Speaker Change: We are now focused on strengthening our position as an independent supplier of paperboard packaging products to North American converters.
Speaker Change: We will look for opportunities to expand our product portfolio, which may include new applications for our existing paperboard as well as new substrates.
Speaker Change: We have a well invested asset base and a strong balance sheet that will help us persevere through this part of the industry cycle, we remain optimistic about the medium to long term prospects for our industry and our company.
Speaker Change: As a result, we expect strong margins and cash flows through the cycle and aim to strategically deploy capital to create long term shareholder value.
Speaker Change: 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.
Speaker Change: I'd 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: So at this time I would like to remind everyone. If you do have a question be press star one on your telephone keypad.
Speaker Change: I'd like to withdraw your question Press Star one.
Speaker Change: Your first question comes from the line of Matthew Mckellar with RBC capital markets. Please go ahead.
Matthew Mckellar: Hi, good afternoon, thanks for taking my questions.
Speaker Change: All right.
Speaker Change: I was just asking a couple good afternoon guys.
Speaker Change: A couple of questions around kind of tariffs and related issues did you first of all I guess, what's your sense of what's happening with SBB imports here just over the last month or two.
Speaker Change: And then second the 20% to $25 million of purchases I think you've mentioned that would be from outside the U S and Canada.
Speaker Change: As a rough geographic split there and in particular is there any exposure to China, it can be particularly challenging.
Speaker Change: Yes, Matt Let me, let me start with with imports and exports I think looking at monthly data is probably too noisy what I would tell you its imports were.
Speaker Change: Up in 2024.
Speaker Change: And exports were down in 2024, and if you look at whats being forecasted by <unk> in $2025 for imports to actually decreased by 5%.
And for exports to increase by 1% I suspect that's going to be a pretty dynamic number as as tariffs are felt across.
Speaker Change: Across the across the industry like we mentioned in our comments.
Speaker Change: 100% of everything we make in more than 90% of everything we sell is is domestic.
Speaker Change: In the U S and and I suspect that we will have a.
Speaker Change: Domestic customers looking for local supply during this during this time of uncertainty around tariffs and if anything we could potentially benefit from from from those from those dynamics.
Speaker Change: So I think that's that's the first piece the second piece around tariffs just to clarify we import about $100 million.
Speaker Change: About $80 million of that is from Canada, it's chemicals in pulp and some energy.
Speaker Change: The other the.
Speaker Change: The other 20 million comes from other parts of the World I don't have a specific breakdown by country, but I do suspect that some.
Speaker Change: Some some supplies may come from from from China, whether there.
Speaker Change: Zero maintenance supplies. So that's the portion that we're watching.
Speaker Change: And making sure that we either have alternative supplies.
Speaker Change: Supplies or or or we negotiate very hard to mitigate those those those cost increases.
Speaker Change: Great Thanks for that color.
Speaker Change: Yes.
Speaker Change: Next to me just looking at slide 16, it looks like there is a reasonably significant shift in paperboard sales quarter over quarter in terms of mix with folding carton up.
Speaker Change: Service down is that mostly a seasonal shifts with some customer wins and losses in there any kind of color would be helpful. And then as we think about the demand progression into Q2, where you expecting volumes to be up.
Speaker Change: Any significant differences between folding carton and foodservice outlooks to call out there. Thanks.
Speaker Change: Yes, I think the biggest driver there im assuming youre looking at Q1 at 24 versus Q1 of 'twenty five.
Speaker Change: The Big difference there is the inclusion of Augusta.
Speaker Change: And so then you can see that you can see the mix shift as Augusta was added to.
Speaker Change: Two to our to our fold.
Speaker Change: And so that's really the delta that you're seeing from from Q1 to Q1.
Sorry, I just wanted to clarify what I was looking at Q4, 2000, and Florida versus Q1 dollars 25.
Speaker Change: Yep.
Speaker Change: See that okay got it.
Speaker Change: Okay.
Speaker Change: Have a particular, so let's see here.
Speaker Change: We had a small decrease in sales looks like folding carton was relatively flat and it looks like foodservice was.
Speaker Change: It was down I suspect, we had some pretty robust shipments at the end of the year.
Speaker Change: With our foodservice customers, there's nothing in particular that would indicate any.
Speaker Change: Any significant market related slowdown.
Speaker Change: Okay. Thanks for that.
Speaker Change: Next to me just regarding your exploration of options to expand your product offering maybe starting with CRB what.
Speaker Change: What would be your criteria.
Speaker Change: Value, adding M&A if that's the railroad you choose to go down there.
Speaker Change: Yes.
Speaker Change: More broadly speaking I think it has to be a good strategic fit they have to be good.
Speaker Change: Good good quality good quality assets that are a good fit for our network.
Speaker Change: Most importantly.
Speaker Change: We have to we have to believe that we can win in that space that we have a right to win in that space.
Speaker Change: And so we will be looking at both the market as well as any potential assets that may be available in the future.
Speaker Change: Okay, and just around the lightweight folding carton product under development, what kind of cost associated with the paper machine upgrades, you mentioned and how should we think about that product and its share of your overall volumes.
Speaker Change: Late 'twenty six or into 'twenty, seven would you be targeting mostly existing customers who've got a product or are there some new opportunities that can be Jason.
Speaker Change: Yes, I think any of those changes will be on our existing machines. We're still working on an on potential projects on the way to get there. So I don't have a good.
Speaker Change: Good estimate for you in terms of capital required maybe more broadly speaking we believe that.
Speaker Change: Any capital would largely fit within our within.
Speaker Change: Within our stated cap.
Speaker Change: Capital range.
Speaker Change: That we've discussed previously and this will be on our existing equipment with existing capacity. So this is more of a mix.
Speaker Change: Shift versus versus versus incremental revenue growth. So.
Speaker Change: So we would obviously be targeting.
Speaker Change: Working with our existing customers, where they have a need for this type of product.
Speaker Change: And obviously and obviously looking forward for new customers that may be buying this product somewhere else.
Speaker Change: Great. Thanks, and then just a couple of costs related questions.
Speaker Change: To finish how significant would you expect the impact of cost savings to be sequentially in Q2, or maybe put differently, what kind of run rate of cost savings would you expect to exit the quarter at.
Speaker Change: And then just around the synergies from Augusta recognizes a big portion of that 40% to $50 million is capturing volume and cost synergies there but.
Speaker Change: How much of that 40 to 50 have you achieved today just given that the mill is now integrated into your system.
Speaker Change: So I'll take the first one Matt So I would say four on a sequential basis, we'll see probably roughly <unk> the amount of savings in the second quarter that we saw in the first quarter. That's just more from a timing and execution of the various initiatives across the organization you will see some.
Speaker Change: Additional incremental benefit on a sequential basis as youre getting into the back half and then it should probably start to plateau as you're exiting the year that would be how I would think about the ramp up of the fixed cost savings.
Speaker Change: That would be the first one on the second piece, the 40% to $50 million on a got it it is by far volume synergies keep in mind that that assumption also is based off of what we'll call normalized EBITDA margin. So we are certainly seeing a good chunk of the benefit of the volume so far but we are.
Also need to get back to work is that our cross cycle margin in order to achieve that $40 million to $50 million of synergies.
Speaker Change: Yeah.
Speaker Change: Great very helpful. Thanks for all the color I'll turn it back.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: To conclude today's conference call you may now disconnect.
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