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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 fourth quarter of 2020 were released shortly after today's market close.
On a consolidated basis, the company reported net sales for the fourth quarter of $453 million and adjusted EBITDA of $72 million.
Which represents growth of approximately 4% and 38%, respectively, over the fourth quarter of last year.
A few business highlights to mention.
Our tissue business drove results with both higher sales and production volumes year-over-year to meet volatile demand, which exceeded our expectations.
Our production in the quarter was similar to our sales.
Our paperboard business delivered strong performance as well.
Our backlogs are robust, which contributed to our decision to announce a price increase of $50 per ton across our SBS portfolio, starting on February 2.
In the fourth quarter, we used the free cash flows generated to reduce net debt by an additional $58 million.
On slide four, as I noted over the previous quarters, we remain focused on our top priorities during COVID, the health and safety of our people and safely operating our assets to service our customers.
Our efforts and risk mitigation strategies are making a difference in helping to reduce the risk of COVID at our sites.
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 people's diligence to date has been key to our success and will continue to be so.
As a recognition of the work by our entire team during this challenging time, we paid out a onetime discretionary bonus of $1,000 in November to over 2,800 of our people.
We're also strongly encouraging all our people to get the COVID vaccine with a $200 incentive.
I would like to express my deepest gratitude to our entire team for their extraordinary efforts and perseverance through this challenging time.
As we start to see the benefits from a broader vaccine rollout, I want to encourage maintaining high levels of vigilance until COVID is under control and behind us.
I will now share what we saw for both the tissue and paperboard businesses in the fourth quarter.
Let's start with our Consumer Products division on slide five.
As we had previously noted, at home tissue demand was volatile during the quarter.
New waves of the pandemic caused significant spikes in demand mid-November through mid-December.
While we originally anticipated demand at or below levels that we saw in the fourth quarter of 2019, we were reminded of how unpredictable demand can be for essential products during this time.
Mike will expand further on demand patterns in the fourth quarter during his comments.
Our team and customers are doing a great job working through this volatility, and we benefited from higher-than-anticipated sales and production volumes in the fourth quarter.
Our industry view remains largely the same, which I'll summarize in a few key points to provide some context.
First, recall that the market for tissue in the U.S. is traditionally 2/3 at-home and 1/3 away-from-home, with limited manufacturing production capability to swing between the 2.
As consumers have been more homebound, there has been a shift toward at-home consumption.
Demand swings have and will continue to be driven by consumer behavior.
Our expectation is that as COVID vaccines are administered and infection rates decrease, that we will see a shift back to away-from-home consumption, which we expect will negatively impact us as we're primarily focused on the at-home market.
With that said, it is unclear if there will be a lasting impact on consumer behavior in a post COVID environment.
Second, while it is too early to discern private branded share trends, we continue to note that paper towel demand is tracking ahead of the overall tissue category, while facial demand is lagging.
Private brands have had a good track record of gaining share relative to branded products over the past decade, a trend that we would expect to continue.
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 in previous quarters, SKU rationalization has occurred, aiding 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 fourth quarter were robust.
We shipped 13.9 million cases, which was up around 5.3% compared to the fourth quarter of 2019.
Sales were down 4.2% relative to the third quarter of 2020.
As we mentioned on our third quarter earnings call, we exited several customers to reduce complexity and improve our network, which impacted the fourth quarter results and is expected to impact first quarter 2021 results as well.
We are encouraged by our pipeline of sales for the remainder of 2021.
As you recall, we estimate that approximately 2/3 of paperboard demand is derived from products that are more recession-resilient and 1/3 is driven by economically -- by more economically sensitive or discretionary products.
Our folding carton customers, especially those with concentrations in food or healthcare packaging, continue to see strong demand and our food service customers, especially those with concentrations in quick service restaurants and away-from-home dining, continue to see weaker demand.
We are pleased with the market reception of our sustainability focused brands of Nuvo Cup and ReMagine folding carton.
Both are playing a meaningful role in our favorable market position.
We're encouraged by our solid performance in the quarter and continued strong demand for our products.
We made an announcement last week about the natural gas curtailment in Arkansas that caused us to temporarily suspend production in Cypress Bend.
Natural gas deliveries were curtailed to the point where we could no longer operate.
We estimate that the costs associated with the weather event across our paperboard system, including loss production, repairs and spikes in natural gas prices, could impact us in the first quarter by approximately $6 million to $8 million.
We continue to experience the same fundamental supply and demand dynamics that led us to announce a $50 per ton price increase in January.
Demand remains robust and our backlogs have grown since beginning of the year.
Price increase implementation has begun, and we expect that it will take several more months to fully implement the increase.
The consolidated company summary income statement shows fourth quarter as well as the full year 2020 and 2019.
In the fourth quarter, diluted net income per share was $1.34 per share and adjusted EBITDA was $71.6 million and full year diluted net income per share was $4.61 per share, and adjusted EBITDA was $283.2 million.
These represent significant increases over the prior periods, which were driven by tissue demand due in large part by consumer COVID-related behavior as well as the benefits from our Shelby investment, favorable raw material pricing and the lack of a major planned outage in our paperboard division.
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.
Before we speak in more detail about our divisional performance, I want to note changes in how we portray our financial bridges.
Previously, we have shown the impact of production volume changes and associated fixed cost leverage impact in our cost category.
We have modified that approach and are including production volume changes in our volume category.
We believe that this change will enable investors to better understand sales changes as we expect to produce similar quantities of product that we sell, which will all be in the volume category.
The cost category will better reflect the changes in raw material input pricing and inflation.
This sheeting is a service that distorts our sales price of our base paperboard products.
Additionally, we have decided to make some accounting changes that will impact our financials starting in 2021, but we want to note them for you today.
You can also review these changes and the pro forma impact in our 8-K filing.
Our bail pulp sales from our Lewiston mill to third parties have been recorded in our tissue business.
These sales will now be recorded in our paperboard business.
Bail pulp sales from Lewiston to our tissue operations will be transferred at market price going forward as opposed to cost.
We believe this change will better reflect the economics associated with the business.
We will still transfer pulp from the Lewiston pulp mill to the Lewiston tissue operations at cost given the located nature of these assets.
As a reminder, in the second quarter of 2019, we started our new 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.
We achieved the targeted production rate of our new paper machine in the second quarter of 2020 and we're continuing to capture the benefits associated with the project, including ramping our converting lines, realizing supply chain savings and achieving sales wins and mix improvements.
While we are 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're benefiting from the volume increases related to the production ramp, which helped to meet elevated demand.
Overall, lower input costs, improved mix and fixed cost leverage from increased production possibly impacted our tissue business in the fourth quarter of 2020 relative to the fourth quarter of 2019.
You can also review a comparison of our fourth quarter 2020 performance relative to third quarter 2020 on slide 17 of the appendix.
slide 10 contains some additional context on tissue related to the volatility of demand and its impact on our financial performance.
The IRI panel data, which is a snapshot of retail sales of tissue measured in dollars depicts what our customers and we have observed from consumer demand patterns, with the line showing changes on a year-over-year basis, while the data in the box shows a quarterly review versus last year.
As we exited the third quarter, we anticipated an elevated but stable demand pattern.
Based on that demand profile, ample inventory levels at our customers, and slowing demand from our customers in October, we expect to see softness in our fourth quarter sales.
But the consumer-driven demand spike in mid-November into December, that changed rapidly.
This period of volatility, both the October pullback, which we noted on our third quarter earnings call, and strong orders in November and December, are a good reminder that we may not return to a stable order pattern until after COVID-related volatility is behind us, impacting our ability to forecast the business.
We added an additional slide in the appendix of the supplemental materials that details the weekly volatility in IRI panel data that our customers and supply chain have experienced.
Our sales in the fourth quarter were 13.9 million cases, representing a unit decline of 4.2% versus the third quarter and unit growth of 5.3% versus prior year.
Our production in the quarter was $13.9 million cases or down 9% versus the third quarter and up 2.4% versus prior year.
Production levels have 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 year-over-year.
Slide 11 is a year-over-year adjusted EBITDA comparison for our paperboard business.
Lower pricing, which RISI reported in February 2020, was partly offset by favorable mix.
The absence of a planned major outage at our Cypress Bend mill was also a driver of year-over-year improvement.
Overall, our team ran our operations well in the quarter and continued to deliver strong results.
You can review a comparison of our fourth quarter 2020 performance relative to third quarter 2020 performance on slide 18 in the appendix.
Slide 12 provides a perspective on our first quarter outlook and some other key drivers for full year 2021.
As previously discussed, tissue outlook is largely a function of sales demand.
Tissue shipments in January were 4.6 million cases, and our shipments in February are trending to below four million cases.
At this pace, we are expecting first quarter shipments to be below levels experienced in the first quarter of 2020, when COVID initially impacted consumer buying patterns, and down versus the fourth quarter of 2020.
As we mentioned previously, our paperboard business announced a price increase of $50 a ton across our SBS grades effective February 2.
Given the nature of our agreements and discussions with customers, we expect that the benefit of this will be reflected in the next couple of quarters with limited benefit expected in Q1.
The unexpected weather-related outage at our Arkansas mill, which caused loss production and repairs as well as natural gas price increases across our paperboard system, is expected to negatively impact the quarter by approximately $6 million to $8 million.
If our assumptions are correct, we would anticipate the first quarter adjusted EBITDA to be in the range of $51 million to $59 million.
This range also assumes that we continue to operate our assets without significant COVID-related disruptions.
While we are not prepared to provide specific annual guidance for 2021 and there are several drivers, assumptions and variables that we would like to address.
We are expecting a positive impact from the previously announced SBS price increases.
We are anticipating tissue volumes to drop high single to low double-digit percentages.
This assumes continued normalization of consumer buying patterns, but is highly dependent upon the course of the pandemic.
We are encouraged by our sales pipeline, which we anticipate will have a positive impact on the second part of the year.
Paperboard volumes are expected to be largely stable.
We are expecting higher input costs, including pulp, packaging, energy and freight.
While these variables are difficult to predict today, raw material inputs in total could be a $40 million to $50 million headwind this year, with more than half the total coming from pulp.
In our paperboard business, planned major maintenance outages are expected to reduce our earnings for 2021 compared to 2020 by $25 million to $30 million.
We have updated this guidance on slide 23, where we broke out the timing by quarter, which reflects our current plan.
In light of the Cypress Bend weather event, we're evaluating timing of our outage schedule and may update you in the coming quarters.
For the full year 2021, we're also anticipating the following: interest expense between $38 million and $40 million.
Depreciation is expected to be between $106 million and $110 million.
Capital expenditures are expected to be between $60 million and $65 million, which is closer to historical trends as we expect to execute against some projects that were delayed in 2020.
And our effective tax rate is expected to be 25% to 26%, and we expect to utilize some of our current tax attributes which amount to $60 million to reduce cash taxes.
Slide 13 outlines our capital structure.
We utilized approximately $50 million of free cash flow to reduce our net debt, including making voluntary prepayments on our term loan, and our liquidity was $250 million at the end of the year.
We continue to make strides in reducing our net debt and increasing our financial flexibility as we target a net debt to adjusted EBITDA ratio of 2.5 times, assuming adjusted EBITDA after COVID benefits and with a normal amount of outages.
Before wrapping up with our value proposition, I wanted to reflect on some of our key accomplishments in 2020 on slide 14.
Our team did an outstanding job managing through COVID.
We mitigated risks in our facilities with a focus on health and safety and continue to run our assets and serve our customers.
We rapidly adjusted to demand volatility to build stronger relationships with customers.
We ramped our new Shelby paper machine and are on track to fully ramp the overall site by the end of this year.
We delivered outstanding financial results, reduced net debt by $200 million, refinanced our near-term debt maturities and strengthen our balance sheet.
At the same time, we went through several leadership transitions, including my promotion to CEO, a hiring of a new CFO and a new leader of our CPD business.
It was certainly an interesting year to say the least, and I'm proud that we make this many changes and perform at the levels that we did.
We believe we're well positioned heading into 2021 to continue driving an improvement in our business and focusing on our near-term strategy of paying down debt while deleverage -- while developing options for long-term capital allocation.
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 U.S. 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 a 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 operated well invested assets with a geographic footprint, enabling us to efficiently service customers on both coasts.
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 commitments.
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 fourth quarter, with a net debt reduction of approximately $58 million, bringing our net reduction in 2020 to over $200 million.
We intend to continue to deleverage by delivering benefits from our Shelby investment, continuing operational improvements, aggressively managing working capital and prudently allocating capital.
While we expect to have lower tissue shipments in the first part of the year, we're making sound strategic moves to support our customers and their success and continue to position our business for success in the long term.
We believe that this strategy is the best way to create shareholder value.
With an adjusted EBITDA impacted by normal outages and reduced COVID benefits, we do not anticipate achieving our 2.5 leverage target this year.
We continually engage with our Board on future capital allocations.
Beyond deleveraging, we expect to explore a variety of means of creating shareholder value, including: first, internal investments in our operation that improve competitiveness.
Second, external investments that deliver synergies and improve our market position; and third, returning capital to our shareholders.

user
q4 earnings per share $1.34.
q4 sales $453 million versus refinitiv ibes estimate of $449.3 million.

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