Clearwater Paper Corporation (CLW) Earnings Call Transcript & Summary

Good morning, and welcome to the Clearwater Paper Corporation's 2025 Annual Meeting of Stockholders. I'm Arsen Kitch, President and CEO of Clearwater Paper Corporation. Here with me today is Mark Roman, our Corporate Secretary. Also, we have Alexander Toeldte, our Chair of the Board; as well as the other members of our Board, John Corkrean; Jeanne Hillman, Joe Laymon and Nelson John O'Donnell; and Chris Vickers Tucker and other members of management. Mr. Toeldte, as Chair of the Board, has asked me to preside over today's meeting. This is the business portion of the meeting to formally approve the specific proposals described in the proxy materials. I would like to welcome those listening over the Internet. While you won't be able to directly participate in the business portion of the meeting, we invite you to stay following the conclusion of the business portion of the meeting. At that time, the floor will be opened up and we will take questions via the Q&A box on the website for those persons listening online. I'd like to address a few additional procedural matters before calling the meeting to order. The agenda for the meeting has been provided. The Board of Directors has designated Mark Roman, Sherri Baker and me as the persons to act as proxies for this annual meeting of stockholders. Notice of this meeting was sent to our stockholders. Leah Grant of Broadridge who is joining us today has been appointed Inspector of Election for today's meeting and any adjournment. Ms. Grant has taken and signed a note to faithfully execute the duties of Inspector of Election with strict impartiality and according to the best of her ability. Ms. Grant will report on the ballots in connection with this meeting or any adjournment and will certify the final tabulation of all votes and ballots. Ms. Grant, do we have represented today the shares and voting power required for a quorum.

Yes. We have a total of 13,231,243 shares and votes represented here today in person or by proxy. This represents 81.7% of the company's outstanding shares. Therefore, a quorum is present.

Since the necessary quorum is present, I'll call the 2025 Annual Meeting of Stockholders to order and declare the polls open today, May 8, 2025 at 9:03 a.m. Pacific Time. I appoint Mark Roman to act as Secretary of this meeting to record its proceedings. As stated in the notice of this meeting and further described in the proxy statement, there are 4 proposals for consideration by the stockholders. Mark, will you [Technical Difficulty] to be voted upon.

The first proposal is the election by separate vote of each of 2 nominees to serve as a Director of Clearwater Paper Corporation for a 1-year term. Result, that each of the following nominees is hereby elected to serve as a Director of Clearwater Paper Corporation for a 1-year term expiring at the 2026 Annual Meeting of Stockholders: Jeanne M. Hillman; Ann C. Nelson. The second proposal is the ratification of KPMG LLP. Result, that the appointment of KPMG LLP as the independent registered public accounting firm of Clearwater Paper Corporation for the fiscal year ending December 31, 2025, and is hereby ratified. The third proposal is the advisory vote to approve named officer executive compensation. Result, that the compensation paid to the company's named executive officers as disclosed pursuant to Item 402 of Regulation S-K, including the executive compensation discussion and analysis, compensation tables and narrative discussion is hereby approved. The fourth proposal is to approve the amendment to the 2017 stock incentive plan. Result, that the amendment to the Clearwater Paper Corporation 2017 Stock Incentive Plan is hereby approved.

Under the company's bylaws, stockholders must have given advanced notice to the Corporate Secretary in order to bring other business before the meeting. As no such notice was received, there is no other business to be conducted today. I now declare the polls closed. Will the Inspector of Election, please give your preliminary voting report.

As Inspector of Election, I report the following preliminary results. Each of the nominees for election of director and Proposal 1 received the affirmative vote of at least 95% of the votes represented in person or by proxy. Proposal 2, the ratification of the appointment of KPMG LLP as the company's independent registered public accounting firm received the affirmative vote of approximately 95% of the votes represented in person or by proxy. Proposal 3, the advisory vote to approve named executive officer compensation received the affirmative vote of approximately 89% of the votes represented in person or by proxy. And finally, proposal 4, the vote to approve the amendment to the Clearwater Paper Corporation Stock Incentive Plan received the affirmative vote of approximately 88% of the votes represented in person or by proxy.

Thank you for your report. I now declare that each of director nominees proposed for election has been elected and that proposals 2, 3 and 4 have passed. The business part of the meeting is now concluded. Before I open up the meeting for questions, a reminder that those participating remotely, you can submit a question by typing it into the Q&A box. I will say a few words about the company. So let me start by spending a few minutes highlighting our strategic accomplishments in 2024. We took significant steps to transform Clearwater into a premier independent paperboard packaging supplier to North American converters. The first step of the transformation was the acquisition of the Augusta, Georgia, Paperboard facility in May of last year. Augusta is a great fit for our network and increased our paperboard capacity by around 75%. We have integrated Augusta into our operation and now have a nationwide geographic footprint. Our Lewiston, Idaho, mill covers the Western part of the U.S., the Cypress Bend, Arkansas, mill covers the central part and Augusta covers the East. These mills have an annual capacity of approximately 1.4 million tons of SBS and can produce around 1.4 million tons of pulp per year. The second strategic step was the sale of the tissue business in November. Thanks to the efforts of our team, the tissue business has delivered excellent financial and operational results over the past couple of years. This outstanding performance enabled a $1.06 billion sale of the business and we used the net proceeds to significantly delever our balance sheet and position us for growth. We're optimistic about the long-term prospects for our paperboard business as we believe that will benefit from growing demand as consumers seek sustainable fiber-based packaging solutions. We're partnering with our converter customers to develop new products and deliver innovative solutions that consumers are looking for. I'll now turn to our financial performance in 2024. Net sales from continuing operations, which excludes our former Tissue segment were up 22% as compared to 2023, primarily due to the incremental volume from our Augusta acquisition. Net loss from continuing operations was $74 million compared to net income of $49 million in 2023, driven by lower paperboard pricing and higher maintenance costs. Adjusted EBITDA from total operations, which includes the former Tissue segment, was $182 million compared to $281 million in 2023. Looking at our balance sheet. We utilized the net proceeds from the sale of our Tissue business to delever. We reduced our net debt by $199 million and as of year-end, we have a net leverage ratio of around 1.1x. In addition, last November, our Board approved a new $100 million share repurchase authorization. Between November of last year and the end of the first quarter of this year, we have repurchased approximately $15 million of outstanding shares. Let me provide a few comments on our industry conditions. SBS demand continued to recover in 2024 with industry shipments increasing by 4% versus 2023. We are expecting that demand will recover to pre-COVID levels by the end of 2025. While demand continues to recover, the industry remains in a down cycle with operating rates at 85% in 2024, below what we believe to be a balanced market utilization between 90% and 95%. Let's look at what's ahead for us in 2025. We expect a continued demand recovery, but with utilization rates remaining below historical averages as the industry absorbs new capacity that is forecasted to come online from another company. Our primary focus is on factors that are within our control. This includes our cost structure, improving our operating performance, developing new products and continuing to deliver superior service to our customers. As part of our cost focus, we're targeting $30 million to $40 million in cost savings across SG&A and operations, which we expect to yield $40 million to $50 million in annual run rate savings. As I mentioned, we're working to expand our product portfolio, including new applications for our existing paperboard as well as new substrates to provide our customers with a broader range of offerings. In closing, we remain optimistic about the medium to long-term prospects for our industry and our company. We have a well-invested asset base and a strong balance sheet that will help us persevere through this part of the industry cycle, and we expect strong margins and cash flows through the cycle and aim to strategically deploy capital to create long-term shareholder value. And with that, I would like to open the meeting to questions. Again, please enter your questions into the portal, if you're joining us virtually. As we wait for questions to come in, I'll address a few questions that were submitted ahead of time.

The first question was around the outlook for SBS and other competing grades in regards to volume and price? As I mentioned, SBS shipments grew by about 4% in 2024. And based on various industry publications, we expect demand to grow by another 3% to 5% in 2025. Industry operating rates have also been recovering, but could be impacted by new capacity that's being added this quarter. What remains unclear is the impact of tariffs on industry dynamics. 100% of everything we produce is made right here in the U.S. and more than 90% of everything we sell is sold domestically. So we believe that we could be a net beneficiary of the uncertainty that's being driven by tariffs. In terms of price, we'll refrain from commenting on any future price movements. So that was the first question. The second question that was submitted asked about the useful lives of our facilities and how long projected margins and production volumes can be sustained at current CapEx plans? So we believe we have a good network, well-invested assets that are competitive in the geographies and markets that they serve. We also said that we need to invest $70 million to $80 million of annual capital into our mills to maintain and improve the performance of our assets. And -- but this excludes large strategic or replacement projects, which could add another $10 million to $20 million per year on average over the long term. The third question submitted was around expectations around market recovery and how the market ultimately comes out of the cycle. We previously mentioned that SBS demand continues to recover, and we expect a return to stable and growing demand. We're going to refrain from speaking about capacity removals, but we believe that it could take several years to absorb the new capacity that's being added. Ultimately, we believe the changes in supply or demand could bring our industry back into balance, but it's hard to predict exactly how that happens. So these were the questions that were submitted ahead of time. It looks like there are no further questions that were submitted through the Internet. So with that, since there are no further questions, we will wrap up the meeting and close it up. Thank you for joining us today.