Clearwater Paper Corporation (NYSE:CLW) Q4 2022 Earnings Call Transcript

Clearwater Paper Corporation (NYSE:CLW) Q4 2022 Earnings Call Transcript February 14, 2023

Operator: Good afternoon, and welcome to Clearwater Paper Corporation’s Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants are in a listen only mode. After the speakers’ presentation, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Sloan Bohlen, Investor Relations. Thank you. Please go ahead.

Sloan Bohlen: Thank you, Julian. Good afternoon and thank you for joining Clearwater Paper’s fourth quarter 2022 earnings conference call. Joining me on the call today are Arsen Kitch, President and Chief Executive Officer; and Mike Murphy, Chief Financial Officer. Financial results for the fourth quarter of 2022 were released shortly after today’s market close, along with the filing of our 10-K. You will find a presentation of supplemental information, including a slide providing the company’s current outlook posted on the Investor Relations page of our website at clearwaterpaper.com. Additionally, we will be providing certain non-GAAP 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 that Slide two of our supplemental information covering the forward-looking statements, rather than rereading this slide, we were going to incorporate it by reference into our prepared remarks. And with that, let me turn the call over to Arsen.

Arsen Kitch: Good afternoon and thank you for joining us today. Please turn to Slide three. We had a strong year in 2022, but a challenging fourth quarter due to operational and weather related issues. We reported net sales of $527 million in the fourth quarter and $2.1 billion for 2022. Adjusted EBITDA was $28 million in the fourth quarter and $227 million for 2022. Let me share a few highlights. Prices increased in both paperboard and tissue during the quarter and the year. Private branded tissue share strengthened as consumers sought to offset inflation. Paperboard demand had a robust year, but moderated late in the fourth quarter due to customers managing inventories and a return to more normal seasonal patterns. While inflation started to moderate, it was still a headwind in the fourth quarter.

We completed a major maintenance outage at our Lewiston site, but experienced several operational and weather related issues during the quarter. We reduced net debt by $3 million in the quarter and $108 million in 2022 for a total of $377 million reduction since 2020. And finally, we repurchased $5 million of shares in 2022, but did not buy back shares in the fourth quarter. We have $25 million remaining on our buyback authorization. With that, let’s discuss some additional details about both of our businesses. Let’s start on Slide four with a few comments on our paperboard business. Since early 2021, the industry has experienced high operating rates with strong demand. As a result, RISI reported price increases for the U.S. market that totaled $500 per ton over the last two years, including a $30 increase in October of 2022.

We continue to implement our previously announced price increases in the fourth quarter. And based on that, we expect sequential improvements into early 2023. As a reminder, it typically takes us up to two quarters for price changes to be reflected in our financials. It is also worth noting that our product portfolio includes additional grades and price mechanisms that are not reflected in RISI’s reporting. We experienced a moderation in demand late in the fourth quarter, which we believe was due to customers managing inventories after a strong year and a return to more normal seasonal patterns. Prior to COVID, it was typical to see holiday inventory builds take place earlier in the year with a slowdown in activity during the fourth quarter.

Converters have historically used this slower time of the year to reduce inventories and take holiday related downtime. We believe that we’re seeing a return to these more normal patterns as customers are becoming more comfortable with the certainty of supply. From a consumer demand perspective, we believe that paperboard is economically resilient given the end use of the products. Our portfolio, in particular, skews more heavily towards consumer applications such as food packaging, pharmaceuticals and cosmetics. In addition, we expect the shift to paper based products to continue and we’re optimistic that demand for paperboard will continue to be healthy. Let’s turn to our operating results in the fourth quarter. We completed the major maintenance outage at our Lewiston mill.

The good news is that, we believe that we will not need to take the next outage until early 2024. Unfortunately, we experienced several setbacks during the outage and startup that resulted in approximately $5 million of negative impact to paperboard adjusted EBITDA versus our expectations. Additionally, we experienced other operational and weather related issues, primarily at our Cypress Bend mill that continued into January. These issues impacted our adjusted EBITDA during the fourth quarter by approximately $19 million. We have now put these issues behind us and are taking the opportunity to capture lessons learned to improve our processes in the future. I appreciate our teams addressing these unexpected challenges under difficult conditions through the holidays.

Now please turn to Slide five for some additional comments on our tissue business. The underlying performance was strong and we continue to observe consumers shifting their demands toward private branded tissue products to help offset the impacts of inflation. Private branded dollar of the market — share of the market continues to climb and is approaching 36% based on IRI panel data. We shipped 13 million cases in the fourth quarter, which was 600,000 cases higher than the fourth quarter of 2021 and exceeded our third quarter shipments of 12.6 million cases. The Lewiston paperboard mill outage issues also negatively impacted tissue adjusted EBITDA by approximately $2 million in the quarter. As we previously mentioned, cost inflation has outpaced price increases in our tissue business over the past two years leading to margin compression.

Our team has focused on recovery margins through cost reduction initiatives and implementing previously announced price increases. We did see higher pricing in the fourth quarter and expect additional sequential price benefits into early 2023. We’re encouraged by the trends that we’re seeing and expect a continued strengthening of our tissue business this year. I will now ask Mike to discuss our fourth quarter results in more detail.

Michael Murphy: Thank you, Arsen. Please turn to Slide six. The consolidated company summary income statement shows fourth quarter and full year for 2022 and 2021. In the fourth quarter 2022, we recorded a net loss of $6 million, net loss per diluted share of $0.34 and adjusted net loss per diluted share was $0.30. Our full year net income was $46 million. Net income per share — diluted share was $2.68 and adjusted net income per diluted share was $3.63. Our adjusted net income per share in 2022 represents a 250% increase relative to the $1.03 in 2021. The corresponding segment results are on Slide seven. Slide eight is a year-over-year segment income and adjusted EBITDA comparison for our pulp and paperboard business in the fourth quarter.

We benefited from our previously announced price increases. You’ll recall in the fourth quarter of 2021, we had no major maintenance outages. Whereas in 2022, we experienced a major maintenance outage impact of $28 million comprised of approximately $8 million in volume and $20 million in cost. Additionally, our $19 million of operational issues impacted volume by $11 million and cost by $8 million. Costs were also higher due to impacts of raw material, freight and labor inflation. You can review a comparison of our fourth quarter 2022 performance relative to third quarter on slide 16. On Slide nine, we have a comparison of full year 2022 results relative to 2021 for pulp and paperboard. Pricing and mix had the largest impact. Operational issues negatively impacted results by $90 million with an additional $7 million impact from major maintenance outages.

Collectively, this $26 million impact was made up of $16 million in lower volume and $10 million in higher costs. The remainder of cost changes were primarily driven by raw material, freight and labor cost inflation. Please turn to Slide 10, where we provide a year-over-year comparison for our tissue business in the fourth quarter. In addition to the implemented price increases, we realized some mix benefit. Our sales volume of converted products were higher than last year. These benefits were largely offset by higher costs due to inflationary pressures. You can review a comparison of our fourth quarter 2022 performance relative to third quarter on slide 17. On slide 11, we have a comparison of full year 2022 relative to 2021 for tissue. The benefits of price and mix together with higher volumes were largely offset by raw material, freight and cost inflation.

Slide 12 outlines our capital structure. Liquidity was $318 million at the end of the fourth quarter. We reduced net debt by $3 million in the fourth quarter and $108 million in 2022. While we did not repurchase shares in the fourth quarter, we repurchased 150,000 shares for full year 2022 at an average price just above $33 dollars a share or $5 million We have approximately $25 million remaining on our share repurchase authorization and expect to continue buying back shares in 20 23. We also expect to continue to pay down our debt. In the fourth quarter, we continue to improve our financial flexibility and renewed our ABL credit facility, which extended our maturity to November of 2027 and increased the size to $275 million. Our net debt to adjusted EBITDA at the end of 2022 was 2.27 times and net debt was $491 million.

Slide 13 provides a perspective on our first quarter 2023 outlook and building blocks for 2023 full year expectations. We want to reiterate that price realization inflation will continue to be difficult to predict. Our current expectation for the first quarter is adjusted EBITDA of $65 million to $75 million. The midpoint of that range is $70, which is $42 million higher than the fourth quarter of 2022. The $42 million sequential improvement is primarily driven by the absence of major maintenance outages, as well as operational and weather related issues. Previously announced price increases are expected to largely offset inflation. We expect that tissue sales volume will be flat to slightly below the fourth quarter. Now let me provide some building blocks for 2023 relative to 2022.

Similar to the first quarter outlook, we believe that our operational results will improve by approximately $42 million in 2023, primarily due to lower maintenance outage expenses and improved operating performance. While it’s difficult to predict pricing and inflation, it’s our expectation that the two will offset each other during the year. We expect modest volume growth in tissue. We are also anticipating the following for 2023. Interest expense between $27 million and $29 million, depreciation and amortization between $98 million and $101 million, on capital expenditures, we expect to spend $70 million to $80 million in 2023. Our Lewiston recovery boiler tube replacement project, which is expected to require a capital expenditure approaching $40 million is expected to occur in early 2024 along with our planned major maintenance outage.

We spent $4 million in 2022 and expect to spend an additional $8 million in 2023 on this project. Our effective tax rate for the full year is expected to be 25% to 26%. Based on our current expectations for 2023, our cash tax payments are expected to be similar to our statutory tax estimates. This assumes that we will utilize our current rebates and refunds to largely offset some timing differences between book and tax depreciation, which is expected to cause our future tax rate to mostly exceed our statutory tax rate. Let me turn the call back over to Arsen.

Arsen Kitch: Thanks, Mike. I want to spend a few minutes discussing our key priorities for shareholder value creation. Last quarter, we communicated a more formal capital allocation framework. We made some minor adjustments to the framework on Slide 14 to provide more clarity. We have prioritized our capital allocation as follows. Our top priority is to sustain our asset base. We believe that this requires an average of $60 million to $70 million of capital expenditures annually, excluding large projects. We expect to invest above that target level in the near to medium term. Second, we intend to maintain a balance sheet that provides us with financial flexibility. While we have a target long term leverage ratio of around 2.5 times, we may continue to deleverage further to create greater financial flexibility.

A strong balance sheet provides us with the ability to take advantage of investment opportunities, including in the potential down cycle. Third, we will look at various opportunities to create value through investments and opportunistically returning capital to shareholders. We will evaluate value accretive internal and external investments. Given the current business environment, we’re likely to prioritize incremental cost reduction projects and add on acquisitions, versus large greenfield or brownfield capacity expansions. We will compare these potential investments relative to opportunistically returning capital to shareholders based upon our share price. We also expect to buy back shares to mitigate the impact of dilution from share grants to our employees.

I would like to emphasize that we will continue to be disciplined allocators of capital and we’ll seek out the right opportunities to create value across both of our businesses. In closing, I would like to thank our people for all that they do to keep our operations running safely and efficiently and for servicing our customers. I also want to thank our shareholders for their continued support and our customers for placing their trust in us. We had a strong year in 2022 and despite various economic uncertainties, we’re optimistic about 2023. With that, we will end our prepared remarks and take your questions.

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Q&A Session

Operator: Our first question comes from Adam Josephson from KeyBanc Capital Markets. Please go ahead. Your line is open.

Adam Josephson: Thanks. Good afternoon, Arsen and Mike. Hope you’re well.

Arsen Kitch: Good afternoon. Mike, just couple of questions about your operational assumptions and then one or two others. So you mentioned that you expect your previously announced price increases and mix to largely offset cost inflation, meaning, I guess, that you’re expecting inflation to slightly outpace price mix, whereas last year the price mix more than offset inflation by about $50 million. So can you just help us frame your price cost assumptions for 2023 versus what you experienced last year. Obviously, you’ll have many fewer paperboard price increases and perhaps that’s the difference that anything you can help me with in terms of your price and cost assumptions and your — for that relationship this year versus last?

Michael Murphy: Yes. So, Adam, it’s been difficult to predict how price and costs are going to move around. So I think you’re right. Last year, we had a bit of a tailwind in terms of price mix, less cost inflation this year what we’re predicting is that they’re roughly going to offset each other. And so that’s — we looked at it in a number of different ways and that’s where we came out that we think that price mix will largely be offset by that inflation that we’re seeing.

Adam Josephson: And Mike, just as part of that, are you assuming any future SBS or tissue price changes as part of those 2023 operational assumptions?

Michael Murphy: Adam, we can’t talk about forward-looking price increases, all we can state is our estimates are based off of previously announced price increases.

Adam Josephson: Right. Okay. Okay. In terms of the SBS demand and backlog moderation late in the fourth quarter, what are you expecting along those lines for 2023? It sounds like you’re expecting stable SBS demand, if I heard you correctly, but can you confirm that? Just help me with what you’re expecting for this year just given what you experienced late in the fourth quarter? Yes, Adam, if we step back, we’ve said this all along. We believe that SBS is approximately two-thirds recession resilient and our markets skew more towards consumer packaging and retail foodservice. So yes, we did see moderation in demand in late Q4 and coincidentally that looks very similar to what we experienced pre COVID in 2019. Our January shipments are higher than they’ve been in the last several months.

Our folding customers in particular are telling us to expect a good — good 2023 and I believe them. So we’re expecting a — at this stage, we’re expecting a solid year in demand and that’s what we’re seeing and hearing from our customers.

Adam Josephson: Got it. Thanks. And one last one. I noticed in your risk factor in your 10-K that you just filed noting the potential adverse impact on your business from the several significant SBS and FBB capacity investments that have been announced over the past year or so. So how are you thinking about your competitive position both domestically and globally given those investments, particularly given that you’re not as integrated as some of your domestic peers and that you have not been investing hundreds of millions of dollars or more as some of your global peers are doing?