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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 of 2021 were released shortly after today's market close, along with the filing of our 10-Q.
On a consolidated basis, the company reported net sales of $450 million, adjusted net income of $9 million, and adjusted EBIT of $50 million.
A few highlights to mention, our paperboard business continue to see strong demand.
Based on that demand, we implemented previously announced price increases across our SBS portfolio.
As per our expectations, we saw improving trends and tissue orders and shipments.
We completed the last of our major maintenance outages for the year at our Cypress Bend, Arkansas terminal.
We also completed the closure of the high cost Neenah tissue mill and our exit from the away-from-home tissue segment.
We saw accelerating inflation across both of our businesses, particularly in energy, chemicals, wood fiber and transportation, as pulp reached its peak and started to ease.
And finally, we maintained ample liquidity of $270 million at quarter end and reduce net debt by another $7 million.
As noted during previous quarters, we remain focused on our top priorities during COVID, the health and safety of our people and safely operating our assets to serve as customers.
We're monitoring the latest trends and are adjusting protocols and policies to keep our people safe.
Let's discuss some additional details about both of our businesses.
The industry continues to experience strong backlogs even with a higher SBS pricing that has been reported by Fastmarkets RISI, the third-party industry publication.
We have benefited from these industry dynamics and previously announced price increases.
Since the beginning of this year, Fastmarkets RISI has reported price increases for the US market that totaled $250 per ton in folding carton and cardstock.
This includes a $50 per ton increase in October for both grades.
We'll continue to see strong demand from our folding carton customers and a recovery in the foodservice segments.
We're also pleased with the reception of our sustainability focused brands of NuVo cup and ReMagine folding carton.
Both are helping our customers differentiate themselves in the market.
It typically takes us a couple of quarters for price changes to be fully reflected in our financials.
It is also worth noting that our portfolio includes additional grades and price mechanisms that are not reflected in RISI's reporting.
We will discuss the estimated impact of our previously announced pricing to our 2021 financials later in our comments.
Finally, we completed a planned maintenance outage at our Cypress Bend, Arkansas mill during the third quarter.
The financial impact from this outage to our adjusted EBITDA was $5 million.
We continue to operate in a difficult market environment.
As previously discussed, COVID led to significant volatility in tissue demand and retailer behavior in 2020 and 2021.
With that said, let me provide you with our point of view on the overall market.
In North America, we view tissue demand as being approximately 10 million tons with annual demand growth of 1% to 2%, slightly exceeding population growth.
Pre-COVID, the market was about two-thirds at home and one-third away from home.
Using that math, the at home market is six million to seven million tons, of which approximately two-thirds is branded and one-third is private branded.
We operate in the private branded market, which is approximately two million tons and has grown more quickly than the branded market.
In terms of the retailer, environment, clubs and the mass merchandisers have gained share at the expense of traditional grocers over the years.
As a reminder, we have greater exposure to grocery than the overall market.
In terms of supply, tissue capacity additions have primarily targeted the private branded space with capacity growth exceeding demand growth.
To the best, we believe that private branded manufacturers will operate a depressed capacity utilization levels in the next several years.
Let me share some context pertaining to demand trends that we witnessed in the first nine months of the year.
Consumers started to return to a more normal lifestyle in the first half of the year, as vaccines were becoming available and restrictions lessened.
This led to a reduction of at home tissue purchases and destocking of consumer pantries.
Based on IRI market data, consumer purchases measured in dollars bottomed out in March.
Due to these consumer trends, retailers were faced with higher inventories in the first quarter and into the second quarter.
In response, they reduced orders to manage their inventories.
Based on RISI data, retailers shipments of finished goods bottomed out in April.
This is largely consistent with our order patterns.
We observed demand recovery at the retailer level throughout the third quarter.
There was a demand uptick in August, related to the emergence of the Delta variant that led to higher orders than we anticipated.
September order patterns return to more normal levels, but we observed another uptick in orders in late October.
This volatility is a reminder of the unpredictable nature of our market during COVID.
Let me provide some additional detail on our tissue volume trends.
We ship 12.3 million cases in the third quarter, a 21% increase from the 10.2 million cases shipped in the second quarter.
This was a bit higher than our guidance of 10% to 15% growth, partly driven by the August demand uptick.
We expect demand to be flat in the fourth quarter relative to the third quarter.
But there's a high degree of uncertainty in consumer and retailer behavior as we head into the holidays.
We will continue to selectively take asset downtime as needed to manage inventories and our cost structure, particularly while coal prices are at elevated levels.
The consolidated company summary income statement shows third quarter 2021 -- the third quarter of 2020 in the first nine months of each year.
In the third quarter 2021, our net income was $2 million, diluted net income per share was $0.11, and adjusted net income per share was $0.55.
The adjustments incorporate the impacts from the Neenah mill closure as well as other adjustments.
The impact of the Neenah closure activities in the quarter was $5.4 million, which was related to severance and related expenses.
Corresponding segment results are on slide seven.
Slide eight is a year-over-year adjusted EBITDA comparison for our Pulp and Paperboard business in the third quarter.
We benefited from our previously announced price increases and a mild mix improvement with similar sales volumes as last year.
Our costs were impacted by $5 million of major maintenance outage expenses, and higher inflation and maintenance expenses.
You can review a comparison of our third quarter 2021 performance relative to second quarter 2021 performance on slide 14 in the appendix.
Price/mix were a limited part of the story for tissue.
Our sales have converted products in the third quarter were 12.3 million cases representing a unit decline of 15% versus prior year.
Our production of converted product in the quarter was 11.4 million cases are down 25% versus the prior year.
Please note that we largely exited the away from home tissue segments in the third quarter of this year, which historically represented 3% to 4% of our overall case volume.
While inflation pressure was significant, the action that we took it at Neenah helped offset some of the higher costs that we face.
You can review a comparison of our third quarter 2021 performance relative to second quarter of 2021 on slide 15 in the appendix.
We also have finished other operational and financial data on a quarterly basis on slide 16 for both businesses.
Slide 10 outlines our capital structure, our liquidity was $270 million at the end of the third quarter.
During the third quarter, we reduced net debt by $7 million.
Maintenance financial covenants do not present a material constraint on our financial flexibility.
And we do not have near-term debt maturities.
We've continued to target the net debt to adjusted EBITDA ratio of 2.5 times, which we expect to achieve by 2023.
Slide 11 provides a perspective on our fourth quarter and full year 2021 outlook the key drivers.
Our expectations assume that we continue to operate our assets without significant COVID related disruptions.
As previously discussed, demand visibility and tissue, as well as inflation expectations have and will continue to be unpredictable.
But that said, our expectation for the fourth quarter is adjusted EBITDA of $48 million to $56 million.
Let me walk you through the build up to that range from our third quarter adjusted EBITDA $50 million.
Previously announced SBS prices is expected to positively impact us during the quarter by $7 million to $9 million which is helping to offset inflation.
Raw material and freight cost inflation is expected to negatively impact us by $7 million to $12 million.
There are no planned major maintenance outages, which will benefit us, given the $5 million Q3 outage.
Tissue shipments are expected to be flat, while we take additional asset downtime to manage inventories.
We are expected to achieve the full run rate benefit of the Neenah closure, which we previous previously stated as being more than $10 million annualized.
If we take actuals for the first nine months and add our expectations for the first quarter, we expect adjusted EBITDA of $167 million to $175 million for the full year 2021.
We wanted to comment on some of the key drivers for 2021 relative to 2020.
We are expecting continued positive impact from previously announced SPS price increases, which are expected to result in year-over-year benefits of $53 million to $55 million.
In our paper board business, planned major maintenance outages are expected to reduce our earnings for 2021 compared to 2020 by $27 million.
Our guidance for 2022 planned major maintenance outages is on slide 20.
We expect to have additional major maintenance outages in 2023.
And we'll provide an update when we refine our estimates.
Our current view is that our tissue volume decline year-over-year will be above 20%, which is not adjusted for the impact of our exit from the away-from-home business.
In total, from 2020 to 2021, input cost inflation, including pulp, packaging, energy, and chemicals, as well as freight is expected to be $80 million to $85 million relative to our previous estimate of $60 million to $70 million.
Increasing energy, chemicals and fiber prices, drove our inflation expectations higher.
While pulp pricing has started to decrease, we do not expect for that to have a material impact on our financials until early next year.
The Neenah mill recently generated negative adjusted EBITDA by closing the site, we will avoid these losses and lower our overall cost structure by producing our retail volume at other lower cost sites.
These actions are helping us to fully realize the benefits of the Shelby North Carolina mill investment.
In total, the benefit from the Neenah closure is expected to exceed $10 million annually.
For the full year 2021, we are also anticipating the following.
Interest expense between $36 million and $38 million; depreciation and amortization between $104 million and $107 million; capital expenditures of approximately $42 million and $47 million, which is lower than our prior expectations; and historical average of around $60 million, excluding extraordinary projects, and our effective tax rate is expected to be 26% to 27%.
It has certainly been an interesting with robust SBS market conditions, significant inflationary headwinds and volatility and tissue demand.
As we mentioned previously, we believe that supply and demand drive near to medium term pricing and margins.
Our paperboard business is benefiting from these dynamics, while tissue remains challenged.
I'm proud of how our people have managed these challenges and opportunities.
We're committed to a strong finish in 2021 in positioning Clearwater Paper for future success.
For the last couple of quarters, I spoke about performance improvement efforts, focused on our core operations in the medium to long term.
These efforts are well underway and are aimed at offsetting inflationary and competitive pressures that we face in our industry.
It is important for us to invest in these efforts to maintain and grow our cash flows in the long run.
We're encouraged by the work to-date as we start moving from planning to execution, and believe that we are well positioned to combat margin compression in the next several years.
Let me remind you, why I think these businesses are well positioned in the long run.
For 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 our customers.
We have a diverse customer base, which serves 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 through product and brand development, 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.
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.
Second, there are long-term trends away from branded products to private brand.
Private brand tissue share in the US rose to over 30% recently, up from 18% in 2011.
While these trends are impressive, we're still a long way from where many European countries are in which private brands represent over half of total tissue share.
Lastly, tissue is an economically resilient and an essential need-based product.
Historically, demand has not been negatively impacted by economic uncertainty.
We are optimistic that this business will generate meaningful cash flows over the long run.
We're committed to improving our business to be successful both in the near and long-term, and I firmly believe that we will come out of 2021, a better and stronger operation than where we started.
In addition, in addition to appropriately sustaining our asset base, our capital allocation plan is focused on paying down debt and improving our cost structure and operating performance.
As Mike mentioned earlier, with this plan, we will achieve our near-term target leverage ratio of 2.5x by 2023.
Our long-term capital allocation prioritizes maintaining a strong and flexible balance sheet with a focus on shareholder value.
We will share additional perspectives on our long-term capital allocation prioritization when we reach our near term leverage ratio target.

user
compname posts q3 earnings per share of $0.11.
q3 earnings per share $0.11.
q3 adjusted non-gaap earnings per share $0.55.
q3 revenue $450 million.

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