Clearwater Paper Corp (CLW) Q3 2026 Earnings Call Transcript

Thank you for standing by. At this time, I would like to welcome everyone to today's Clearwater Paper, third quarter, 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, press star one to raise your hand. To withdraw your question, press star one again. I'd now like to turn the call over to Sherry Ellison with Investor Relations. Sherry, please go ahead.

Thank you, Tracy. Good afternoon and welcome to Clearwater Papers' third quarter 2026 earnings conference call. Joining me today are Arsene Kitsch, President and Chief Executive Officer, and Sherry Baker, Senior Vice President and Chief Financial Officer. Our third quarter results were released after today's market close along with the filing of our 10-Q. Supplemental materials, including our current outlook, are available on the Investor Relations page of our website. Today's discussion includes non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are included in our earnings release and supplemental materials. Please also refer to the forward-looking statement disclosure on slide two of the supplemental materials which we incorporate into these remarks by reference. With that, I'll turn the call over to Arson.

Good afternoon and thank you for joining us today. I'll begin with an overview of our third quarter results, provide some perspectives on industry conditions, and discuss actions that we're taking to improve performance and broaden our product portfolio. I'll then turn the call over to Sherry to review your financial results in more detail, discuss our recent refinancing, and provide our fourth quarter outlook. Turning now to our third quarter performance. Our adjusted EBITDA was at $24 million, which was within our guidance range of $20 to $30 million. Results were driven by benefits from our previously announced price increase and no major maintenance outages during the quarter. Partly offsetting that were incremental costs due to the conflict in the Middle East and operational issues at our Augusta mill. While revenue decreased by 4% versus the third quarter of last year, primarily due to lower market-driven pricing, we're now beginning to realize the benefits of our announced price increases. Average selling price was $34 per ton higher than in the second quarter, contributing nearly $8 million to our quarterly results. We have fully implemented our first announced price increase of $60 per ton and are making progress implementing our second $60 announced increase. Our shipment volumes and production were impacted by significant operational disruptions at our Augusta mill. This was largely offset by a portion of the representation and warranty insurance settlements that we received. On that subject, we received our fourth and final representation and warranty insurance payment of 17.5 million dollars during the quarter for a total of 73 million as a reminder these recoveries are related to our augusta acquisition where we believe certain representations and warranties made to us were either incomplete or inaccurate finally and most importantly we completed our debt refinancing significantly extending maturities by five years to 2031. This simplifies our capital structure and provides sufficient liquidity to operate our business. Let me address the operational disruptions at our Augusta mill during the quarter. In late September and into October, the mill experienced several electrical and mechanical failures in the pulp, power, and recovery areas of the operation. Due to the interconnected nature of a craft pulp mill and the continuous flow of our manufacturing process, these failures had significant downstream impacts. For those of you familiar with these processes, you will understand how challenging and time consuming it is to recover from these types of events. We continue to work through the impacts of these failures, but we will recover and return the mill back to its normal production capability. looking ahead we will need to invest additional capital dollars in the mill to address asset conditions that were not easily identifiable through a typical diligence process and were not accurately represented to us during the sale as a result of these disruptions we were unable to complete some of our planned maintenance work at the augusta mill in october we're planning on executing a maintenance outage in January of 2027 with an estimated cost of $12 to $15 million. We will likely have to take additional downtime in Augusta in Q2 or Q3 of 2027 to perform maintenance work, with that cost estimated at $7 to $10 million. Let me now turn to industry conditions. We are seeing signs of recovery in SBS, with year-to-date shipments up 6% through the second quarter, compared with declines of 2% three percent in cuk and crb we believe sbs is attractive pricing on a per square foot basis together with its strength and print character characteristics is supporting substitution on the supply side based on publicly available information we estimate we estimate annualized production has decreased by around 800 000 tons since the end of last year this is a combination of a permanent paper machine closure earlier in the year and temporary curtailments by several industry participants. Based on these assumptions, we estimate that industry operating rates should be above 90% by year-end for current operating capacity. In terms of industry pricing, RECI has reported a $60 per ton price increase in folding carton and cub grades in July and August. We have fully implemented our first announced $60 price increase and are making good progress implementing our second increase. We see particular strength in our cub grades, with customer demand exceeding our capacity. As a reminder, nearly 50% of our total volume is tied to RISI, and it generally takes us a couple of quarters to fully implement index-driven pricing. In total, our first $60 price increase is expected to result in more than $70 million in annual benefit, which started flowing through our financial results during the third quarter. Let me now turn to imports. Total bleached imports declined by 1% year-to-date through August. We're seeing unexpected resilience in imports from Europe, even with tariffs, higher transportation costs, and higher energy and chemical costs. It is likely that European competitors are facing their own supply and demand challenges in their home markets and see the North American market as an outlet for their excess capacity. Let me summarize my industry comments. The green shoots that we mentioned in previous calls are starting to show up in our financial performance. Pricing is improving, demand and backlogs remain strong, and industry operating rates are increasing. RECI SBS price index has already reflected a $60 per ton price increase, with an additional $100 per ton forecasted in folding carton grades by the end of 2027. If all these increases materialize across all our tons, we would expect our adjusted EBITDA run rate to improve by nearly $200 million, helping us get back to our target cross-cycle margins of 13% to 14%. Lastly, I would like to provide an update on our strategy to broaden our product offering to be able to deliver a full range of paperboard options for our independent converter customers. In July of this year, we launched CERCA, our CRB offering in partnership with Green Paper. We're trialing the product with several of our customers, and initial feedback has been positive. Given domestic CRB overcapacity, our progress will likely be gradual. As a reminder, our CRB launch required no capital investment, and we will take our time developing the right mix of strategic customer relationships versus selling spot tons. We're continuing to make good progress on developing a CUK product offering from our Cypress Bend Mill. We believe that we've developed a highly competitive folding carton grade that we're now trialing with several of our customers. Interest has been strong, and we're planning to formally launch a new C-UK product line by the end of the year. As a reminder, we have engineered a capital solution that would enable us to swing the entire Cypress-Venn mill to C-UK. The full capital solution has an estimated cost of approximately $60 million. We're pursuing a lower-cost capital alternative of approximately three to five million this alternative should provide us with sufficient capacity to establish a meaningful position with independent converter customers we believe that addressable cuk demand is approximately three to four hundred thousand tons and we're targeting to capture 20 to 30 percent of that demand with that i'll turn the call over to sherry to discuss our third quarter financial results in more detail and provide our outlook for the fourth quarter thank you arson and good Good afternoon, everyone.

Turning to our third quarter financial performance. We reported a net loss from continuing operations of $2 million for $0.10 per diluted share, including $17.5 million of insurance proceeds. Net sales were $385 million, with shipments down 1% and a 4% decline in pricing compared with the prior year. Adjusted EBITDA was $24 million towards the midpoint of our guidance range of $20 to $30 million. As Arsten mentioned earlier, operational disruptions at Augusta were mostly offset by a representation and warranty insurance reimbursement received in 2026. SG&A was at 5.2% of net sales, down from 6.2% in the third quarter of 2025, reflecting our continued focus on cost discipline. Year-to-date, we reduced net debt by $56 million, supported by $29 million in cash tax refunds, $50 million in insurance proceeds, and working capital initiatives. Let me now provide a brief update on our debt refinancing. We closed the transaction in September with our partners in the farm credit system. The transaction extends our maturity profile to 2031, reduces refinancing risk, simplifies our capital structure, provides us with adequate liquidity and establishes a stable foundation to execute our long-term strategy. We used proceeds from a new $275 million term loan to redeem our 2020 notes, which were redeemed on October 3rd. We also replaced both the ABL and term revolver with a new $200 million revolving facility with $15 million outstanding at quarter end. The revolver includes a $100 million accordion option that may be exercised after we file our 2027 annual report, subject to agreement from our farm credit partners. Pricing is determined by a tiered gross leverage framework measured quarterly. As of the third quarter, our effective interest rate was 8.25% with a fixed base rate for a one-year term. Let me also provide an update on our recovery efforts related to representation and warranty insurance. We received a fourth and final settlement payment of $17.5 million in Q3. Year to date, we have recovered nearly $50 million, bringing total recoveries since the fourth quarter of 2025 to $73 million against the $105 million policy limit. Turning to input cost inflation and tariffs. We continue to face higher costs in transportation and chemicals driven by the conflict in the Middle East. Oil-derived chemicals, particularly polyethylene, have experienced increased price volatility. Transportation and wood costs have also been affected by significantly higher diesel prices. In the third quarter, we incurred approximately $12 million in higher costs related to the conflict versus last year. We expect these costs to increase by another $1 to $2 million in the fourth quarter and continue into 2027 our total impact from the conflict is approaching 30 million this year as we look at canadian tariffs we ship approximately 50 to 60 000 tons of paperboard into canada annually we also procure some of our inputs from canada particularly chemicals at this point both our imports and exports are largely exempt from various tariffs Turning now to our outlook. For the fourth quarter, we expect adjusted EBITDA of $10 to $20 million. We expect paperboard shipments and production to decline sequentially with normal seasonality and continued operational challenges at our Augusta Mill in October. We expect our announced price increases to contribute $8 to $12 million in the quarter sequentially. Our planned major maintenance outage at Cypress Bend is expected to result in direct expenses of $5 to $7 million. Finally, we expect roughly $4 million of seasonal energy cost increases and $1 to $2 million in incremental conflict-related costs, primarily in transportation and wood. For the full year 2026, our assumptions include revenue of roughly $1.5 billion with flat to slightly higher shipment volumes. We continue to expect approximately $70 million of carryover pricing pressure from 2025 price decreases, partially offset by $15 to $20 million of benefit from the July and August price increases. Our productivity and restructuring efforts are expected to mostly offset higher costs, including a full-year conflict-related impact of $28 to $32 million. We expect direct major maintenance outage costs of $27 to $29 million this year, driven by Lewiston and Cypress Bend. Augusta's annual outage is now planned for January of 2027, with direct costs estimated at $12 to $15 million. We will likely need to have an additional outage in Augusta in the second or third quarter of 2027, at a cost of $7 to $10 million to complete necessary work. In addition to the Augusta outage in January, our Lewiston outage is scheduled for Q2 of 2027, while Cypress Bend is scheduled for Q4 of 2027. In terms of cash flows, we now expect to finish the year generating positive free cash flows. This is due to a combination of positive EBITDA, 50 million in insurance recoveries, 25 to 30 million reduction in net working capital and tax refunds, offsetting that our capital expenditures, which we are now projected to be in the 55 to 60 million range for the year. SG&A is expected to be well below our target range of 6 to 7 percent of net sales as we continue to focus on managing our cost structure. Let me now turn the call over to Arson for closing remarks.

Thank you, Sherry. Let me close with a few thoughts on where we stand today. We have successfully refinanced our debt with our long-term partners in the farm credit system, establishing a strong foundation as we navigate challenging industry conditions and execute our strategy. We have continued our focus on managing costs and have been able to largely offset some of the cost headwinds that we face this year. We're implementing our second announced price increase and are close to launching a new C-UK product line. We remain confident that the industry cycle will recover and we will return to our cross-cycle target of adjusted EBITDA margins of 13 to 14 percent with more than 100 million of annual free cash flow. Let me wrap up our remarks with an organizational announcement that was included in today's filing. Sherry will be leaving us in a few weeks for a new opportunity. She joined us more than three years ago and has been an important part of our journey. She played a key role in our strategic transformation in 2024 for, including securing financing for our Augusta transaction, as well as in refinancing our debt last quarter. Sherry has also led the finance function through significant changes and helped us achieve our cost reduction targets over the last few years. On behalf of our board and the rest of our organization, I would like to thank Sherry for her contributions and wish her nothing but the best in this next chapter.

Thank you, Arson. I want to thank everyone at Clearwater for the opportunity to be part of this organization over the past three years. I feel very fortunate to have worked alongside such a talented team of Clearwater Enners its next chapter. My new opportunity will bring me back to my home state of Texas, closer to family and friends, and I am grateful for this opportunity. I remain confident in Clearwater's ability to execute a strategy for growth and value creation, and I look forward to following the company's progress in the years ahead. Thank you for the opportunity to be part of that journey. Thank you everyone for joining us today. Operator, please open the line for questions.

We will now begin the question and answer session. Your line will remain open for follow-up questions. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you do pick up your handset when asking a question to allow for optimum sound quality. If you're muted locally, please remember to unmute your device. Now please stand by while we compile the Q&A roster. Your first question comes from the line of Mike Roxland with Truist Securities. Your line is open. Please go ahead.

Thank you, Ars and Sherry, and Sherry for taking my questions. Sherry, wishing you the best of luck in your in your new role um thank you mike arson my my first question is um you know you mentioned cuk and adding tons by end of the year somewhere in the range of 50 to 100 000 tons i mean how big do you expect cuk to ultimately be for you and what's the timing in terms of trying to achieve that good good question thanks mike um so as we mentioned previously cuk is going to go into our cypress bend facility um if you recall we've reduced reduced production across our system particularly in cypress bend so this will help this will help us fill out

the cypress bend mill and it will become a swing mill for us between sbs and cuk until we launch the product and we're in the market it's hard to tell what the ramp is going to look like and what ultimately we're going to sell but reception so far has been very positive and i think independent converters are looking forward to having an independent, a third independent supplier in this space offering C-U-K.

Got it. Okay. In terms of CRB, obviously, it sounds like you made some headway there in terms of a new partnership. What do you think with respect to CRB demand, the weakness there? And what price spread to SPS do you think the weakness in CRB could normalize?

Yeah, it's a good question. So we've started working with our customers and trialing the product. You know, we think the independent market is in that few hundred thousand ton range in CRB. So it kind of remains to be seen how big that business becomes for us. I think it's important to note this was a capital, this was a no capital solution where we're essentially privately labeling green papers CRB and offering our services along with it. I don't want to comment on pricing and spreads at this point between CRB and SBS. What I would tell you is on a per-score-foot basis, SBS has been more attractive than CRB because it takes a heavier weight CRB to replicate the performance of SBS. Customers typically buy by area, not by weight, which is why I think SBS has been competitive and which is why I think you've seen SBS growth here this year while the other substrates have been flat or declining.

Got it. And just quickly, you mentioned with respect to Augusta that part of the issues that you've incurred were due to reps and warranties that were not available, that maybe you were misled on for the purchase. can you comment on what those reps and warranties were as it relates to the electrical issues you experienced in the quarter and post-quarter? And then second question is for Sherry. How much debt do you currently have outstanding? And really how much interest expense should we expect on an annual basis? Thanks very much.

All right. Let me start with RWI. So we We bought RWI as part of the Augusta acquisition, so the limit on the policy is about $105 million. During an M&A process, the seller makes representations and warranties on assets, on customer contracts, and so on and forth. So after we acquired Augusta, it became clear to us that some of those representations and warranties were either incomplete or inaccurate, and they deal with both customer agreements, commercial agreements, as well as assets. So in Q3, the events that occurred, the failures that occurred, we were able to allocate $9.5 million of our RWI recoveries to offset the losses that we experienced in Q3 from the operational disruptions.

And then to answer your question on interest, so you should expect probably in the range of, call it, $25 million on an annual basis. You'll see something smaller than that in 26 just because of the lower interest rate that we had on the notes for the predominant amount of the year. But as you think about going forward, I'd probably use an estimate in the range of $25 million.

Thank you very much.

Your next question comes from the line of Sean Stewart with TD Cohen. Your line is open. Sean, please go ahead.

Hi, thanks everyone. Apologies for the technical problems beforehand. Congratulations, Sherry. Best wishes going forward. I want to start with, let's start with CapEx plans. So $55 million to $60 million this year. it sounds like on the capital side you would plan to spend more next year for Augusta. Maybe confirm that's the case and if not, you guys have talked about 70 to 80 million being normalized maintenance level. How long can you spend under that level before you're worried about I suppose other productivity issues creeping into the mix for the company?

Yeah, Sean, I think part of the 55 to 60 this year versus our original estimate is pushing out the Augusta outage into 2027. A lot of capital work takes place during those outages. I think delaying the outage pushed some capital into 2027, so we'll spend that capital in 2027. At this point, we're not going to forecast or project capital into next year, but it will certainly be higher than this year, whether it's higher than the $70 to $80 million that we said we'd spend across the cycle remains to be seen. But we do think there'll be some additional investments in Augusta next year to take care of some of the liabilities that we've uncovered. Just don't know exactly what that's going to be yet.

Okay, thanks for that.

And then you connected some of the dots on the maintenance schedule for next year um is there any guide i think we have the quarterly cadence down but overall maintenance expense guide for next year can you connect some of the dots for that number yeah yep so i think we said augusta will be 12 to 15 in q1 and another 7 to 10 in q2 or q3 so that's somewhere in the low low 20 million dollar range low to mid 20s um in augusta lewiston i mean i think it'll probably be something similar to what we spent this year which was somewhere in that low 20 million dollar range and and cypress bend will be you know i think we're spending six maybe it'll be a little bit higher next year maybe seven or

eight um but i would expect we're probably somewhere in the 50-ish million dollar range for for next year okay uh thanks for that and sherry just on the interest expense question again i think you said $25 million for this year, and I think you said similar next year, and I'm hoping you can square that up. I would think with the refi and being based off the SOFR rate, it looked like the effective interest expense was going to be up a few points. Maybe if you can reconcile the comments you made before on expected interest expense next year.

Yes, the $25 that I was referring to is on a go forward basis so that would be more of the expectation for next year this year will be closer to probably around numbers 20 just because we have the lower interest rate on the notes for the predominant amount of the year but going forward i would expect something close to 25. okay uh that's all i have for now thanks very much thanks john your next question comes from the line of george staffos with bank of america your line is open please go ahead.

Hi, everyone. Good afternoon. Thanks for the details. Sherry, best of luck and congratulations. I wanted to talk about Augusta again. Can you reference whether you have any other recourse at this juncture, Arson and Sherry, in terms of Augusta and how it's performed relative to what you thought you'd be getting? Do you have any other ability to get remuneration or is it a disjuncture you need to spend capital to get the mill to where you want it to be?

Yep. So, George, we're done with the RWI policy. So we recovered $73 million on $105 million policy limit. I think your question is, do we have any other recourse? The right answer here is we'll review all of our facts and all of our options related to the acquisition, but we won't be able to provide any additional details at this time. I understand.

Recognizing that the goal is to, with the maintenance and with the capital you're going to put into Augusta, to get it back to where you had thought it would be, can you give us some way of dimensionalizing what the EBITDA contribution from Augusta is in its current state relative to what you thought you were getting? In other words, is EBITDA $10 million lower, $5 million lower, $20 million lower? Is there a way to have us think through what the variances at this juncture, recognizing it's going to get better?

So, George, the right way to think about it is the biggest gap in Augusta EBITDA performance is the price changes that we've seen since early 2024. for. So in our acquisition, we believe we bought $100 million worth of EBITDA on about 400 and some 1,000 tons, if I recall correctly. Since then, pricing has decreased, and I'm rounding here by a couple hundred dollars a ton. So as you may imagine, that has a very substantial impact on the P&L. I think that's been the biggest delta versus what we expected. We have achieved our supply chain synergies. We have loaded up the mill with volume. We're making good progress on our large strategic customer in Augusta, but we've got to work through some of these asset and performance issues. I would say the mill is probably performing somewhere in the 10% to 15% below where it needs to from a production standpoint right now across the last several quarters. So we have to get that back into a normal production capability for us to be able to achieve that EBITDA. I think in the long run, once the market recovers and we get Augusta back to normal, I think we'll be at that $150 million EBITDA contribution.

I was not including the pricing change because the pricing changes are by the market, not by the mill's performance or lack of performance. So you would say, you know, 10 to 15% times 400,000 tons times some margin per ton would give us a reasonable estimate. Would that be, I don't know, $50 million, would you say, in terms of the performance you could get back if you just get the mill running the way it should be running?

Yeah, I think 10 to 15% is based off of a capacity of 600,000 tons. So, yeah, I think you can apply the variable contribution margin to that kind of to dimensionalize, you know, what the upside is. You know, we think we'll get there. It's just going to require more work than we originally expected.

I just want to try two more questions. I'll turn it over. One on pricing and then one on, as Sean was getting at, at maintenance. If I take the latter, if the maintenance negative variance, 27 versus 26, would it be sort of basically what you're spending on Augusta incrementally, like $15 million in terms of if we're doing a waterfall to 27? Would that be fair, or am I missing something there?

No, it's almost entirely Augusta.

We really didn't have that. Okay, that's fair. And then arson and cherry on pricing. So, holding the second price hike in advance right now, because I don't think the trade pubs picked it up yet, correct me if I'm wrong, on what's been recognized, how much incremental pricing would you get in 27 versus 26? And then if you do get the second increase reflected, you know, I know timing will have a little bit of an effect here, but let's say sometime in the fourth quarter, how much incremental would you get on top of that given normal timing lags into 27? Thank you.

Okay, George, you're making me do math, but let me try it. So what we said is this year, that first price increase should deliver 15, $20 million of upside. And we said that full price increase is worth about $70 million on an annualized basis. So for next year, I would say this first price increase should deliver another $50, $55 million of upside. The second price increase, we're implementing. I think we're making good progress. You know, whether, you know, RECI reflects it or not, that's up to RECI. But let's just assume that that price increase is fully implemented and recognized by RECI by year end. It takes us a couple of quarters to roll through those prices into our customers based on agreements. So if you get, let's just say, half or two-thirds of that second price increase, that would be another $30, $40 million next year of additional pricing benefit. If that second price increase is fully recognized.

Thank you. I'll turn it over.

Your next question comes from the line of Matthew McKellar with RBC Capital Markets. Your line is open. Please go ahead.

Hi, good afternoon. Thanks for taking my questions and congratulations, Sherry. Best of luck to you in your new role. Just want to follow up on the C.U.K. production at Cypress Bend and confirm, are you intending to restart that second line at Cypress Bend as those C.U.K. volumes pick up? maybe in early 27? Or would you intend to run those volumes on the line that's operating today for some period of time? And if so, how should we think about what that does from a mixed perspective at Cypress Bend? Thanks.

Good question. So Matt, just a small clarification. We have one paper machine in Cypress Bend, so our intent is to create SWIN capacity and to campaign the machine between the uh the two the two grades um you know if we get into that you know 20 30 percent um of of demand addressable demand you're probably in the 50 to 100 000 ton range we would just fit it in on our schedules and cypress then and that machine would run sbs and then campaign and swing to uh swing to cuk our goal is to get that mill 100 utilized um to 300 some of thousand tons of of its capacity okay great thanks for that um and then just quickly wanted to touch on sgna as well

um it seems like your your run rate there has been pretty favorable compared to where expectations were uh is that a pretty sustainable run rate here for the next few quarters uh or anything we should be thinking about uh that develops from here just in the near term thanks so much yeah i think it's pretty sustainable i think we've been very cost focused Just, you know, setting aside any kind of cost of living changes or incentive compensation changes, I think this is a fairly sustainable SG&A cost structure for the time being. Great. The rest of mine have been asked, so thanks very much. I'll turn it back.

Thanks, Matt.

We have one more question from George Staffos. Your line is open. Please go ahead.

Hi, everyone. Just a quick question further on Cypress Bend. And so what did you find that you could do in terms of the second version of the C-U-K implementation as opposed to going with the less costly version versus I think RSN you said would be a $60 million project if you had the full ability to swing? What was it that you found, and what will you be able to do, and what won't you be able to do when Cyberspend is up and running with that capability?

Yep. So let me tell you what I think we'll be able to do is we'll be able to deliver a very high-quality CUK product that matches up to what the two largest players in the space are providing. So that's our goal. That's what we want to launch into the market. The tradeoff between the full $60 million project and what we are doing is going to be around speed as well as total available capacity at the mill. The $60 million solution would enable the mill to run on Cuk at its current speeds. With this much smaller capital investment, I think we'll be more limited in terms of speed as well as potentially have some higher costs associated with the product that we make. That being said, I think the tradeoff is worth it, especially as we're launching a new product line, and it helps us fill out some open capacity. we have at the mill which you know price if you do the analysis on variable contribution margin makes it very very attractive we have now reached the end of the q a session this concludes today's call thank you for attending you may now disconnect