Clearwater Paper - Earnings Call - Q1 2025

Executive Summary

• Net sales were $378.2M (+46% YoY), with Adjusted EBITDA $29.8M (7.9% margin) at the high end of guidance, driven by Augusta volume, operational improvements, and fixed-cost reductions; paperboard ASP fell 7% to $1,188/ton, partially offset by higher volumes.
• EPS from continuing operations was -$0.36; revenue modestly beat S&P Global consensus ($378.2M vs $376.0M*) while EPS missed (-$0.36 vs -$0.04*), reflecting price headwinds and non-GAAP “Other operating charges” of $11.8M.
• Management guided Q2 2025 Adjusted EBITDA to $35–$45M and maintained FY25 revenue of ~$1.5–$1.6B and ~85% utilization, with fixed cost reduction of $30–$40M and annual run-rate savings of $40–$50M; FY25 direct maintenance costs raised to $45–$50M.
• Stock-relevant narrative: cost-reduction ramp (2x sequential savings into Q2), continued demand recovery and potential tariff-related domestic supply benefit, plus synergy capture from Augusta by end-2026; buybacks of $11M in Q1 continue capital return optionality.

What Went Well and What Went Wrong

What Went Well

• “We delivered $30 million of adjusted EBITDA during the quarter, which was at the high end of our guidance range… driven by strong operational performance, increased production and sales volumes, primarily due to the Augusta acquisition”.
• Fixed cost actions underway: “eliminating more than 200 positions… 10% of total roles… on track to deliver $30–$40 million of savings this year versus 2024”.
• Integration: “successfully completed the integration of the Augusta mill… focused on fully capturing volume and cost synergies by the end of 2026”.

What Went Wrong

• Pricing headwinds: paperboard average net selling price down 7% YoY to $1,188/ton; pricing impacted Adjusted EBITDA by -$9M YoY per CFO commentary.
• Non-GAAP “Other operating charges” of $11.8M booked in the quarter, contributing to continuing operations loss and EPS miss vs consensus.
• Industry still in downcycle: utilization at ~88% vs 90–95% balanced level; new capacity expected in Q2 keeps pricing/margins pressured near term.

Transcript

Speaker 1

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. All lines have been placed on mute to prevent any background noise. After the speakers remark, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star once again. Thank you. I would now like to turn the call over to Sloan Bohlen, Investor Relations. Go ahead, sir.

Speaker 0

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 Arsen Kitch, 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. You will find a presentation of the supplemental information, including a slide providing the company's current outlook, posted on the Investor Relations page of 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 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 the supplemental information covering forward-looking statements. Rather than reading this slide, we'll incorporate it by reference into our prepared remarks.

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

Speaker 2

Thank you for joining us today, and good afternoon. I'm going to structure my remarks across three key areas. First, I'll provide a summary of our first quarter results. Next, I'll discuss our perspective on industry conditions and trends. Lastly, I'll provide an update on the key strategic initiatives that we're focused on in 2025 and beyond. I will then turn the call over to Sherri to provide additional details on our first quarter performance as well as our outlook for the second quarter. Let's begin with an overview of our first quarter results. We delivered $30 million of adjusted EBITDA during the quarter, which was at the high end of our guidance range. This was driven by strong operational performance, increased production and sales volumes, primarily due to the Augusta acquisition, and benefits from our cost reduction work.

Our net sales increased 46% to $378 million versus the first quarter of last year, driven largely by the Augusta acquisition. We successfully integrated the Augusta mill into our operation and are now working to capture targeted volume and cost synergies by the end of 2026. We took action to reduce our fixed cost structure by eliminating more than 200 positions across the company, representing around 10% of total roles. We're on track to deliver $30-$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 a paperboard-focused company, and our efforts on managing factors that we can control are paying off as evident in our first quarter results.

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. Let's start with demand. Based on AF&PA data, industry shipments increased by 2% in the first quarter of 2025 versus the first quarter of 2024. Demand is projected to grow by 3-5% in 2025 versus 2024 based on various industry publications, which would result in a return to pre-COVID levels of demand by the end of the year. 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. 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. Now, let's turn to supply.

Industry utilization rates improved sequentially in the first quarter of 2025 to 88% versus 84% in the first quarter of 2024. While this is an improvement, our industry remains below a cross-cycle average utilization of 90-95%. New industry capacity is also expected to be added this quarter, which will increase SBS supply by up to 10% once the asset is fully ramped. Let me provide some commentary on tariffs. All of our production is U.S.-based, and around 90% of our shipments go to domestic customers. The rest is primarily exported to Japan, Canada, and Mexico. Most of our raw materials are U.S.-sourced as well, although some chemicals, pulp, and energy are imported primarily from Canada. 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.

Approximately 500,000 to 600,000 tons of bleached paperboard is imported to North America annually, primarily from Europe, making up around 10% of total SBS supply. In addition, based on our estimates, around 200,000 tons of paperboard finished goods are imported annually, primarily from Asia. Some examples of these finished goods imports include plates, cups, and food service containers. If a portion of these imports swings to domestic supply, we could see improvement in industry operating rates even as new capacity is added. Finally, let me provide you with an update on our key strategic initiatives for 2025. As we mentioned previously, our goal is to strengthen our position as a premier independent supplier of paperboard packaging products to North American converters. We believe that today we have a strong position in the industry along with a geographically advantaged manufacturing footprint with high-quality assets.

To remain a preferred supplier to our customers, we're investing in product development efforts to broaden our portfolio. These efforts are split into three categories. The first category is compostable food service products, particularly plates. We have BPI certification and expect to be in the market by year-end. The second category is lightweight folding carton products that don't sacrifice print quality and strength. We're looking at various options to deliver against this, including paper machine upgrades and using mechanical pulp in our products. We believe that we will have a solution ready in 2026. The third category is alternative polyfree barrier technologies. We currently have products in the market that meet this need, but they're costly to produce, which limits broader applications. We're continuing to work on additional barrier technologies that can be scaled up in the market at the right cost structure.

In addition to these product development efforts, which are largely based on our existing SBS capacity, we're exploring the potential to expand into additional paperboard substrates. These substrates make up approximately 50% of the paperboard market outside of SBS. This translates into around 5 million tons of North American demand. We're evaluating these parts of the market as well as our options to more effectively compete. The first substrate is coated unbleached kraft or CUK. A common application for the substrate is beverage carriers. This substrate uses a similar manufacturing process, but without the bleaching that is inherent to SBS. The other substrate is coated recycled board or CRB, which is used in folding carton applications across a number of consumer good categories. 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.

Some of these options are capital-driven, while others would involve an acquisition. In addition to looking at new product offerings and expanding into additional substrates, we're intensively focused on continuing taking actions to reduce our overall cost structure. We're targeting $30-$40 million in cost savings in 2025 across SG&A and operations, which we expect to yield $40-$50 million annual run rate savings. We previously announced that we took a major step in January with a 10% reduction in all positions across the company, eliminating more than 200 positions in salaried and hourly roles. 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. Let me conclude by reiterating our view of the industry. We operate in an inherently cyclical industry driven by supply and demand.

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. A balanced market would see utilization rates between 90-95%, with an expected EBITDA margin between 13-14%. This could translate to more than $250 million of EBITDA, with more than $100 million of free cash flow annually. For now, our primary focus is to improve our overall cost structure while providing high-quality products and superior service to our customers. With that, let me turn the call over to Sherri for a more in-depth review of our financials.

Speaker 1

Thank you, Arsen. Before we review our first quarter results in more detail, I want to start with an overview of tariffs and the associated potential cost impacts. We purchased roughly $80 million of energy and other raw materials from Canada. Our Lewiston, Idaho facility is the top destination for these materials due to the mill's proximity to Canadian suppliers. We also sourced another $20-$25 million of parts and supplies from outside of the U.S. A hypothetical 25% tariff on all of these items would cost us around $25 million per year. However, we believe that much of our raw material supply from Canada falls under the U.S. MCA umbrella and is 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.

Additionally, indirect items such as capital equipment or MRO supplies could see an impact later in the year. 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. In the meantime, we are taking actions to qualify additional suppliers, use 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. Turning now to our first quarter results, we had a consolidated net loss of approximately $6 million from continuing operations, or $0.36 per diluted share. We delivered net sales of approximately $378 million, up 46% versus the prior year. The year-over-year increase is driven by our Augusta acquisition, which closed on May 1 of last year.

We generated approximately $30 million of adjusted EBITDA, up from $14 million in the prior year. 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. Offsetting these improvements was input cost inflation of approximately $3 million, driven by higher fiber and chemical prices. We also continue to see paperboard pricing headwinds, which impacted us by $9 million year-over-year. It is important to note that prices were relatively stable quarter over quarter. The 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. As Arsen mentioned, we've begun taking steps to reduce our overall fixed cost structure, and you're seeing these actions flowing through our financials.

As we look at SG&A, we have taken steps to reduce headcount across our organization in addition to removing portions of our stranded overhead costs due to our tissue divestiture last November. While SG&A is essentially flat year-over-year, as a percent of sales, it declined from 10.9% to 7.6%. As a reminder, we are targeting 6-7% of SG&A as a percent of sales this year and believe that we will get there by year-end. 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 1 of 2024. 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.

Turning to our outlook for the second quarter of 2025. In the second quarter, we expect to deliver $35-$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. Raw material costs are expected to be stable, with a $6 million decrease in seasonal energy costs versus the first quarter. We expect to incur planned major maintenance outage costs of $7-$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. For the full year 2025, our assumptions remain largely unchanged. 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 this quarter.

Our internal utilization is projected to be around 85%, with expected revenue of approximately $1.5 billion-$1.6 billion, as we benefit from a full year of incremental Augusta sales volume. We expect improved mill operating performance will offset pricing and inflation headwinds. In addition to improved manufacturing performance, we are targeting $30 million-$40 million of fixed cost reduction with actions that should generate an overall $40 million-$50 million annual run rate. 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. We expect to incur approximately $45 million-$50 million of total direct outage costs this year, including $22 million-$24 million in Lewiston in Q3 and $15 million-$17 million in Augusta in Q4.

We expect capital expenditures of $80-$90 million, which includes our projected $70-$80 million of annual maintenance CapEx, plus additional carryover spend from two large projects that we will complete this year. 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 13-14% range, with free cash flow conversion of 40-50%, which will produce more than $100 million in annual free cash flows. I will close with a brief overview of our capital allocation philosophy. Our first goal is to maintain and improve the performance of our assets, which will require approximately $70-$80 million of annual maintenance capital. This excludes large strategic or replacement projects, which could add another $10-$20 million per year on average over the long term.

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. Second, we aim to maintain a strong balance sheet with a net leverage ratio of 1-2 times through the cycle. We may temporarily go above or below that range to provide us with strategic flexibility or during industry down cycles. 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 me now turn the call back over to Arsen for closing remarks.

Speaker 0

Thank you, Sherri. I'll summarize where we are today. We transformed Clearwater into a paperboard-focused company with two major strategic actions in 2024. We are now focused on strengthening our position as an independent supplier of paperboard packaging products to North American converters. We will look for opportunities to expand our product portfolio, which may include new applications for our existing paperboard, as well as new substrates. 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. 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.

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. 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 1

At this time, I would like to remind everyone, if you do have a question, please press star one on your telephone keypad. If you would like to withdraw your question, press star one again. Your first question comes from the line of Matthew McKeller with RBC Capital Markets. Matthew, please go ahead.

Speaker 2

Hi, good afternoon. Thanks for taking my questions.

Speaker 4

Good afternoon.

Speaker 2

I was going to start just asking a couple of good afternoon, Arsen. Just a couple of questions around kind of tariffs and related issues. Maybe first of all, I guess what's your sense of what's happening with FBB imports here just over the last month or two? Then second, the $20-$25 million of purchases, I think you mentioned, would be from outside the U.S. and Canada. Do you have a rough geographic split there? In particular, is there any exposure to China that could be particularly challenging?

Speaker 4

Yeah, Matt, let me start with imports and exports. I mean, I think looking at monthly data is probably too noisy. What I would tell you is imports were up in 2024 and exports were down in 2024. If you look at what's being forecasted by REICI in 2025, it's for imports to actually decrease by 5% and for exports to increase by 1%. I suspect that's going to be a pretty dynamic number as tariffs are felt across the industry. Like we mentioned in our comments, 100% of everything we make and more than 90% of everything we sell is domestic in the U.S. I suspect that we will have domestic customers looking for local supply during this time of uncertainty around tariffs. If anything, we could potentially benefit from those dynamics. I think that's the first piece.

The second piece around tariffs, just to clarify, we import about $100 million. About $80 million of that is from Canada. It's chemicals and pulp and some energy. 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 supplies may come from China, whether they're MRO maintenance supplies. That's the portion that we're watching and making sure that we either have alternative supplies or we negotiate very hard to mitigate those cost increases.

Speaker 2

Great. Thanks, Jason Cardew. Next from you, 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, food service down. Is that mostly a seasonal shift? Were there some customer kind of wins and losses in there? Any kind of color would be helpful. As we think about the demand progression into Q2, where you're expecting volumes to be up, any significant differences between folding carton and food service outlooks to call out there? Thanks.

Speaker 4

Yeah, I think the biggest driver there, I'm assuming you're looking at Q1 of 2024 versus Q1 of 2025. The big difference there is the inclusion of Augusta. You can see the mix shift as Augusta was added to our fold. That's really the delta that you're seeing from Q1 to Q1.

Speaker 2

Sorry, Arsen, just to clarify, I was looking at Q4 2024 versus Q1 2025.

Speaker 4

I see that. Okay, got it. I do not have a particular, so let's see here. We had a small decrease in sales. Looks like folding carton was relatively flat and looks like food service was down. I suspect we had some pretty robust shipments at the end of the year with our food service customers. There is nothing in particular that would indicate any significant market-related slowdown.

Speaker 2

Okay. Thanks for that. Next from you, just regarding your exploration of options to expand your product offering, maybe starting with CRB, what would be your criteria for evaluating M&A if that's the road you choose to go down there?

Speaker 4

Yeah, I mean, I think more broadly speaking, I think it has to be a good strategic fit. They have to be good quality assets that are a good fit for our network. I think most importantly, we have to believe that we can win in that space, that we have a right to win in that space. We will be looking at both the market as well as any potential assets that may be available in the future.

Speaker 2

Okay. Just around the lightweight folding carton product under development, what kind of costs would be associated with the paper machine upgrades you mentioned? How should we think about that product and its share of your overall volumes? Call it late 2026 or into 2027. Would you be targeting mostly existing customers with that product, or are there some new opportunities you could be chasing?

Speaker 4

Yes, I think any of those changes would be on our existing machines. We're still working on potential projects on the way to get there, so I don't have a good estimate for you in terms of capital required. Maybe more broadly speaking, we believe that any capital would largely fit within our stated capital range that we've discussed previously. This would be on our existing equipment with existing capacity. This is more of a mix shift versus incremental revenue growth. We would obviously be targeting working with our existing customers where they have a need for this type of product and obviously looking for new customers that may be buying this product somewhere else.

Speaker 2

Great. Thanks. Just a couple of kind of cost-related questions to finish. How significant would you expect the impact of cost savings to be sequentially in Q2? Maybe put differently, what kind of run rate of cost savings would you expect to exit the quarter at? Just around the synergies from Augusta, I recognize a big portion of that $40-$50 million is capturing volume and cost synergy there. How much of that $40-$50 million have you achieved today, just given that the mill is now integrated into your system?

Speaker 3

I'll take the first one, Matt. I'd say on a sequential basis, we'll see probably roughly 2X 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'll see some additional incremental benefit on a sequential basis as you're 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 of the fixed cost savings. That would be the first one. On the second piece, the $40-$50 million on Augusta, it is by far volume synergies. Keep in mind that that assumption also is based off of what we'll call normalized EBITDA margins.

We are certainly seeing a good chunk of the benefit of the volume so far, but we also need to get back to what we'll consider a cross-cycle margin in order to achieve that $40-$50 million of synergies.

Speaker 2

Great. Very helpful. Thanks for all the color. I'll turn it back.

Speaker 1

Thank you. This concludes today's conference call.