Sloan Bohlen; Head of Investor Relations; Clearwater Paper Corp
Arsen Kitch; President, Chief Executive Officer, Director; Clearwater Paper Corp
Sherri Baker; Chief Financial Officer, Senior Vice President; Clearwater Paper Corp
Matthew McKellar; Analyst; RBC Capital Markets
Operator
Good afternoon, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Clearwater Paper Fourth Quarter and Full Year 2024 Earnings Call.
(Operator Instructions)
I would now like to turn the call over to Sloan Bohlen, Head of Investor Relations. Please go ahead.
Sloan Bohlen
Thank you, Kelvin. Good afternoon, and thank you for joining Clearwater Paper's Fourth Quarter 2024 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 2024 were released shortly after today's market close.
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 financial 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 the supplemental information covering forward-looking statements. Rather than reading this slide we'll incorporate it by referencing it to our prepared remarks.
And with that, let me turn the call over to Arsen.
Arsen Kitch
Thank you for joining us, and good afternoon. I'm going to structure my remarks today across threee key areas. First, I'll provide a summary of our major strategic accomplishments in 2024. Next, I'll discuss our fourth quarter performance, including our perspective on current industry conditions.
And lastly, I will outline our near- and long-term priorities, including actions that we're taking to reduce our cost structure.
I will then turn the call over to Sherri to provide additional details on our fourth quarter and full year results as well as our outlook for 2025.
Let's start with an overview of our strategic accomplishments in 2024. We announced the planned acquisition of the Augusta paperboard facility in February of last year. This was our first major step to transform Clearwater to premier independent paperboard packaging supplier in North America.
The Augusta acquisition increased our paperboard capacity by around 70% and improved our geographic footprint. We closed the transaction on May 1 and are well on track to integrate the Augusta mill into our network.
We believe that this acquisition can contribute $140 million to $150 million of annual adjusted EBITDA to Clearwater once we capture volume synergies and assuming the industry returns to normalized cross-cycle utilization levels. Within 3 short months of closing on the Augusta acquisition, we announced the planned sale of our tissue business for $1.06 billion.
Our team worked tirelessly over the last several years to improve our tissue business, leading to this outstanding outcome for Clearwater. We completed the sale on November 1 and utilized the net proceeds to significantly delever our balance sheet. These 2 deals transform Clearwater and position our company for future growth in paperboard.
I'm very proud of our team for these tremendous accomplishments in such a short period of time and look forward to the next chapter of our story.
Let me now turn the focus to our performance in the fourth quarter. We delivered $21 million of adjusted EBITDA across total operations, which included 1 month of discontinued operations from our tissue business.
The quarter was impacted by Hurricane Helene, particularly operations at our Augusta facility. The mill suffered some damage, which was then followed by a planned major maintenance outage that took place within a few weeks of the hurricane. These events created a very challenging operating environment, which led to higher costs and operational disruptions.
The Augusta team did an outstanding job of recovering and the mill was back on track as of year-end. As we've discussed throughout 2024, while market demand has continued to gradually improve, the industry continued to operate with utilization rates below historical averages, resulting in lower market pricing and margin pressure. Lastly, our Board authorized a new $100 million share repurchase program, and we repurchased approximately $9 million of our shares through February 7 of this year.
Let me now provide some comments on market and industry conditions. Let's start with demand. Based on AF&PA data, industry shipments increased by 4% in 2024 versus 2023. Demand is further projected to grow by 3% to 5% in 2025 based on various industry publications, returning to pre-COVID levels.
This supports our view that demand continues to recover, and we're optimistic about the long-term prospects for paperboard packaging.
Now let's turn to supply. Industry utilization rates improved in 2024 to 85% versus 82% in 2023. Net exports decreased by approximately 250,000 tons in total driven by increased global supply and competition. North American capacity remained largely unchanged in 2024, although new industry capacity is forecasted to be added in 2025. As we've discussed previously, we believe a balanced market will have utilization rates between 90% and 95%.
Let me provide you with an overview of the actions that we're taking to drive revenue growth and reduce our cost structure. We recently signed a major long-term supply agreement with a customer that should help us fill out our open capacity and capture volume synergies from the Augusta acquisition.
We expect this volume to gradually ramp over the next several years. We have incorporated this volume into our 2025 assumptions that Sherri will discuss in a moment.
In addition, we're taking actions to reduce our cost structure. We're targeting $30 million to $40 million in cost savings in 2025 across SG&A and operations. We took a major step in January with a 10% reduction in all positions across the company. This action eliminated more than 200 positions in salaried and hourly roles. We're also targeting spend reductions in other areas, including contractors, professional services and maintenance.
We expect benefits from these initiatives to ramp through the year. We have also incorporated the impact of all these actions in our 2025 outlook.
Finally, we're continuing to explore ways to broaden our product offering to better service our converter customers. We are focused on compostability, increasing the recycled content of our products and lightweighting to name a few. We have product development efforts underway to deliver these solutions to our customers. These are near-term initiatives, and we expect that they will require modest capital investments that fit into our overall capital outlook.
We're also exploring options to diversify into additional paperboard substrates. This may include beverage carrier grades, white top or recycled board. These are larger and longer-term investments that will likely take 24 to 36 months to execute. We're kicking off market studies as well as engineering efforts to explore these options.
Let me conclude my comments by reiterating our view of the industry. We operate in an inherently cyclical industry driven by supply and demand. With demand being relatively stable, this balance is greatly impacted by changes in supply. And across the cycle, we would expect utilization rates to average around 90% to 95%, while in an up cycle, these rates can exceed 95% with increasing margins.
SBS is currently in a down cycle, which we believe to be a temporary condition until supply and demand come back in the balance. As we navigate the current environment, we're focused on actions that are within our control, including improving our operational performance, reducing cost and strengthening our product offering.
With that, let me turn the call over to Sherri for a more in-depth review of our financials.
Sherri Baker
Thank you, Arsen. As Arsen mentioned earlier, we delivered $21 million of adjusted EBITDA in the fourth quarter down from $63 million in the previous year. This decline was driven by 2 fewer months of contributions from the tissue business, which we divested on November 1.
The other sources of the decline were major maintenance expenses at our Augusta mill and lower paperboard pricing. This was partly offset by higher sales and production volumes from the addition of the Augusta mill and lower input costs.
As we turn to the full year 2024, adjusted EBITDA from total operations was $182 million, down from $281 million in 2023. The change in year-over-year results was predominantly driven by a $90 million impact from lower paperboard pricing. 2 fewer months of contribution from the tissue business also lowered our results versus 2023.
Partly offsetting these headwinds was additional volume as a result of our Augusta acquisition and some input cost deflation. With the completion of the divestiture of our tissue business, we generated significant value.
When recognized a gain on the sale of the business of $307 million in Q4, contributing significantly to our full year net income. We utilized the approximately $850 million of net proceeds to significantly delever our balance sheet and meaningfully reduce our debt. For full year 2024, we reduced net debt by $199 million and as of year-end, we have $275 million of notes outstanding due in 2028 and a net leverage ratio of 1.1x.
Turning to our outlook for the first quarter of 2025. In the first quarter, we expect to deliver $20 million to $30 million of adjusted EBITDA. We will not incur planned major maintenance outage costs in the first quarter, and we'll continue to match supply to meet demand.
We expect approximately $4 million to $5 million in higher energy costs in the quarter due to higher seasonal pricing and usage. This will also be our first full quarter as a paperboard only business with no tissue impact.
And as Arsen mentioned, we took initial actions to reduce our fixed costs in January, including a 10% reduction in all positions across the company. We expect the savings from these actions to ramp throughout the year. For full year 2025, we are making the following assumptions. We expect a continued demand recovery but with utilization rates remaining low as the industry absorbs new capacity that is forecasted to come online beginning in Q2.
Our internal utilization rate is projected to be around 85% with expected revenue of approximately $1.5 billion to $1.6 billion as we benefit from a full year of incremental Augusta sales volume. We are expecting that improved mill operating performance will offset pricing and inflation headwinds. We are also expecting less impact from weather-related events and other operational disruptions that we experienced in 2024.
In addition to improved manufacturing performance, we are targeting $30 million to $40 million of fixed cost reduction with actions that should translate to an overall $40 million to $50 million annual run rate. As previously announced, we are migrating to an annual major maintenance outage cadence, which we believe will lead to smaller, less costly and more predictable outages. We expect to incur $40 million to $50 million of outage costs with the bulk of the cost coming from Lewiston in Q3 and Augusta in Q4.
We expect capital expenditures of $80 million to $90 million, which includes our projected $70 million to $80 million of annual maintenance CapEx plus additional carryover spend from our large projects that we will complete this year.
As Arsen noted and we stated last quarter, we remain confident in a market cycle recovery and our ability to deliver mid-cycle margins in the 13% to 14% range with free cash flow conversion of 40% to 50% which would produce more than $100 million in annual free cash flows.
I will close with a brief overview of our capital allocation philosophy. Our first goal is to maintain and improve the performance of our assets. which will require approximately $70 million to $80 million of annual maintenance capital.
This excludes large strategic or replacement projects, which could add another $10 million to $20 million per year on average over the long term. Please note that these additional expenditures are episodic and come in large increments.
We will communicate these large projects ahead of time, just like we did with the recovery boiler project in Lewiston and the emissions project in Cypress Bend in 2024.
Second, we aim to maintain a strong balance sheet with a net leverage ratio of 1 to 2x through the cycle. We may temporarily go above or below that range to provide us with strategic flexibility. Third, we aim to return capital to shareholders when it provides a better return than reinvesting in the business.
Let me now turn the call back over to Arsen for closing remarks.
Arsen Kitch
Thank you, Sherri. I'll summarize where we are today. We completed 2 major strategic transactions in 2024 that transform Clearwater into a paperboard focused company. We're now focused on strengthening our position as an independent supplier of paperboard packaging products to North American converters. We will look for opportunities to expand our product offering, which may include new applications for existing paperboard as well as new substrates.
We have a well-invested asset base and a strong balance sheet that will help us weather this part of the industry cycle. We remain optimistic about the medium to long-term prospects for our industry and our company. As a result, we expect strong margins and cash flows through the cycle and aim to strategically deploy capital to create long-term shareholder value.
Finally, I'd like to thank our people for their efforts to remain focused on operating safely and providing excellent service to our customers during this time of change and transition. 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
(Operator Instructions)
Matthew McKellar from RBC Capital Markets.
Matthew McKellar
Hi, good afternoon. Thanks for taking my questions. Maybe first starting with -- just starting with the new agreements you mentioned, recognize that is supposed to ramp over several years. But are you able to help us get a better sense of how meaningful those incremental volumes could be over time or what the shape of that ramp-up curve looks like?
Arsen Kitch
Yeah, So we incorporated into our '25 volume assumptions. This was part of our assumption set that we were contemplating with the Augusta acquisition. So it's going to take several years to ramp, but it should provide us with enough volume to fill out our open capacity and capture Augusta synergies. And Matthew, if you recall, when we purchased Augusta, the mill was approximately 70% full, which provides us with approximately 150,000 to 200,000 tons of open capacity.
So I think it provides you a bit of an idea of what this could look like over the long run.
Matthew McKellar
Okay. That's helpful. And maybe one other kind of cleanup just in your opening remarks there. You talked about you're expecting improving operating performance to help offset the pricing and inflation headwinds which in your, I think, initial 2025 assumptions, you kind of dimensionalized is $40 million to $50 million year-over-year. Just wanted to, I guess, make sure I'm understanding the moving parts here.
Are you expecting, I guess, incremental benefits now versus your initial assumptions around how you run your mill system? Or I just wanted to make sure we're thinking about that message in the correct way.
Arsen Kitch
I think there's probably 3 areas to think about. I think the first area is improving operational performance. As you mentioned, that should offset that -- those price and cost headwinds. I mean we talked about $40 million to $50 million last quarter. The next set of improvement will come from, hopefully, fewer disruptions due to the major weather events that we experienced in 2024.
Hard to predict, but it's also hard to imagine having such 2 large events like we did last year in Lewiston and Augusta. And the third bucket is the $30 million to $40 million of cost reductions that we're pursuing. And we took actions here in January to capture some of those savings. So I think those are the 3 buckets of improvement that we're expecting in '25 versus 2024.
Matthew McKellar
That's very helpful. Maybe sticking with those headcount reductions and other fixed cost savings. Are you expecting much benefit from those initiatives in Q1? Or does that really start to show up in Q2?
Sherri Baker
It would be, I'd say, a modest amount that you'll see in Q1. It will start to ramp more through Q2 with the, I'd say, the bulk of the savings really happening in the second half of the year.
Matthew McKellar
And then just backing up a little bit here. If the U.S. applies tariffs to Mexico and Canada and they apply reciprocal tariffs in return, what do you think the impact to the SBS market would be? Or I mean, SBS and other grades you consider yourself competing against and then how are you thinking change if we also see tariffs on the European Union? I realize there's a lot of moving parts there and a lot of ambiguity, but just any high-level thoughts would be helpful.
Arsen Kitch
Yeah, So let me talk about how it potentially could impact us. We purchased some of our supplies from Canada chemicals and pulp would be 2 good examples. We do some export into Mexico and a little bit into Canada. So there will be an impact that we would feel, but it will primarily come from higher costs passed on to us from our chemical suppliers potentially and pulp suppliers.
Our goal in that scenario would be to pass on those cost increases to our customers. But it's kind of -- it's hard to predict how all those tariffs and the flows would be impacted by these tariffs. So that's how we think about impact on Clearwater. It's higher cost to us, which we would then pass on to our customers. We're primarily a domestic supplier.
So there could be some impact in the global flow of paperboard, but it's really hard to predict what that would look like.
Matthew McKellar
Okay. That's fair. And if I get one more in. Obviously, your balance sheet is in a great place now. And I recognize there are options you're considering that you could have to put some capital against over the medium term.
But where the stock is today, do you think you have more room to get aggressive on the share repurchases versus I think the $9 million you've done since November? Or how are you thinking about that option for capital allocation?
Arsen Kitch
I think what we said all along is we'd be opportunistic buyers of our shares when they trade at a sufficient discount to what we think our intrinsic value is. Our top priority remains investing in our assets and maintaining a strong balance sheet.
And as we see our cash flow generation in 2025, I think we'll make adjustments to the share buyback program. But again, it's -- we view this as an investment, but our top 2 priorities are investing back into our assets to maintain their competitiveness and also to maintain a really strong balance sheet.
Matthew McKellar
Okay. That's great. And if I could do one more, just looking at how demand has started the year here versus maybe where you saw things trend in Q4. Any comments on what you're seeing, any differences across folding carton versus cup and plates? Any other trends to call out here?
Arsen Kitch
Yeah, I think this is maybe a little bit anecdotal, but the conversations we're having with our customers are positive. I think they're expecting '25 to be a better year than '24. I would also tell you that some of our food service demand is more robust than our folding carton demand. In fact, we are on several of our machines -- on a couple of our machines, we are close to being sold out, especially on what I'd call extruded products, so think cup.
We're essentially being pretty close to being sold out. So it really depends on the category, but we're seeing some hopeful signs of demand continue to recover.
Matthew McKellar
Okay, great, thanks for all the color. I'll turn it back.
Arsen Kitch
Great, thank you.
Operator
There are no further questions at this time, and with that, ladies and gentlemen, that concludes your conference call. We thank you for participating and ask that you please connect your lines.
