Q3 2025 Clearwater Paper Corp Earnings Call

Speaker #2: Thank you for standing by . At this time I would like to welcome everyone to today's Clearwater Paper Third Quarter 2020 Earnings Conference call .

Arsen Kitch: Thank you for standing by. At this time, I would like to welcome everyone to today's Clearwater Paper Third Quarter 2025 Earnings Conference Call. 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'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Once again, star one. If you'd like to withdraw your question, simply press star one again. Thanks. I'd now like to turn the call over to Sloan Bohlen, Investor Relations. Sloan.

Speaker #2: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Speaker #2: If you'd like to ask a question during this time , simply press star , followed by the number one on your telephone keypad .

Speaker #2: Once again , star one . And if you'd like to withdraw your question , simply press star one again . Thanks . I'd now like to turn the call over to Sloan Bohlen investor Relations Sloan .

Speaker #3: Thank you Greg . Good afternoon , and thank you for joining Clearwater Paper third quarter 2020 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 .

Sloan Bohlen: Thank you, Greg. Good afternoon, and thank you for joining Clearwater Paper Corporation's Third Quarter 2025 Earnings Conference Call. Joining me on the call today are Arsen Kitch, President and Chief Executive Officer, and Sherri Baker, Senior Vice President and Chief Financial Officer. Financial results for the third quarter of 2025 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 our investor relations page at our website at clearwaterpaper.com. Additionally, we will be providing certain non-GAAP financial information in this afternoon's discussion. A reconciliation of the non-GAAP financial 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 reading this slide, we'll incorporate it by reference into our prepared remarks.

Speaker #3: Financial results for the third quarter of 2025 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 our Investor Relations page at our website at Clearwater Paper .

Speaker #3: Com . Additionally , we will be providing certain non-GAAP financial information in this afternoon's discussion . A reconciliation of the non-GAAP Financial information to comparable GAAP information is included in the press release and in the Supplemental information provided on our website .

Speaker #3: Please note slide two of our supplemental information covering forward looking statements . Rather than reading this slide , we'll incorporate it by reference into our prepared remarks .

Speaker #3: And with that, let me turn the call over to Arsen Kitch.

Sloan Bohlen: With that, let me turn the call over to Arsen.

Speaker #4: Thank you and good afternoon, everyone. Let me begin with a summary of our third quarter performance highlights. We delivered adjusted EBITDA of $18 million, which is toward the high end of our guidance range of $10 million to $20 million.

Arsen Kitch: Thank you, and good afternoon, everyone. Let me begin with a summary of our third quarter performance highlights. We delivered an adjusted EBITDA of $18 million, which is toward the high end of our guidance range of $10 to $20 million. Year-to-date adjusted EBITDA from continuing operations stands at $87 million, up from $26 million during the same period last year. This increase is driven mostly by our efforts to reduce fixed costs and for incremental months of Augusta results included in our P&L. Net sales grew by 2% versus the prior quarter, driven by a 6% increase in shipment volumes, partly offset by lower market-driven pricing. We successfully completed all three of our planned major maintenance outages for 2025. The Lewiston outage was completed in August at a direct cost of $24 million. The Augusta outage was completed in October at a direct cost of $16 million.

Speaker #4: Year to date , adjusted EBITDA from continuing operations stands at 87 million , up from 26 million during the same period last year .

Speaker #4: This increase is driven mostly by our efforts to reduce fixed costs and for incremental months of Augusta results included in our PNL . Net sales grew by 2% versus the prior quarter , driven by a 6% increase in shipment volumes , partly offset by lower market driven pricing .

Speaker #4: We successfully completed all three of our planned major maintenance outages for 2025. The Lewiston outage was completed in August at a direct cost of $24 million.

Speaker #4: The Augusta outage was completed in October at a direct cost of $16 million. I'm pleased to report that the execution of our planned major maintenance outages was significantly improved versus the prior year.

Arsen Kitch: I'm pleased to report that the execution of our planned major maintenance outages was significantly improved versus prior year. This confirms our belief that an annual cadence delivers generally more manageable and predictable outages. We've also largely captured the run-rate benefits of our fixed cost reduction initiatives. These are now tracking to around $50 million in savings for the year, which would exceed our original estimate of $30 to $40 million. These savings are helping us offset some of the margin pressure that we're facing during this industry down cycle. Let's now turn to some commentary on the industry and our key strategic initiatives. While the latest third quarter AFMPA report is not yet available, the trends that we saw in Q2 have largely persisted into Q3. We believe a competitor is continuing to ramp new SBS capacity, which may add up to 10% of additional supply to the industry.

Speaker #4: This confirms our belief that an annual cadence delivers generally more manageable and predictable outages . We've also largely captured the run rate benefits of our fixed cost reduction initiatives .

Speaker #4: These are now tracking to around $50 million in savings for the year , which would exceed our original estimate of 30 to 40 million .

Speaker #4: These savings are helping us offset some of the margin pressure that we're facing during this industry down cycle. Let's now turn to some commentary on the industry and our key strategic initiatives.

Speaker #4: While the latest third quarter report is not yet available , the trends that we saw in Q2 have largely persisted into Q3 . We believe a competitor is continuing to ramp up capacity , which may add up to 10% of additional supply to the industry without other changes .

Arsen Kitch: Without other changes, this level of new capacity would result in utilization rates in the low 80% range by year-end. This would be well below the normalized cross-cycle average of 90 to 95% and would result in supply exceeding demand by more than 500,000 tons. These low utilization rates have led to margin pressure, resulting in returns that can't support investments into our capital-intensive industry. This is simply not a sustainable position to be in for the industry, which is why we believe that the industry will rebalance supply with demand in the medium to long term. As we previously discussed, there are several potential paths to this recovery. First, RECE is forecasting an approximately 350,000-ton net capacity reduction in the first half of 2026, which would drive utilization rates to above 90%.

Speaker #4: This level of new capacity would result in utilization rates in the low 80% range by year end . This would be well below the normalized cross cycle average of 90 to 95% , and would result in supply exceeding demand by more than 500,000 tons .

Speaker #4: These low utilization rates have led to margin pressure resulting in returns that can't support investments into our capital intensive industry . This is simply not a sustainable position to be in for the industry , which is why we believe that the industry will rebalance supply with demand in the medium to long term .

Speaker #4: As we previously discussed , there are several potential paths to this recovery . First , Resy is forecasting an approximately 350 000 ton net capacity reduction in the first half of 2026 , which would drive utilization rates to above 90% .

Speaker #4: Second , tariffs and a weakening dollar may put pressure on the price of some of the more than 700,000 tons of imports into the US , encouraging customers to seek domestic suppliers and lastly , industry participants may choose to swing capacity to other grades , such as cook , Whitetop or other non-bleached applications .

Arsen Kitch: Second, tariffs and a weakening dollar may put pressure on the price of some of the more than 700,000 tons of imports into the U.S., encouraging customers to seek domestic suppliers. Lastly, industry participants may choose to swing capacity to other grades, such as coated unbleached kraft (CUK), YTOP, or other non-bleached applications. This could help absorb excess solid bleached sulfate (SBS) capacity. Without a combination of these supply changes, we believe that it will take more than five years of demand growth to fully absorb the excess capacity that exists today. While the current industry oversupply is primarily limited to SBS, we believe that it is having an impact on the other two paperboard substrates. Each substrate has its own strengths and applications, but there's meaningful overlap between them, presenting substitution opportunities to customers.

Speaker #4: This could help absorb excess SBS capacity without a combination of these supply changes . We believe that it will take more than five years of demand growth to fully absorb the excess capacity that exists today .

Speaker #4: While the current industry oversupply is primarily limited to SBS, we believe that it is having an impact on the other two paperboard substrates. Each substrate has its own strengths and applications, but there is meaningful overlap between them, presenting substitution opportunities to customers.

Speaker #4: This is why we believe that pricing has been historically correlated between SBS , cook and CRB . Today , CUC is priced $50 per ton higher than SBS , according to Resy , which is not intuitive given as superior print quality and higher bleaching costs .

Arsen Kitch: This is why we believe that pricing has been historically correlated between SBS, CUK, and coated recycled board (CRB). Today, CUK is priced $50 per ton higher than SBS, according to RECE, which is not intuitive given SBS's superior print quality and higher bleaching costs. If you look at the 30-year history of this market, it is only in recent years that CUK pricing has exceeded SBS. CRB today is priced $120 per ton lower than SBS, according to RECE, which is a narrower gap than we've seen historically. SBS has superior performance characteristics versus CRB, with a higher production cost of more than $200 per ton due to the use of virgin fiber and bleaching. Buying decisions and packaging are driven by several factors, including performance, cost, and sustainability. Most importantly, customers buy paperboard by area or square feet and not tons.

Speaker #4: If you look at the 30 year history of this market , it is only in recent years that CUC pricing has exceeded SBS .

Speaker #4: CRB . Today is priced at $120 per ton , lower than SBS , according to Resy , which is a narrower gap than we've seen historically .

Speaker #4: SBS has superior performance characteristics versus CRB , with a higher production cost of more than $200 per ton due to the use due to the use of virgin fiber and bleaching .

Speaker #4: Buying decisions and packaging are driven by several factors , including performance , cost , and sustainability . Most importantly , customers buy paperboard by area or square feet and not tons to match the strength , performance characteristics of SBS .

Arsen Kitch: To match the strength performance characteristics of SBS, a customer would need to use a heavier weight of CRB, resulting in a price that we estimate to be equal to or higher on a per square foot basis than SBS in today's market. If these trends persist, we believe that CPG and retail customers will look closely at substitutions, which would support higher SBS demand, put a ceiling on CUK and CRB, and return to historical pricing correlations between the three substrates. Let me now shift to some comments on a potential CUK investment that we previously discussed. As a reminder, we're exploring adding CUK swing capability to one of our SBS machines. We have nearly completed the engineering work, and now I can share some additional details on the project.

Speaker #4: A customer would need to use a heavier weight of CRB, resulting in a price that we estimate to be equal to or higher on a per square foot basis than SBS.

Speaker #4: In today's market , if these trends persist , we believe that CPG and retail customers will look closely at substitutions which would support higher SBS demand , put a ceiling on CUC and CRB , and return to historical pricing .

Speaker #4: Correlations between the three substrates . Let me now shift to some comments on potential CUC investment that we previously discussed . As a reminder , we're exploring adding CUC swing capability to one of our SBS machines .

Speaker #4: We have nearly completed the engineering work , and now I can share some additional details on the project . The estimated capital required for the investment is approximately $50 million , with a 12 to 18 month lead time to complete .

Arsen Kitch: The estimated capital required for the investment is approximately $50 million, with a 12 to 18-month lead time to complete. At today's prices, the project return is estimated to be more than 20%, largely based on trading up lower-end SBS volume to CUK. The returns would be considerably higher if we assume that we're filling up open SBS capacity. Our mill in Cypress Bend, Arkansas, is best positioned for this project, given its proximity to customers and access to low-cost softwood fiber required for CUK. We estimate that open market demand for CUK is around 300,000 to 400,000 tons, with potential upside if independent converters had reliable domestic supply. Our goal would be to capture around 100,000 tons of this volume, utilizing about one-third of Cypress Bend's capacity. The remaining two-thirds of the capacity would remain in SBS. We see two upsides to this project.

Speaker #4: At today's prices , the project return is estimated to be more than 20% , largely based on trading up lower end SBS volume to CUC .

Speaker #4: The returns would be considerably higher if we assume that we're filling up open SBS capacity . Our Mill and Cypress Bend , Arkansas , is best positioned for this project given its proximity to customers and access to low cost softwood fiber required for CUC .

Speaker #4: We estimate that open market demand for CUC is around 300,000 to 400,000 tons, with potential upside if independent converters had reliable domestic supply.

Speaker #4: Our goal would be to capture around 100,000 tons of this volume , utilizing about one third of cypress beds . Capacity . The remaining two thirds of the capacity would remain in SBS .

Speaker #4: We see two upsides to this project . First , there is a strategic benefit to expanding our product portfolio to better serve our converter customers .

Arsen Kitch: First, there's a strategic benefit to expanding our product portfolio to better serve our converter customers. Second, it would enable us to more fully utilize our network capacity during an SBS industry downturn. We may conclude in the future that this is a good investment, but we're putting a final decision on hold at this time. We remain focused on running all three of our SBS mills, vigorously defending our SBS market share, and preserving the strength of our balance sheet. With that, I'll turn the call over to Sherri to discuss our Q3 financial results in more detail, as well as provide an outlook for Q4 and some additional thoughts on 2026.

Speaker #4: Second , it would enable us to more fully utilize our network capacity during an SBS industry downturn . We may conclude in the future that this is a good investment , but we're putting a final decision on hold at this time .

Speaker #4: We remain focused on running all three of our SBS mills, vigorously defending our SBS market share, and preserving the strength of our balance sheet.

Speaker #4: With that , I'll turn the call over to Shari to discuss our Q3 financial results in more detail , as well as provide an outlook for Q4 and some additional thoughts and some initial thoughts on 2026 .

Speaker #5: Thank you . Arsen Kitch . Let's start by reviewing our financial performance in the third quarter . In more detail . Net sales were at $399 million , up 1% year over year , driven by a 3% increase in paperboard shipment volumes , partially offset by lower market pricing .

Sherri Baker: Thank you, Arsen. Let's start by reviewing our financial performance in the third quarter in more detail. Net sales were at $399 million, up 1% year over year, driven by a 3% increase in paperboard shipment volumes, partially offset by lower market pricing. Net loss from continuing operations was $54 million, or $3.34 per diluted share, primarily due to a $48 million non-cash impairment of goodwill. This non-cash impairment represents all of our remaining goodwill. Most of this goodwill was accumulated through the acquisition of Manchester Industries in 2016. The impairment was driven by the decline in our market capitalization as compared to the increase in our book value, which was driven by the gain from divestiture of our tissue business late last year. Adjusted EBITDA was at $18 million towards the higher end of our guidance range of $10 to $20 million.

Speaker #5: Net loss from continuing operations was $54 million , or $3.34 per diluted share , primarily due to a $48 million non-cash impairment of goodwill .

Speaker #5: This non-cash impairment represents all of our remaining goodwill . Most of this goodwill was accumulated through the acquisition of Manchester Industries in 2016 .

Speaker #5: The impairment was driven by the decline in our market capitalization as compared to the increase in our book value , which was driven by the gain from divestiture of our tissue business late last year .

Speaker #5: Adjusted EBITDA was 18 million towards the higher end of our guidance range of 10 to 20 million . We saw improved cost , performance due to our fixed cost reduction initiatives , which more than offset lower pricing and higher input costs .

Sherri Baker: We saw improved cost performance due to our fixed cost reduction initiatives, which more than offset lower pricing and higher input costs. SG&A as a percent of sales was at 6.2% at the lower end of our targeted range of 6% to 7% of net sales. We believe that this is at the lower end of our industry benchmarks, demonstrating our commitment to running a lean, cost-effective company. Let's now turn to our balance sheet and capital allocation. We generated $34 million in cash from operations during the quarter and approximately $3.5 million in free cash flows. Our net leverage ratio is at 2.7 times, and we have ample available liquidity of $455 million. While our leverage ratio has increased due to the current industry down cycle, our aggregate debt level has remained stable as we continue our focus on maintaining a strong balance sheet.

Speaker #5: G&A as a percent of sales was at 6.2% at the lower end of our targeted range of 6 to 7% of net sales .

Speaker #5: We believe that this is at the lower end of our industry benchmarks , demonstrating our commitment to running a lean , cost effective company .

Speaker #5: Let's now turn to our balance sheet and capital allocation . We generated $34 million in cash from operations during the quarter , and approximately $3.5 million in free cash flows .

Speaker #5: Our net leverage ratio is at 2.7 times , and we have ample available liquidity of 455 million . While our leverage ratio has increased due to the current industry down cycle .

Speaker #5: Our aggregate debt level has remained stable as we continue our focus on maintaining a strong balance sheet . We also repurchased $2 million of shares , bringing our total to $20 million against our $100 million authorization .

Sherri Baker: We also repurchased $2 million of shares, bringing our total to $20 million against our $100 million authorization. We will consider additional share repurchases when we have a line of sight to free cash flow generation in the near to medium term. Turning now to our outlook for the fourth quarter, we expect adjusted EBITDA of $13 to $23 million. We expect slightly lower paperboard shipments versus the third quarter due to seasonality. We expect 3% to 4% lower production volume, driving less cost absorption than during the prior quarter. We have largely captured the benefits from our fixed cost reduction efforts in previous quarters. While we will maintain those savings, we do not expect significant additional savings between the third and fourth quarters.

Speaker #5: We will consider additional share repurchases when we have a line of sight to free cash flow generation in the near to medium term .

Speaker #5: Turning now to our outlook for the fourth quarter , we expect adjusted EBITDA of 13 to 23 million . We expect slightly lower paperboard shipments versus the third quarter due to seasonality .

Speaker #5: We expect 3 to 4% lower production volume , driving less cost absorption than during the prior quarter . We have largely captured the benefits from our fixed cost reduction efforts in previous quarters , and why , while we will maintain those savings , we do not expect significant additional savings between the third and fourth quarters .

Speaker #5: We expect other input costs to remain relatively stable , and our guidance includes $16 million of major maintenance outage costs at our Augusta mill , which was completed in October .

Sherri Baker: We expect other input costs to remain relatively stable, and our guidance includes $16 million of major maintenance outage cost at our Augusta mill, which was completed in October. Lastly, let me provide you with some of our initial assumptions for 2026. We expect revenue of around $1.45 to $1.55 billion and a capacity utilization rate in the mid-80% range. We are also assuming that we'll see the carryover impact from 2025 market-driven price changes into 2026. We expect to generate enough productivity and cost reductions to offset 2 to 3% of cost inflation. We expect capital expenditures of $65 to $75 million. To generate incremental cash flow, we will target more than $20 million in working capital improvements, primarily in inventory. Lastly, given newly enacted tax legislation, we do not expect to be a net cash taxpayer next year.

Speaker #5: And lastly , let me provide you with some of our initial assumptions for 2026 . We expect revenue of around 1.45 to 1.55 billion , and a capacity utilization rate in the mid 80% range .

Speaker #5: We are also assuming that we'll see the carryover impact from 2025 , market driven price changes into 2026 . We expect to generate enough productivity and cost reductions to offset 2 to 3% of cost inflation .

Speaker #5: We expect capital expenditures of 65 to 75 million to generate incremental cash flow . We will target more than $20 million in working capital improvements , primarily in inventory .

Speaker #5: And lastly , given newly enacted tax legislation , we do not expect to be a net cash taxpayer next year . The biggest variable that is difficult for us to predict is price changes in 2026 .

Sherri Baker: The biggest variable that is difficult for us to predict is price changes in 2026. Currently, RBC Capital Markets is forecasting an increase in SBS folding carton price of $30 per ton and cup stock of $40 per ton in the first half of next year. This corresponds to their assumption that utilization rates will improve to over 90%, with a net industry capacity reduction of approximately 350,000 tons. Regardless of industry conditions, we remain focused on operating effectively, reducing our cost, and maintaining a strong balance sheet. I'll now turn the call back to Arsen for closing remarks.

Speaker #5: Currently , Resy is forecasting an increase in SBS folding carton price of $30 per ton and Cub stock of $40 per ton in the first half of next year .

Speaker #5: This corresponds to their assumption that utilization rates will improve to over 90% , with a net industry capacity reduction of approximately 350,000 tons .

Speaker #5: Regardless of industry conditions . We remain focused on operating effectively reducing our cost and maintaining a strong balance sheet . I'll now turn the call back to Arsen for closing remarks .

Speaker #4: Thank you Sherri . While we're navigating a challenging industry environment , we remain confident in the long term fundamentals of the paperboard market and our ability to generate strong returns .

Arsen Kitch: Thank you, Sherri. While we're navigating a challenging industry environment, we remain confident in the long-term fundamentals of the paperboard market and our ability to generate strong returns. We have high-quality assets that are geographically well-positioned to serve independent customers, and we intend to maintain our market share. We believe that paperboard packaging has strong demand fundamentals as consumers and customers continue to seek sustainable and renewable packaging solutions. We have a strong balance sheet with manageable debt levels and more than $450 million in liquidity, positioning us to weather this current downturn. In an environment where utilization rates return to 90 to 95%, we expect to achieve cross-cycle adjusted EBITDA margins of 13 to 14%, resulting in free cash flow conversion of 40 to 50% or over $100 million in free cash flow per year, assuming $1.8 to $1.9 billion in net sales.

Speaker #4: We have high quality assets that are geographically well positioned to serve independent customers , and we intend to maintain our market share . We believe that paperboard packaging has strong demand fundamentals as consumers and customers continue to seek sustainable and renewable packaging solutions .

Speaker #4: We have a strong balance sheet with manageable debt levels and more than $450 million in liquidity, positioning us to weather this current downturn in an environment where utilization rates return to 90% to 95%.

Speaker #4: We expect to achieve cross-cycle adjusted EBITDA margins of 13% to 14%, resulting in free cash flow conversion of 40% to 50%, or over $100 million in free cash flow per year.

Speaker #4: Assuming 1.8 to 1.9 billion in net sales . Let me conclude my remarks by thanking our people for their efforts to remain focused on operating safely and providing excellent service to our customers .

Arsen Kitch: Let me conclude my remarks by thanking our people for their efforts to remain focused on operating safely and providing excellent service to our customers. 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 #4: 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 #2: Great . Thanks . And at this time , I would like to remind everyone , in order to ask a question , it is star and the number one on your telephone keypad .

Operator: Great. Thanks, Arsen. At this time, I would like to remind everyone in order to ask a question, it is star and the number one on your telephone keypad. Once again, star one. We will pause just a moment to compile the Q&A roster. It looks like our first question today comes from the line of Sean Stewart with TD Cowen. Sean, please go ahead.

Speaker #2: Once again , star one . And we will pause just a moment to compile the Q&A roster . And it looks like our first question today comes from the line of Sean Stewart with TD Cowan .

Speaker #2: Sean, please go ahead.

Speaker #6: Thanks . Good afternoon everyone . Arsen I wanted to start with the decision to to hold the cook up , swing capacity project .

[Analyst 1]: Thanks. Good afternoon, everyone. Arsen, I want to start with the decision to hold the CUK swing capacity project. I gather, given a pretty strong return profile for that project, this is more around wanting to hit balance sheet targets. Assuming that's correct, can you give us a sense of where you would like to see leverage ratios get to or the free cash flow profile for the overall company improve to before you would greenlight that project?

Speaker #6: You know , I gather given a pretty strong return profile for that project . This is more around wanting to hit balance sheet targets .

Speaker #6: Assuming that's correct , can you give us a sense of where you would like to see leverage ratios get to , or free cash flow profile for the overall company ?

Speaker #6: Improved to before you would greenlight that project ?

Speaker #4: Yeah , good question . So you're right . I think it's a good it's likely a good project , but we're putting that decision on hold .

Arsen Kitch: Yeah, good question. You're right. I think it's a good, it's likely a good project, but we're putting that decision on hold. It would take more than two years for us to deliver cash flow from this project, which means we'd have to finance it through debt. Right now, we need to prioritize maintaining a strong balance sheet and focusing on running our SBS mills and defending our market share. You know, we said previously we're targeting leverage ratio in the 1% to 2% range, EBITDA margins cross-cycle 13% to 14%. We'll revisit this decision later. In today's market environment and today's crisis, it is a very attractive return, but we have to revisit it in the future and see what those conditions look like and see if we need to update our assumptions.

Speaker #4: It would take more than two years for us to deliver cash flow from this , from this project , which means we'd have to finance it through debt .

Speaker #4: And right now we need to prioritize maintaining a strong and a strong balance sheet and focusing on on running our SBS mills and defending our our market share .

Speaker #4: You know , we've said previously , we're targeting leverage ratio in the 1 to 2 , 1 to 2% range . EBITDA margins across cycle 1,314% .

Speaker #4: So we'll revisit this decision . Decision later at today's in today's market environment and today's prices , it is a very attractive return .

Speaker #4: But we have to revisit it in in the future and see what what those conditions look like and see if we need to update our assumptions .

Speaker #6: Okay . Understood . On that front . And then with respect to your your view on the market outlook for SBS , you know , I gather a lot of this is based on what Ricci's forecasting in terms of forthcoming capacity closures .

[Analyst 1]: Okay. Understood on that front. With respect to your view on the market outlook for SBS, I gather a lot of this is based on what RBC is forecasting in terms of forthcoming capacity closures. According to their forecast, we would need to see those announcements soon. I guess I'm wondering on your perspective of industry willingness to make these, to take these initiatives to rebalance the market and the extent to which you're seeing any import relief at this point as tariffs take hold and if that's helping at the margin at all.

Speaker #6: You know , according to their forecast , you know , we would need to see those announcements soon . I guess I'm wondering on your perspective of industry willingness to make these , to take these initiatives to rebalance the market and the extent to which you're seeing any import relief at this point as , as tariffs take hold .

Speaker #6: And if that's helping at the margin at all .

Speaker #4: Yeah . Listen , we're we're not going to comment on what our competitors may or may not do . You're right . Ricci is forecasting a first half net capacity reduction of 350,000 tonnes .

Arsen Kitch: Yeah. Listen, we're not going to comment on what our competitors may or may not do. You're right. RECE is forecasting a first-half net capacity reduction of 350,000 tons. They're assuming a turn in the market. We're certainly hoping for that, but we're planning for tomorrow looking like today. From an import perspective, it's still a bit early to tell, but as we look at European imports July year to date, they're down, I believe, approximately 10%. I think you're starting to see some cracks in the import balance into North America. Between a 15% tariff and a weakening dollar, absorbing 20% or 30% of additional costs for an importer into North America, I think, is getting harder and harder. For domestic customers, I think they're looking for more reliable, stable domestic supply. We're optimistic that this will be a tailwind for us as we head into 2026.

Speaker #4: So they're they're assuming a a turn in in the market . We're certainly you know , we're certainly hoping for that . But we're planning for tomorrow looking looking like looking like today from an import perspective .

Speaker #4: It's still a bit early to tell . But as we look at European imports July year to date , they're down . I believe approximately 10% .

Speaker #4: So I think you're starting to see some cracks in in the import balance into North America . You know , between a 15% tariff and a weakening dollar , absorbing 20 or 30% of additional costs for a for an importer into North America .

Speaker #4: I think is getting harder and harder . And for domestic customers , I think they're looking for more reliable , stable domestic supply .

Speaker #4: So we're we're optimistic that this will be a tailwind for us as we head into 2026 .

Speaker #3: Okay .

[Analyst 1]: Okay. Just one last one, maybe for Sherri. You know, you went through a bunch of 2026 metrics that you're targeting. Do you have an initial view on what the maintenance schedule is going to look like? I appreciate you're smoothing this out now with a more regular schedule across the mill platform. Can you give us perspective on the cadence of anticipated closures in 2026, and are we safe to assume that the overall expense that you're targeting would be similar to 2025 levels?

Speaker #6: Just one last one , maybe for Sherry . You know , you went through a bunch of 20 , 26 metrics that you're targeting .

Speaker #6: Do you have an initial view on what the maintenance schedule is going to look like? I appreciate your smoothing this out.

Speaker #6: Now, with a more regular schedule across the mill platform, can you give us perspective on the cadence of anticipated closures in 2026?

Speaker #6: And are we safe to assume that the overall expense that you're targeting would be similar to 2025 levels ?

Speaker #5: Yeah . So I'll answer the second part first . You should expect the cost to look very similar to what we see in 25 .

Sherri Baker: I'll answer the second part first. You should expect the cost to look very similar to what we see in 2025. I would start there. We're still finalizing the schedules for next year, so we'll be able to come out and tell you exactly which facilities and which quarters, probably by our February call. We'll highlight if there's any overlap or inconsistencies if we change the quarters.

Speaker #5: So I would start there . We're still finalizing the schedules for next year , so we'll be able to come out and and tell you exactly which facilities and which quarters , probably by our by our February call .

Speaker #5: And then we'll , we'll highlight if there's any overlap inconsistencies if we change the quarters .

Speaker #4: Sean , maybe one more comment on that . We we had our our Lewiston outage in late , late Q2 . So it was it was in August with Augusta and in October .

Arsen Kitch: Sean, maybe one more comment on that. We had our Lewiston outage in late Q2. It was in August with Augusta in October. Doing an outage in the middle of summer is pretty challenging from just a heat perspective. We are looking at potentially moving up that outage into earlier in the summer, maybe late Q2, just to make it a safer, more manageable outage. We are still finalizing those details, but that is a potential for us to have that Lewiston outage a bit earlier in the year, which would mean that we would have two Lewiston outages within a 12-month period, potentially. We will share that with you in February.

Speaker #4: Doing an outage in the middle of summer is pretty challenging from from just a heat perspective . So we are looking at potentially moving up that outage into earlier in the summer , maybe late , late Q2 , just to make it a as safe or more manageable outage .

Speaker #4: So we're still finalizing those details , but that is a potential for us to have to have that . Lewiston outage a bit earlier in the year , which would mean that we would have a two Lewiston outages within a 12 month , a 12 month period , potentially .

Speaker #4: But we'll we'll share that with you in February .

Speaker #6: Okay . Okay . That's all I have for now . Thanks very much .

[Analyst 1]: Okay. Okay. That's all I have for now. Thanks very much.

Speaker #2: Thanks , Sean . And our next question comes from the line of Matthew Mackellar at RBC . Matthew , please go ahead .

Operator: Thanks, Sean. Our next question comes from the line of Matthew McKellar at RBC Capital Markets. Matthew, please go ahead.

Speaker #7: Hi . Thanks very much for taking my questions . First for me , it's in a quarter . Were solidly ahead of where you sort of guided to it looks like food service sales are pretty healthy , but could you provide some additional perspective on where you saw the incremental strength versus your expectations ?

Matthew McKellar: Hi. Thanks very much for taking my questions. First, in the shipments in the quarter, we're solidly ahead of where you sort of guided to. It looks like food service sales are pretty healthy. Could you provide some maybe additional perspective on where you saw the incremental strength versus your expectations as of late July? If you could provide any other broader commentary around relative strength or weakness you're seeing in conditions across, you know, liquid packaging, folding carton, food service, that would be great. Thanks.

Speaker #7: As of late July and if you could provide any other broader commentary around relative strength or weakness you're seeing in conditions across liquid packaging , folding carton , food service , that would be great .

Speaker #7: Thanks .

Speaker #4: I think summertime is normal seasonality uptick for food service . We certainly saw some some , some nice strength in food service and our team is doing a really nice job of competing vigorously in the market and filling out our filling out our our capacity .

Arsen Kitch: Yeah. I think summertime is normal seasonality uptick for food service. We certainly saw some nice strength in food service, and our team is doing a really nice job of competing vigorously in the market and filling out our capacity. I think we've had some optimism from some of our food service customers. I think you may be seeing some import relief helping on things like paper plates. That is helping some of our paper plate customers see stronger demand. I think those are some of the variables that came into play in Q3.

Speaker #4: You know , I think we've we've had some optimism from some from some of our food service customers . I think you may be seeing some import relief helping on things like on things like paper plates .

Speaker #4: That is helping some of our paper plate customers . See , see stronger demand . So I think those are some of the I think those are some of the variables that that came came into play in Q3 .

Speaker #7: Okay . That's great . And I guess just following up on the second part of that , any other comments around kind of weakness you're seeing into Q4 or strength relatively between those kind of product categories ?

Matthew McKellar: Okay, that's great. I guess just following up with the second part of that, any other comments around kind of weakness you're seeing into Q4 or strength relatively between those kind of product categories?

Speaker #4: I think Q4 is seasonally a little weaker than than Q3 , and it's typically in , in , in food service , just the seeds of the summer season is over .

Arsen Kitch: Yeah. I think Q4 is seasonally a little weaker than Q3, and it's typically in food service. Just the summer season is over, so we're expecting a little bit of seasonality decline as we head into Q4. I think, as Sherri mentioned, we'll also see a few percentage points less of production as we head into Q4 versus Q3 that will have some absorption impact. Matt, as we stated on the last earnings call, absorption is a meaningful component of our P&L. If you do the math, it could be upwards of $500 a ton of absorption with production changes. I think that's part of the reason why Q4 is flat versus Q3, is I think we'll see some impact of absorption.

Speaker #4: So we're expecting a little bit of seasonality decline as we head into Q4 . And I think as Sherry mentioned , we'll also see a few percentage points less of production as we head into into Q4 versus Q3 .

Speaker #4: That that will have some absorption . Absorption impact . And that as we as we stated in the last earnings call , absorption is a is a meaningful component of our , of our of our PNL .

Speaker #4: And and if you do the math , it could be upwards of $500 a ton of absorption with with production changes . So I think that's part of that's part of the reason why Q4 is flat versus Q3 is I think it's we'll see some impact of absorption .

Speaker #7: Okay . And just kind of pulling on that string , you know , it's a fairly large range for guidance on EBITDA in Q4 , considering you're through the maintenance , is it mostly seasonality of demand and maybe energy costs would take you to the top of the bottom of that range ?

Matthew McKellar: Okay. Just kind of pulling on that string, you know, it's a fairly large range for guidance on EBITDA in Q4, considering you're through the maintenance. Is it mostly seasonality of demand and maybe energy costs that would take you to the top or the bottom of that range? Do you maybe even see any risks around, I guess, the government shutdown and the Supplemental Nutrition Assistance Program? What else would you be watching for in terms of variability within that range? Thanks.

Speaker #7: Do you maybe even see any risks around ? I guess the government shutdown and the supplemental Nutrition Assistance Program ? What else would you be watching for in terms of variability within that range ?

Speaker #7: Thanks .

Speaker #4: I think energy's right . We did bake in some energy into into Q4 versus Q3 , but it's it's very much weather dependent .

Arsen Kitch: I think energy is right. We did bake in some energy into Q4 versus Q3, but it's very much weather-dependent. Some of our, one of our mills at least, is more and more susceptible to bigger swings in energy prices than the other mills, just due to its location. I think part of it is energy. Part of it is just production. You know, 1,000 tons of production is worth upwards of $500,000. For those folks that spend time in paper mills know that 1,000 tons plus or minus in a given week or a given month is a rounding error, but it has a pretty substantial impact on our earnings. I think it's the nature of being a paperboard-focused business with three mills.

Speaker #4: And some of our one of our mills at least is more more susceptible to bigger swings in energy prices than , than the other mills .

Speaker #4: Just , just just due to its location . So I think it's part of it is energy . Part of it is just production , you know , a thousand tons of production is , is is worth upwards of $500,000 .

Speaker #4: And for those folks that spend time in paper mills , know that a thousand tons plus or minus in a given , in a given week or given month is a rounding error , but it has a pretty substantial impact on on our earnings .

Speaker #4: So I think it's it's the nature of being a paperboard focused business with three mills .

Speaker #7: Okay . Fair enough . And last for me , just the working capital improvements of 20 million for 26 . Can you just share a little bit more about how you plan to achieve that ?

Matthew McKellar: Okay. Fair enough. Last for me, just the working capital improvements of $20 million for 2026. Can you just share a little bit more about how you plan to achieve that? It sounds like it's mostly inventory, but it's also the timing of when you'd expect to reach that target. Thanks.

Speaker #7: It sounds like it's mostly inventory, but it's also the timing of when you'd expect to reach that target. Thanks.

Speaker #5: Yeah , it will be primarily in inventory . I think you'll see us start to to work those pieces down in the second half of next year .

Sherri Baker: Yeah. It will be primarily in inventory. I think you'll see us start to work those pieces down in the second half of next year. That would be the timing of when I would be looking to achieve those estimates.

Speaker #5: So that would be the timing of when I would be looking to achieve those estimates.

Speaker #4: And I .

Speaker #7: Think back to .

Arsen Kitch: I think back to the production comment, you know, this year, I think we probably built a little bit of inventory, and we'll be reducing inventory next year to free up some working capital. There will be a trade-off between fixed cost absorption and just cash coming off the balance sheet. There will be some trade-off as we head into next year. We'll provide a bit more context on this in the coming quarters.

Speaker #4: The back to the back to the production comment . You know , this year , I think we probably built a little bit of inventory and we'll be reducing inventory next year to free up some some working capital .

Speaker #4: So there will be a trade off between fixed cost absorption and just cash coming off the balance sheet . So there'll be some trade off as we head into next year .

Speaker #4: And we'll provide a bit more context on this in the coming quarters .

Speaker #7: Okay. Thanks very much for the help. I'll turn it back.

Matthew McKellar: Okay, thanks very much for the help. I'll turn it back.

Speaker #2: All right . Thanks , Matt . And one last reminder . In order to ask a question again , press star and the number one on your telephone keypad .

Operator: All right. Thanks, Matt. One last reminder, in order to ask a question, again, press star and the number one on your telephone keypad. Once again, star one. We will pause just a moment. Going once, going twice. All right. Ladies and gentlemen, that does conclude today's call. Thank you so much for joining us today, and you may now disconnect.

Speaker #2: Once again , star one . And we will pause . Just a moment . Going once , going twice . All right , ladies and gentlemen , that does conclude today's call .