Clearwater Paper Third Quarter 2026 Earnings Call - CLEARWATER PAPER CORP

Financial Performance:

• Q3 2026 Net Loss: $2 million ($0.10 diluted share), including $17.5 million insurance proceeds.
• Q3 Revenue: $385 million (down 4% YoY), driven by a 4% price decline and 1% shipment volume drop.
• Q3 Adjusted EBITDA: $24 million (within guidance range of $20-$30 million).
• Cash Flow & Debt: Net debt reduced $56 million YTD; completed $275 million term loan refinancing to 2031; effective interest rate 8.25%.
• Insurance Recoveries: Received $17.5 million in Q3 (4th payment); total recoveries reach $73 million against a $105 million policy limit.
• SG&A: 5.2% of net sales (down from 6.2% YoY).
• Capital Expenditures (FY26): Projected $55-$60 million, primarily offset by positive free cash flow driven by insurance proceeds and working capital reductions.

Guidance and Future Outlook:

• Q4 2026 EBITDA Guidance: $10-$20 million, facing seasonal energy costs, $1-$2 million conflict-related cost increases, and $5-$7 million maintenance expenses.
• FY26 Full-Year Outlook: Revenue ~$1.5 billion; flat to slightly higher shipments; $15-$20 million benefit from new price hikes; $28-$32 million impact from Middle East conflict costs.
• Long-Term Goals: Target cross-cycle adjusted EBITDA margins of 13-14% and >$100 million annual free cash flow.
• Price Impact: $60/ton increase fully implemented, expected to yield ~$70 million annual benefit; second $60/ton increase in progress; potential for $100/ton additional increase by end of 2027.
• Future EBITDA Run Rate: Potential improvement of nearly $200 million if all price increases and market recovery materialize.

Business Segments and Product Lines:

• SBS (Solid Bleached Sulfate): Year-to-date shipments up 6%; industry supply decline estimated at 800k tons annually; operating rates >90% expected by year-end.
• CUK (Coated Unbleached Kraft): Launching new product line by end of year at Cypress Bend mill; targeting 20-30% capture of 300-400k ton addressable market; utilizing ~$3-$5M lower-cost capital solution for swing capacity.
• CRB (Coated Recycled Bleached): Launched "Circa" product in July via partnership with Green Paper; no capital investment; gradual rollout expected due to domestic overcapacity.
• Mill Operations: Augusta mill recovering from electrical/mechanical failures; planned major maintenance outage in Jan 2027 ($12-$15M) and potential Q2/Q3 2027 outage ($7-$10M).

Market and Competitive Landscape:

• Pricing Dynamics: RECI reported $60/ton increase in folding carton grades; Clearwater fully implementing first increase and progressing on second.
• Import/Export Trends: Bleached imports down 1% YTD; European resilience despite tariffs and high transport costs; 50,000-60,000 tons of paperboard exports to Canada exempt from tariffs.
• Substitution: SBS showing strength over CUB and CRB due to better price per square-foot; demand for SBS exceeding capacity.
• Industry Health: Demand and backlogs remain strong; operating rates increasing; supply contraction supporting pricing.

Risks and Challenges:

• Operational Risks: Significant electrical/mechanical failures at Augusta mill requiring unplanned downtime and additional capital ($27M-$29M maintenance YTD).
• Cost Inflation: Middle East conflict driving $12M incremental cost in Q3; total annual impact approaching $30M; volatility in oil-derived chemicals and diesel.
• Capital Requirements: Need for additional capital at Augusta to fix undisclosed asset conditions; potential for further down-time in 2027.
• Market Risks: Potential pricing pressure from $100M carryover from 2025 price decreases.

Management Commentary and Tone:

• Tone: Confident and resilient; management emphasizes successful debt refinancing, cost discipline, and market recovery despite operational headwinds.
• Key Themes: Focus on "green sheets" (pricing trends) materializing in financials; commitment to restoring Augusta mill to 100% capacity; strategic shift to broaden product offerings.
• Leadership Change: Senior Vice President and CFO Sherry Baker announced departure after 3 years; succeeded by interim leadership.

Analyst Questions and Answers:

• CUK Strategy: Clarified that Cypress Bend runs as a swing mill between SBS and CUK; no second paper machine restart planned initially; aiming for 20-30% of addressable demand (50-100k tons).
• Augusta Performance: EBITDA gap largely attributed to price decline vs. acquisition expectations; mill currently 10-15% below target production capacity; full recovery estimated at $150M annual contribution.
• Maintenance Costs: FY26 maintenance costs ($27-29M) driven by Lewiston and Cypress Bend; FY27 expected to be higher due to Augusta outage, potentially reaching ~$50M total.
• Interest Expense: Go-forward annual interest expense expected ~$25 million; 2026 full-year expected ~$20 million due to legacy lower rates.
• Pricing Lags: First price increase to yield $15-20M in 2026; second increase could add $30-40M next year if fully recognized by year-end.
• Recourse on Augusta: RWI policy exhausted ($73M of $105M limit); no other immediate recourse disclosed, though facts/options will be reviewed.

Other Key Points:

• Refinancing: Closed transaction with Farm Credit System partners, extending maturities to 2031, reducing refinancing risk, and establishing a stable capital structure.
• Operational Recovery: Augusta mill disruptions involved interconnected pulp/power/recovery failures; recovery expected to be time-consuming.
• Strategic Product Mix: Moving toward a full paperboard offering for independent converters; CRB launch utilizes existing assets via private labeling.
• Cost Discipline: SG&A reduction to 5.2% reflects successful restructuring; productivity efforts offsetting significant inflationary pressures.