Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Clearwater Paper 4Q 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Sloan Bohlen, Investor Relations, you may begin your conference.

Thank you, Emma. Good afternoon, and thank you for joining Clearwater Paper’s fourth quarter 2021 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 2021 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 the supplemental information provided on our website. Please note Slide 2 of the supplemental information covering forward-looking statements. Rather than rereading this slide, we are going to incorporate it by reference into our prepared remarks. With that, let me turn the call over to Arsen.

Good afternoon, and thank you for joining us today. Please turn to Slide 3. As you saw from our press release, our financial performance was at the high end of our expectations for the fourth quarter. On a consolidated basis, the company reported fourth quarter net sales or $490 million, adjusted net income of $9 million and adjusted EBITDA of $56 million. For the full year 2021, we delivered net sales of nearly $1.8 billion, adjusted net income of $17 million and adjusted EBITDA of $175 million. A few highlights to mention. Strong demand continued in our paperboard business. Based on the demand, we implemented previously announced price increases across our SBS portfolio. Demand in our tissue business stabilized with volume in the fourth quarter similar to the third quarter. We’re implementing previously announced price increases across our tissue business to recover some of the cost inflation that we’re experiencing. While pulp prices showed modest easing, we continue to experience inflation across most of our other input costs. We’re focused on operating and supply chain efficiencies along with price increases to help offset these headwinds. We received net proceeds of $13 million from the sale of our closed Neenah, Wisconsin tissue site and related assets. And finally, we maintained ample liquidity of $265 million at quarter end and reduced net debt by another $37 million in the quarter, which included proceeds from asset sales. For the year, we reduced our net debt by a total of $69 million. As noted previously, we remain focused on our top priorities during COVID, the health and safety of our people and operating our assets to service customers. We saw spike in cases and absences starting in December. The team did an outstanding job managing to keep our most critical assets running. But we…

Thank you, Arsen. Please turn to Slide 7. The consolidated company summary income statement shows fourth quarter and full year comparisons for 2021 and 2020. In the fourth quarter of 2021, our net income was $9 million, diluted net income per share was $0.54 and adjusted net income per share was $0.82. The corresponding segment results are on Slide 8. Slide 9 is a year-over-year adjusted EBITDA compares from our Pulp and Paperboard business in the fourth quarter. We benefited from our previously announced price increases, favorable mix improvement and slightly higher sales volume. Our costs were impacted by higher inflation, particularly in energy, chemicals and freight. This resulted in adjusted EBITDA of $61.9 million, which represents a quarterly adjusted EBITDA record for our Paperboard division. You can review a comparison of our fourth quarter 2021 performance relative to third quarter on Slide 17 in the appendix. On Slide 10, we compare the full year 2021 performance to 2020 for Paperboard with adjusted EBITDA similar in 2021 relative to 2020. We implemented substantial price increases that were largely offset by significant cost inflation. That cost category had a $27 million impact associated with the planned major maintenance outages in 2021, whereas we had no major maintenance outages in 2020. Please turn to Slide 11, where we provide a year-over-year comparison for our tissue business in the fourth quarter. We implemented previously announced price increases in addition to realizing some mix benefits in the fourth quarter. Our pricing impact was significantly below inflation as we struggled to maintain our margins due in part to the supply and demand dynamics in tissue. Relative to last year, our sales and production volumes were significantly lower as the impact from COVID-driven buying lessens. As you’ll recall, in the second quarter, we announced the closure…

Thanks, Mike. First, I want to thank our people for their focus on safety and serving our customers throughout 2021 as well as a strong finish to the year. As Mike mentioned, the inflation that we saw in 2021 is expected to carry over into 2022, and we expect the tissue demand volatility will be greatly reduced. As we mentioned previously, we think that supply and demand drive near- to medium-term pricing and margins in both of our businesses. Our Paperboard business is benefiting from favorable market dynamics. In tissue, we have some success on announcing and implementing price increases in the fourth quarter, but the supply and demand dynamics remain challenging. We continue to work on efforts to improve our cost positions to offset margin compression, which is a recurring theme. I want to share some perspectives with you regarding some recent industry headlines as well as some larger contract renewals in tissue that could impact future performance. In December, the European company announced the acquisition of a U.S.-based printing and writing grade company and its intention to convert to paper machines to a primarily folding boxboard or FBB grade. The announced time line for the conversion of the first machine is in 2025 and the second machine is in 2029. The two machines are expected to have a combined capacity of over 1 million tons. Let me share some perspectives related to this announcement. RISI and other industry sources report the domestic consumption of SBS is 4.1 million tons with an additional 400,000 tons of FBB imports. Demand is expected to grow by 1% to 2% per year or 50,000 to 100,000 tons for a total of 400,000 to 800,000 tons by the end of the decade. A domestically-produced FBB would likely partially offset imported FBB due to…

Thank you. Your first question today comes from the line of Mark Wilde with BMO Capital Markets. Your line is now open.

Thanks. Good evening, Arsen. Good evening, Mike.

Good evening.

Start off, Arsen. Any way to help us think about the impact of that 2022 shift mix in the bleached board business?

So Mark, on the shift mix, just clarify the question for us.

Well, you’re talking about basically volume moving from kind of folding carton back to food service and that was – when I went the other way during COVID, that was a benefit, and now it looks like it’s going back towards foodservice. So what’s the impact of that on a year-over-year basis for you in your view?

Mark, what we’ve seen is some strength within the food service category from a pricing standpoint. So it’s probably going to be a less pronounced negative impact this year as it was a positive impact back in 2020.

Okay. All right. And is it possible for you to talk at all about sort of just a general – in general terms about the strategy to counter this European boxboard producer. I mean, it does seem to me that they are aiming at that same merchant piece of the SBS market that you focus on, a lot of the independent carton converters. So it seems like you’re coming straight at your wheelhouse. I’m just curious about how you counter that or how you think about countering that?

Mark, I think there’s a couple of ways to look at it. I think the first thing worth mentioning, this is a big, expensive, risky conversion, right? So over the next eight, nine years. So as you know, these conversions can be pretty unpredictable. So let’s start there. I think the second piece, I think, more broadly speaking, in today’s market, demand is outstripping supply. And we think there’s healthy growth ahead of us in SBS and ahead of the market. And we think the FBB nature of these conversions will really target the imports first. So if you take all those factors you combine all those factors, we still maintain a bullish positive outlook on our Paperboard business. And while we’re going to monitor it, it’s – frankly, we’re not losing sleep over it.

Yes. Okay. All right. That’s fair enough. And then final question for me, Arsen. Is it possible to get any sense of kind of the activity levels that you’ve seen in January and through the 1st of February on both sides of the business?

I think we continue to see strong demand in paperboard. I think demand is still outstripping supply. We’re still having to turn away customers. We’re focused on servicing our long-term customers and trying our best to provide them with paperboard. On the tissue side, I think we’ve seen similar trends as we saw in Q4. So January was a reasonable month, and I think it speaks to the normalization that’s taking place in tissue.

So Mark, to quantify, we shipped 4.1 million cases in January for tissue, which is kind of right in line with what we were doing in the fourth quarter. On paperboard, things are a little bit murkier. We actually had a really strong shipment month in December as some of our customers wanted to get in before – one of our price increases kicked in on some contracts on January 1. We managed to fund the freight. And also in January, Arsen mentioned in his comments that we had an outage. So we’ll see a pullback a little bit in our first quarter paperboard numbers because of those two phenomenons, a strong shipment month in December and an outage in January.

Okay. All right. I will turn it over. Thanks, Mike.

Thanks, Mark.

Your next question comes from the line of Adam Josephson with KeyBanc. Your line is now open.

Arsen, Mike, good afternoon. I hope you well.

Hi, Adam.

Arsen, just on your tissue, your private label tissue comment, I mean, you commented extensively about the challenging supply-demand conditions, about the likelihood that producers will operate at depressed levels for years to come. Obviously, some of your competitors have echoed those statements in recent weeks. So it’s clear that the industry is in need of some consolidation, and we’ve been waiting for it and nothing has transpired as yet. What do you think is necessary? And you have these large contract renewals coming up, which you said could cause some bumps in the next year or two. I mean, what do you think – what can you do in light of the supply demand challenges that you and your peers will be facing for some time, such that you can earn adequate returns in this business?

Yes. Thanks, Adam. So let me maybe reiterate a couple of a few points here. So there’s now a small number of customers that dominate the tissue market. If you look at the top four, five customers now represent something like approaching 70% of all private-branded tissue purchases. And the suppliers have deconsolidated and are adding capacity at rates that exceed demand growth. And as you mentioned, that’s not a long-term sustainable position to be in. Just to speak bluntly, we do think consolidation is needed to improve scale and improve the cost positions of the industry. And frankly, we’re a willing participant, and we’ll look at for opportunities where they make sense for us. Now to your question, what would need to happen? I suppose we would need to have willing buyers and willing sellers for that to happen.

Yes. No, understood, Arsen. In terms of your price mix – well, first of all, your full year guidance, should we assume that you gave us the big buckets of inflation and price mix volume. Sounds like their puts and takes but relatively stable. Are there any – so I assume the maintenance is going to be flattish year-on-year in 2022. Anything else that you would point me to other than the three buckets that you highlighted bearing in mind that maintenance will be flat?

I think those are the key drivers, Adam. And the cautionary statement is it’s very hard to make predictions in this environment, and we certainly saw that in 2021, and we’ll look forward to updating you guys with our best estimates as the year progresses.

Yes. Adam, I think what we saw here in late Q4 and early Q1 is supply chain disruptions, COVID absenteeism, some of our mills approaching 10%. So we ran into some issues and challenges that weren’t expecting at the end of Q4 and early Q1. Don’t know where this year leads, as to Mike’s point, it’s really around those supply chain challenges that we need to be facing, which could translate into higher cost.

Yes. You mean above and beyond what the inflation range that you’re talking about?

Sure. And at the same time, we’re also focused on offsetting those right with supply chain efficiency initiatives and productivity. So we’re doing what we can on our end to offset those. But some of these can be quite overwhelming in nature.

No, I hear. And one on the inflation, Arsen, can you help us with what you’re assuming in terms of your raw material, freight and energy costs? Are you basically just taking current prices across the board and flatlining number. Walk us through whatever your assumptions might be along those lines, if you don’t mind.

Sure, Adam. We’ll look at the same things that you look at across the spectrum, so to get an estimate on fiber, pulp, chemicals, energy, we’re looking at third-party publications and trying to look at their forward curves and make a prediction based off of that. Therefore, curves are probably better than our own internal judgments in many cases. But that’s our best assumptions that we have today as we sit here and talk to you this afternoon.

And I think as Mike mentioned, some of these can be a little uncertain in nature. If you look at pulp a few months ago, I think we were predicting and the industry was predicting pulp prices to fall here later in 2022. And the forecasts are still showing an easing in pulp prices, but we’ve also seen some fairly significant price announcements by the pulp suppliers here recently. So while we don’t – frankly, we don’t think they’re supported in the long run, it kind of remains unclear where something major like pulp goes in 2022.

Right. All right. Just to – you’re not assuming any major changes from current levels. Is that a reasonable assumption?

You know…

Is that – yes.

Yes. I think, Adam, largely, the pulp curve is somewhat flat for this year. And I’ll remind you of two things. One, it takes about a quarter for pulp prices to make their way through our financial statements. And two, we start off 2021 really at a much lower pulp price level. So we are seeing inflation in pulp due to those phenomena. But I don’t think there are material out buyers of fiber, I’m assuming you’ve heard from others, is going to be up year-over-year. We’re experiencing that as well. But I don’t think there’s a statistical difference between what we’re seeing today versus our forward estimates on fiber.

That’s perfect, Mike. And just one last one on your price mix assumption in paperboard. So – did you have – of the $73 million of price mix, Mike, that you had in that segment for the year, was $55 million of that price thereabouts?

It’s a little bit higher than that, Adam. So there’s – mix is one component. We also have pulp pricing that shows up there. We show a little bit of market-based pulp. I think a fair number would be about $60 million for paperboard price increase for volume.

Right – got it. So you had $60 million and then you’re expecting another, call it, $115 million at the midpoint this year such that the cumulative pricing would be about $175 million. If I take the $300 million multiply by year capacity, that rough math is $240 million, but obviously, you’ve talked about the fact that only about 1/4 of your paperboard business is tied to the index and their 6-month lags. Are those the two kind of call-outs that you would make in terms of the deviation from that theoretical $240 million or so?

That’s exactly right. So Adam, you’ve nailed it.

Thanks so much, Mike.

Thanks.

Your next question comes from the line of Paul Quinn with RBC Capital Markets. Your line is now open.

Yes. Thanks very much. Afternoon, guys.

Hey, Paul.

Good afternoon.

Hey, yes, you mentioned the material like contract in the tissue side that are up for renewal. How material are they? Like what percentage of your total volume is in these contracts approved renewal?

Yes, I’m going to – Paul, I’ll use round numbers. In most years, we aim for about 1/4 of our business to be up for renewals. This will be approaching 50% of our business, just to give you an approximation. So it’s – we typically go through these renewals every year. This year, we just have more of them than normal just due to the nature of some of the agreements that are expiring.

Okay. And then just on the major maintenance that you expect in 2023, and it sounds like the Lewiston recovery boiler, we are – I guess, I would expect that you are hoping for a reprieve on major maintenance there. What is going on with the recovery boiler?

So Paul, at our last major maintenance outage in Lewiston, we discovered that we have some screening tubes that are nearing their end of their useful life. And so this is a major product – a project to replace a significant amount of screen tubes there in the recovery boiler. And so the capital component is that the screen tubes and some other components – the downtime component, we’re going to have to take the pulping operations down for an extended period of time. So we’re going to have to pay more for pulp to feed into the paper machines.

Right. So will 2023 get this done? Or is there going to be more to come in 2024 or we expect it to have a break in 2024 then?

So Paul, I think we’re going to be in a better position to respond to that question once we get through the outage in 2023. The intent of the outage is to fix or address the end of useful life of these tubes. So hopefully, that answers your question.

Okay. And then just back to the tissue business, I mean, I know this business has been struggling for a while now. Just sounded like you’re partially successful in price increases. What are the major implements to get these price increases through it? Not like anybody in the industry on the private label, so as doing gangbusters here. So what’s the issue?

I think when it comes down to it, supply and demand drives pricing. So these are negotiations that take place. And so frankly, we got to a – to cost inflation where it just wasn’t feasible not to be able to take pricing to offset some of that cost inflation. But at the end of the day, Paul, it’s that supply and demand that drives it and the customers have an option to, frankly, go bid their business and look for alternative suppliers. So it’s a negotiation at the end of the day.

All right. Let’s go ahead. Thanks, guys.

Thanks, Paul.

Your next question comes again from the line of Adam Josephson with KeyBanc. Your line is open.

Arsen and Mike, thanks very much for taking my follow-up. Just a couple of them. Arsen, just on your SBS demand commentary, the expectation of call it, 1% to 2% growth or thereabouts. When I look at your November slide deck, one can see that production has actually been in decline for the past decade in the SBS market. So to the extent, we’re talking about apples and apples, why would you take the market to go from contraction to pretty steady expansion?

So Adam, it’s Mike. Maybe I’ll lead off. So there’s a domestic component to the market, and there’s the exporter – net export and total component to the market. So the comments that we had made – almost three quarters of that production is oriented to the domestic market. And what we’ve seen over time is the domestic market has grown at that 1% to 2% rate. The decline that you’re referencing in terms of total production here in the U.S. was really a function of a decline going into the export market. So that’s the historical trends. Going forward, unclear what’s going to happen in the export market. We’re very focused on the domestic market, and we’re focused on those demand drivers there. And as Arsen had connected the dots with the announcement of the conversion of the mill, we think there’s a decent amount of domestic growth that will accommodate at least some of that volume that’s projected to come online. And so in any event, I hope that we’re answering your question there.

No, I appreciate it. I can see that exports have come down from, I think, $1.8 million to $1.1 million. So I hear you loud and clear on that. The tissue – and also on growth expectations, you’re talking about 1% to 2%-ish in tissue, slightly greater than population. I mean, the U.S. population was flat last year in the year ended June for the first time in a very long time. So one would think that would be having an impact on tissue demand growth to the extent that tissue demand is driven by population much more so than anything else. Would you have any reason to think otherwise? If population remains flat, is there a good reason to think that tissue demand would grow over the next few years?

I think two ways to look at it. I think what we’ve said is that tends to just slightly outpace whatever population growth is. I think the more important number is the private branded share gains in tissue. So that private brand of growth has outpaced overall growth. And if you look at private-branded share, last year, it hit 33%. And it’s up versus – let me just grab the numbers here, from less than 32% in 2019. So we picked up – private brands have picked up 0.5 of share roughly since 2019. So the trend of about a 1 point of share pickup continues. So we think that’s what’s going to drive our space, but you’re right, Adam. I mean, population growth stays at 0, potentially that overall demand growth may be less than 1% to 2%.

Yes. No, I understand, Arsen. So one last thing I want to ask you about was you mentioned club and mass versus grocery. And I’m just wondering how that factor is playing into these contract renewals. I know you’re much more heavily weighted toward grocery, which has been losing share to club and mass. Can you just talk about that dynamic in the context of these contract renewals that you said there could be some challenges in the next couple of years as a result of them.

Yes. If you look at what’s happened with grocers. So the first trend is, yes, they’ve lost share to club and mass. The second piece, there’s been a tremendous amount of consolidation over the last 10 years in groceries. So if you look at the more sizable grocery players, there’s a small handful of players that can drive the category and drive our business. So those are still critically important customers to us, and we’re very much committed to working with them and growing their categories and helping them gain share. At the same time, as we’ve mentioned before, we’re focused on growing in club and mass, in dollar, and we’ve made a lot of progress over the years in growing our share in that space. But to your point, we’re still overweighting in grocery. So we’re still very much committed to winning with our grocery retailers.

I appreciate that. And just one last one, Mike, on cash flow. Do you expect any major – are there any major cash flow items that we ought to be aware of aside from CapEx? Any big working capital swings you’re expecting cash taxes, anything that we ought to be aware of that might deviate from 2021?

Yes. We’re a bigger cash taxpayer this year. We do have a refund. You can see that in current assets. We have probably an offsetting liability almost dollar for dollar with the repayment of the payroll tax associated with carriers. And so those two will offset and then we’re going to be a cash taxpayer on our income. So that would be the big difference year-over-year.

Thanks a lot, Mike.

Your next question comes from the line of Mark Wilde with BMO Capital Markets. Your line is now open.

Thanks. Arsen, I just want to come back for a minute or two to structure in the tissue business. Does the private sort of ownership nature of so much of your competition in private label. Is that an obstacle in your view to seeing some consolidation? Family-owned companies willing to kind of take the pain for a longer period than public companies perhaps?

I think it’s a variable. Certainly, we answer to shareholders and we have public company returns that we have to deliver in the long haul. If you’re a family-owned company, that may lead to different dynamics and different objectives in the long run. So yes, that could certainly be a factor mark.

Okay. And then just one other one. I mean, it does look to me in the last couple of months that we may be starting to see some no mass moments for some of the smaller players in this market. You’ve got one producer that basically has sort of shutdown the fiber island that supplied its main tissue operations. So it’s hard to imagine that there’s not more change coming there. What is your kind of strategy as this kind of stuff happens? Do you just sort of stay untack with optimizing existing operations and getting down the debt? Or how could you or could you not participate in this?

I think it’s a twofold approach. I think the first one is the one you just mentioned is we have to be cost efficient and we have to be highly competitive in our market. So that’s the first priority. The second priority is really looking at ways, which we could participate in the consolidation, where it makes sense, both from a value perspective and strategically for us. And that’s a very important component for Mike and myself as we think through these potential opportunities. It has to make sense for our network, it has to improve our cost structure, and it has to drive value for our shareholders.

Okay. Fair enough. Good luck.

There are no further questions at this time. This concludes today’s conference call. Thank you for attending. You may now disconnect.