Q4 2023 Clearwater Paper Corp Earnings Call
Participants
Kyle Nagarkar; IR; Solebury Trout LLC
Arsen Kitch; President, CEO & Director; Clearwater Paper Corp
Sherri Baker; Chief Financial Officer, Senior Vice President; Clearwater Paper Corp
Matthew McKellar; Analyst; RBC Capital Markets, LLC
Presentation
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Clearwater Paper Fourth Quarter and Full Year 2023 earnings conference call. (Operator Instructions) As a reminder, today's call is being recorded. I will now hand today's call over to Kyle Nagarkar, Investor Relations. Please go ahead, sir.
Kyle Nagarkar
Thank you, operator. Good afternoon, and thank you for joining Clearwater Paper's Fourth Quarter and Full Year 2023 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 fourth quarter 2023 were released shortly after yesterday'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 Slide 2 of our supplemental information covering forward-looking statements rather than rereading this slide, we are going to incorporated by reference into our prepared remarks. With that, let me turn the call over to Arsen.
Arsen Kitch
Good afternoon, and thank you for joining us today. We will begin today's call with a strategic update and the announcement of our pending acquisition of the Augusta, Georgia paperboard manufacturing facility from Graphic Packaging on our last call, I mentioned that we've made significant progress over the past few years, improving our operations B and becoming a more competitive player in both of our businesses. I also mentioned that we believe that scale is needed to be able to invest and grow, especially given the capital intensive nature of our industry.
In paperboard, we laid out a goal of building a scaled, high-performing and diversified paperboard business that is well matched to the needs of paperboard converters in North America. The Augusta acquisition is an outstanding strategic fit. It will add significant scale and growth capacity to our paperboard business and strengthen our position as a premier independent supplier of paperboard products to North American converters. We have also stated that we believe in the overall attractiveness of the North American paperboard market. It is a robust 10 million ton market that is growing and well positioned to capitalize on sustainable consumer packaging trends while demand softened in 2023 and utilization rates fell.
This is a cyclical industry, and we expect demand to start recovering in the second half of this year and into 2025. Let me provide you with some additional details regarding the acquisition and synergies. The Augusta site is a well-invested SBS facilities with around 600,000 tons of paperboard capacity and about 700 talented employees with volume upside and cost synergies. We believe that Augusta will contribute $140 million to $150 million of adjusted EBITDA by the end of 2026. If realized, we're expecting a post-synergy multiple to approach 4.5 times the largest component underlying our expected $40 million to $50 million of annual synergies as volume.
We expect the facility to be about 70% to 80% utilized in 2024. And assuming a 95% long-term utilization rate, we believe that we have up to 150,000 tons of volume upside through additional cost synergies that we expect to target, including optimizing production across our network, procurement savings and transportation efficiencies. The acquisition is enabled by our strong balance sheet flexibility resulting from significant deleveraging that we began in 2020.
At the end of 2023, our leverage ratio was around 1.5 times, enabling us to pursue this opportunity. After we complete the acquisition, we expect our leverage ratio to peak between 3.5 and 4 times in the coming quarters. Our top priority will be deleveraging the business toward our normalized goal of 2.5 times through the cycle, and we're confident in our ability to do so given our track record of cash flow generation and disciplined capital allocation.
On the tissue side, we have a well-run business with an outstanding team that has a strong track record of performance improvement. The business generated more than $1 billion in sales and $150 million in adjusted EBITDA in 2023. Just like in paperboard, our tissue business needs scale to invest and grow with our customers. Given the consolidated customer landscape and the fragmented supplier base, we continue to believe that consolidation is needed to build scaled tissue manufacturers that can make sizable long-term investments in capacity to keep up with the growth of these large retailers.
Given that industry landscape and our investment in paperboard growth, we will evaluate strategic options for our tissue business regardless of the direction that we take, we will remain focused on what's best for our company overall, including our shareholders, customers and our people. We expect and look forward to completing the Augusta acquisition in the second quarter of this year. The completion of the transaction and timing are subject to regulatory approvals.
We will update you on our progress in the coming months, let's shift our focus to our fourth quarter and full year 2023 results. Please turn to Slide 6. As you saw in our press release, we had a great year, driven by strong operational execution, lower input costs and continued strength in our tissue business. We maintain our focus on cash flow generation and reduced our net debt by almost $90 million during 2023.
Slide 6 provides a summary of our consolidated results. We reported net sales of $513 million and adjusted EBITDA of $63 million in the quarter, which is within our range and significantly higher than the fourth quarter of last year when we completed our major maintenance at our Lewiston paperboard mill, our tissue business drove the improvement by more than doubling its adjusted EBITDA from $18 million in the fourth quarter of last year to $46 million this year. Our paperboard business delivered $37 million of adjusted EBITDA in the fourth quarter with continued soft demand and a natural gas disruption to significantly curtailed operations at our Lewiston facility.
Let me share a few highlights with you for prices increase in our tissue business as compared to the fourth quarter of 2022 and decreased in paperboard, which reflects market trends as reported by REC lower input costs benefited both of our businesses as compared to the fourth quarter of 2022, particularly in fiber, energy and freight. We had good operational performance across both businesses as we balance supply and demand to manage our inventories, tissue demand continued to be strong. While paperboard remained soft, we reduced net debt by $32 million in the quarter for a total of almost $450 million since 2020. We repurchased $3 million of shares during the quarter for a total of $23 million since 2022 with $7 million remaining on our buyback authorization.
With that overview, let me turn to each of our segments and provide some additional details. Let's begin with our paperboard business on Slide 8 of our supplemental materials. Let's start by focusing on broader industry trends. Based on AF&PA data, shipments were down about 16% full year 2023 versus 2022 and down 15% in the fourth quarter. Operating rates dipped to under 80% in the fourth quarter and were at about 84% for the year. Reflecting these trends, recent reported price decreases of $80 per ton in the second half of last year and another $40 per ton in February of this year.
While our demand remained soft, we did outperform industry averages with shipments down 9% for the year and flat in Q4 of 2023 versus Q4 of 2022. We took approximately 15% downtime on our paper machines during the quarter to balance supply and demand. In addition, we also experienced unplanned downtime during the quarter due to a disruption in natural gas supplies to our Lewiston facility in November. That event negatively impacted us by approximately $1 million.
As I mentioned earlier in my remarks, we remain optimistic about the long-term prospects for paperboard, we're forecasting a gradual sequential improvement in demand starting in the first quarter of this year. We expect a more meaningful recovery in the second half of 2024 and next year.
Please turn to slide 9 for additional comments on tissue. Let's start with some broader industry trends. Private brand market share remained at and at a nearly all-time high of 36%. Based on store count panel data, consumers are continuing to shift to private brands due to economic uncertainty and inflation. Utilization rates were at about 94% in Q4 as reported by REC, which we believe represents a healthy supply and demand balance.
As we've discussed previously, more than 180,000 tons of capacity were removed between 2021 and 2023, while more than 350,000 tons of capacity have been announced to be added between 2024 and 2026. All this data supports our view that the tissue industry conditions remain stable.
Let's turn to our performance in the quarter. Our business remained very strong, with revenue growing by 3% year over year and adjusted EBITDA more than doubling. Our adjusted EBITDA margin was nearly 17%, driven by higher pricing, lower input costs and strong operational execution by our team and we remain optimistic that we can retain much of that margin improvement as we head into 2024.
With that, I'll turn the call over to Sherri to cover our financial results.
Sherri Baker
Thank you, Arsen. Let's cover our financial performance in the fourth quarter by turning to slide 10, the consolidated summary income statement shows results for the fourth quarter of 2023 and 2022. In the fourth quarter of 2023, we reported net income of $17.6 million, net income per diluted share of $1.04 and adjusted net income per diluted share of $1.35. For the full year, we reported net income of $107.7 million. Net income per diluted income per share of $6.30 and adjusted net income of $6 .69 per share.
The corresponding segment results are on Slide 11. The business performed very well on a consolidated basis with lower input costs and strong operating performance, driving a healthy improvement in profitability. Adjusted EBITDA margin rose to 12.3% in the quarter as compared to 5.3% in the fourth quarter of last year or about 10% if we exclude the impact of the major outage.
Slide 12, as a year-over-year comparison of adjusted EBITDA for our paperboard business, the business delivered $37 million of adjusted EBITDA in the quarter with a 15% margin on a year-over-year basis, lower sales price and mix negatively impacted results, which was more than offset by lower input costs. The impact of volume between periods was negligible as we took market related downtime in the fourth quarter of 2023 and had our planned major outage in Lewiston in the fourth quarter of 2020.
To Slide 20, in the appendix shows a sequential comparison of the fourth quarter to the third quarter of this year. It reflects a lower sales price and mix, lower volumes and higher costs.
Slide 13. As a full year comparison of adjusted EBITDA for our paperboard business. The business delivered $206 million of adjusted EBITDA for the year with a 19% margin on a full year basis. Higher pricing on paperboard was offset by unfavorable mix and reduced operating schedules to match supply and demand. These were partially offset by favorable cost inputs, primarily due to freight and energy.
Slide 14, as a year-over-year comparison of adjusted EBITDA for our tissue business. As Arthur discussed, we are benefiting from previously announced price increases and lower input costs. The business delivered $46 million of adjusted EBITDA in the quarter with a 17% margin. As noted on this slide, in the fourth quarter, we saw the benefit from lower pulp prices as those flowed through to our income statement.
Slide 15. As a full year comparison of adjusted EBITDA for our tissue business, the business delivered $151 million of adjusted EBITDA for the year with a 15% margin, which is double that of the prior year. On a full year basis, increasing pricing shipments and production along with lower freight costs, all positively impacted our results.
Slide 21 shows a sequential comparison of the fourth quarter to the third quarter of this year. It reflects the benefits that we are seeing from lower input costs, particularly in pulp, freight and energy.
Slide 16 outlines our capital structure. Our balance sheet remains very strong and our liquidity improved quarter-over-quarter now totaling $277 million. During the fourth quarter, we generated $40 million in free cash flow and reduced our net debt by an additional $32 million. On a year to date basis, we generated $117 million in free cash flow.
Since 2020, we have reduced our net debt by almost $450 million at the end of the fourth quarter, our net debt to EBITDA ratio was approximately 1.5 times. We use free cash flows to repurchase $3 million of our stock during the quarter. That translated into almost 79,000 shares repurchased at an average price of $35.69 per share.
We have roughly $7 million left on our share repurchase authorization we expect to continue to buy back shares to mitigate the impact of dilution from share grants to our employees. We intend to fund the acquisition of the Augusta facility with $490 million of new secured debt, additional draws on our existing ABL and term loan facilities and cash on hand.
Let's now move to Slide 17 for an outlook on the first quarter of 2024, as well as some updates to our full year expectations. We experienced a severe weather event at our Lewiston mill in January that had an estimated $13 million negative impact. That impact is being partially offset by increasing paperboard demand and production. We are expecting continued strong performance in tissue with those variables.
We expect adjusted EBITDA in the range of $53 million to $63 million in the first quarter. For the full year 2024, we expect to maintain strong margins in tissue with stable volumes. We also expect a rebound in paperboard demand in the second half of 2020 for our planned major maintenance at Lewiston is expected to negatively impact adjusted EBITDA by $30 million to $35 million. And we do expect price and cost to negatively impact us by an additional $40 million to $50 million.
Finally, our other key assumptions for the full year remain unchanged and do not take into account. Our announced Augusta acquisition interest expense should be in the $28 million to 30 million range. Depreciation and amortization expense should be $97 million to $100 million. Capital expenditures should be between $90 million and $100 million, which includes $26 million for the Lewiston recover recovery boiler tube replacement project and $28 million for the precipitator replacement in Arkansas.
As a reminder, the recovery boiler project will require approximately $40 million of total spend. While the precipitator is projected to require $45 million. And finally, our tax rate should be in the mid 20% range.
Let me now turn the call back over to Arsen.
Arsen Kitch
Thanks Sherri. The expected Augusta acquisition is a big strategic step for Clearwater Paper. Upon the expected completion of the transaction, we will welcome the very talented Augusta team to Clearwater Paper. We will focus on successful integration and delivering against our value creation expectations. Our goal is to bring together the best of Augusta and our existing mills to build a stronger paperboard business our long-term objective is to build a scaled and diversified paperboard business that meets the needs of our convert converter customers.
We intend to continue to opportunistically look at paperboard assets across multiple substrates. We will also continue to evaluate the feasibility of investing in our existing assets to expand our product offering. While we look at additional opportunities in the long run in the near to medium term, we're going to focus on generating cash flows and deleveraging our balance sheet. We have a proven track record of doing just that and expect to be back to our cross-cycle target of 2.5 times by the end of 2026.
When you wrap up by thanking our people for a strong 2023, we delivered outstanding financial results, navigated through challenging market conditions and continued to prioritize our customers. I would also like to thank our customers for placing their trust in us and our shareholders for their continued support.
With that, we will end our prepared remarks and take your questions at this time.
Question and Answer Session
Operator
(Operator Instructions) Matthew McKellar, RBC Capital.
Matthew McKellar
Arsen and Sherri, thanks a lot for taking my call and congrats on the transaction. Maybe to start off, we've seen pricing move a little bit lower for SBS here. Are you able to get a sense of what the run rate annual EBITDA generation for the Augusta facility would be like based on where SBS prices are today and the utilization rates you're expecting for 24?
Arsen Kitch
Assuming that we believe that there was $100 million in EBITDA in 2023. That was, of course, at 2023 prices and volume, we are expecting a lower carryover and that pricing that you're referring to, but we're expecting a recovery in volume. So the two in the long run should offset each other. I think once we complete the transaction, we'll be able to give a better idea of what 2024 it looks like at Augusta.
Matthew McKellar
Okay, understood. And then can you give us a bit more color maybe on the cost synergies you expect to achieve on the acquisition by the end of '26, including the cadence of when you'd expect those synergies to be achieved? And whether any CapEx or price increases would be associated with how we bridge that ''26 number?
Arsen Kitch
Let me start with this, the bulk of the synergies we're expecting are really coming from volume. So we believe the mill is going to be 70% to 80% utilized in 2024. In the long run, we should expect to see 95% utilization, which is back to historical run rates. And so that would imply about 150,000 tons of volume upside that we have at Augusta. So the bulk of those synergies should come from that volume left.
And if you look at historical Clearwater Paper Board EBITDA per ton. It's probably in that $200 to $300 range, depending on where you are in the cycle. And so the bulk of the synergies I think are going to come from this volume lift. There is more modest synergies and things like network optimization, procurement and transportation, but that I think is secondary to our focus on the commercial side, and we expect to get these to get these synergies by the end of 2026. We're not prepared to talk about the cadence of what happens in '25, '26. I think some of that is going to be dependent on the market recovery that we're expecting. But we'll have more to say as we as we progress through the acquisition.
Matthew McKellar
And then just thinking through the utilization projection events, where you talked about 70% to 80% in '24, I mean, yes, that would be a little bit softer than what you've seen across your own paperboard portfolio, although I think you've outperformed the market recently. But just for completeness, could you give us a bit of color on what's behind those assumptions, whether there is anything around the relative health of folding carton versus carbon plates or where you'd expect to concentrate any economic downtime given the level of demand you expect in the market or other factors?
Arsen Kitch
Yes, that's a great. It's a great question. I think it mostly refers to the book of business that we're acquiring with the mill. And so that's so we believe that book of business will fill the mill up 70% to 80% comment at the time that we complete the acquisition and into 2024. So really that upside is is us capturing additional volume and having some additional wins wins in the market. So it's really more indicative of how the mill is going to be loaded and the book of business that that we're hoping to retain as part of the acquisition.
Matthew McKellar
That makes sense. Maybe sticking with Augusta, I know you talked about looking at some additional substrates and paperboard that could add to your customer value proposition. I know graphic had done some work historically evaluating the production of folding boxboard at that facility. Is that something you'd be at all interested in? And then I guess just more broadly, can you give us a sense of which substrates you might find attractive are most complementary to your existing portfolio.
Arsen Kitch
And so that's a great question. I think we're going to focus on as well. What do the what are the converters and North America what is it that they need? And what is it that they're looking for in the long run?
We do believe that there will be a place in the market for lighter paperboard. So we're going to explore those options will also explore other products complementary to SBS that our customers may need or want in the future. Beyond SBS., our customers purchase other substrates as well. And so we will look at potential acquisitions that make sense with the other substrates of paperboard. But at this point, we are really going to be focusing on on cash flow generation and deleveraging to get us back into a position where on where we can take advantage of those opportunities.
And Matthew, this is what we've been saying for the last several years is the goal of deleveraging is to put us in the spot to where we can. We can make a transformational acquisition and our intent is to get us back into that spot that we can continue to grow greater than.
Matthew McKellar
Makes sense. And maybe just zooming out and sticking to your outlook for paperboard more broadly it sounds like you've seen a little bit of a pickup in Q1 sequentially here. Are there any end markets you call out as being stronger or weaker meaningfully versus Q4 and then maybe can you talk just to what's informing your view that we'll see improved demand in the second half of the year and whether you'd expect imports of folding boxboard to be a material factor for how you expect '24 to play?
Arsen Kitch
I think there's three questions there. So I'll tried to tackle all three of them. If I miss one, let me know. So I think the first one is around which substrate, which portions of the market are holding up better than others. I would say we've seen in '23 is foodservice has held up better than that in folding carton, and that makes it makes sense. Folding carton. As you know, SBS is used more in higher end applications and I think those have those have had some softness in 2023.
In terms of in terms of a demand recovery. And when we when we say demand we refer to either consumer demand or our customer converter demand, I think and that inventory build that we saw in 2022 and into 2022 was really substantial and as I have discussions with our customers on that, they still had a hangover of inventory at the end of 2023, but they're working their way through it.
And so what we are expecting to happen is a more normalized ordering pattern from our customers as we progress through 2024. We're hoping for some strengthening in consumer demand as well for those higher end applications of paperboard. So those are the two things that I think will drive driver recovery. I think it's going to be gradual and in the next couple of quarters and strengthening into at the end of 24 and into 2025.
Matthew McKellar
Great. And I know there's a multipart question there I think the last part was just I mean, are folding boxboard imports on a pretty material factor for your outlook in 2014. What are you seeing on that perhaps?
Arsen Kitch
Thanks for reminding me. So listen, if you look at if you look at the data of imports in '23 were actually down versus 2022. If you look at recent data, they were they were down by almost 20%, 25% year over year. They're projecting that they maybe bump up by 10% or about 50,000, 60,000 tons in '24 and being flat in '25 and right around 500,000, 600,000 tons.
I mean, those are historical averages that we've seen. And so I know there's been some commentary out there about imports. But from what we're seeing, certainly, they're here, they've been here, they've been here for many years, and the rate of imports is about what we'd expect at this time. So I don't I don't think this is this is important.
Matthew McKellar
Okay, thanks. That's really helpful. And last one on paperboard, and should we understand I guess your announcement yesterday is essentially confirming that you intend to remain an independent supplier of paperboard. And by that, I mean, you don't see yourself growing into converting operations in a substantial way. Is that strategic option pretty firmly off the table at this point?
Arsen Kitch
I think in the near to medium term, that's absolutely right. I think we're committed to it to the independent converters and where the independent supplier. I think we think it's a great set of customers, and we think we have plenty of room to grow and that's been been our sweet spot in our value proposition for for many years. So we're going to play to our strengths and we think we can be there. And for those for those customers for those customers in the long run. So yes, our focus is to be that independent supplier to the North American converters.
Matthew McKellar
And maybe next, just switching over to tissue, I'd just like to ask about your process of exploring options there. I think you've previously been pretty candid in reviewing your options for both businesses be able to share at this point, how advanced any process might be for exploring your options for the tissue business and even give an indication of what your expectations might be for time line or value? And then any color you could provide on how a sale would work for the Lewiston site in particular, given that mill produces both products?
Arsen Kitch
Yes, I think it's a little premature to be to be jumping to timelines or expectations. I mean, if we step back, we talked about our focus on paperboard growth and we have a fantastic tissue business. We operate that business really well. And but as I've said before, that the business does need scale and the industry does need consolidation, given the supply and demand landscape and we'll look at all options and one of those options. It may very well be operating the business.
So we'll do the right thing for our shareholders. We'll do the right thing for our customers. And our people have said I've said before, yes, Lewiston and Lewiston has multiple product categories in there. It's a great site. It's our it's our biggest site, the largest producing site. That site is critical to Clearwater Paper. And so we're obviously thinking about any implications there. But I think it's premature to be talking about any specific paths.
Matthew McKellar
Yes, that's fair enough. But one last one for me. I just want to confirm that I heard correctly that the impact from the extreme cold weather events in January was $13 million for the Q1 number. Just want to understand, I guess what maybe is embedded in that it will what exactly occurred and whether you might have any business interruption insurance could be applied against that in time?
Kyle Nagarkar
So let me start with what's embedded and then Sherri can grab the financial piece. So it's there's a combination of two things. One is equipment damage. So when the freeze happened, it was very cold in Lewiston for an extended period of time when the mill goes down in that kind of cold. It causes extensive damage. So part of it is just equipment damage and repairing equipment. The other part was downtime that we had to take to get the mill back up and running. So together, that was $13 million. And Sherri will you take the insurance question?
Sherri Baker
We would have a deductible of $4 million that we would have to offset. And we have not assumed any recovery in the numbers that we included. So any recovery that we would be able to achieve would be an offset to the guidance that we provided.
Arsen Kitch
And we've obviously we're working with our insurance companies. So I don't want to imply that. I mean now it's $13 million minus $4 million is the recovery that we'll see. So we'll have to work through it through with our insurance company and figure out what that recovery, what would look like there's both an asset equipment portion of insurance as well as business interruption. So that's what we have to work through.
Operator
(Operator Instructions) At this time, there are no further questions. Thank you for joining today's call. You may now disconnect your lines.
