Ladies and gentlemen, thank you for standing by, and welcome to the Clearwater Paper Fourth Quarter and Full Year 2023 Earnings Conference 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] As a reminder, today's call is being recorded. I will now hand today's call over to Kyle Nagarkar, Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, and thank you for joining Clearwater Paper's Fourth Quarter and Full Year 2023 Earnings Conference Call. Joining me on the call today are Arsen Kitch, President and Chief Executive Officer; and Sherri Baker, Senior Vice President and Chief Financial Officer. Financial results for the fourth quarter of 2023 were released shortly after yesterday'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 Slide 2 of our 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. We will begin today's call with a strategic update and the announcement of our pending acquisition of the Augusta, Georgia paperboard manufacturing facility from Graphic Packaging. On our last call, I mentioned that we've made significant progress over the past few years, improving our operations and becoming a more competitive player in both of our businesses. I also mentioned that we believe that scale is needed to be able to invest and grow, especially given the capital-intensive nature of our industry. In paperboard, we laid out our goal of building a scaled, high-performing and diversified paperboard business that is well matched to the needs of paperboard converters in North America. The Augusta acquisition is an outstanding strategic fit. It will add significant scale and growth capacity to our paperboard business and strengthen our position as a premier independent supplier of paperboard products to North American converters. We have also stated that we believe in the overall attractiveness of the North American paperboard market. It is a robust 10 million-ton market that is growing and well positioned to capitalize on sustainable consumer packaging trends. While demand softened in 2023 and utilization rates fell, this is a cyclical industry, and we expect demand to start recovering in the second half of this year and into 2025. Let me provide you with some additional details regarding the acquisition and synergies. The Augusta site is a well-invested SBS facility with around 600,000 tons of paperboard capacity and about 700 talented employees. With volume upside and cost synergies, we believe that Augusta will contribute $140 million to $150 million of adjusted EBITDA by the end of 2026. If realized, we're expecting the post-synergy multiple to approach 4.5 times. The largest component underlying our expected $40 million…

Thank you, Arsen. Let's cover our financial performance in the fourth quarter by turning to Slide 10. The consolidated summary income statement shows results for the fourth quarter of 2023 and 2022. In the fourth quarter of 2023, we reported net income of $17.6 million, net income per diluted share of $1.04 and adjusted net income per diluted share of $1.35. For the full year, we reported net income of $107.7 million, net income per diluted income per share of $6.30 and adjusted net income of $6.69 per share. The corresponding segment results are on Slide 11. The business performed very well on a consolidated basis with lower input costs and strong operating performance driving a healthy improvement in profitability. Adjusted EBITDA margin rose to 12.3% in the quarter as compared to 5.3% in the fourth quarter of last year or about 10% if we exclude the impact of the major outage. Slide 12 is the year-over-year comparison of adjusted EBITDA for our paperboard business. The business delivered $37 million of adjusted EBITDA in the quarter with a 15% margin. On a year-over-year basis, lower sales price and mix negatively impacted results, which was more than offset by lower input costs. The impact of volume between periods was negligible as we took market-related downtime in the fourth quarter of 2023 and had our planned major outage in Lewiston in the fourth quarter of 2022. Slide 20 in the appendix shows the sequential comparison of the fourth quarter to the third quarter of this year. It reflects a lower sales price and mix, lower volumes and higher costs. Slide 13 is a full year comparison of adjusted EBITDA for our paperboard business. The business delivered $206 million of adjusted EBITDA for the year with a 19% margin. On a full year…

Thanks, Sherri. The expected Augusta acquisition is a big strategic step for Clearwater Paper. Upon the expected completion of the transaction, we will welcome the very talented Augusta team to Clearwater Paper. We will focus on successful integration and delivering against our value creation expectations. Our goal is to bring together the best of Augusta and our existing mills to build a stronger paperboard business. Our long-term objective is to build a scaled and diversified paperboard business that meets the needs of our converter customers. We intend to continue to opportunistically look at paperboard assets across multiple substrates. We will also continue to evaluate the feasibility of investing in our existing assets to expand our product offering. While we look at additional opportunities in the long run, in the near to medium term, we're going to focus on generating cash flows and deleveraging our balance sheet. We have a proven track record of doing just that and expect to be back to our cross-cycle target of 2.5 times by the end of 2026. Let me wrap up by thanking our people for a strong 2023. We delivered outstanding financial results, navigated through challenging market conditions and continue to prioritize our customers. I would also like to thank our customers for placing their trust in us and our shareholders for their continued support. With that, we will end our prepared remarks and take your questions.

[Operator Instructions] Your first question is from the line of Matthew McKellar with RBC Capital.

Hi, Arsen and Sherri. Thanks for taking my call. Congrats on the transaction. Maybe to start off, we've seen pricing move a little bit lower for SBS here. Are you able to give us a sense of what the run rate annual EBITDA generation for the Augusta facility would be like based on where SBS prices are today and the utilization rates you're expecting for?

Listen, we believe that there was $100 million in EBITDA in 2023. That was, of course, a 2023 prices and volume. We are expecting a lower carryover in that pricing that you're referring to, but we're expecting a recovery in volume. So the two in the long run should offset each other. I think once we complete the transaction, we'll be able to give a better idea of what 2024 looks like at Augusta.

Okay. Understood. And then can you give us a bit more color maybe on the cost synergies you expect to achieve on the acquisition by the end of 2026 including the cadence and when you'd expect those synergies to be achieved and whether any CapEx or price increases would be associated with how we bridge to that 2026 number?

Yes. So let me start with this. The bulk of the synergies we're expecting are really coming from volume. So we believe the mill is going to be 70% to 80% utilized in 2024. In the long run, we should expect to see 95% utilization, which is back to historical run rates. So that would imply about 150,000 tons of volume upside that we have at Augusta. So the bulk of those synergies should come from that volume lift. And if you look at historical Clearwater paperboard EBITDA per ton, it's probably in that $200 to $300 range depending on where you are in the cycle. And so the bulk of the synergies, I think, are going to come from this volume left. There is more modest synergies in things like network optimization, procurement and transportation. But that, I think, is secondary to our focus on the commercial side. We expect to get these synergies by the end of 2026. We're not prepared to talk about the cadence of what happens in 2025, 2026. I think some of that is going to be dependent on the market recovery that we're expecting, but we'll have more to say as we progress through the acquisition.

Okay. Thanks for that. And then just thinking through the utilization projection a bit when you talked about 70% to 80% in 2024, that would be a little bit softer than what you've seen across your own paperboard portfolio, although I think you've outperformed the market recently. But just for completeness, could you give us a bit of color on what's behind those assumptions, whether there's anything around the relative health of folding carton versus cup and plates or where you'd expect to concentrate any economic downtime given the level of demand you expect in the market or other factors?

Yes, it's a great question. I think it mostly refers to the book of business that we're acquiring with the mill. So that's -- so we believe that book of business will fill the mill up 70% to 80% at the time that we complete the acquisition into 2024. So really, that upside is us capturing additional volume and having some additional wins in the market. So it's really more indicative of how the mill is going to be loaded and the book of business that we're hoping to retain as part of the acquisition.

Sure. That makes sense. Maybe sticking with Augusta. I know you talked about looking at some additional substrates and paperboard that could add to your customer value proposition I know Graphic had done some work historically evaluating the production of folding boxboard at that facility. Is that something you'd be at all interested in? And then I guess just more broadly, can you give us a sense of which substrates you might find attractive or most complementary to your existing portfolio?

That's a great question. I think what we're going to focus on is what do the converters in North America, what is it that they need and what is it that they're looking for. In the long run, we do believe that there will be a place in the market for lighter weight paperboard. So we're going to explore those options. We'll also explore other products complementary to SBS that our customers may need or want in the future. Beyond SBS, our customers purchase other substrates as well. So we will look at potential acquisitions that make sense with the other substrates of paperboard. But at this point, we are really going to be focusing on cash flow generation and deleveraging to get us back into a position where we can take advantage of those opportunities. And Matthew, this is what we've been saying for the last several years is the goal of deleveraging is to put us in the spot to where we can we can make a transformational acquisition. And our intent is to get us back into that spot that we can continue to grow.

Great. That makes sense. Maybe just zoom out and pick it to your outlook for paperboard more broadly. It sounds like you've seen a little bit of a pickup in Q1 sequentially here. Are there any end markets that you call out as being stronger or weaker meaningfully versus Q4? And then maybe can you talk just what's informing your view that we'll see improved demand in the second half of the year? And whether you'd expect imports of folding boxboard to be a material factor for how you expect 2024 to play out?

Okay. I think there's three questions there, so I'll try to tackle all three of them, if I miss one, let me know. So I think the first one is around which portions of the market are holding up better than others. I would say we've seen in 2023 is food service has held up better than folding carton. That makes sense, folding cartons and SBS is used more and higher-end applications and I think those have this have had some softness in 2023. In terms of the demand recovery, when we say demand, we refer to either consumer demand or our customer converter demand. I think that inventory build that we saw in 2022 was really substantial. And as I have discussions with our customers, they still had a hangover of inventory at the end of 2023, but they're working their way through it. And so what we are expecting to happen is a more normalized ordering pattern from our customers as we progress through 2024. We're hoping for some strengthening in consumer demand as well for those higher-end applications of the paperboard. So those are the two things that I think will drive a recovery. I think it's going to be gradual in the next couple of quarters and strengthening into at the end of 2024 and into 2025.

Great. And yes, I know that was a multipart question there. I think the last part was just -- I mean, there are folding boxboard imports a pretty material factor for your outlook in 2024? What are you seeing on that?

Thanks for reminding me. So listen, if you look at the data, imports in 2023 were actually down versus 2022. If you look at RISI data, they were down by almost 20%, 25% year-over-year. They're projecting that they maybe bump up by 10% or about 50,000, 60,000 tons in 2024 and being flat in 2025, right around 500,000, 600,000 tons. I mean those are historical averages that we've seen. And so I know there's been some commentary out there about imports. But from what we're seeing, certainly, they're here, they've been here. They've been here for many years and the rate of imports is about what we'd expect at this time. So I don't think this is [indiscernible].

Okay. Thanks. That's really helpful. Last one on paperboard. Should we understand, I guess, your announcement yesterday is essentially confirming that you intend to remain an independent supplier of paperboard? And by that, I mean, you don't see yourself growing into converting operations in a substantial way. Is that strategic option pretty firmly off the table at this point?

I think for -- I think in the near to medium term, that's absolutely right. I think we're committed to the independent -- to the converters and we're the independent supplier. I think we think it's a great set of customers, and we think we have plenty of room to grow. And that's been our sweet spot and our value proposition for many years. So we're going to play to our strengths. And we think we can be there for those customers in the long run. So yes, our focus is to be that independent supplier to the North American converters.

Great. Thanks for that. Maybe next, just switching over to tissue. I'd just like to ask about your process of exploring options there. I think you've previously been pretty candid in reviewing your options for both businesses. Are you able to share at this point how advanced any process might be for exploring your options for the tissue business, even given an indication of what your expectations might be for the time line or value? And then any color you could provide on how a sale would work for the Lewiston site, in particular, given that mill produces both products?

Yes, I think it's a little premature to be jumping on time lines or expectations. If we step back, we talked about our focus on paperboard growth. We have a fantastic tissue business. We operate that business really well. But as I've said before, the business does need scale in the industry does need consolidation given the supply and demand landscape. We'll look at all options. And one of those options, it may very well be operating the business. So we'll do the right thing for shareholders, we'll do the right thing for our customers and our people. And I've said before, yes, in Lewiston has multiple product categories in there. It's a great site. It's our biggest site, the largest producing site. That site is critical to Clearwater Paper. So we're obviously thinking about any implications there, but I think it's premature to be talking about any specific paths.

Sure. Okay. That's fair enough. One last one for me. I just want to confirm that I heard correctly that the impact from the extreme cold weather event in January was $13 million for the Q1 number. Just want to understand, I guess, what maybe is embedded in that? What exactly occurred and whether you might have any business interruption insurance that could be applied against that in time?

So let me start with what's embedded and then Sherri can grab the financial piece. So it's -- there's a combination of two things: One is equipment damage. So when the freeze happened, it was very cold in Lewiston for an extended period of time. When the mill goes down and that kind of cold, it causes extensive damage. So part of it is just equipment damage and repairing equipment. The other part was downtime that we have to take to get the mill back up and running. So together, that was $13 million. And Sherri, why don't you take the insurance question?

So we would have a deductible of $4 million that we would have to offset, and we have not assumed any recovery in the numbers that we included. So any recovery that we would be able to achieve will be an offset to the guidance that we provided.

And it's -- we've obviously -- we're working with our insurance companies. So I don't want to imply that it's $13 million minus $4 million is the recovery that we'll see. So we'll have to through with our insurance company and figure out what that recovery would look like. There's both an asset equipment portion of insurance as well as business interruption. So that's what we have to work through.

Okay. That makes sense. Thanks very much for that color. That’s all from me. I’ll turn it back. Thank you.

[Operator Instructions] At this time, there are no further questions. Thank you for joining today's call. You may now disconnect your lines.