Clearwater Paper (CLW) Q2 2026 earnings call transcript

I'd now like to turn the call over to Sherry Ellison, investor relations. Sherry?

Thank you, operator. Good afternoon. And thank you for joining Clearwater Paper's Second Quarter 2026 earnings conference call. Joining me on the call today are Arson Kitch, President and Chief Executive Officer and Sherry Baker, Senior Vice President and Chief Financial Officer. Financial results for the second quarter of 2026 were released shortly after today's market close, along with the filing of our 10Q.

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-GAP financial information in this afternoon's discussion. A reconciliation of the non-GAP information to comparable GAP information is included in the press release and in the supplemental information provided on our website. Please note slide two of our supplemental information covering forward-looking statements. Rather than reading this slide, we incorporate it by reference into our prepared remarks.

With that, let me turn the call over to Arson.

Good afternoon and thank you for joining us today. I'll begin my comments with a brief overview of our second quarter results. I will also provide some perspectives on industry conditions and discuss actions that we're taking to reduce costs and improve our margins through the cycle.

I'll then turn the call over to Sherry to review the financial results in more detail and discuss our outlook. Turning first to highlights of our second quarter performance.

Our shipment volumes were up this quarter with strong 8% year-over-year growth. This was offset by a 9% year-over-year decline in market pricing as reflected in the recent index.

Adjusted EBITDA for the quarter was negative 8 million, which was within our guidance range. We phased higher than expected transportation costs, partly driven by the RMR.

We successfully completed the major maintenance outage at our Lewiston Idaho facility on time and on target with total direct expense of around 22 million.

We restructured our 5% Arkansas facility, resulting in a reduction of approximately 20% of roles at the mill. This action is driving an expected cost reduction of 8 to 12 million on an annualized basis.

As GNA expenses were at 5.6% of net sales in the quarter, remaining below our targeted range of 6 to 7%. We believe that these are industry leading numbers that reflect our continued cost discipline.

Last week, we announced the launch of circa our new CRB product line. This line will be sold and distributed through our network while being manufactured by green paper. This is aligned with our strategy to offer broader product range to our North American converter customers.

Finally, we reduced net debt by 59 million in the quarter and by 50 million year to date, driven by improvements in networking capital, tax refunds and additional insurance recoveries.

Let me now provide you with some industry updates. We are seeing some meaningful green shoots in SBS industry conditions. Our ship and volumes are up 6% year to date. Industry imports are down 11%, continuing a trend that we saw last year. RIC has reflected approximately 300,000 tons of reduced SBS production across the industry since the beginning of the year.

We're seeing evidence of substitution into SBS from other substrates by customers and our integrated competitors. Finally, we also believe that some industry participants have been able to swing some of their SBS capacity to other paper grades. All of these factors are driving an improvement in SBS operating rates from the low 80% range in the first quarter of this year to a receive forecast of 88% in the second quarter and over 90% by year end.

As a result of substantial cost pressure and improving industry conditions, we're implementing a $60 per ton price increase that we announced in June. We have recently announced a second $60 per ton price increase across all of our products that is to go into effect in August.

In its latest monthly report, RIC has reported a $40 per ton price increase on folding card and $60 per ton on cup.

We expect that our June price increase and the RIC price index changes will be reflected across all of our tons with a 50 to 60 million annual improvement in EBITDA. This does not take into consideration our second price increase or the additional increases that RIC is forecasting for later in the year and into 2027. As a reminder, approximately 50% of our volume is tied to the RIC index while the rest is subject to open market negotiation.

It will take us a couple of quarters for the RIC index move to flow through our P&L. Even as industry conditions and pricing are improving, we continue to face substantial cost pressure and margin levels that do not support long-term investment in our industry's capital intensive assets.

We believe that our margins are still around 10% below where they need to be across the cycle to deliver returns on capital required to invest in our assets, even with a recent RIC reported price improvement.

Against this backdrop, we remain focused on the items that are within our control, primarily reducing costs and maintaining share with our customers. Since 2024, we have removed more than 60 million of fixed costs from our system, including restructuring all of our mills and lowering as G&A as percent of sales. These actions have enabled us to weather this industry downturn while continuing to invest in our assets.

As part of these efforts, we announced a restructuring of our Cypress Bend Arkansas facility during the second quarter, resulting in a reduction of approximately 20% of roles with expected annual savings of eight to 12 million.

This action limits our network production to approximately 1.2 million tons per year, balancing supply with our current demand. We are currently sold out across our network and are in an oversold position on extruded capacity, which primarily serves the cup market. We believe that the actions we have taken through the down cycle were resolved and improved margins and cash flow as the industry recovers in the coming quarters.

Lastly, I would like to provide an update on our strategic actions to further build and diversify our product portfolio.

Last week, we announced the launch of Circa, a new line of CRV for folding carton and beverage carrier applications in the US.

Circa complements our SBS portfolio and strengthens our ability to serve customers across more induced applications. In the high quality recycled option designed to deliver dependable converting performance, reliable supply and strong value for everyday applications. Circa was developed through collaboration with Green Paper, a global producer of 100% recycled paper board at a state-of-the-art facility in Monterrey, Mexico. By combining our market reach, support and service with Green Paper's manufacturing capabilities, we plan to deliver a high quality CRV solution to independent converters in North America without the channel conflict that exists with current industry suppliers.

This follows our launch earlier this year of Alora, a lightweight paperboard product that we believe can effectively compete with FBD.

In addition to launching a CRV line, we continue to explore the possibility of producing CUK at our cyber spend facility to further meet demand for non-integrated paperboard options and expand our offering with other substrates.

While engineering work is complete for a full capital solution of approximately $60 million, we're exploring a lower cost capital alternative that would enable us to launch a CUK product line sooner and within our typical annual capital spend.

We're in trials at Cypress Bend with this potential solution and we'll share updates on these efforts in the coming quarters.

These actions are aligned with our long-term strategy to diversify our product portfolio and become a preferred independent supplier of paperboard to North American converters. With that, I'll turn the call over to Sherry to discuss our second quarter financial results in more detail and provide our outlook for the third quarter.

Thank you, Arsen, and good afternoon, everyone. Turning to our second quarter financial performance, we reported that net loss from continuing operations of $21 million for $1.33 per diluted share, including $15 million of insurance proceeds. Net sales were $375 million with 8% shipment growth offset by a 9% decline in market pricing compared to the prior year.

Adjusted EBITDA for the quarter was negative 8 million with the year-over-year decrease impacted by the timing of our Lewiston major maintenance outage, lower market pricing, and impacts from the Irene conflict. The Lewiston outage was completed in June on time and on target with a direct cost of 22 million. SG&A as a percentage of sales was 5.6% remaining below are targeted to range of 6% to 7% of sales.

In terms of the balance sheet, we reduced net debt by $59 million in the quarter and $50 million a year today, driven by a cash tax refund of $26 million, insurance proceeds of $15 million in the quarter and a reduction in networking capital.

Let's now move to some additional details on the impact of the Irene conflict. We continue to see upward pressure on both chemical and transportation costs. Oil-derived chemicals, particularly polyethylene, have experienced significant cost pressure. Transportation costs have been impacted by fuel prices and further exacerbated by tight supply due to driver shortages. The combined impact of these factors was approximately $5 million during the second quarter compared to the first quarter.

We expect an additional 3 to 5 million impact in the third quarter for a total of 8 to 10 million. We expect some improvement in the fourth quarter as supply chains adjust to the new reality in the Middle East. In total, we believe that the conflict will negatively impact us by 20 to 25 million this year. We will continue to monitor these developments closely and provide updates as appropriate.

Let me also provide an update on our recovery efforts related to representation and warranty insurance. As a reminder, this is related to the Augusta acquisition where we believe certain representations and warranties made to us were either incomplete or inaccurate. In the second quarter, we received a third settlement payment of 15 million of which 4 million was directly related to reimbursable operating costs.

Year to date, we have recovered 32.5 million. In total, we have recovered 55.5 million with 25 million of the 105 million policy limit remaining. We will continue to pursue a final settlement on the policy. Let me now provide a brief update on our refinancing efforts. Our intention remains to extend maturities prior to our credit facilities going current.

We are working with our existing bank partners to find the best solution that balances cost, liquidity, and maturities. We have ample liquidity on our balance sheet today with levels higher than historical averages with the tissue divestiture and our actions to quickly deliver the balance sheet. We remain committed to maintaining a strong balance sheet and liquidity then enables us to invest in our assets across the cycle.

Turning now to our outlook for the third quarter. We expect adjusted EBITDA of 20 million to 30 million. We expect paperwork shipments to be roughly flat versus the second quarter with higher sequential production. We expect to begin seeing benefits from our price increase efforts and we have no plan major maintenance outages in the third quarter. As I mentioned earlier, we expect additional cost pressure from the Iran conflict primarily in chemicals and transportation.

Let me briefly provide an update on our planned major maintenance outages this year. We now expect total direct cost of 32 to 35 million for the year versus previous estimates of 45 to 50 million. We have reduced the scope of our Augusta outage in the fourth quarter of 26, 2026 to 5 to 6 million and plan to complete the remaining work in the first quarter of 2027 with remaining spent of 10 million to 11 million.

We do not expect to have another major maintenance outage in Augusta until the first quarter of 2028. We also plan to conduct a maintenance outage at our side percent facility in the fourth quarter with an estimated cost of 5 to 7 million.

For the full year 2026, our assumptions include revenue of 1.4 billion to 1.5 billion with moderate shipment growth. We continue to expect a carryover impact from 2025, market-driven price decreases of approximately 70 million, partially offset by approximately 10 million to 20 million of price improvements in the second half of this year. We expect productivity and other cost reduction efforts to partly offset the cost increases that we are experiencing this year.

To round out our 2026 assumptions, we expect capital expenditures of 65 million to 75 million, targeted working capital improvements of 20 million to 30 million, and maintaining SGNA toward the bottom of our targeted range of 6% to 7% of net sales.

With that, I'll turn the call back to arson for closing remarks.

Thank you, Sherry. To close, I want to emphasize that we operate high-quality assets are executing well and have long-standing strategic customer relationships that we're prepared to defend. We have taken critical steps to improve our financial performance, including the restructuring of our Cypress Bend Mill, discipline pricing actions, and continued product portfolio diversification. These actions will improve our margins and cash flow in the long run, regardless of where we are in the industry cycle.

We're starting to see positive signs of a recovery in SBS, and that remain confident that the industry will return to its historical performance levels. Over time, we believe we will deliver cross-cycle e-bodem margins of 13 to 14% and generate more than 100 million of annual free cash flow.

With that, we'll conclude our prepared remarks and open the call up for questions.

Arsen, sure. I guess first question, and if you'd mentioned it, I missed it. I apologize. Do you have a view on what free cash flow will be for this year at this juncture, given the momentum that you had to queue and some of the pricing, or how would you have us think about that?

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

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

Let me, thanks George, let me tackle the Augusta question first. So that's the biggest, that's the biggest delta this year, is we are splitting the Augusta outage into two pieces, doing the five, six million this year and the rest early, early next year. We had a go-no-go decision on the Augusta outage and to be perfectly frank. I like the confidence that we were prepared to execute a good outage. So we made the decision to do the most critical things in October and push the rest of it to January and give the team a little bit more time to prepare.

We've also made some leadership changes at the mill, so we'd like to give the new leaders at the mill an opportunity to impact this outage. Augusta has historically done their outages in Q1, so we're going to revert back to that date moving forward. So the next outage will be in Q1 of 2028. So I think that's the Augusta question from a demand perspective.

So we saw a 8% volume increase in Q2 year-to-date. We're seeing a 6% volume increase. I don't view it as a fluke. We have good growth with, especially in our food service business. We have some strategic customers that we are growing with through some new programs, new volumes that we're picking up. So we feel pretty good about where we are from a volume perspective. We are our production right now is about 1.2 million tons per year.

Our paper machine backlogs are strong and we're actually oversold on extruded capacity, which goes into the cup segment.

Yep, that sounds great. Good questions, Matt. Thank you. So if we rewind the tape to 2024, when we emerged as a paperboard, focus company, what we said is our goal is to have all substrates under our umbrella and to be able to offer a more complete solution to our independent converter customers. The CRB collaboration, pretty excited about it. I think it's an excellent product. We were the facility that the Green Paper runs is outstanding.

We think there's space in the CRB part of the industry. For a truly independent supplier, without any channel conflict. We think approximately 20% of that industry is non-integrated. So it's hard to tell exactly how much volume we're going to capture, but let's just say it's 10%. That would be somewhere probably in the 40,000-tonne range if we were to capture 10% of that independent part of the market.

So we're in the process of talking to our customers about it, and it's going to take a few months for us to get qualified and placed in place volume, but we're excited to have another tool in our tool kit for our independent customers.

CUK is something that we think we can do on our existing assets. So Cypress Bend is where we're looking at. We have an engineered solution, a $60 million solution that would essentially enable us to produce as much CUK as we want at Cypress Bend. We are developing a much lower cost solution, call it less than $10 million that would fit within our capital budget that would allow us to come to market a lot sooner.

What we would sacrifice there is probably some speed, some cost, but what we get is speed to market that would allow us to see how well this product would do. The key for us is to make sure that we deliver a really high-quality product to the market. So we're in trials as we speak in Cypress Bend, and we're not going to go to market unless we're confident that we're able to deliver a solution that's as good, if not better, than what the competitive set up there offers.

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

You're guiding to hire quarter-quarter production flat shipments, which, you know, it's surprising a little bit, given you've taken some Casio at Cypress. Maybe I'm missing something in inventory shift, quarter-to-quarter, because we don't get the production data directly. But can you give us context on where you're squeezing tons out of the other mills, and you'd seemingly be on a track to exceed the pro form of 1.2 million tons of capacity for volumes this year. Can you connect some of those dots through the back half of the year? Yeah, absolutely, Sean. So if you recall, we performed a major maintenance outage at our Lewiston facility in Q2. So what we ought to see is a bit of a bump in production without having that downtime in Q3.

That's really the extent of it. I think it's as simple as that. So sales would be, I would say, relatively flattish, but we would see a bit more production, because we actually took down our inventory here in Q2 through the outage. So it's rebuilding just necessary inventories. We still have our work in that working capital goal reduction through through balance of the year. So the team is focused on that.

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

And if so, do you have an estimate of direct costs for the maintenance program in 2027? So let's see. So next year, so we will do this portion of the august outage in, let's call it January. We will do a Lewiston major maintenance outage in Q2, which will be probably similar level of spending as maybe a little higher than this year with inflation or everything. Then we would do a, at this point we would probably do a Cypress Venn outage in Q3, Q4 time frame.

So probably the delta would be a smaller august outage next year technically speaking until we get to 2028 when we have all, you know, all of our annual outages in full force.

How's it going? Why is thought that you want to answer on the answer to one of Georgia's questions in terms of volume growth? You mentioned, you know, some new programs and volumes picking up did the volume, does the volume growth, you had this quarter of reflect, share against against peers or is the growth reflective of growth is coming from existing customers?

You know, it's a good, it's a good question. So let me think through this. So we saw call it 6% for today growth. We haven't seen Q2 industry data yet. Q1 was flat.

I would say there's been some capacity changes in the industry as you know. So maybe that's infecting that a bit. You know, I guess by definition, if our share, if our volume is growing and the industry is not, that would mean we are picking up share. Maybe I'll just more comment more. It's existing customers exist with new and existing programs that are driving this growth. So hard for me to pinpoint whether there's some specific when we had against the competitor. But I think you have a industry capacity that has shrunk a bit through in the first half. And we've seen some good robust growth on food service with some of our existing customers. So what the existing program just more is on food service.

But actually it tells that you also have maybe some business wins as well. It would not be fair to tell you it's a new ad existing business, right? So existing businesses mentioned being food service, the new business wins came from where exactly.

Listen, I think the growth came from food service. So without going into too much detail, I think we're seeing quite a bit of good growth on the food service side.

We have relationships, I would say, with essentially every major customer. Good relationships, longstanding relationships. So in due course, you pick up programs, you lose programs, and I think we're picking up programs.

Got it. And so when I think about the price weakness in during the quarter, with, you know, I think it was 1,077 a ton, so down from $1,100 a ton in one queue, is that all due to Reese's pricing? Or some of that due to maybe the more and more competitive market that you were participating in that helped you achieve some of those wins?

I think it's primarily the carryover from last year. So if you recall, Reese reflected about $100 a ton late in the year, and we've said previously it takes us a couple of quarters for Reese to play through our P&L. So I think that's what you're largely seeing. There was also a bit of a mixed impact. Food service has various components, including things like play. So you have a bit of an ASP change because of a heavier food service mix.

Got it.

Can you help us frame how to think about the $40 that Reese reflected in July, in terms of falling carting under $50 per ton in cup stock? What type of impact should we expect in 3Q and 4Q? My sense is probably getting more of a 27 event, but just any type of play you could provide around how that flows through too much would be really helpful. Thank you. Okay. I'll give you a little bit of detail here to help through this. Maybe starting at the high level, what we said is this year we're expecting $20 million impact from both our first price increase, as well as what Reese reflected in their July report. We think that that first increase and the Reese change will be applicable to all of our tons.

That would be a benefit of $50 to $60 million on an annualized basis, as we add into next year. I think it's probably the best way to start thinking about it at a high level. If you drill into it a bit, about half of our volume is tied to Reese. The other half is spot negotiated or open-market negotiated. So 50% of our volume is tied to Reese. It's going to take a couple of quarters for that to play through just like it did from 25 into 26. The open-market negotiations, those are frankly arm wrestling matches that our team is doing on a daily basis with our customers. Does that help answer your question or can I go into more detail?

You're expecting 10 to 20 million impact this year from the $50 to $60 million. That's right. I think it's going to start in Q3, probably bigger impact in Q4. I would expect that early next year we ought to see the full run rate of benefit across all of our Reese's tons, as well as our open-market tons.

But what does that actually suggest about whether customers are or are not pre-buying? And what gives you comfort that you're not borrowing some demand from third quarter, fourth quarter into second quarter? And then I had a couple questions on circa. Yeah, George, it's a really good question. It's a hard one to answer unless you have real good visibility into your customers' inventories, as well as their customers' inventories.

I would say Reese's price changes flow through, and a lot of times all the way down to the customer of the actual product. What I would say is the numbers we look at is backlogs. So our backlogs are as strong now as they were the last few months. So if there was a major pre-buy effort in Q1, Q2, you would start to see the backlogs trailing off. We're not seeing that.

Again, don't know what's going to happen tomorrow. But at the moment, our backlogs are strong. We don't usually report our backlogs. They'll be more of a qualitative comment. Our backlogs are strong, and frankly, the team is struggling to deliver products on time to our customers right now.

How would that work? I mean, I don't think there's some firm penalties that exist. I don't think that's how we normally operate. I may have to go back in time and try to recall last time we had a massive amount of orders canceled by customers. So I don't have a good answer between that, George. I don't expect at this point cancellations of orders. I think customers are buying what they need to buy. Now, historically, when price does move, you would see some customers potentially pre-buying out of price increases. So that is not an atypical pattern. I just don't know if I'm seeing it right now.

Now, with circa, strategically, on the one hand, I understand why you're bringing it into the market based on the original value proposition you offered your customers once you sold off tissue. On the other hand, though, because there's been this compression that's occurred with CRB, and that's been one of the grades you've been to some degree battling against in the market, why would you bring in CRB that's presumably pretty attractively priced when ultimately you've got the integration and the value add, if you will, in bleach board. What's helped me understand how circa ultimately helps clear water and helps you improve your return over time, particularly in bleach board. Yeah, George, I would say many, many of our customers buy CRB and CUK in addition to SBS.

Right now, all we can sell is SBS, and they have to go to our competitors to buy the other two, and frankly, go to our integrated competitors to buy the other two, where they're not going to be a priority.

So we think having a more, I call it wholesome solution by an independent supplier to independent customers has value in this market over the long haul. I know there's dynamics that play right now with substitution and various operating rate trends across the various substrates, but I think in the long run, our goal is to be able to deliver a more complete solution to our customers where they can buy all substrates from us from an independent supplier versus splitting up their buying.

Thanks, George. Yes, tariffs have been notoriously difficult to predict on the impact of those tariffs. So the latest 50% tariff on Canadian products, it does, the way we read it, it will include paperwork imports from Canada, but not market pulp. There is a SBS, there's a bleached paperboard mill up in Canada, hard to tell exactly what impact it has on the North American market.

You know, we about 10% of everything we buy and sell is global. So these things have a more limited impact on us and we have to see how the USMCA negotiation plays out and we're yet to see if there will be any retaliation from Canada for products coming up from the US. Or if these tariffs will go into a factor, they'll get negotiated. So there's just a lot of, a lot of, a lot of moving pieces.