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Operator: Good afternoon, and welcome to Clearwater Paper Corporation’s Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants are in a listen only mode. After the speakers’ presentation, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Sloan Bohlen, Investor Relations. Thank you. Please go ahead.

Sloan Bohlen: Thank you, Julian. Good afternoon and thank you for joining Clearwater Paper’s fourth 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 fourth quarter of 2022 were released shortly after today’s market close, along with the filing of our 10-K. You will find a presentation of supplemental information, including a slide providing the company’s current outlook posted on the Investor Relations page of our website at clearwaterpaper.com. Additionally, we will be providing certain non-GAAP information in this afternoon’s discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release and in the supplemental information provided on our website.

Please note that Slide two of our supplemental information covering the forward-looking statements, rather than rereading this slide, we were going to incorporate it by reference into our prepared remarks. And with that, let me turn the call over to Arsen.

Arsen Kitch: Good afternoon and thank you for joining us today. Please turn to Slide three. We had a strong year in 2022, but a challenging fourth quarter due to operational and weather related issues. We reported net sales of $527 million in the fourth quarter and $2.1 billion for 2022. Adjusted EBITDA was $28 million in the fourth quarter and $227 million for 2022. Let me share a few highlights. Prices increased in both paperboard and tissue during the quarter and the year. Private branded tissue share strengthened as consumers sought to offset inflation. Paperboard demand had a robust year, but moderated late in the fourth quarter due to customers managing inventories and a return to more normal seasonal patterns. While inflation started to moderate, it was still a headwind in the fourth quarter.

We completed a major maintenance outage at our Lewiston site, but experienced several operational and weather related issues during the quarter. We reduced net debt by $3 million in the quarter and $108 million in 2022 for a total of $377 million reduction since 2020. And finally, we repurchased $5 million of shares in 2022, but did not buy back shares in the fourth quarter. We have $25 million remaining on our buyback authorization. With that, let’s discuss some additional details about both of our businesses. Let’s start on Slide four with a few comments on our paperboard business. Since early 2021, the industry has experienced high operating rates with strong demand. As a result, RISI reported price increases for the U.S. market that totaled $500 per ton over the last two years, including a $30 increase in October of 2022.

We continue to implement our previously announced price increases in the fourth quarter. And based on that, we expect sequential improvements into early 2023. As a reminder, it typically takes us up to two quarters for price changes to be reflected in our financials. It is also worth noting that our product portfolio includes additional grades and price mechanisms that are not reflected in RISI’s reporting. We experienced a moderation in demand late in the fourth quarter, which we believe was due to customers managing inventories after a strong year and a return to more normal seasonal patterns. Prior to COVID, it was typical to see holiday inventory builds take place earlier in the year with a slowdown in activity during the fourth quarter.

Converters have historically used this slower time of the year to reduce inventories and take holiday related downtime. We believe that we’re seeing a return to these more normal patterns as customers are becoming more comfortable with the certainty of supply. From a consumer demand perspective, we believe that paperboard is economically resilient given the end use of the products. Our portfolio, in particular, skews more heavily towards consumer applications such as food packaging, pharmaceuticals and cosmetics. In addition, we expect the shift to paper based products to continue and we’re optimistic that demand for paperboard will continue to be healthy. Let’s turn to our operating results in the fourth quarter. We completed the major maintenance outage at our Lewiston mill.

The good news is that, we believe that we will not need to take the next outage until early 2024. Unfortunately, we experienced several setbacks during the outage and startup that resulted in approximately $5 million of negative impact to paperboard adjusted EBITDA versus our expectations. Additionally, we experienced other operational and weather related issues, primarily at our Cypress Bend mill that continued into January. These issues impacted our adjusted EBITDA during the fourth quarter by approximately $19 million. We have now put these issues behind us and are taking the opportunity to capture lessons learned to improve our processes in the future. I appreciate our teams addressing these unexpected challenges under difficult conditions through the holidays.

Now please turn to Slide five for some additional comments on our tissue business. The underlying performance was strong and we continue to observe consumers shifting their demands toward private branded tissue products to help offset the impacts of inflation. Private branded dollar of the market — share of the market continues to climb and is approaching 36% based on IRI panel data. We shipped 13 million cases in the fourth quarter, which was 600,000 cases higher than the fourth quarter of 2021 and exceeded our third quarter shipments of 12.6 million cases. The Lewiston paperboard mill outage issues also negatively impacted tissue adjusted EBITDA by approximately $2 million in the quarter. As we previously mentioned, cost inflation has outpaced price increases in our tissue business over the past two years leading to margin compression.

Our team has focused on recovery margins through cost reduction initiatives and implementing previously announced price increases. We did see higher pricing in the fourth quarter and expect additional sequential price benefits into early 2023. We’re encouraged by the trends that we’re seeing and expect a continued strengthening of our tissue business this year. I will now ask Mike to discuss our fourth quarter results in more detail.

Michael Murphy: Thank you, Arsen. Please turn to Slide six. The consolidated company summary income statement shows fourth quarter and full year for 2022 and 2021. In the fourth quarter 2022, we recorded a net loss of $6 million, net loss per diluted share of $0.34 and adjusted net loss per diluted share was $0.30. Our full year net income was $46 million. Net income per share — diluted share was $2.68 and adjusted net income per diluted share was $3.63. Our adjusted net income per share in 2022 represents a 250% increase relative to the $1.03 in 2021. The corresponding segment results are on Slide seven. Slide eight is a year-over-year segment income and adjusted EBITDA comparison for our pulp and paperboard business in the fourth quarter.

We benefited from our previously announced price increases. You’ll recall in the fourth quarter of 2021, we had no major maintenance outages. Whereas in 2022, we experienced a major maintenance outage impact of $28 million comprised of approximately $8 million in volume and $20 million in cost. Additionally, our $19 million of operational issues impacted volume by $11 million and cost by $8 million. Costs were also higher due to impacts of raw material, freight and labor inflation. You can review a comparison of our fourth quarter 2022 performance relative to third quarter on slide 16. On Slide nine, we have a comparison of full year 2022 results relative to 2021 for pulp and paperboard. Pricing and mix had the largest impact. Operational issues negatively impacted results by $90 million with an additional $7 million impact from major maintenance outages.

Collectively, this $26 million impact was made up of $16 million in lower volume and $10 million in higher costs. The remainder of cost changes were primarily driven by raw material, freight and labor cost inflation. Please turn to Slide 10, where we provide a year-over-year comparison for our tissue business in the fourth quarter. In addition to the implemented price increases, we realized some mix benefit. Our sales volume of converted products were higher than last year. These benefits were largely offset by higher costs due to inflationary pressures. You can review a comparison of our fourth quarter 2022 performance relative to third quarter on slide 17. On slide 11, we have a comparison of full year 2022 relative to 2021 for tissue. The benefits of price and mix together with higher volumes were largely offset by raw material, freight and cost inflation.

Slide 12 outlines our capital structure. Liquidity was $318 million at the end of the fourth quarter. We reduced net debt by $3 million in the fourth quarter and $108 million in 2022. While we did not repurchase shares in the fourth quarter, we repurchased 150,000 shares for full year 2022 at an average price just above $33 dollars a share or $5 million We have approximately $25 million remaining on our share repurchase authorization and expect to continue buying back shares in 20 23. We also expect to continue to pay down our debt. In the fourth quarter, we continue to improve our financial flexibility and renewed our ABL credit facility, which extended our maturity to November of 2027 and increased the size to $275 million. Our net debt to adjusted EBITDA at the end of 2022 was 2.27 times and net debt was $491 million.

Slide 13 provides a perspective on our first quarter 2023 outlook and building blocks for 2023 full year expectations. We want to reiterate that price realization inflation will continue to be difficult to predict. Our current expectation for the first quarter is adjusted EBITDA of $65 million to $75 million. The midpoint of that range is $70, which is $42 million higher than the fourth quarter of 2022. The $42 million sequential improvement is primarily driven by the absence of major maintenance outages, as well as operational and weather related issues. Previously announced price increases are expected to largely offset inflation. We expect that tissue sales volume will be flat to slightly below the fourth quarter. Now let me provide some building blocks for 2023 relative to 2022.

Similar to the first quarter outlook, we believe that our operational results will improve by approximately $42 million in 2023, primarily due to lower maintenance outage expenses and improved operating performance. While it’s difficult to predict pricing and inflation, it’s our expectation that the two will offset each other during the year. We expect modest volume growth in tissue. We are also anticipating the following for 2023. Interest expense between $27 million and $29 million, depreciation and amortization between $98 million and $101 million, on capital expenditures, we expect to spend $70 million to $80 million in 2023. Our Lewiston recovery boiler tube replacement project, which is expected to require a capital expenditure approaching $40 million is expected to occur in early 2024 along with our planned major maintenance outage.

We spent $4 million in 2022 and expect to spend an additional $8 million in 2023 on this project. Our effective tax rate for the full year is expected to be 25% to 26%. Based on our current expectations for 2023, our cash tax payments are expected to be similar to our statutory tax estimates. This assumes that we will utilize our current rebates and refunds to largely offset some timing differences between book and tax depreciation, which is expected to cause our future tax rate to mostly exceed our statutory tax rate. Let me turn the call back over to Arsen.

Arsen Kitch: Thanks, Mike. I want to spend a few minutes discussing our key priorities for shareholder value creation. Last quarter, we communicated a more formal capital allocation framework. We made some minor adjustments to the framework on Slide 14 to provide more clarity. We have prioritized our capital allocation as follows. Our top priority is to sustain our asset base. We believe that this requires an average of $60 million to $70 million of capital expenditures annually, excluding large projects. We expect to invest above that target level in the near to medium term. Second, we intend to maintain a balance sheet that provides us with financial flexibility. While we have a target long term leverage ratio of around 2.5 times, we may continue to deleverage further to create greater financial flexibility.

A strong balance sheet provides us with the ability to take advantage of investment opportunities, including in the potential down cycle. Third, we will look at various opportunities to create value through investments and opportunistically returning capital to shareholders. We will evaluate value accretive internal and external investments. Given the current business environment, we’re likely to prioritize incremental cost reduction projects and add on acquisitions, versus large greenfield or brownfield capacity expansions. We will compare these potential investments relative to opportunistically returning capital to shareholders based upon our share price. We also expect to buy back shares to mitigate the impact of dilution from share grants to our employees.

I would like to emphasize that we will continue to be disciplined allocators of capital and we’ll seek out the right opportunities to create value across both of our businesses. In closing, I would like to thank our people for all that they do to keep our operations running safely and efficiently and for servicing our customers. I also want to thank our shareholders for their continued support and our customers for placing their trust in us. We had a strong year in 2022 and despite various economic uncertainties, we’re optimistic about 2023. With that, we will end our prepared remarks and take your questions.

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Operator: Our first question comes from Adam Josephson from KeyBanc Capital Markets. Please go ahead. Your line is open.

Adam Josephson: Thanks. Good afternoon, Arsen and Mike. Hope you’re well.

Arsen Kitch: Good afternoon. Mike, just couple of questions about your operational assumptions and then one or two others. So you mentioned that you expect your previously announced price increases and mix to largely offset cost inflation, meaning, I guess, that you’re expecting inflation to slightly outpace price mix, whereas last year the price mix more than offset inflation by about $50 million. So can you just help us frame your price cost assumptions for 2023 versus what you experienced last year. Obviously, you’ll have many fewer paperboard price increases and perhaps that’s the difference that anything you can help me with in terms of your price and cost assumptions and your — for that relationship this year versus last?

Michael Murphy: Yes. So, Adam, it’s been difficult to predict how price and costs are going to move around. So I think you’re right. Last year, we had a bit of a tailwind in terms of price mix, less cost inflation this year what we’re predicting is that they’re roughly going to offset each other. And so that’s — we looked at it in a number of different ways and that’s where we came out that we think that price mix will largely be offset by that inflation that we’re seeing.

Adam Josephson: And Mike, just as part of that, are you assuming any future SBS or tissue price changes as part of those 2023 operational assumptions?

Michael Murphy: Adam, we can’t talk about forward-looking price increases, all we can state is our estimates are based off of previously announced price increases.

Adam Josephson: Right. Okay. Okay. In terms of the SBS demand and backlog moderation late in the fourth quarter, what are you expecting along those lines for 2023? It sounds like you’re expecting stable SBS demand, if I heard you correctly, but can you confirm that? Just help me with what you’re expecting for this year just given what you experienced late in the fourth quarter? Yes, Adam, if we step back, we’ve said this all along. We believe that SBS is approximately two-thirds recession resilient and our markets skew more towards consumer packaging and retail foodservice. So yes, we did see moderation in demand in late Q4 and coincidentally that looks very similar to what we experienced pre COVID in 2019. Our January shipments are higher than they’ve been in the last several months.

Our folding customers in particular are telling us to expect a good — good 2023 and I believe them. So we’re expecting a — at this stage, we’re expecting a solid year in demand and that’s what we’re seeing and hearing from our customers.

Adam Josephson: Got it. Thanks. And one last one. I noticed in your risk factor in your 10-K that you just filed noting the potential adverse impact on your business from the several significant SBS and FBB capacity investments that have been announced over the past year or so. So how are you thinking about your competitive position both domestically and globally given those investments, particularly given that you’re not as integrated as some of your domestic peers and that you have not been investing hundreds of millions of dollars or more as some of your global peers are doing?

Arsen Kitch: So I’ll avoid commenting on specifics of what they’re doing. These investments are large and they’re challenging to implement. But if you step back and look at potential growth in the SBS market in the U.S. and you assume low to moderate growth. There is a need for capacity in this market to absorb demand growth. The question becomes, what does that supply and demand balance look like beyond 2026 and 2027? And that’s still unclear to me. What we’re obviously doing is looking at our strategy to make sure that we retain our position in the market and we retain our margins in the market. So we’re obviously working through it to make sure that we’re well positioned 2023 and beyond.

Adam Josephson: I appreciate it. Just one, how are you thinking about the integration issue at Lewiston, as distinct from how you might have thought about it in years past, particularly just given all this new supply that’s coming both in the U.S. and elsewhere that will presumably target these converters?

Arsen Kitch: Historically, we viewed us being an as part of our value proposition and we still view it that way. There’s still a large portion of the North American SBS market that’s not integrated and we’ve been a great supplier to them for many years and actually many decades. And our customers saw that over the last few years with more demand than supply in the market and that we’ve done a great job of taking care of them. So we still view that as a value proposition. As I mentioned earlier, we’re going to continue to look at our strategy to make sure that what we’re doing today still makes sense tomorrow. But from where I sit today, we still view that as part of our value proposition.

Adam Josephson: Thanks so much, Arsen.

Operator: Our next question comes from Paul Quinn from RBC Capital Markets. Please go ahead. Your line is open.

Paul Quinn: Yes. Thanks very much. Good afternoon, guys. Just question — Q4 seemed to come in sort of in line with us on pulp and paper side, but weaker on the tissue side, even given the $2 million hit on the outage at Lewiston. Anything particular, I mean, you described it as a pretty decent quarter, but I sort of expected the previously announced price increases in tissues to more than offset inflation and catch up, but it doesn’t seem to be the case. Did I got that right?

Arsen Kitch: So Paul, I’ll remind you that we still have that lag effect with some of the inflationary pressures that we’ve seen in the business. So we’d say it was a good quarter for tissue in the fourth quarter. What we’re hoping for and expecting, but just hadn’t seen throughout last year was some sort of relief on some of those raw material inputs, notably pulp.

Paul Quinn: Okay. I hope you get that soon. And then I’m trying to reconcile your expectation that you shouldn’t have to take a major maintenance outage at Lewiston until early 2024 with the fact that you had all sorts of issues that moves in on startup. But just how confident are you that you’ll get through 2023 without having to shut down that mill?

Arsen Kitch: So the timing of the 24 outage was — the timing of the next outage was going to be dependent on the inspections and what we saw in this last outage. And based on that, we’re comfortable stating that our intent to take that outage in 2024 around the major project that we need to do at the same time. The issues were outage and startup from outage related. As you know, Paul, in these types of mills, there’s always something we are working on and addressing. But at this point, given what we’ve seen in the last outage, we’re comfortable saying that the next one is in early 2024.

Michael Murphy: Arsen, let me add to that. The outage startup issues, Paul, were not related to the recovery boiler. So that was the key piece of equipment that we’re examining in this outage. So it’s a good question that you asked.

Paul Quinn: Okay. That’s helpful. And then just so I understand this CapEx, you’ve got CapEx of $70 million to $80 million next year. Your basic is $60 million to $70 million, so there’s basically $10 million spread. You’re spending $8 million on in advance on the Lewiston project for 2024 and then basically $2 million on discretionary if I got that?

Michael Murphy: I think there is a blending of discretionary and sustaining, but yes, you’re right to say you’re spending $8 million on a project in 2024 and 2023, otherwise you’re at to slightly above the normalized range that you’ve put out there.

Paul Quinn: Okay. And then just lastly, you’re under your debt leverage target at 2.5 times when I purchased shares in Q4 as opposed to reduced debt?

Michael Murphy: So Paul, it’s a good question. We have an active debate internally. If Q4 wasn’t a great cash flow quarter for us and neither will Q1. And so we ended up just holding on to the cash and liquidity. We are price sensitive on the share buyback and it’s something that we’ll continue to examine here in 2023. Arsen, do you want to add to that?

Arsen Kitch: Yes, to add to that, Paul. That 2.5 time is a cross cycle target. So we may go meaningfully below that at times where it makes sense and we may go higher if we find the right investment opportunities. To me that around 2.5 times is a through a cycle target, we will likely to continue to pay down debt here in 2023 in addition to looking at opportunities to buy back shares.

Paul Quinn: Okay. So does that infer that you’re thinking that the current peer right now is below cycle average?

Arsen Kitch: We think at this stage, given the environment and it makes sense for us to continue to pay down our debt below that 2.5 times.

Paul Quinn: Okay. That’s all I had. Thanks very much.

Operator: Our next question comes from Adam Josephson from KeyBanc Capital Markets. Please go ahead. Your line is open.

Adam Josephson: Thanks again for taking my call. Mike, I think you mentioned in tissue that you were hoping pulp prices would have fallen by a bit more in the fourth quarter than they did. Bearing in mind mostly hardwood, there’s obviously a tremendous amount of new supply coming from South America over the next couple of years. But at the same time, pricing has been separately high for you. So can you just talk to us about what you’re seeing and why you think prices have been perhaps considerably more resilient than you might have thought? Just your thoughts about the hardwood market at the moment?

Arsen Kitch: Adam, there’s a lot of different thoughts around it and what we’ve seen and you know this, from 2020, if you just look at the index, that’s gone from $900 to over $1,600 and that eased, I don’t know, eased $20, $30 dollars here recently. If you go back through COVID, it was higher demand, supply chain issues and so on and forth. At this point, Adam, and given what’s coming online, it would make sense for us that these prices would come down in the coming years. But I can’t give you a good reason beyond what’s already out there in terms of why these prices are staying stubbornly high.

Adam Josephson: Got it. And just one last one from me, Arsen, on the topic of tissue and just private label tissue industry consolidation in North America. You’ve talked about the need for that on previous calls. Can you just update us on what you’re seeing supply demand wise and if there’s any more or less need for consolidation now than what you thought three, six, nine months ago?

Arsen Kitch: Yes, Adam, it’s an interesting question. So as we look out into this year through 2025, according to RISI, there’s 220,000 tons of announced capacity of that, about 74,000 tons is in unknown location at this stage. So that is a considerably, call it, lower forward capacity curve than we’ve seen — than we’ve seen in the past. So I suspect it’s a function of the industry margin compression that we’ve seen along with higher interest rates. But again, our competitors get to make their own decisions on when to invest in new capacity. We are approaching, starting to approach our practical capacity constraints. So we’re working to optimize our product and customer mix at this stage. But stepping back, I think if you look over the long run, given the buyers in this market, given the large retailers and the disaggregated — the disaggregated supplier base, there’s a mismatch and consolidation is needed to improve cost structure in the long run for our suppliers to be better matched up with retailers from a scale perspective.

So we still think that’s needed. In terms of capacity additions in the next couple of years, it certainly seems like there is a slowdown.

Adam Josephson: Thanks so much, Arsen. Thanks a lot.

Arsen Kitch: Thank you.

Operator: We have no further questions. This will conclude today’s conference call. Thank you for your participation. You may now disconnect.