Clearwater Paper Corporation 2026 Q3 Earnings Call

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 Sherri to review our 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 million-$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 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 5 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 kraft 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 are planning on executing a maintenance outage in January of 2027 with an estimated cost of $12 million-$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 million-$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%-3% in CUK and CRB. We believe SBS's attractive pricing on a per square foot basis, together with its strength and print characteristics, is supporting substitution. On the supply side, based on publicly available information, 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, RISI has reported a $60 per ton price increase in folding carton and cup 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 cup 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 are 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. RISI 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%-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 Circa, our CRB offering in partnership with Greenpaper. We are 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 are continuing to make good progress on developing a CUK product offering from our Cypress Bend mill. We believe that we have developed a highly competitive folding carton grade that we are now trialing with several of our customers.

Interest has been strong, and we are planning to formally launch a new CUK 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 Bend mill to CUK. The full capital solution has an estimated cost of approximately $60 million. We are pursuing a lower-cost capital alternative of approximately $3 million-$5 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 300,000-400,000 tons, and we are targeting to capture 20%-30% of that demand. With that, I will turn the call over to Sherri to discuss our third quarter financial results in more detail and provide our outlook for the fourth quarter.

Thank you, Arsen, and good afternoon, everyone. Turning to our third quarter financial performance. We reported a net loss from continuing operations of $2 million, or $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 million-$30 million. As Arsen 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 million-$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 50,000-60,000 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 million-$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 million-$12 million in the quarter sequentially.