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Text: Joining me on the call today are Arsen Kitch, President and Chief Executive Officer; and Mike Murphy, Chief Financial Officer.
Financial results for the third quarter 2020 were released shortly after today's market close.
On a consolidated basis, the company reported net sales for the third quarter of $457 million and adjusted EBITDA of $77 million, which represents growth of approximately 3% and 145% respectively over the third quarter of last year.
A few business highlights to mention.
Our tissue business drove results with both higher sales and production volumes, to meet elevated demand.
Lower input costs, particularly in pulp were also a tailwind on a year-over-year basis.
Our service levels in tissue started to recover to pre-COVID levels, as we continued to work with customers to fulfill orders and replenish inventory levels.
Our paperboard business continue to deliver stable performance, managing through uneven end-market segments with solid execution.
Our current backlogs are in line with previous years and we successfully launched ReMagine folding carton brand, offering recycled content in SBS Board.
In the third quarter, we used the free cash flows generated to reduce our net debt by an additional $40 million and we refinanced our 2023 notes with a new 2028 notes.
On slide four as I noted, these last two quarters, we remain focused on our top priorities during COVID, the health and safety of our employees and safely operating our assets to service our customers.
We continue to operate with appropriate safeguards against COVID, including temperature checks, quarantine protocols, sanitation practices, social distancing guidelines, face covering requirements, remote work, travel restrictions and enhanced benefits.
Our human resources and manufacturing leadership teams are doing an exceptional job of proactively monitoring the health of our workforce and ensuring that we have the proper staffing levels in place.
Our efforts and risk mitigation strategies are making a difference in helping to reduce the risk of COVID at our sites.
I would like to express my deepest gratitude to all of our people for their extraordinary efforts and perseverance through these challenging times.
I will now share what we saw from both the tissue and paperboard businesses in the third quarter.
Let's start with our Consumer Products division on slide five.
As we have previously noted, at-home tissue demand remained elevated during the quarter.
We continue to believe that this is being driven by the shift from away from home to at-home consumption, as many people continue to work and learn from home.
We noted on our previous earning call that because of these consumption changes, we were seeing retail sales per IRI panel data stabilize at above pre-COVID levels.
In the third quarter that resulted in low double-digit retail sales growth relative to the 2019 quarter.
We expect that year-over-year increase had continued to moderate as retailers replenished their inventories, consumers de-stocked their pantries and people adjust to living with the pandemic.
Our industry view remains largely the same, so I will summarize in a few key points to provide some context.
First, recall that the market for tissue in the US is traditionally two-third at-home and one-third away-from-home.
Many states economies began to reopen, which we believe drove some of the normalization and demand in the third quarter.
We expect continued uncertainty associated with these reopening and travel patterns, making it challenging to predict demand drivers for these end markets during the next few quarters.
It is also difficult to predict what a new normal might look like as the pandemic eventually subsides.
Second, while it is too early to discern trends on branded share relative to private branded share.
We are noticing the paper towel demand is tracking ahead of the overall tissue category while facial demand is lagging.
We will continue to monitor these trends in the coming months and quarters due to the continued uncertainty in consumer demand associated with COVID.
Third, as we noted last quarter, SKU rationalization has occurred, creating additional production.
We believe that lower SKU counts benefit both retailers and manufacturers like us.
While we have seen some customers desiring a recovery of SKUs, we do not anticipate SKU counts to go back to pre-COVID levels in the near to medium term.
Our tissue results in the third quarter were robust.
We shipped 14.5 million cases, which was up around 10% compared to the third quarter of 2019, but down 9% over the second quarter of 2020, as expected.
We continue to execute for our customers and are pleased with production efficiency and fixed cost leverage achieved.
We have largely replenished inventories throughout the supply chain and are seeing in-stock conditions improve.
In addition, to meet peak demand during the pandemic, we believe that some of our customers need short-term commitments to alternative suppliers and tertiary brands to meet demand, including imported products.
As a result, we believe that these customers have greater than normal inventory levels in several product categories that they are now working to reduce.
We have also adjusted our sales and customer mix over the last six months to better position our business for growth in a long-run.
That has led us to exit several customers to reduce complexity and improve our network.
While we have a robust pipeline of new business for next year, these strategic moves are expected to have a volume drag in the next couple of quarters.
Mike will further address the impact of these trends on our businesses and financial outlook section of our discussion.
As you recall, we estimate that approximately two-thirds of paperboard demand is derived from products that are more recession-resilient and one-third is driven by more economically sensitive or discretionary products.
Our business including customer demand has been stable despite economic uncertainties.
Our folding carton customers, especially those with exposure to food and healthcare packaging continue to see strong demand and our foodservice customers, especially those with exposure to quick service restaurants and away-from-home dining, as well as commercial printers continue to see weaker demand.
Our exposure to diverse end-market segments helped provide stability for our order book in the quarter.
We did not have a planned major maintenance outage in the third quarter of 2020 like we did in 2019, which drove improved operations.
Our current sales backlogs are consistent with previous years, indicating stable demand.
While we're encouraged by our solid performance in the quarter, we're navigating through some uncertain market conditions.
On our last earnings call, we introduced the ReMagine brand of SBS folding carton paperboard with up to 30% post-consumer recycled fiber that is FDA-compliant for food contact.
Together with our NuVo SBS brand of cup stock with up to 35% post-consumer recycled fiber, we're meeting our customers and consumer preferences for more recycled content in an already highly sustainable form of paper-based packaging without compromising on consumer safety and product quality.
The consolidated company summary income statement is depicted under the third quarter as well as the first three quarters of 2020 and 2019.
In the third quarter, diluted net income per share was $1.28 per share and adjusted EBITDA was $77 million.
The corresponding segment results are on slide eight.
Our Paperboard business continued its strong adjusted EBITDA performance while consumer products benefited from significant sales growth and fixed cost leverage associated with production growth and favorable input costs.
In the second quarter of 2019, we started our Shelby, North Carolina, paper machine and incurred as anticipated, start-up costs related to lower production throughput, higher waste and other costs which persisted during the remainder of 2019.
As a reminder, we achieved the targeted production rate of our new paper machine in the second quarter of 2020 and we are continuing to capture the benefits associated with the project, including ramping our converting lines, realizing supply chain benefits and achieving sales wins and mix improvements.
While we're not providing a specific dollar amount for these costs and benefits, the continued realization of the Shelby investment is an important factor in our performance improvement.
Our mix continues to improve as Shelby has come online, more than offsetting some year-over-year price impacts.
We are benefiting from the volume increases related to the production ramp which helped to meet elevated demand.
Overall fixed cost leverage from increased production, lower input costs and improved mix positively impacted our tissue business in the third quarter of 2020, relative to the third quarter of 2019.
You can review a comparison of our third quarter 2020 performance relative to the second quarter of 2020 on slide 16 in the appendix.
Slide 10 contains some additional context to the outstanding performance in our tissue business and we are building off the data we shared last quarter.
The slide contains IRI panel data, which is a snapshot of retail sales of tissue measured in dollars.
The line shows monthly change on a year-over-year basis while the data on the box shows a quarterly view versus last year.
It is estimated that $1 retail sales grew 34% in the first quarter, 23% in the second quarter and 12% in the third quarter.
You can see in the data that pantry loading phenomenon at the end of the first and beginning of second quarters, that has given away to a more stable demand picture for our retail customers.
During our last quarter's call, we anticipated the IRI panel data to be up in the 10% to 15% range in the third quarter and it was close to 12%.
In the fourth quarter, we would expect year-over-year sales growth to continue to moderate.
This expectation is highly uncertain and dependent on consumer behavior, retail buying patterns and COVID-related restrictions.
Our sales in the third quarter were 14.5 million cases, representing a unit decline of 9% versus the second quarter and unit growth of 10% versus prior year as expected.
Our production in the quarter was 15.3 million cases, were down 4% versus the second quarter and up 19% versus prior year.
Our production levels had benefited from the Shelby ramp and SKU rationalization.
The cost leverage from the significant increase in production along with improved costs in freight and logistics led to continued strong results.
Slide 11 is a year-over-year adjusted EBITDA comparison for our paperboard business.
Lower pricing reflected in Macy's reported price decrease in February was partially offset by favorable mix.
The absence of a planned major maintenance outage at our Idaho mill was also a major driver of year-over-year improvement.
Overall, our team brand our operations well in the quarter and continue to deliver stable results.
You can review a comparison of our third quarter 2020 performance relative to the second quarter of 2020 performance on slide 17 in the appendix.
Our performance in the third quarter exceeded our expectations with stronger sales and production volumes in tissue and continued stability in paperboard, despite weak economic conditions.
These factors combined with outstanding operational execution delivered robust results.
Slide 12 provides a perspective on our fourth quarter outlook.
As previously discussed, tissue outlook is largely a function of sales demand.
As Arsen mentioned, we recently exited some customers and specific products to better position us for the future.
Additionally, several of our large customers placed heavy orders with us and other suppliers in the third quarter, leaving them with high inventories in several product categories.
As a result, we're seeing order pace slow in October as customers are adjusting their supply chains.
Our October shipments were around 4 million cases, which is down from an average of 4.8 million cases per month in the third quarter of 2020 and 4.4 million cases per month in the fourth quarter of 2019.
We are anticipating our tissue sales to be at or below fourth quarter 2019 levels.
Our production will also decline to meet this level of demand, so that our inventories do not exceed targeted levels, which will impact our fixed cost absorption that had benefited Clearwater throughout much of 2020.
Input costs are expected to continue to be largely benign except for some increasing freight expenses.
And as we mentioned previously, our paperboard business remained stable in total and while we continue to prepare for potential COVID recession-related weakness, our portfolio of customers and end-market segment exposure continues to position us well through the end of October.
If assumptions around demand as well as largely stable prices and raw material inputs hold, we would anticipate fourth quarter adjusted EBITDA to be in the range of $52 million to $62 million.
This range also assumes that we continue to operate our assets without significant COVID-related disruptions.
For the full year 2020, we anticipate the following.
Interest expense between $46 million and $48 million, which is a slight decrease to the past expectations due to debt repayments.
Depreciation is expected to be between $109 million and $112 million.
Capital expenditures are trending toward $45 million and we still do not expect to be a net cash taxpayer in 2020.
While we're not prepared to provide specific guidance for 2021, there are several variables to keep in mind.
Planned major outage expenses are expected to reduce our earnings in 2021 compared to 2020 by $25 million to $30 million.
We've updated this guidance on slide 22, which represents a slight increase relative to prior guidance of $23 million to $27 million.
This is due partly to a new project to replace the head box on one of our Lewiston paper machines, which will require some additional downtime.
Based on third-party pulp forecast, we are anticipating around a $50 per ton increase in pulp.
As a reminder, we purchased approximately 300,000 tons of pulp each year.
Capex is expected to trend closer to our historical averages of approximately $50 million.
Slide 13 outlines our capital structure.
We utilized approximately $40 million of free cash flow to reduce our net debt, which included a $40 million voluntary prepayment of our term loans and our liquidity was $277 million.
In the quarter, we refinanced our 2023 notes with a new 2028 note maturity, providing approximately 5.5 additional years of tenure at a rate we deemed to be attractive at 4.75%.
We also achieved the mass [Phonetic] amendment through our ABL facility, providing some reporting and other flexibilities.
S&P recognized our improving credit trend and removed us from negative outlook.
We continue to make strides, reducing our net debt and increasing our financial flexibility.
I would like to reiterate our value proposition, which we discussed on our previous earnings call and mentioned to investors throughout the quarter.
We believe Clearwater Paper is very well positioned across two attractive and complementary businesses.
Our Consumer Products division is a leader within the growing private branded tissue market.
From our vantage point, we believe the key strengths of this business are the following.
First, we have a national footprint with an ability to supply a wide range of product categories and quality tiers, which is an attractive sales proposition to our customers.
Our expertise in manufacturing, supply chain and transportation is a key differentiator, especially during challenging times like today.
Second, there are long-term trends away from branded products to private brands.
These have typically been amplified during recessions.
Private brand tissue share in the US rose to over 30% in 2019, up from 18% in 2011.
While these trends are impressive, we're still a long way from where many European countries are, where private brands represent over half of total tissue share.
Lastly, tissue is an economically resilient and need-based product.
Historically, demand has not been negatively impacted by economic uncertainty.
Turning to our Paperboard division.
We believe that the key strengths of this business are the following.
First, we operate well-invested assets with a geographic footprint enabling us to efficiently service customers on both posts.
We have a diverse customer base that serve end markets that have largely stable demand.
Second, not being vertically integrated enables us to focus on independent customers with unparalleled service and quality commitment.
Third, we believe the business is well positioned to take advantage of trends toward more sustainable packaging and food service products.
Lastly, our paperboard business has demonstrated an ability to generate good margins and solid cash flows.
Overall, our large capital investments are behind us and we're prioritizing cash flows to reduce debt, as we demonstrated in the third quarter with a net debt reduction of approximately $40 million, bringing our net reduction thus far in 2020 to over $140 million.
We intend to continue to deleverage by delivering benefits from our Shelby investment, continuing with operational improvements, aggressively managing working capital and prudently allocating capital.
While we expect to have lower tissue shipments in the coming quarters, we're making sound strategic moves to support our customers and their success and continue to position our business for success in the long-run.
We believe that this strategy is the best way to create value for equity and debt holders.

user
q3 earnings per share $1.28.
q3 sales $457 million versus refinitiv ibes estimate of $461.6 million.
in q4, demand for tissue products is expected to soften relative to q3 of 2020.

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