Clearwater Paper Corporation (CLW) Earnings Call Transcript & Summary

Thank you for standing by. At this time, I would like to welcome everyone to today's Clearwater Paper Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Cheri Ellison, Investor Relations. Cheri?

Thank you, operator. Good afternoon, and thank you for joining Clearwater Paper's second quarter 2026 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 second quarter of 2026 were released shortly after today's market close, along with the filing of our 10-Q. 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 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 2 of our supplemental information covering forward-looking statements. Rather than reading this slide, we incorporate it by reference into our prepared remarks. With that, let me turn the call over to Arsen.

Good afternoon, and thank you for joining us today. I'll begin my comments with a brief overview of our second quarter results. I will also provide some perspectives on industry conditions and discuss actions that we're taking to reduce costs and improve our margins through the cycle. I'll then turn the call over to Sherri to review the financial results in more detail and discuss our outlook. Turning first to highlights of our second quarter performance. Our shipment volumes were up this quarter with strong 8% year-over-year growth. This was offset by a 9% year-over-year decline in market pricing as reflected in the RISI index. Adjusted EBITDA for the quarter was negative $8 million, which was within our guidance range. We faced higher-than-expected transportation costs, partly driven by the Iran war. We successfully completed the major maintenance outage at our Lewiston, Idaho facility on time and on target with total direct expense of around $22 million. We restructured our Cypress Bend, Arkansas facility, resulting in a reduction of approximately 20% of roles at the mill. This action is driving an expected cost reduction of $8 million to $12 million on an annualized basis. SG&A expenses were at 5.6% of net sales in the quarter, remaining below our targeted range of 6% to 7%. We believe that these are industry-leading numbers that reflect our continued cost discipline. Last week, we announced the launch of Circa, our new CRB product line. This line will be sold and distributed through our network while being manufactured by Greenpaper. This is aligned with our strategy to offer a broader product range to our North American converter customers. Finally, we reduced net debt by $59 million in the quarter and by $50 million year-to-date, driven by improvements in net working capital, tax refunds and additional insurance recoveries. Let me now provide you with some industry updates. We are seeing some meaningful green shoots in SBS industry conditions. Our shipment volumes are up 6% year-to-date. Industry imports are down 11%, continuing a trend that we saw last year. RISI has reflected approximately 300,000 tons of reduced SBS production across the industry since the beginning of the year. We're seeing evidence of substitution into SBS from other substrates by customers and our integrated competitors. Finally, we also believe that some industry participants have been able to swing some of their SBS capacity to other paper grades. All of these factors are driving an improvement in SBS operating rates from the low 80% range in the first quarter of this year to a RISI forecast of 88% in the second quarter and over 90% by year-end. As a result of substantial cost pressure and improving industry conditions, we're implementing a $60 per ton price increase that we announced in June. We have recently announced a second $60 per ton price increase across all of our products that is going -- that is to go into effect in August. In its latest monthly report, RISI has reported a $40 per ton price increase on folding carton and $60 per ton on cup. We expect that our June price increase and the RISI price index changes will be reflected across all of our tons with a $50 million to $60 million annual improvement in EBITDA. This does not take into consideration our second price increase or the additional increases that RISI is forecasting for later in the year and into 2027. As a reminder, approximately 50% of our volume is tied to the RISI Index, while the rest is subject to open market negotiation. It will take us a couple of quarters for the RISI Index move to flow through our P&L. Even as industry conditions and pricing are improving, we continue to face substantial cost pressure and margin levels that do not support long-term investment in our industry's capital-intensive assets. We believe that our margins are still around 10% below where they need to be across the cycle to deliver returns on capital required to invest in our assets, even with the recent RISI reported price improvement. Against this backdrop, we remain focused on the items that are within our control, primarily reducing costs and maintaining share with our customers. Since 2024, we have removed more than $60 million of fixed costs from our system, including restructuring all of our mills and lowering SG&A as a percent of sales. These actions have enabled us to weather this industry downturn, while continuing to invest in our assets. As part of these efforts, we announced the restructuring of our Cypress Bend, Arkansas facility during the second quarter, resulting in a reduction of approximately 20% of roles with expected annual savings of $8 million to $12 million. This action limits our network production to approximately 1.2 million tons per year, balancing supply with our current demand. We are currently sold out across our network and are in an oversold position on extruded capacity, which primarily serves the cup market. We believe that the actions we have taken through the down cycle will result in improved margins and cash flow as the industry recovers in the coming quarters. Lastly, I would like to provide an update on our strategic actions to further build and diversify our product portfolio. Last week, we announced the launch of Circa, a new line of CRB for folding carton and beverage carrier applications in the U.S. Circa complements our SBS portfolio and strengthens our ability to serve customers across more end-use applications. It's a high-quality recycled option designed to deliver dependable converting performance, reliable supply and strong value for everyday applications. Circa was developed through a collaboration with Greenpaper, a global producer of 100% recycled paperboard at a state-of-the-art facility in Monterrey, Mexico. By combining our market reach, support and service with Greenpaper's manufacturing capabilities, we plan to deliver a high-quality CRB solution to independent converters in North America without the channel conflict that exists with current industry suppliers. This follows our launch earlier this year of Velora, a lightweight paperboard product that we believe can effectively compete with FBB. In addition to launching a CRB line, we continue to explore the possibility of producing CUK at our Cypress Bend facility to further meet demand for nonintegrated paperboard options and expand our offering with other substrates. While engineering work is complete for a full capital solution of approximately $60 million, we're exploring a lower cost capital alternative that would enable us to launch a CUK product line sooner and within our typical annual capital spend. We're in trials at Cypress Bend with this potential solution, and we'll share updates on these efforts in the coming quarters. These actions are aligned with our long-term strategy to diversify our product portfolio and become a preferred independent supplier of paperboard to North American converters. With that, I'll turn the call over to Sherri to discuss our second quarter financial results in more detail and provide our outlook for the third quarter.

Thank you, Arsen, and good afternoon, everyone. Turning to our second quarter financial performance. We reported a net loss from continuing operations of $21 million or $1.33 per diluted share, including $15 million of insurance proceeds. Net sales were $375 million, with 8% shipment growth offset by a 9% decline in market pricing compared to the prior year. Adjusted EBITDA for the quarter was negative $8 million, with the year-over-year decrease impacted by the timing of our Lewiston major maintenance outage, lower market pricing and impacts from the Iran conflict. The Lewiston outage was completed in June on time and on target with a direct cost of $22 million. SG&A as a percentage of sales was 5.6%, remaining below our targeted range of 6% to 7% of sales. In terms of the balance sheet, we reduced net debt by $59 million in the quarter and $50 million year-to-date, driven by a cash tax refund of $26 million, insurance proceeds of $15 million in the quarter and a reduction in net working capital. Let's now move to some additional details on the impact of the Iran conflict. We continue to see upward pressure on both chemical and transportation costs. Oil-derived chemicals, particularly polyethylene, have experienced significant cost pressure. Transportation costs have been impacted by fuel prices and further exacerbated by tight supply due to driver shortages. The combined impact of these factors was approximately $5 million during the second quarter compared to the first quarter. We expect an additional $3 million to $5 million impact in the third quarter for a total of $8 million to $10 million. We expect some improvement in the fourth quarter as supply chains adjust to the new reality in the Middle East. In total, we believe that the conflict will negatively impact us by $20 million to $25 million this year. We will continue to monitor these developments closely and provide updates as appropriate. Let me also provide an update on our recovery efforts related to representation and warranty insurance. As a reminder, this is related to the Augusta acquisition, where we believe certain representations and warranties made to us were either incomplete or inaccurate. In the second quarter, we received a third settlement payment of $15 million, of which $4 million was directly related to reimbursable operating costs. Year-to-date, we have recovered $32.5 million. In total, we have recovered $55.5 million with $25 million of the $105 million policy limit remaining. We will continue to pursue a final settlement on the policy. Let me now provide a brief update on our refinancing efforts. Our intention remains to extend maturities prior to our credit facilities going current. We are working with our existing bank partners to find the best solution that balances cost, liquidity and maturities. We have ample liquidity on our balance sheet today with levels higher than historical averages with the Tissue Divestiture and our actions to quickly delever the balance sheet. We remain committed to maintaining a strong balance sheet and liquidity that enables us to invest in our assets across the cycle. Turning now to our outlook for the third quarter. We expect adjusted EBITDA of $20 million to $30 million. We expect paperboard shipments to be roughly flat versus the second quarter with higher sequential production. We expect to begin seeing benefits from our price increase efforts, and we have no planned major maintenance outages in the third quarter. As I mentioned earlier, we expect additional cost pressure from the Iran conflict, primarily in chemicals and transportation. Let me briefly provide an update on our planned major maintenance outages this year. We now expect total direct cost of $32 million to $35 million for the year versus previous estimates of $45 million to $50 million. We have reduced the scope of our Augusta outage in the fourth quarter of 2026 to $5 million to $6 million and plan to complete the remaining work in the first quarter of 2027, with remaining spend of $10 million to $11 million. We do not expect to have another major maintenance outage in Augusta until the first quarter of 2028. We also plan to conduct a maintenance outage at our Cypress Bend facility in the fourth quarter with an estimated cost of $5 million to $7 million. For the full year 2026, our assumptions include revenue of $1.4 billion to $1.5 billion with modest shipment growth. We continue to expect a carryover impact from 2025 market-driven price decreases of approximately $70 million, partially offset by approximately $10 million to $20 million of price improvements in the second half of this year. We expect productivity and other cost reduction efforts to partly offset the cost increases that we are experiencing this year. To round out our 2026 assumptions, we expect capital expenditures of $65 million to $75 million, targeted working capital improvements of $20 million to $30 million and maintaining SG&A toward the bottom of our targeted range of 6% to 7% of net sales. With that, I'll turn the call back to Arsen for closing remarks.

Thank you, Sherri. To close, I want to emphasize that we operate high-quality assets, are executing well and have long-standing strategic customer relationships that we're prepared to defend. We have taken critical steps to improve our financial performance, including the restructuring of our Cypress Bend mill, disciplined pricing actions and continued product portfolio diversification. These actions will improve our margins and cash flow in the long run, regardless of where we are in the industry cycle. And we're starting to see positive signs of a recovery in SBS, and I remain confident that the industry will return to its historical performance levels. Over time, we believe we will deliver cross-cycle EBITDA margins of 13% to 14% and generate more than $100 million of annual free cash flow. With that, we'll conclude our prepared remarks and open the call up for questions.

[Operator Instructions] Your first question comes from the line of George Staphos with BofA Securities.

Appreciate all the details. Arsen, Sherri, I guess first question, and if you had mentioned it and I missed it, I apologize. Do you have a view on what free cash flow will be for this year at this juncture, given the momentum that you had in 2Q and some of the pricing? Or how would you have us think about that?

Yes. We are expecting free cash flow to be positive. I think some of the bigger drivers are obviously the reps and warranties insurance of which we've received $33 million year-to-date this year. The tax payments that we've received $30 million on a year-to-date basis. And then we're also targeting a $20 million to $30 million working capital improvement. So we think all of those combined, offset by the capital and interest estimates that we've given earlier, we do believe that we have a clear line of sight to positive free cash flow this year.

On the tax refunds, what's left at this juncture? I want to say you said there was $27 million year-to-date, and there was $23 million coming into the quarter, but I just want to make sure I've got my numbers right.

Yes. We got $4 million in the first quarter. We received $26 million in the second quarter. We do have, I'm going to call it, a net payable of right around $5 million to $6 million just due to some of the pieces that we need to reimburse and then we have a small amount of tax receivable that's still to come. So call it a small net payable.

Okay. Very good. Switching gears. So the maintenance outage expense for the year, can you talk about what some of the drivers were in terms of, I think, decent sized reduction? And then Arsen, you mentioned that bleached board demand is up. It was up 8% in the quarter, 6% year-to-date. What gives you comfort that it's not just buying ahead of obviously warranted price hikes based on what you said about reinvestment rates?

Let me -- thanks, George. Let me tackle the Augusta question first. So that's the biggest delta this year is we are splitting the Augusta outage into 2 pieces, doing the $5 million, $6 million this year and the rest early next year. We had a go/no-go decision on the Augusta outage. And to be perfectly frank, I like the confidence that we were prepared to execute a good outage. So we made the decision to do the most critical things in October and push the rest of it to January and give the team a little bit more time to prepare. We've also made some leadership changes at the mill. So we'd like to give the new leaders at the mill an opportunity to impact this outage. Augusta has historically done their outages in Q1. So we're going to revert back to that date moving forward. So the next outage will be in Q1 of 2028. So I think that's the Augusta question. From a demand perspective, so we saw an 8% volume increase in Q2. Year-to-date, we're seeing a 6% volume increase. I don't view it as a fluke. We have good growth with -- especially in our foodservice business. We have some strategic customers that we are growing with through some new programs, new volumes that we're picking up. So we feel pretty good about where we are from a volume perspective. We are -- our production right now is about 1.2 million tons per year. Our paper machine backlogs are strong, and we're actually oversold on extruded capacity, which is -- which goes into the Cup segment.

Your next question comes from the line of Matthew McKellar with RBC Capital Markets.

Maybe first, just on the collaboration with Greenpaper. Can you maybe provide some updated perspective on what this does for you strategically? Maybe talk about what kind of volumes you might anticipate through this agreement, either immediately or with time? And then I guess with adding that second grade to the portfolio, does that change at all how you think about pursuing that CUK capacity and what that might mean for you strategically? I'll leave it there.

Yes. That sounds great. Good question, Matt. Thank you. So if we rewind the tape to 2024 when we emerged as a paperboard-focused company, what we said is our goal is to have all substrates under our umbrella and to be able to offer a more complete solution to our independent converter customers. The CRB collaboration, pretty excited about it. I think it's an excellent product. We were -- the facility that Greenpaper runs is outstanding. We think there's space in the CRB part of the industry for a truly independent supplier without any channel conflict. We think approximately 20% of that industry is nonintegrated. So it's hard to tell exactly how much volume we're going to capture, but let's just make -- let's just say it's 10%. That would be somewhere probably in the 40,000 ton range if we were to capture 10% of that independent part of the market. So we're in the process of talking to our customers about it, and it's going to take a few months for us to get qualified and place volume, but we're excited to have another tool in our toolkit for our independent customers. CUK is something that we think we can do on our existing assets. So Cypress Bend is where -- is what we're looking at. We have an engineered solution, $60 million solution that would essentially enable us to produce as much CUK as we want at Cypress Bend. We are developing a much lower cost solution, call it, less than $10 million that would fit within our capital budget that would allow us to come to market a lot sooner. What we would sacrifice there is probably some speed, some cost, but what we get is the speed to market that would allow us to see how well this product would do. The key for us is to make sure that we deliver a really high-quality product to the market. So we're in trials as we speak in Cypress Bend, and we're not going to go-to-market unless we're confident that we're able to deliver a solution that's as good, if not better, than what the competitive set out there offers.

Very helpful. And then just focusing on CRB again, beyond the benefits of being able to serve your independent converter customers more effectively, I guess, with the additional grade, should we expect, I guess, a meaningful financial contribution from this new arrangement?

I think it's too early to tell. I think it's going to -- it's essentially a distribution agreement. We will sell and distribute this product through our channels. So it's a bit too early for us to start talking about potential revenue and profit upside. Let's see how much traction we get in the market in the next couple of quarters.

Your next question from the line of Sean Steuart with TD Cowen.

Arsen, first question on the volume guide. You're guiding to higher quarter-over-quarter production, flat shipments, which is surprising a little bit given you've taken some capacity out at Cypress. Maybe I'm missing something in sort of inventory shift quarter-to-quarter because we don't get the production data directly. But can you give us some context on where you're squeezing tons out of the other mills? And you'd seemingly be on a track to exceed the pro forma 1.2 million tons of capacity for volumes this year. Can you connect some of those dots through the back half of the year?

Yes, absolutely, Sean. So if you recall, we performed a major maintenance outage at our Lewiston facility in Q2. So we ought to see is a bit of a bump in production without having that downtime in Q3. That's really the extent of it. I think it's as simple as that. So sales would be, I would say, relatively flattish, but we would see a bit more production because we actually took down our inventory here in Q2 through the outage. So it's rebuilding just necessary inventories. We still have our net working capital goal reduction through balance of the year. So the team is focused on that.

Okay. And then on that working capital piece of it, maybe a question for Sherri. You would seemingly be ahead of pace through the first half of the year with respect to the target for working cap declines, and I appreciate there's seasonality to this, but could we qualify the overall objective as conservative at this stage?

I think $20 million to $30 million is the right number. I think you'll see ebbs and flows in inventory. So you saw, I guess, an ebb in Q2. You may see a flow in Q3. But we're focused on getting to the right inventory targets by year-end. There's probably smaller pieces on other inventory buckets as well as accounts payable. So we think we're on track for that $20 million to $30 million reduction.

Okay. One last one. I appreciate the Q4 maintenance shut is being split, and you'll see some of that in Q1 next year. Is the only other outage, the Q4 outage, I think it was at Cypress next year? And if so, do you have an estimate of direct costs for the maintenance program in 2027?

So let's see. So next year, so we will do this -- the portion of the Augusta outage in, let's call it, January. We will do a Lewiston major maintenance outage in Q2, which will be probably a similar level of spending as maybe a little higher than this year with inflation and everything, then we would do a -- at this point, we would probably do a Cypress Bend outage in Q3, Q4 time frame. So probably the delta would be a smaller Augusta outage next year, technically speaking, until we get to 2028 when we have all of our annual outages in full force.