Clearwater Paper - Earnings Call - Q3 2025

Executive Summary

• Net sales of $399.0M (+1% YoY) and adjusted EBITDA of $17.8M; GAAP diluted EPS from continuing operations was -$3.34 due to a $48M goodwill impairment; adjusted loss per share was -$0.51.
• Results vs consensus: revenue beat ($399.0M vs $387.9M*), adjusted EBITDA beat ($17.8M vs $15.6M*), but EPS missed (-$3.34 vs -$0.53*), driven by the non-cash goodwill impairment; adjusted EPS (-$0.51) was closer to expectations *.
• Q4 guidance introduced: adjusted EBITDA $13–$23M; seasonally lower shipments, 3–4% lower production, and ~$16M Augusta outage costs embedded.
• Medium-term setup: management reiterated initial FY 2026 assumptions—revenue $1.45–$1.55B, mid-80% utilization, capex $65–$75M, and >$20M working capital improvements; expects to be a non-cash taxpayer in 2026.
• Execution drivers: higher shipments (+6% q/q), improved production, and fixed cost reduction tracking to ~$50M in 2025; Lewiston outage completed at ~$24M direct cost, Augusta outage in October at ~$16M.

What Went Well and What Went Wrong

What Went Well

• Shipments and production execution: “We delivered an adjusted EBITDA of $18 million, toward the high end of our guidance range... Net sales grew by 2% versus the prior quarter, driven by a 6% increase in shipment volumes”.
• Cost actions: “We’ve largely captured the run rate benefits of our fixed cost reduction initiatives... tracking to around $50 million in savings for the year”.
• Outage execution: “Our Lewiston team also did an outstanding job completing the major maintenance outage as planned”.

What Went Wrong

• Industry downcycle and pricing pressure: SBS oversupply pressured pricing; paperboard ASP -3% YoY to $1,160/ton; adjusted EBITDA down vs Q2 due to outage timing and lower prices.
• EPS miss driven by non-cash goodwill impairment: $48M impairment (tax-affected ~$45M) tied to lower market cap vs higher book after tissue divestiture.
• Cost absorption and energy variability headwinds into Q4: 3–4% lower production reduces absorption; energy swings are mill/location dependent.

Transcript

Operator (participant)

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. Thank you. I'd now like to turn the call over to Sloan Bohlen, Investor Relations. Sloan?

Sloan Bohlen (Investor Relations)

Thank you, Greg. Good afternoon, and thank you for joining Clearwater Paper'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.

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

Arsen Kitch (President and CEO)

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 million-$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.

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 million-$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 AF&PA 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. 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%-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, RISI is forecasting an approximately 350,000-ton net capacity reduction in the first half of 2026, which would drive utilization rates to above 90%. 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 CUK, YTOP, or other non-bleached applications. This could help absorb excess SBS capacity. Without a combination of these supply changes, we believe that it will take more than 5 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. This is why we believe that pricing has been historically correlated between SBS, CUK, CRB. Today, CUK is priced $50 per ton higher than SBS, according to RISI, 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 RISI, 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. 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.

The estimated capital required for the investment is approximately $50 million, with a 12-18-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 tons-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 1/3 of Cypress Bend's capacity. The remaining 2/3 of the capacity would remain in SBS. We see two upsides to this project.

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.

Sherri Baker (SVP and CFO)

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 goodwill impairment. This non-cash goodwill 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 million-$20 million.

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%-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 2.7x, 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.

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 million-$23 million. We expect slightly lower paperboard shipments versus the third quarter due to seasonality. We expect 3%-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.

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. Lastly, let me provide you with some of our initial assumptions for 2026. We expect revenue of around $1.45 billion-$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%-3% of cost inflation. We expect capital expenditures of $65 million-$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.

The biggest variable that is difficult for us to predict is price changes in 2026. Currently, RISI 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.

Arsen Kitch (President and CEO)

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%-95%, we expect to achieve cross-cycle adjusted EBITDA margins of 13%-14%, resulting in free cash flow conversion of 40%-50% or over $100 million in free cash flow per year, assuming $1.8 billion-$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. 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.

Operator (participant)

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 Steuart with TD Cowen. Sean, please go ahead.

Sean Steuart (Analyst)

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 free cash flow profile for the overall company improve to before you would greenlight that project?

Arsen Kitch (President and CEO)

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 2 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%-2% range, EBITDA margins cross-cycle 13%-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.

Sean Steuart (Analyst)

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 RISI 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 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.

Arsen Kitch (President and CEO)

Yeah, listen, we're not going to comment on what our competitors may or may not do. You're right, RISI is forecasting a first-half net capacity reduction of 350,000 tons, so 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.

Sean Steuart (Analyst)

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?

Sherri Baker (SVP and CFO)

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 inconsistencies if we change the quarters.

Arsen Kitch (President and CEO)

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're 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'll share that with you in February.

Sean Steuart (Analyst)

Okay. That's all I have for now. Thanks very much.

Operator (participant)

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

Matthew McKellar (Analyst)

Hi. Thanks very much for taking my questions. First, the shipments in the quarter were 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 liquid packaging, folding carton, and food service, that would be great. Thanks.

Arsen Kitch (President and CEO)

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. 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.

Matthew McKellar (Analyst)

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?

Arsen Kitch (President and CEO)

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 in 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, as I think we'll see some impact of absorption.

Matthew McKellar (Analyst)

Okay. Just kind of pulling on that string, 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.

Arsen Kitch (President and CEO)

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 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 ± 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.

Matthew McKellar (Analyst)

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.

Sherri Baker (SVP and CFO)

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.

Arsen Kitch (President and CEO)

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, and we'll provide a bit more context on this in the coming quarters.

Matthew McKellar (Analyst)

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

Operator (participant)

All right. Thanks.