Clearwater Paper (CLW) Q3 2025 Earnings Transcript

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Date

Tuesday, Oct. 28, 2025, at 5 p.m. ET

Call participants

• Chief Executive Officer — Arsen Kitch
• Senior Vice President & Chief Financial Officer — Sherri J. Baker

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Takeaways

• Adjusted EBITDA -- $18 million in adjusted EBITDA for Q3 2025, positioned toward the upper end of the $10 million to $20 million guidance range.
• Net sales -- Primarily driven by a 3% gain in paperboard shipment volumes, partially offset by lower market pricing.
• Net loss from continuing operations -- $54 million net loss from continuing operations, or $3.34 per diluted share, mostly due to a $48 million non-cash goodwill impairment that fully eliminated remaining goodwill from the balance sheet.
• Cash generation -- $3.5 million in free cash flows produced during the quarter.
• Cost reduction savings -- Tracking toward approximately $50 million in annualized fixed cost reductions for the year, exceeding the original target of $30 million to $40 million.
• Liquidity -- $455 million in available liquidity, with a stated net leverage ratio of 2.7 times.
• Share repurchases -- $20 million cumulatively against a $100 million authorization.
• Maintenance outage expenses -- $24 million for the Lewiston mill and $16 million for the Augusta mill, with all three planned outages for 2025 completed.
• SG&A expense ratio -- 6.2% of net sales, at the lower end of the targeted 6%-7% range, reflecting management's focus on cost efficiency.
• Q4 adjusted EBITDA guidance -- Management expects $13 million to $23 million, citing seasonally lower shipments and stable input costs.
• 2026 revenue outlook -- Anticipated at $1.45 billion to $1.55 billion, with a capacity utilization rate projected in the mid-80% range.
• Capital expenditures guidance -- $65 million to $75 million expected for 2026, as explained in management's capital allocation commentary.
• Working capital improvement target -- More than $20 million planned for 2026, primarily from inventory reductions.
• Paperboard market utilization -- Management cited current and projected industry SBS utilization rates remaining in the low 80% range by year-end, below the historical 90%-95% cross-cycle average.
• CUK swing capability project -- $50 million investment (estimated capital required for the CUK swing capability project) with an estimated return above 20% at today's prices and a 12- to 18-month lead time is on hold to prioritize balance sheet strength.
• Tariff and import effects -- CEO Kitch stated, "European imports, July year to date, they're down, I believe, approximately 10%," referencing early evidence of reduced imports into North America, and highlighting initial import relief as tariffs of 15% and currency effects increase costs for foreign suppliers by approximately 20% to 30%.

Summary

Clearwater Paper (NYSE:CLW) reported top-line growth in Q3 2025, driven by a 3% increase in paperboard shipment volumes, while lower pricing offset gains and pressured margins. The company executed all planned major mill outages with reduced operational disruption and finalized key cost-reduction initiatives that exceeded original savings estimates. A non-cash goodwill impairment of $48 million eliminated all remaining goodwill, marking a significant book value adjustment. Management deferred a capital investment for CUK swing capacity despite projected robust returns of more than 20%, citing leverage and liquidity priorities. Inventory-driven working capital improvements are targeted for 2026, primarily through inventory reductions.

• Management sees industry oversupply, particularly in SBS grades, driving utilization rates well below historical averages, with recovery contingent on capacity reductions or shifts in trade policy.
• RISI projections incorporated into the outlook forecast an approximately 350,000-ton net capacity reduction, which underpins expectations for price improvement in folding carton and cup stock grades.
• CEO Kitch said, "as we look at European imports, July year to date, they're down, I believe, approximately 10%," referencing early evidence of reduced imports into North America, and highlighting initial import relief as tariffs of 15% and currency effects increase costs for foreign suppliers by approximately 20% to 30%.
• Persistent margin pressure, seasonally lower Q4 food service volumes, and variable energy costs are acknowledged as major factors influencing near-term earnings guidance variability.
• Capital expenditures for 2026 are expected to be $65 million to $75 million, as explained in management's capital allocation commentary.

Industry glossary

• SBS (Solid Bleached Sulfate): A premium paperboard substrate produced from virgin fiber and fully bleached pulp, valued for print quality and packaging strength.
• CUK (Coated Unbleached Kraft): A type of paperboard made from unbleached kraft pulp, typically used for packaging requiring strength and durability.
• CRB (Coated Recycled Board): Recycled-content paperboard commonly used in folding cartons and other packaging applications where sustainability and cost are priorities.
• RISI: An independent provider of price benchmarks and market forecasts for the global forest products industry, frequently referenced for industry pricing and capacity trends.

Full Conference Call Transcript

Arsen Kitch: Thank you, and good afternoon, everyone. Let me begin with a summary of our third-quarter performance highlights. We delivered adjusted EBITDA of $18 million, which is towards the high end of our guidance range of $10 million to $20 million. Year-to-date adjusted EBITDA from continuing operations stands at $87 million, up from $26 million during the same period last year. This increase is driven mostly by our efforts to reduce fixed costs and four incremental months of Augusta results included in our P&L. Net sales grew by 2% versus the prior quarter driven by a 6% increase in shipment volumes partly offset by lower market-driven pricing.

We successfully completed all three of our planned major May maintenance outages for 2025. The Lewiston outage was completed in August, at a direct cost of $24 million. The Augusta outage was completed in October at a direct cost of $16 million. I'm pleased to report that the execution of our planned major maintenance outages was significantly improved versus prior year. This confirms our belief that an annual cadence delivers generally more manageable and predictable outages. We've also largely captured the run rate benefits of our fixed cost reduction initiatives. These are now tracking to around $50 million in savings for the year, which exceed our original estimate of $30 million to $40 million.

These savings are helping us offset some of the margin pressure that we're facing during this industry down cycle. Let's now turn to some commentary on the industry and our key strategic initiatives. While the latest third quarter ASMPA report is not yet available, the trends that we saw in Q2 have largely persisted into Q3. We believe a competitor is continuing to ramp new SPS capacity, which may add up to 10% of additional supply to the industry. Without other changes, this level of new capacity would result in utilization rates in the low 80% range by year-end.

This will be well below the normalized cross-cycle average of 90% to 95% and would result in supply exceeding demand by more than 500,000 tons. These low utilization rates have led to margin pressure, resulting in returns that can support investments into our capital-intensive industry. This is simply not a sustainable position to be in for the industry, which is why we believe that the industry will rebalance supply with demand in the medium to long term. As we previously discussed, there are several potential paths to this recovery. First, RISI is forecasting an approximately 350,000-ton net capacity reduction in 2026, which would drive utilization rates to above 90%.

Second, tariffs and a weakening dollar may put pressure on the price of some of the more than 700,000 tons of imports into the US, encouraging customers to seek domestic suppliers.

And lastly, industry participants may choose to swing capacity to other grades such as CUK white top or other non-bleached applications. This could help absorb excess SBS capacity. Without a combination of these supply changes, we believe that it will take more than five years of demand growth to fully absorb the excess capacity that exists today. While the current industry oversupply is primarily limited to SBS, we believe that it is having an impact on the other two paperboard substrates. Each substrate has its own strengths and applications, but there's meaningful overlap between them, presenting substitution opportunities to customers. This is why we believe that pricing has been historically correlated between SBS, CUK, and CRB.

Today, CUK is priced $50 per ton higher than SBS according to RISI, which is not intuitive given SBS's superior print quality and higher bleaching costs. If you look at the thirty-year history of this market, it is only in recent years that CUK pricing has exceeded SBS. CRB today is priced at $120 per ton lower than SBS according to RISI, which is a narrower gap than we've seen historically. SBS has superior performance characteristics versus CRV, with a higher production cost of more than $200 per ton due to the use of virgin fiber and bleaching. Buying decisions and packaging are driven by several factors including performance, cost, and sustainability.

Most importantly, customers buy paperboard by area or square feet and not tons. To match the strength performance characteristics of SBS, a customer would need to use a heavier weight of CRB resulting in a price that we estimate to be equal to or higher on a per square foot basis than SBS in today's market. If these trends persist, we believe that CPG and retail customers will look closely at substitutions.

Which would support higher SBS demand, put a ceiling on CUK and CRB, and return to historical price correlations between the three substrates. Let me now shift to some comments on potential CUK that we previously discussed. As a reminder, we're exploring adding CUK's swing capability to one of our SBS machines. We have nearly completed the engineering work and now I can share some additional details on the project. The estimated capital required for the investment is approximately $50 million with a twelve to eighteen-month lead time to complete.

At today's prices, the project return is estimated to be more than 20%, largely based on trading up lower-end SBS volumes to CUK. The returns will be considerably higher if we assume that we're filling up open SBS capacity. Our mill in Cypress Bend, Arkansas is best positioned for this project given its proximity to customers and access to low-cost softwood fiber required for CUK. We estimate that open market demand for CUK is around 300,000 to 400,000 tonnes, with potential upside if independent converters had reliable domestic supply. Our goal will be to capture around 100,000 tonnes of this volume utilizing about one-third of Cypress Bend's capacity. The remaining two-thirds of the capacity would remain in SBS.

We see two upsides to this project. First, there's a strategic benefit to expanding our product portfolio to better serve our converter customers. Second, it would enable us to more fully utilize our network capacity during an SBS industry downturn. We may conclude in the future that this is a good investment, but we're putting a final decision on hold at this time. We remain focused on running all three of our SBS mills, vigorously defending our SBS market share, and preserving the strength of our balance sheet.

Operator: With that, I'll turn the call over to Sherri to discuss our Q3 financial results in more detail as well as provide an outlook for Q4 and some additional thoughts and some initial thoughts on 2026. Thank you, Arsen.

Sherri J. Baker: Let's start by reviewing our financial performance in the third quarter in more detail. Net sales were at $399 million, up 1% year over year driven by a 3% increase in paperboard shipment volumes partially offset by lower market pricing. Net loss from continuing operations was $54 million or $3.34 per diluted share primarily due to a $48 million non-cash impairment of goodwill. This non-cash impairment represents all of our remaining goodwill. Most of this goodwill was accumulated through the acquisition of Manchester Industries in 2016.

The impairment was driven by the decline in our market capitalization as compared to the increase in our book value, which was driven by the gain from the divestiture of our tissue business late last year. Adjusted EBITDA was at $18 million towards the higher end of our guidance range of $10 million to $20 million. We saw improved cost performance due to our fixed cost reduction initiative, which more than offset lower pricing and higher input costs. SG&A as a percent of sales was at 6.2% at the lower end of our targeted range of 6% to 7% of net sales.

We believe that this is at the lower end of our industry benchmark, demonstrating our commitment to running a lean cost-effective company. Let's now turn to our balance sheet and capital allocation. We generated $34 million in cash from operations during the quarter and approximately $3.5 million in free cash flows. Our net leverage ratio is at 2.7 times. We have ample available liquidity of $455 million. While our leverage ratio has increased due to the current industry down cycle, our aggregate debt level has remained stable as we continue our focus on maintaining a strong balance sheet. We also repurchased $2 million of shares bringing our total to $20 million against our $100 million authorization.

We will consider additional share repurchases when we have a line of sight to free cash flow generation in the near to medium term. Turning now to our outlook for the fourth quarter. We expect adjusted EBITDA of $13 million to $23 million. We expect slightly lower paperboard shipments versus the third quarter due to seasonality. We expect 3% to 4% lower production volume driving less cost absorption than during the prior quarter. We have largely captured the benefits from our fixed cost reduction efforts in previous quarters. And while we will maintain those savings, we do not expect significant additional savings between the third and fourth quarters.

We expect other input costs to remain relatively stable, and our guidance includes $16 million of major maintenance outage costs at our Augusta mill, which was completed in October. Lastly, let me provide you with some of our initial assumptions for 2026. We expect revenue of around $1.45 to $1.55 billion and a capacity utilization rate in the mid-80% range. We are also assuming that we'll see the carryover impact from 2025 market-driven price changes into 2026. We expect to generate enough productivity and cost reductions to offset 2% to 3% of cost inflation. We expect capital expenditures of $65 to $75 million.

To generate incremental cash flow, we will target more than $20 million in working capital improvements, primarily in inventory. And lastly, given newly enacted tax legislation, we do not expect to be a net cash taxpayer next year. The biggest variable that is difficult for us to predict is price changes in 2026. Currently, RISI is forecasting an increase in SBS folding carton price of $30 per ton and cup stock of $40 per ton in the first half of next year. This corresponds to their assumption that utilization rates will improve to over 90% with a net industry capacity reduction of approximately 350,000 tons.

Regardless of industry conditions, we remain focused on operating effectively, reducing our cost, and maintaining a strong balance sheet. I'll now turn the call back to Arsen for closing remarks.

Arsen Kitch: Thank you, Sherri. While we're navigating a challenging industry environment, we remain confident in the long-term fundamentals of the paperboard market and our ability to generate strong returns. We have high-quality assets that are geographically well-positioned to serve independent customers and we intend to maintain our market share. We believe that paperboard packaging has strong demand fundamentals. As consumers and customers continue to seek sustainable and renewable packaging solutions. We have a strong balance sheet with manageable debt levels and more than $450 million in liquidity, positioning us to weather this current downturn.

In an environment where utilization rates return to 90% to 95%, we expect to achieve cross-cycle adjusted EBITDA margins of 13% to 14%, resulting in free cash flow conversion of 40% to 50% or over $100 million in free cash flow per year. Assuming $1.8 billion to $1.9 billion in net sales. Let me conclude my remarks by thanking our people for their efforts to remain focused on operating safely, and providing excellent service to our customers. I would also like to thank our customers for putting their trust in us and our shareholders for their continued interest. With that, we'll open it up to your questions.

Operator: Great. Thanks, Arsen. And at this time, I would like to remind everyone in order to ask a question, it. And it looks like our first question today comes from the line of Sean Steuart with TD Cowen. Sean, please go ahead.

Sean Steuart: Thanks. Good afternoon, everyone. Arsen, I want to start with the decision to hold the CUK swing capacity project. You know, I gather given a pretty strong return profile for that project, this is more around wanting to hit balance sheet targets. Assuming that's correct, can you give us a sense of where you would like to see leverage ratios get to or free cash flow profile for the overall company improved to before you would greenlight that project?

Arsen Kitch: Yeah. Good question. So you're right. I think it's likely a good project. But we're putting that decision on hold. It would take more than two years for us to deliver cash flow from this project, which means we'd have to finance it through debt. And right now, we need to prioritize maintaining a strong balance sheet and focusing on running our SBS mills and defending our market share. You know, we said previously we're targeting a leverage ratio in the one to two, one to 2% range. EBITDA margins cross-cycle, 13% to 14%. So we'll revisit this decision later.

In today's market environment, at today's prices, it is a very attractive return, but we have to revisit it in the future and see what those conditions look like and see if we need to update our assumptions.

Sean Steuart: Understood on that front. And then with respect to your view on the market outlook for SBS, I gather a lot of this is based on what RISI is forecasting in terms of forthcoming capacity closures. According to their forecast, you know, we would need to see those announcements soon. I guess I'm wondering on your perspective of industry willingness to make these to take these initiatives to rebalance the market, and the extent to which you're seeing any import relief at this point as tariffs take hold and if that's helping at the margin at all?

Arsen Kitch: Yeah. Listen. We're not gonna comment on what our competitors may or may not do. You're right. RISI is forecasting a first-half net capacity reduction of 350,000 tons, so they're assuming a turn in the market. We're certainly, you know, we're certainly hoping for that, but we're planning for tomorrow looking like today. From an import perspective, it's still a bit early to tell. But as we look at European imports, July year to date, they're down, I believe, approximately 10%. So I think you're starting to see some cracks in the import balance into North America.

You know, between a 15% tariff and a weakening dollar, absorbing 20% or 30% of additional cost for an importer into North America, I think, is getting harder and harder. For domestic customers, I think they're looking for more reliable, stable, domestic supply. So we're optimistic that this will be a tailwind for us as we head into 2026.

Sean Steuart: Okay. Just one last one, maybe for Sherri. You know, you went through a bunch of 2026 metrics that you're targeting. Do you have an initial view on what the maintenance schedule is gonna look like? And I appreciate you're smoothing this out now with a more regular schedule across the mill platform. Can you give us perspective on the cadence of anticipation closures in 2026? And are we safe to assume that the overall expense that you're targeting would be similar to 2025 levels?

Sherri J. Baker: Yeah. So I'll answer the second part first. You should expect the cost to look very similar to what we see in '25. So I would start there. We're still finalizing the schedules for next year, so we'll be able to come out and tell you exactly which facilities in which quarters, probably by our February call. And then we'll highlight if there's any overlap inconsistencies if we change the quarters.

Arsen Kitch: Sean, maybe one more comment on that. We had our Lewiston outage in late Q2. So it was in August with Augusta in October. Doing an outage in the middle of summer is pretty challenging. From just a heat perspective. So we are looking at moving up that outage into earlier in the summer, maybe late Q2? Just to make it a safer, more manageable outage. So we're still finalizing those details, but that is a potential for us to have that Lewiston outage even earlier in the year, which would mean that we would have two Lewiston outages within a twelve-month period potentially. But we'll share that with you in February.

Sean Steuart: Okay. That's all I have for now. Thanks very much.

Arsen Kitch: Thanks, Sean.

Operator: And our next question comes from the line of Matthew McKellar at RBC. Matthew, please go ahead.

Matthew McKellar: First of all, in the quarter were solidly ahead of where you sort of guided to. Looks like foodservice sales are pretty healthy. But you provide some maybe additional perspective on where you saw the incremental strength versus your expectations as of late July? And could provide any other broader commentary around relative strength and weakness you're seeing in conditions across liquid packaging, folding carton, food service, that'd be great. Thanks.

Arsen Kitch: I think summertime is normal seasonality uptick for food service. We certainly saw some nice strength in food service, and our team is doing a really nice job of competing vigorously in the market and filling out our capacity. You know, I think we've had some optimism from our food service customers. I think you may be seeing some import relief helping on things like paper plates. That is helping some of our paper plate customers see stronger demand. So I think those are some of the variables that came into play in Q3.

Matthew McKellar: Okay. That's great. And, guess just following up with the second part about any other comments around kind of weakness you're seeing into Q4 or strength relatively between those kind of product categories?

Arsen Kitch: Yeah. I think Q4 is seasonally a little weaker than Q3, and it's typically in food service. Just the summer season is over. So we're expecting a little bit of seasonality decline as we head into Q4. And I think as Sherri mentioned, we'll also see a few percentage points less of production as we head into Q4 versus Q3 that will have some absorption impact. And, Matt, as we stated in the last earnings call, absorption is a meaningful component of our P&L. And, you know, if you do the math, it could be upwards of $500 a ton of absorption with production changes.

So I think that's part of the reason why Q4 is flat versus Q3 is I think we'll see some impact of absorption.

Matthew McKellar: Okay. And just kind of pulling on that string, you know, it's a fairly large range for guidance on EBITDA in Q4. Considering you're through the maintenance. Is it mostly seasonality of demand and maybe energy costs that would take you to the top or the bottom of that range? Do you maybe even see any risks around the government shutdown and the supplemental nutrition assistance program? Else would you be watching for terms of variability within that range? Thanks.

Arsen Kitch: I think energy is right. We did bake in some energy into Q4 versus Q3, but it's very much weather dependent in some of our one of our mills at least is more susceptible to bigger swings in energy prices than the other mills just due to its location. So I think part of it is energy, part of it is just production. You know, a thousand tons of production is worth upwards of $500,000. And for those folks that spend time in paper mills know that a thousand tons plus or minus in a given week or given month is a rounding error, but it has a pretty substantial impact on our earnings.

So I think it's the nature of being a paperboard-focused business with three mills.

Matthew McKellar: Okay. Fair enough. And last for me, just the working capital improvements of $20 million to $26 million. Can you just share a little bit more about how you plan to achieve that? It sounds like it's mostly inventory but also the timing of when you'd expect to reach that target? Thanks.

Sherri J. Baker: Yeah. It will be primarily in inventory. I think you'll see us start to work those pieces down in the second half of next year. So that would be the timing of when I would be looking to achieve those estimates.

Arsen Kitch: And I think back to the production comment, you know, this year, I think we probably built a little bit of inventory. And we'll be reducing inventory next year to free up some working capital. So there will be a trade-off between fixed cost absorption and just cash coming off the balance sheet. So there'll be some trade-off as we head into next year, and we'll provide a bit more context on this in the coming quarters.

Matthew McKellar: Okay. Thanks very much for the help. I'll turn it back.

Operator: Alright. Thanks, Matt. And one last reminder, in order to ask a question, again, press star and the number one on your telephone keypad. Once again, 1. And we will pause just a moment. Going once. Going twice. Alright. Ladies and gentlemen, that does conclude today's call. Thank you so much for joining us today, and you may now disconnect.

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