Clearwater Paper Corporation (CLW) Earnings

Management highlights

- Core Q2 Operational Milestones * Completed a major planned maintenance outage at the Lewiston, Idaho facility on time and on budget, with total direct expenses of $22 million * Completed restructuring of the Cypress Bend, Arkansas facility, reducing roles by approximately 20% and targeting annualized cost reductions of $8-12 million. This action balanced network production capacity to ~1.2 million tons per year matching current demand * Reduced net debt by $59 million in Q2 and $50 million year-to-date, supported by $26 million in cash tax refunds, $15 million in insurance settlement proceeds, and working capital improvements * Secured $15 million in additional settlement proceeds from Augusta acquisition representation & warranty insurance, bringing total recovered claims to $55.5 million, with $25 million remaining under the policy limit - Industry Condition Updates * Noted improving fundamentals for the SBS (solid bleached sulfate) paperboard market: year-to-date company shipments are up 6%, industry imports are down 11%, and total industry SBS production has fallen by ~300,000 tons since the start of 2026 * Industry SBS operating rates have improved from the low 80% range in Q1 2026 to a projected 88% in Q2 2026, with a forecast of over 90% by the end of 2026, driven by reduced production, lower imports, and substrate substitution from other materials * The company is currently oversold on extruded capacity that serves the cup market segment, with strong order backlogs across its production network - Strategic Product Portfolio Diversification * Launched Circa, a new line of 100% recycled CRB (coated recycled paperboard) manufactured by Green Paper at its Monterrey, Mexico facility, distributed through Clearwater Paper's North American sales network. Circa serves folding carton and beverage carrier end uses, and positions the company as an independent non-integrated supplier of CRB with no channel conflict for independent converter customers * Previously launched Elora, a lightweight paperboard product designed to compete with FBV * Is exploring lower-cost capital alternatives to add CUK (clay-coated unbleached kraft paperboard) production at the Cypress Bend facility. A full $60 million capital solution is engineered, but the company is testing a sub-$10 million alternative that would enable faster launch within annual capital budgets, with trials ongoing

Guidance

- Full-year 2026 guidance maintains total revenue in a range of $1.4 billion to $1.5 billion, with modest full-year shipment growth * Full-year 2026 adjusted EBITDA is expected to benefit from $10 million to $20 million in price improvement in H2 2026, partially offsetting a $70 million carryover negative impact from 2025 market price declines * Total direct major maintenance outage costs for 2026 are revised downward to $32 million to $35 million, from a prior estimate of $45 million to $50 million, driven by splitting the Augusta facility outage into 2026 and 2027 segments * Full-year 2026 capital expenditures are expected to be between $65 million and $75 million, with $20 million to $30 million allocated to maintenance and capital improvements * SG&A expenses are projected to remain toward the bottom of the 6% to 7% of net sales target range * Management expects 2026 full-year free cash flow to be positive, supported by insurance and tax proceeds and $20 million to $30 million in working capital improvements - Q3 2026 guidance projects adjusted EBITDA between $20 million and $30 million, with paperboard shipments roughly flat sequentially against Q2 and higher production. No major planned maintenance outages are scheduled for Q3 * The June $60 per ton price increase is expected to deliver $50 million to $60 million in annualized EBITDA improvement, with a $10 million to $20 million positive impact in 2026, and full run-rate benefits realized in early 2027 * A second $60 per ton price increase is scheduled to go into effect in August 2026, with additional EBITDA improvements expected in 2027 - Long-term guidance targets cross-cycle EBITDA margins of 13% to 14% and more than $100 million in annual free cash flow

Segment performance

Clearwater Paper reports as a single integrated paperboard segment for this quarter. Net sales for Q2 2026 were $375 million, with 8% year-over-year shipment volume growth offset by a 9% year-over-year decline in average market pricing. Reported net loss from continuing operations was $21 million ($1.33 per diluted share), which included $15 million in insurance proceeds. Adjusted EBITDA for the quarter was negative $8 million, within management's prior guided range. SG&A expenses totaled 5.6% of net sales, remaining below the company's 6-7% targeted range. Net debt was reduced by $59 million in the quarter, driven by working capital improvements, tax refunds, and insurance recoveries.

Risks & headwinds

- The ongoing Iran conflict has created upward cost pressure on oil-derived chemicals (particularly polyethylene) and transportation costs, with a total projected negative impact of $20 million to $25 million on full-year 2026 EBITDA, including $3 million to $5 million of additional pressure in Q3 2026 * Current industry margin levels remain approximately 10% below the level required to support long-term investment in the industry's capital-intensive assets, even after recent announced price increases * Approximately 50% of the company's volume is tied to the RSEI pricing index, and it takes multiple quarters for index price changes to flow through to the company's P&L, delaying the benefit of recent price increases * New 50% tariffs on Canadian imports to the U.S. have uncertain market impact, with potential for Canadian retaliation against U.S. exports and uncertain outcomes from ongoing USMCA negotiations * There is uncertainty around customer pre-buying activity ahead of announced price increases, which could pull future demand into earlier quarters and lead to weaker demand in subsequent periods * The success of new product lines such as Circa is uncertain, with near-term financial contributions still undetermined as the product gains market qualification and traction

Analyst Q&A

• Q: What is management's outlook for 2026 full-year free cash flow, and how much tax refund remains to be received? /

  A: Management reaffirmed that free cash flow will be positive in 2026, driven by $33 million in received insurance proceeds, $30 million in year-to-date tax refunds, and a $20 to $30 million working capital reduction that offsets planned capital and interest expenses. After receiving $26 million in Q2 refunds, the company now has a small net tax payable of roughly $5 to $6 million after accounting for outstanding reimbursable items, with only a small amount of additional receivables pending. What gives management confidence that recent volume growth is not just customer pre-buying ahead of price increases? / A: Management noted that while some pre-buying is historically typical ahead of price hikes, current order backlogs remain as strong as they have been in recent months. If there was significant pre-buying pulling demand forward, backlogs would be expected to decline, which has not happened. The company is currently struggling to meet customer delivery timelines, and management does not expect material order cancellations, believing customers are purchasing to meet actual current demand. What is the strategic purpose of the Circa CRB partnership with Green Paper, and what is the outlook for CUK capacity at Cypress Bend? / A: The Circa partnership aligns with the company's long-term strategy to become a full-service independent supplier of all paperboard substrates to North American independent converters. Roughly 20% of the CRB market is served by non-integrated suppliers, and Clearwater expects to potentially capture ~40,000 tons annually (10% of the non-integrated market) over time. For CUK production, the company is testing a lower-cost capital alternative (under $10 million, vs. a full $60 million engineered solution) to launch faster within annual capital budgets, and will not go to market until it is confident the product meets quality standards. How will the recent RSEI price increases flow through to the company's P&L, what will the impact be in H2 2026? / A: The first $60 per ton June price increase and RSEI's recent $40 per ton folding carton/$60 per ton cup stock increase will deliver $50 to $60 million in annualized EBITDA improvement, with a $10 to $20 million positive impact in 2026. Half of the company's volume is tied to the RSEI index, which takes multiple quarters to flow through to results, so the full annualized benefit will not be realized until early 2027, with most of the 2026 impact coming in Q4. How does the recent 50% tariff on Canadian imports impact Clearwater Paper? / A: The tariffs apply to Canadian paperboard imports but not market pulp, and only around 10% of the company's activity is cross-border Canada-U.S. trade, so the direct impact is limited. There is high uncertainty around potential Canadian retaliation against U.S. exports, the final outcome of ongoing USMCA negotiations, and how much Canadian export volume will actually be restricted, so it is too early to quantify the full market impact.