Good day, and thank you for joining us. Welcome to the Clearwater Paper second quarter 2022 Earnings Call. I will now hand the call over to Sloan Bohlen from Investor Relations. Please proceed.

Thank you, Sarah. Good afternoon, and thank you for joining Clearwater Paper's second 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 second quarter of 2022 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 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 incorporate it by referencing our prepared remarks. And with that, let me turn the call over to Arsen.

Good afternoon, and thank you for joining us. Please turn to Slide 3. We had an outstanding second quarter that came in at the top end of our outlook range. On a consolidated basis, we reported net sales of $526 million, which were 30% higher than the prior year. Adjusted net income was $19 million, and adjusted EBITDA was $63 million. Let me share a few highlights. Strong paperboard demand continued, and prices increased. Tissue demand was also strong as consumers turned to private brands to help offset the impact of inflation. We successfully renewed key tissue customer agreements that were expiring this year and captured price increases. Inflation remains a headwind across most of our input costs, particularly in pulp, fiber, chemicals, energy, and freight. In addition to price increases, we continue to improve our operating performance, which mitigated the impact of rising costs. We reduced net debt by $68 million in the quarter, and almost $100 million in the first 6 months of the year. And as a result, we achieved our debt leverage target. Finally, we repurchased $4 million worth of shares with $26 million remaining on the authorization. With that, let's discuss some additional details about both of our businesses. Please turn to Slide 4 for a few comments on our Paperboard business. The industry continued to experience strong demand across its end markets with higher SBS pricing as reported by RISI. Since the beginning of 2021, RISI has reported price increases for the U.S. market that totaled $450 per ton. $250 of that was in 2021, $100 in the first quarter of 2022, and another $100 in the second quarter of 2022. As a reminder, it typically takes us up to 2 quarters for price changes to be reflected in our financials. It is also worth noting that our portfolio includes additional grades and price mechanisms that are not reflected in RISI. While perceived economic uncertainty is impacting consumer behavior, we continue to see strong backlogs across our business. June orders remained strong as demand continued to outstrip supply. We will discuss the outlook for both of our businesses later in our prepared remarks. Now please turn to Slide 5 for some additional comments on our Tissue business. We're seeing increased demand for private branded tissue products as consumers become more value-oriented. Private branded share of the tissue market climbed to over 35% in June, which is an all-time high. We shipped 12.6 million cases in the second quarter, considerably higher than the 10.2 million cases shipped in the second quarter of last year and 600,000 cases higher than the first quarter of this year. I mentioned previously that over half of our tissue volume was up for renewal this year. Our sales team has done a wonderful job working closely with our customers to renew and extend key agreements while securing new volume. In addition, the team has done a great job implementing previously announced price increases to help offset inflation. With these moves, we have substantially reduced renewal risk in 2022 and 2023 while positioning our business for success in the years to come. As discussed in previous quarters, both of our businesses continue to see substantial inflation. In addition to price increases, we continued our focus on improving our operating and supply chain performance. That focus on pricing and productivity is helping to offset the inflationary headwinds that we cannot control. I will now ask Mike to discuss our second quarter results in more detail.

Thank you, Arsen. Please turn to Slide 6. The consolidated company summary income statement shows second quarters for 2022 and 2021. In the second quarter of 2022, our net income was $15 million. Diluted net income per share was $0.86. Adjusted net income per share was $1.11. The corresponding segment results are on Slide 7. Slide 8 is a year-over-year adjusted EBITDA comparison for our Pulp and Paperboard business in the second quarter. We benefited from our previously announced price increases, which were largely offset by higher inflation across most of our spend categories. You will recall in the second quarter of 2021; we took a major maintenance outage that impacted adjusted EBITDA by $22 million. We had a modest outage in the second quarter of 2022 of $4 million. A net positive impact of the larger outage in 2021 versus the smaller outage in 2022 was $18 million. You can review a comparison of our second quarter 2022 performance relative to the first quarter on Slide 14. Please turn to Slide 9. We provide a year-over-year comparison for our Tissue business in the second quarter. We implemented previously announced price increases and realized a mixed benefit in the quarter. Our volumes improved versus the prior year when the market was experiencing pantry destocking. Our costs were higher due to inflationary pressures, partially offset by the benefits from the Neenah closure last year. You can review a comparison of our second quarter 2022 performance relative to the first quarter on Slide 15. Slide 10 outlines our capital structure. Our liquidity was $316 million at the end of the second quarter. We reduced net debt by $68 million with our free cash flows in the quarter. We utilized free cash flow to repay our term loan by $30 million, which is now repaid in full, and repurchased $5 million of our notes that mature in 2025. Additionally, we restarted our share buyback program in the second quarter, using approximately $4 million to repurchase around 120,000 shares at an average price of $32.96 per share. Our net debt to adjusted EBITDA at the end of the second quarter 2022 was 2.2 times, and net debt was $500 million, which meets our previously discussed leverage target. We expect to communicate our longer-term capital allocation strategies and priorities as part of our third quarter earnings call. Slide 11 provides a perspective on our third quarter 2022 outlook with key drivers and some assumptions for the rest of 2022. Our expectations assume that we continue to operate our assets without significant supply chain disruptions. The risk of these disruptions remains elevated but has decreased since the first quarter. We want to reiterate that our price realization and inflation will continue to be difficult to predict. Our current expectation for the third quarter is adjusted EBITDA of $64 million to $72 million. The midpoint of the range for the third quarter is $5 million higher than the second quarter adjusted EBITDA of $63 million, but the expectation that previously announced price increases will outpace the freight inflation. Let me share some expected quarter-over-quarter changes. Previously announced paperboard and tissue price increases are expected to positively impact us during the quarter by $20 million to $28 million in total. Paperboard's impact could be $13 million to $17 million and tissue's impact could be $7 million to $11 million. We had a major maintenance outage in paperboard in the second quarter that impacted us by $4 million, and we have none planned in the third quarter. We expect inflation, particularly in pulp, fiber, chemicals, energy, and freight, to cost us an additional $18 million to $22 million. We're also experiencing higher labor and other costs. Let me comment on some of the key operational assumptions for 2022 to provide you with a framework to think about our potential full-year performance. If our previously announced paperboard and tissue prices remain at current levels throughout 2022, we expect a full-year benefit of $255 million to $275 million, with $210 million to $220 million in paperboard and $45 million to $55 million in tissue. This represents an increase from our prior guidance based upon continued strength in paperboard and momentum in tissue. We expect growth in converted tissue volume, but we anticipate that the benefits will largely be offset by higher supply chain costs. Cost inflation, including pulp, fiber, freight, chemicals, and energy, is expected to be $185 million to $205 million, which is also higher than previous expectations. We expect labor inflation, net of cost mitigation efforts, to be approximately $10 million. In our Paperboard business, planned major maintenance outages are expected to have a similar financial impact as in 2021. In total, our outlook for price realization of previously announced price increases, net of inflation is anticipated to be approximately $60 million higher in 2022 versus '21, reflecting a $15 million increase relative to our previously communicated expectations. For the full year 2022, we're also anticipating the following: interest expense between $35 million and $37 million, depreciation and amortization between $101 million and $104 million, and capital expenditures of around $45 million to $55 million. This is lower than our previously expected long-term capital expenditures as we continue to deal with supply chain and other constraints, and an effective tax rate between 26% to 27%. I do want to note that our cash flows after capital expenditures achieved in the first half of the year were $106 million. While we do not provide specific cash flow guidance, we are not expecting to achieve these levels in the second half of the year due to the following timing-related issues. Net working capital benefited from some timing issues that generated a positive cash flow of $20 million in the first half. This will reverse in the second half. We expect to spend approximately $20 million more in capital in the second half of the year versus the first half. Our total cash taxes are expected to be $50 million higher in the second half. Let me turn the call back over to Arsen.

Thanks, Mike. We previously mentioned a larger than normal major maintenance outage planned for 2023 at our Lewiston mill to address our recovery boiler screen tubes, which are at the end of their useful life. While it's still possible that the outage may occur in 2023, we now believe that the more likely timing is 2024. That outage is expected to require a capital expense approaching $40 million and an estimated adjusted EBITDA impact of $30 million. We expect to make the final timing decision in the fourth quarter of this year. We intend to provide you with further updates on outages for 2023 and 2024 during our year-end earnings call. Our ability to offset inflationary pressures is key to our success. We have successfully offset these pressures in our Paperboard business with a combination of previously announced price increases and operating improvements. While we have not been able to fully offset inflation in our Tissue business, we have made progress on increasing prices and reducing the cost of our products. We expect that these pricing actions in tissue will have an annualized run rate benefit above $70 million. We also made great progress in our customer agreements in tissue that position us for success for the next several years. As I conclude my prepared remarks, I wanted to emphasize some of our key priorities for Clearwater Paper shareholder value creation. Our free cash flow generation is essential for shareholder value creation. To drive cash flows, we're focused on commercial, operational, and supply chain improvements. We believe that these actions will continue to demonstrate a compelling free cash flow story for our investors. We have used that free cash flow to rebuild our financial flexibility, which is critical in building a resilient business that can take advantage of opportunities as they're presented, regardless of market conditions. While we achieved our target leverage ratio during the second quarter, we anticipate revisiting our target given the rising cost of debt and the uncertainty in the economic outlook. As Mike noted, we intend to discuss our capital allocation plan and priorities during our third quarter earnings call. These priorities will be anchored by continued performance improvement and capital expenditures and will likely include a balanced and opportunistic approach to return capital to shareholders, further deleveraging, and possible M&A. In closing, I would like to thank our people for all that they do to keep our operations running safely and efficiently and for serving our customers. I also want to thank our shareholders for their continued support and our customers for placing their trust in us. With that, we will end our prepared remarks and take your questions.

Your first question comes from Adam Josephson of KeyBanc Capital Markets.

Thank you. Mike, forgive me if I missed, I wasn't able to listen to all of your prepared comments, but it looks like your price cost expectation for the year has improved by $15 million at the midpoint of the price mix and inflation ranges you gave. I don't think your labor inflation expectations changed, but please correct me if I'm wrong. Are there any components of those full year numbers that I might have missed?

No. Adam, you have it correct that our labor expectations are still $10 million higher year-over-year, and that was what we commented on last quarter. And relative to that price, call it, cost inflation differential that improved by $15 million versus the last time we spoke in the first quarter. Obviously, product prices have moved up a little bit more than the input inflation that we've seen.

And should we assume, just on that same topic, Mike, that as you think about next year, albeit it's still early days that you would have some spillover price/cost benefit going into next year in your SBS business? And if so, can you help give us some rough order of magnitude of what that could look like?

Adam, I won't comment on 2023. I want to highlight that, as Arsen mentioned, we have not yet recovered from the inflation we experienced in the tissue part of the business. Therefore, we still have some work to do regarding what we have seen over the past 18 months. There is more to be done to recover that margin.

I appreciate that. And on that topic, can you talk about the renewal of those key tissue agreements? And on what kind of terms you were able to renew those agreements and how that fits into this price cost recovery that you're talking about next year in your Tissue business?

Thank you for the question, Adam. I won't go into specifics about customer agreements or pricing. However, I mentioned in previous quarters that over half of our business was up for renewal this year. We have concentrated on extending and renewing those agreements. While there are still a few details to finalize, we anticipate a significant reduction in renewal risk for 2022 and 2023, aiming for renewal rates well below normal in the next 12 to 18 months. Additionally, we have successfully increased our volume with some customers, which is encouraging as we look to the next year. Regarding our pricing actions, on a year-to-date basis, we are nearing a $70 million annual run rate, recognizing between $45 million and $55 million this year compared to last year. Overall, we've made substantial progress in terms of pricing, volume, and extending customer agreements, reflecting well on our sales team’s efforts.

Kudos to you guys. And just one last one for me. You mentioned the SBS cumulative price increases of $450 a ton. When you look at folding carton, that's about a cumulative 45% price increase since the beginning of last year; it's a pretty extraordinary price increase even compared to other paper grades such as containerboard, kraft paper. I mean boxboard really stands out. And we've seen erosion in these other paper markets as the economy has weakened; I'm sure you're well aware of that. Do you have any reason to think that boxboard is somehow distinct from the other paper grades whose prices have also moved up over the past 2 years, albeit not to the same extent as SBS and other boxboard grades? Just talk about that dynamic if you can?

Yes, we are experiencing some economic uncertainty like everyone else. However, our order books remain very strong and we have a positive outlook for the rest of the year. I can say that we can sell more than we are currently producing. In the SBS market, it is primarily used for consumer packaging and food service, including food, pharmaceuticals, and cosmetics, which we believe to be about two-thirds resilient to recession. The food service sector faced challenges during COVID but has bounced back as consumers are increasingly shifting from e-commerce to seeking services and experiences. While I am not fully aware of what's happening in other markets, I can confirm that strong demand persists, and food service has been recovering over the past year. We are seeing a robust market, but we are keeping an eye out for any signs of change.

Your next question comes from the line of Mark Wilde with BMO Capital Markets.

Yes. I wondered, Arsen, if it's possible to just provide us with a little more granularity around what you're seeing on your kind of key inputs right now. And also labor, particularly as we move forward here, if you have any major contracts coming up?

Let me begin, and then Mike can add any details I might overlook. When we examine our cost categories, pulp has increased significantly, likely by over 30% year-over-year. Wood prices are up, energy costs are rising, and this trend appears to be worsening due to global issues. Chemicals and freight costs are also on the rise. Overall, last quarter we were experiencing around 15% inflation in input costs, and now we're approaching 20%. This trend is evident across all areas. Regarding freight, there are early signs of moderation and easing. As for pulp, it's uncertain how that will unfold. However, we are noticing signs of peak and some easing in freight and a few cost categories. On the labor front, we do not have any agreements approaching in the near term, but we will closely monitor upcoming contracts to ensure we maintain an effective workforce for our operations.

Okay. Regarding pulp, I noticed that a company recently reduced prices in China, and there are reports indicating that pulp pricing might be weakening in North America. Can you share any additional insights on that?

I think the pace of increases has slowed. So I suppose that's good news. NBSK softwood, it appears to have peaked. I still think there's some logistics and strong underlying demand supporting eucalyptus out of Latin America. But there is new capacity coming online in the next 12 to 18 months. We try to forecast pulp. We haven't been very successful at it. If you look at some of the external forecasts, they are expecting some easing in the second half, but I think we've all been wrong here for the last number of quarters in terms of pulp forecast.

Yes. Well, I've been trying to do that for 35 years, and I haven't had much luck. Can you also give us a sense just on the price side of just when we move kind of sequentially from kind of second quarter to third quarter, what we might expect in terms of your tissue realizations?

So Mark, good question. So we commented in the prepared remarks that for tissue, we thought that we'd be up $7 million to $11 million quarter-over-quarter. I think maybe add to that, I think we hit our run rate in terms of that price realizations for our tissue price increases towards the end of the third quarter. And so that's when we'll be hitting that $70 million annualized benefit.

Okay. And Arsen, I'm just curious. In the Tissue business, we've spent the last couple of years talking about overcapacity in tissue. And I just noticed that the biggest of your competitors is putting $0.5 billion into a mill that really used to make just commercial tissue, and it looks like they're going to invest in a TAD machine, and it looks like it's going to be aimed at the consumer market. So just any thoughts on that situation and why in the face of what have been pretty disappointing returns across much of the tissue sector, we're still seeing such huge capital investments?

I prefer not to comment on specific actions. What we are witnessing is some companies making changes. When you examine the overall market, in 2019 and 2020, over 150,000 tons were added mainly in the private branded segment. In 2021, there were approximately 60,000 to 65,000 tons added; in 2022, the forecast indicates a net addition of about 19,000 tons, with some announcements for 2023 and 2024. Overall, it seems that the growth in additional capacity is slowing down. It appears to be becoming more challenging to justify such investments from a return standpoint, which is likely increasing costs. This could be affecting the industry.

Your next question comes from the line of Paul Quinn with RBC Capital Markets.

I have a question regarding your Tissue business and the renewal of customer contracts. It seems that a significant amount of capacity was removed from the North American tissue market in the first half of the year, but there is a lot of new capacity set to come online in the second half. Knowing that this volume is coming, did you proactively address those contract renewals in anticipation of competition from the new mills starting up?

I believe that as we approach these renewals, we are negotiating on a regular timeline. This year, we experienced an unusually high number of renewals due to how the contracts were structured. We have begun negotiations and made significant progress with our largest customers. Their focus is on the reliable supply, quality, and service we provide, particularly during these challenging times. We have consistently delivered on our commitments over the years, and I think our customers are acknowledging that. I am very satisfied with the advancements we have achieved in a tough environment while also implementing price increases.

Okay. So I think previously, you said that typically, you have 25% of your contracts up for renewal this year was heavier with over 50%. Given the renewals, and it sounds like you've extended some of them. Are you going to expect a similar pattern like next year, kind of 25%, 25%, and then another 50%? Or have you more or less normalized the renewals on a year-over-year basis?

As we finalize the last few details on these agreements, I expect to see lower renewals in '22 and '23. While working through these renewals, we've carefully staggered them to minimize risk in any particular year. Over the next 18 months, between this year and 2023, we should experience lower than usual renewal risk compared to what we typically encounter.

That's great. And then just on the recovery boiler pushing that off and potentially pushing that off into 2023. Is that going to have a production impact on the asset facility?

We're still working through that. Initially, we thought we might do it in 2023. At this point, the most likely scenario is 2024. However, we'll have more clarity at the end of this year when we conduct a major outage in Lewiston. After that, we'll have a definitive timing. It's important to note that when we take an outage for the repair work, there will be downtime as part of our standard major maintenance outage.

And Paul, on the production front, it will impact our pulp production at the mill. We'll provide you greater updates as we get closer to nailing down the timing for the outage.

Your next question is a follow-up from Adam Josephson with KeyBanc Capital Markets.

I appreciate it. Arsen, one obligatory recession question for you. So in the event of one, I would think you'd benefit in tissue given this ongoing move toward private label and the fact that pulp prices are historically high and are likely to come down perhaps quite dramatically in a recession. On the other hand, in SBS, you mentioned that 2/3 of your sales or industry sales are to what you consider recession-resistant end markets. But obviously, the fact that industry prices are up 45% in 1.5 years would suggest that pricing is pretty cyclical in that business. So how would you frame your profit sensitivity to a recession in light of all those variables and whatever others come to mind?

I think if you look at tissue typically during a recession, you see more growth in the private branded side. But what I would tell you is, if you look at the last 4 or 5 years, actually the last 10 years, you've seen private branded share continue to gain. So this last quarter, we were up to 35%. And in 2019, we were 31%, 32%. So you're seeing this continued march towards more private branded share in the tissue space. So certainly, during recessions, the private branded tissue demand should do well. At this point, I don't know how the pulp markets react. They're global in nature, so I don't know how they react to a recession. But maybe it's fair to say that there should be an easing in terms of costs. On the paperboard side, the last time we had a major recession was in '08 and '09, and there was a decline in paperboard demand. But fundamentally, what's going to drive that market supply and demand and the supply and demand situation today is fundamentally different than what it was in '08 and '09. Demand continues to outpace supply, and supply is tight. So if we were to enter a recession, and there was a slowdown in demand, I don't know what impact it would have on our supply and demand picture. But certainly, what we've experienced here over the last 1.5 years has really been driven by supply being fixed and demand far outpacing supply. It really depends on how the recession impacts packaging, food service, and this plastic to paper conversion, so it's pretty hard to tell exactly what happens in this recession and will it look similar to the last one that we have.

One question along goes on, Arsen, which is the supply tightness. Can you talk about the FBB import dynamic and the extent to which that has changed during the pandemic because of all the port congestion and the sky-high freight costs and where you potentially see that going?

Yes. I think it's logical to assume that there's been a constraint on imports, and it's been more challenging for converters to rely on FBB that's sitting on a ship coming over from Europe. So certainly, there's been a constraint with FBB. As logistics ease up and freight eases up, I think we will expect to see more of that paper show up on our shores. So that will certainly be an impact once the supply chain eases up. The question becomes, when do they really ease up? When do those costs go back to where they were before? And what will the Europeans decide to do?

Yes, absolutely. Arsen, you mentioned future opportunities regarding capital allocation, such as returning capital, mergers and acquisitions, and likely reinvestment. Could you share any preliminary thoughts on which capital allocation options seem most appealing at this moment? Are you considering reinvesting in one of the other businesses or returning cash to shareholders? We understand that you'll provide more detailed information in a few months.

Yes. We'll talk more after Q3, but just some preliminary thoughts. The capital markets have changed, debt costs have increased. So we need to revisit our leverage targets and see if that 2.5 makes sense. I suspect we'll do further deleveraging in the upcoming several years. We're going to continue to invest in our assets. And frankly, the last couple of years, our capital expenditures have been lower than what our target is. So we need to identify where we have good projects internally to invest in. Beyond that, I think we'll be opportunistic when it comes to returning and doing share buybacks and so on, but more on that to come after Q3. I mean, it's going to be all of the above, and we'll provide a bit more detail after Q3.

My apologies. We have a follow-up question from Mark Wilde with BMO Capital Markets.

I'm just going to tag along on that question Adam asked about folding boxboard imports. I'm just curious, Arsen, the other dynamic other than port congestion is that we've now got a pretty significant drop-off in the euro, which would make exports more attractive for those producers. But if you're a U.S. folding carton customer, how much flexibility do you think they have to kind of toggle back and forth between different suppliers because typically, people that ship tonnage into the U.S. market when the currency is favorable may not be here when the currency is not favorable. And that would seem to be part of the equation any buyer would have to think about.

Yes, that really gets to the core of the issue. If you're an independent converter with a contract from a large CPG company, you're outlining specific quality and characteristics of the board. You're likely set up for one type of substrate. This becomes particularly challenging when there's an unreliable supply of board coming from Europe, making it difficult to fulfill specifications with a CPG company when that supply might not arrive next month. This has been a longstanding issue in North America, not something new. The main concern has been the reliability of supply, which fluctuates due to logistics, currency strength, and other factors.

Okay, that's helpful. Good luck in the back half of the year.

Thank you.

This concludes the question-and-answer session as well as today's conference call. You may now disconnect your lines.