Prepared remarks
And discuss actions that were taken to reduce costs and improve our margins through the cycle. I will then turn the call over to Sherri to review the financial results in more detail and discuss our outlook. Turning first to highlights of our second quarter performance. Our shipment volumes were up this quarter, with strong 8% year-over-year growth. This was offset by a 9% year-over-year decline in market price as reflected in the RISI index. Adjusted EBITDA for the quarter was -$8 million, which was within our guidance range. We faced higher-than-expected transportation costs partly driven by the Iran conflict. We successfully completed the major maintenance outage at our Lewiston, Idaho facility on time and on target with total direct expense of around $22 million. We restructured our Cypress Bend, Arkansas facility resulting in a reduction of approximately 20% of rolls at the mill. This action is driving an expected cost reduction of $8 million to $12 million on an annualized basis. SG&A expenses were 5.6% of net sales in the quarter, remaining below our targeted range of 6% to 7%. We believe that these are industry-leading numbers that reflect our continued cost discipline. Last week, we announced the launch of CIRCA, our new CRB product line. This line will be sold and distributed through our network while being manufactured by Greenpaper. This is aligned with our strategy to offer a broader product range to our North American converter customers. Finally, we reduced net debt by $59 million in the quarter and by $50 million year to date, driven by improvements in net working capital, tax refunds, and additional insurance recoveries. Let me now provide you with some industry updates. We are seeing some meaningful green shoots in SBS industry conditions. Our shipment volumes are up 6% year to date. Industry imports are down 11%, continuing a trend that we saw last year. RISI has reflected approximately 300 thousand tons of reduced SBS production across the industry since the beginning of the year. We are seeing evidence of substitution into SBS from other substrates by customers and our integrated competitors. Finally, we also believe that some industry participants have been able to swing some of their SBS capacity to other paper grades. All of these factors are driving an improvement in SBS operating rates from the low-80% range in the first quarter of this year to a RISI forecast of 88% in the second quarter and over 90% by year end. As a result of substantial cost pressure and improving industry conditions, we implemented a $60-per-ton price increase that we announced in June. We have recently announced a second $60-per-ton price increase across all of our products that is to go into effect in August. In its latest monthly report, RISI has reported a $40-per-ton price increase on folding carton and $60 per ton on cup. We expect that our June price increase and the RISI price index changes will be reflected across all of our tons, with a $50 million to $60 million annual improvement in EBITDA. This does not take into consideration our second price increase or the additional increases in RISI's forecasting for later this year and into 2027. As a reminder, approximately 50% of our volume is tied to the RISI index, while the rest is subject to open market negotiation. It will take us a couple of quarters for the RISI index move to flow through our P&L. Even as industry conditions and pricing are improving, we continue to face substantial cost pressure and margin levels that do not support long-term investment in our industry's capital-intensive assets. We believe that our margins are still around 10% below where they need to be across the cycle to deliver returns on capital required to invest in our assets, even with a recent RISI-reported price improvement. Against this backdrop, we remain focused on the items that are within our control: primarily reducing costs and maintaining share with our customers. Since 2024, we have removed more than $60 million of fixed costs from our system, including restructuring all of our mills and lowering SG&A as a percent of sales. These actions have enabled us to weather this industry downturn while continuing to invest in our assets. As part of these efforts, we announced a restructuring of our Cypress Bend, Arkansas facility during the second quarter, resulting in a reduction of approximately 20% of rolls with expected annual savings of $8 million to $12 million. This action limits our network production to approximately 1.2 million tons per year, balancing supply with our current demand. We are currently sold out across our network and are in an oversold position on extruded capacity, which primarily serves the cup market. We believe that the actions we have taken through the down cycle will result in improved margins and cash flow as the industry recovers in the coming quarters. Lastly, I would like to provide an update on our strategic actions to further build and diversify our product portfolio. Last week, we announced the launch of CIRCA, a new line of CRB for folding carton and beverage carrier applications in the U.S. CIRCA complements our SBS portfolio and strengthens our ability to serve customers across more end-use applications. It is a high-quality recycled product designed to deliver dependable converting performance, reliable supply, and strong value for everyday applications. CIRCA was developed through collaboration with Greenpaper, a global producer of 100% recycled paperboard at its state-of-the-art facility in Monterrey, Mexico. By combining our market reach, support, and service with Greenpaper's manufacturing capabilities, we plan to deliver a high-quality CRB solution to independent converters in North America without the channel conflict that exists with current industry suppliers. This follows our launch earlier this year of Velora, a lightweight paperboard product that we believe can effectively compete with FBB. In addition to launching a CRB line, we continue to explore the possibility of producing CUK at our Cypress Bend facility to further meet demand for nonintegrated paperboard options and expand our offering with other substrates. While engineering work is complete for a full capital solution of approximately $60 million, we are exploring a lower-cost capital alternative that would enable us to launch a CUK product line sooner and within our typical annual capital spend. We are in trials at Cypress Bend with this potential solution, and we will share updates on these efforts in the coming quarters. These actions are aligned with our long-term strategy to diversify our product portfolio and become a preferred independent supplier of paperboard to North American converters. With that, I will turn the call over to Sherri to discuss our second quarter financial results in more detail and provide our outlook for the third quarter.
Thank you, Arsen, and good afternoon, everyone. Turning to our second quarter financial performance, we reported a net loss from continuing operations of $21 million, or $1.33 per diluted share, including $15 million of insurance proceeds. Net sales were $375 million with 8% shipment growth offset by a 9% decline in market pricing compared to the prior year. Adjusted EBITDA for the quarter was -$8 million with the year-over-year decrease impacted by the timing of our Lewiston major maintenance outage, lower market pricing, and impacts from the Iran conflict. The Lewiston outage was completed in June on time and on target with a direct cost of $22 million. SG&A was 5.6%, remaining below our targeted range of 6% to 7% of sales. In terms of the balance sheet, we reduced net debt by $59 million in the quarter and $50 million year to date, driven by a cash tax refund of $26 million, insurance proceeds of $15 million in the quarter, and a reduction in net working capital. Let's now move to some additional details on the impact of the Iran conflict. We continue to see upward pressure on both chemical and transportation costs. Oil-derived chemicals, particularly polyethylene, have experienced significant cost pressure. Transportation costs have been impacted by fuel prices and further exacerbated by tight supply due to driver shortages. The combined impact of these factors was approximately $5 million during the second quarter compared to the first quarter. We expect an additional $3 million to $5 million impact in the third quarter for a total of $8 million to $10 million. We expect some improvement in the fourth quarter as supply chains adjust to the new reality in the Middle East. In total, we believe that the conflict will negatively impact us by $20 million to $25 million this year. We will continue to monitor these developments closely and provide updates as appropriate. Let me also provide an update on our recovery efforts related to representation and warranty insurance. As a reminder, this is related to the Augusta acquisition where we believe certain representations and warranties made to us were either incomplete or inaccurate. In the second quarter, we received a third settlement payment of $15 million, of which $4 million was directly related to reimbursable operating cost. Year to date, we have recovered $32.5 million. In total, we have recovered $55.5 million with $25 million of the $105 million policy limit remaining. We will continue to pursue a final settlement on the policy. Let me now provide a brief update on our refinancing efforts. Our intention remains to extend maturities prior to our credit facilities going current. We are working with our existing bank partners to find the best solution that balances cost, liquidity, and maturities. We have ample liquidity on our balance sheet today, with levels higher than historical averages following the tissue divestiture and our actions to quickly delever the balance sheet. We remain committed to maintaining a strong balance sheet and liquidity that enables us to invest in our assets across the cycle. Turning now to our outlook for the third quarter, we expect adjusted EBITDA of $20 million to $30 million. We expect paperboard shipments to be roughly flat versus the second quarter with higher sequential production. We expect to begin seeing benefits from our price increase efforts and we have no planned major maintenance outages in the third quarter. As I mentioned earlier, we expect additional cost pressure from the Iran conflict primarily in chemicals and transportation. Let me briefly provide an update on our planned major maintenance outages this year. We now expect total direct cost of $32 million to $35 million for the year versus previous estimates of $45 million to $50 million. We have reduced the scope of our Augusta outage in the fourth quarter of 2026 to $5 million to $6 million and plan to complete the remaining work in the first quarter of 2027 with remaining spend of $10 million to $11 million. We do not expect to have another major maintenance outage in Augusta until the first quarter of 2028. We also plan to conduct a maintenance outage at our Cypress Bend facility in the fourth quarter with an estimated cost of $5 million to $7 million. For the full year 2026, our assumptions include revenue of $1.4 billion to $1.5 billion with modest shipment growth. We continue to expect a carryover impact from 2025 market-driven price decreases of approximately $70 million, partially offset by approximately $10 million to $20 million of price improvements in the second half of this year. We expect productivity and other cost reduction efforts to partly offset the cost increases that we are experiencing this year. To round out our 2026 assumptions, we expect capital expenditures of $65 million to $75 million, targeted working capital improvements of $20 million to $30 million, and maintaining SG&A toward the bottom of our targeted range of 6% to 7% of net sales. With that, I will turn the call back to Arsen for closing remarks.
Thank you, Sherri. To close, I want to emphasize that we operate high-quality assets, are executing well, and have longstanding strategic customer relationships that we are prepared to defend. We have taken critical steps to improve our financial performance including the restructuring of our Cypress Bend mill, disciplined pricing actions, and continued product portfolio diversification. These actions will improve our margins and cash flow in the long run, regardless of where we are in the industry cycle. We are starting to see positive signs of a recovery in SBS, and I remain confident that the industry will return to its historical performance levels. Over time, we believe we will deliver cross-cycle EBITDA margins of 13% to 14% and generate more than $100 million of annual free cash flow. With that, we will conclude our prepared remarks and open the call up for questions.
Questions and answers
We will now begin the question-and-answer session. Your line will remain open for follow-up questions. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of George Staphos with BofA Securities. Your line is open. Please go ahead.
Thanks very much. Good afternoon. Arsen, Sherri, I guess first question, and if you mentioned it and I missed it, I apologize: Do you have a view on what free cash flow will be for this year at this juncture given the momentum that you had in Q2 and some of the pricing? How would you have us think about that?
Yeah. We are expecting free cash flow to be positive. I think some of the bigger drivers are obviously the reps and warranties insurance of which we have received $32.5 million year to date this year, the tax payments that we have received, $30 million on a year-to-date basis, and then we are also targeting a $20 million to $30 million working capital improvement. So we think all of those combined, offset by the capital and interest estimates that we have given earlier, will result in positive free cash flow. We do believe that we have a clear line of sight to positive free cash flow this year.
Thanks, Sherri. On the tax refunds, what is left at this juncture? I want to say you said there is $27 million year to date and there was $23 million coming into the quarter, but I just want to make sure I have my numbers right.
Yeah. We got $4 million in the first quarter and we received $26 million in the second quarter. We do have, I am going to call it, a net payable of right around $5 million to $6 million just due to some of the pieces that we need to reimburse. Then we have a small amount of tax receivable that is still to come. So call it a small net payable.
Okay. Very good. Switching gears. So the maintenance outage expense for the year, can you talk about what some of the drivers were in terms of what drove a decent size reduction? And Arsen, you mentioned that bleached board demand is up; it was up 8% in the quarter, 6% year to date. What gives you comfort that it is not just buying ahead of warranted price hikes, based on what you said about reinvestment rates?
Let me, thanks George. Let me tackle the Augusta question first. So that is the biggest delta this year: we are splitting the Augusta outage into two pieces, doing the $5 million to $6 million this year and the rest early next year. We had a go/no-go decision on the Augusta outage, and to be perfectly frank, we were not confident that we were prepared to execute a full outage successfully, so we made the decision to do the most critical things in October and push the rest of it to January to give the team more time to prepare. We have also made some leadership changes at the mill, so we would like to give the new leaders at the mill an opportunity to impact this outage. Augusta has historically done their outages in Q1, so we are going to revert back to that timing moving forward. So the next outage will be in Q1 of 2028. From a demand perspective, we saw an 8% volume increase in Q2 and 6% year to date. I do not view it as a fluke. We have good growth, especially in our foodservice business. We have some strategic customers that we are growing with through new programs, new volumes that we are picking up. So we feel pretty good about where we are from a volume perspective. Our production right now is about 1.2 million tons per year. Our paper machine backlogs are strong, and we are actually oversold on extruded capacity, which goes into the cup segment.
I have got more questions, but I will turn it over to be fair, and I will see you back in queue. Thank you.
All right. Your next question comes from the line of Matthew McKellar with RBC Capital Markets. Your line is open. Please go ahead.
Hi, Arsen and Sherri. Thanks for taking my questions. Maybe first, just on the collaboration with Greenpaper: can you provide some updated perspective on what this does for you strategically, maybe talk about what kind of volumes you might anticipate through this agreement either immediately or over time? And then, I guess, adding that second grade to the portfolio, does that change at all how you are thinking about pursuing that CUK capacity and what that might mean for you strategically? I will leave it there. Thanks.
Yep. That sounds great. Good questions, Matthew. Thank you. If we rewind the tape to 2024, when we emerged as a paperboard-focused company, what we said is our goal is to have all substrates under our umbrella and to be able to offer a more complete solution to independent converter customers. The CRB collaboration: pretty excited about it. The facility that Greenpaper runs is outstanding. We think there is space in the CRB part of the industry for a truly independent supplier without any channel conflict. We think approximately 20% of that industry is nonintegrated. So it is hard to tell exactly how much volume we are going to capture, but let’s just say if we captured 10% of that nonintegrated portion, that would be somewhere in the 40-thousand-ton range. We are in the process of qualifying with our customers, and it is going to take a few months for us to get qualified and placed volume, but we are excited to have another tool in our toolkit for our independent customers. CUK is something that we think we can do on our existing assets. Cypress Bend is where we are looking. We have an engineered solution, a $60 million solution, that would essentially enable us to produce as much CUK as we want at Cypress Bend. We are developing a much lower-cost solution, call it less than $10 million, that would fit within our capital budget and allow us to come to market a lot sooner. What we would sacrifice there is probably some speed or cost efficiency, but what we get is speed to market that would allow us to see how well this product would do. The key for us is to make sure that we deliver a really high-quality product to the market. So we are in trials as we speak, and we are not going to go to market unless we are confident that we are able to deliver a solution that is as good, if not better, than what the competitive set offers.
Very helpful. Thanks very much. And then just focusing on CRB again: beyond the benefits of being able to serve your independent converter customers more effectively with the additional grade, should we expect a meaningful financial contribution from this new arrangement? Thanks.
I think it is too early to tell. It is essentially a distribution agreement. We will sell and distribute this product through our channels, so it is a bit too early for us to start talking about potential revenue and profit upside. Let's see how much traction we get in the market in the next couple of quarters.
Okay. Thanks. Fair enough. I will pass it back.
Thank you. Next question from the line of Sean Steuart with TD Cowen. Your line is open. Please go ahead.
Thanks. Hi, everyone. Arsen, first question on the volume guide: you are guiding to higher quarter-over-quarter production and flat shipments, which is a little surprising given you have taken some capacity out at Cypress. Maybe I am missing something in terms of inventory shift quarter to quarter because we do not get the production data directly. Can you give us some context on where you are squeezing tons out of the other mills? It seems you would be on a track to exceed the pro forma 1.2 million tons of capacity for volumes this year. Can you connect some of those dots through the back half of the year?
Yeah, absolutely, Sean. If you recall, we performed a major maintenance outage at our Lewiston facility in Q2. So what you should see is a bit of a bump in production without that downtime in Q3. That is really the extent of it. So sales would be relatively flat, but we would see a bit more production because we actually drew down our inventory in Q2 through the outage, so Q3 is rebuilding necessary inventories. We still have our net working capital goal reduction through the balance of the year, so the team is focused on that.
Okay. And then on that working capital piece, maybe a question for Sherri: you would seemingly be ahead of pace through the first half of the year with respect to the target for working capital declines, and I appreciate the seasonality. Could we qualify the overall objective as conservative at this stage?
I think $20 million to $30 million is the right number. You will see ebbs and flows in inventory. So you saw a reduction in Q2; you may see an increase in Q3. But we are focused on getting to the right inventory targets by year end. There are probably smaller pieces on other inventory buckets as well as accounts payable, so we think we are on track for that $20 million to $30 million reduction.
Okay. One last one: I appreciate the Q4 maintenance shutdown being split and that you will see some of that in Q1 next year. Is the only other outage the Q4 outage at Cypress next year? If so, do you have an estimate of direct cost for the maintenance program in 2027?
So next year, we will do the portion of the Augusta outage in January, we will do a Lewiston major maintenance outage in Q2, which will be probably similar or a little higher than this year given inflation, and then we would do a Cypress Bend outage in the Q3–Q4 timeframe. So next year's delta would be a smaller Augusta outage technically speaking, until we get to 2028 when we have all of our annual outages in full force.
Got it. Okay. All right. That's all I have for now. I appreciate the context. Thanks very much.
Thank you. Your next question comes from the line of Michael Roxland with Truist Securities. Your line is open. Please go ahead.
Yeah. Thank you, Arsen, Sherri, for taking my questions. Arsen, how's it going? Wanted to follow up on one of George's questions in terms of volume growth. You mentioned some new programs and volumes picking up. Does the volume growth you had this quarter reflect share gains against peers, or is the growth reflective of growth that is coming from existing customers?
It is a good question. Let me think through this. We saw about 6% year-to-date growth. We have not seen Q2 industry data yet; Q1 was flat. I would say there have been some capacity changes in the industry, so maybe that is impacting things. By definition, if our share is growing and the industry is not, we are picking up share. But more specifically, it is new and existing programs that are driving this growth. So it is hard to pinpoint whether there was one specific win against a competitor. We have seen some industry capacity shrink in the first half, and we have seen good robust growth in foodservice with some of our existing customers.
Gotcha. So with the existing programs, more or less foodservice, but you actually also have maybe some business wins as well. Would that be fair? The new business wins came from where exactly?
I think the growth mainly came from foodservice. Without going into too much detail, we are seeing quite a bit of good growth on the foodservice side. We have relationships with every major customer—good, long-standing relationships. In due course you pick up programs and you lose programs, and I think currently we are picking up programs.
And so when I think about the price weakness during the quarter— I think you said it was $1.08 thousand a ton, down from $1.1 thousand a ton in Q1 — is that all due to RISI pricing, or is some of that due to participating in a more competitive market to achieve some of those wins?
I think it is primarily the carryover from last year. RISI reflected about $100 a ton late in the year, and it takes us a couple of quarters for RISI to play through our P&L. So I think that is largely what you are seeing. There was a mixed impact: foodservice has various components including plates, so you have a bit of an ASP change because of a heavier foodservice mix.
Thanks, Arsen. One last quick question: it takes a couple of quarters for RISI to flow through the P&L. Can you help us frame how to think about the $40 that RISI reflected in July for folding carton and the $60 per ton in cup stock? What type of impact should we expect in Q3 and Q4? My sense is probably more Q4. Any color on how that flows through would be really helpful.
Okay. I'll give you some detail to help frame this. Starting at a high level, we said this year we are expecting a $10 million to $20 million impact from both our first price increase as well as what RISI reflected in their July report. We think that first increase and the RISI change would be applicable to all of our tons and would be a benefit of $50 million to $60 million on an annualized basis as we head into next year. That is the simplest way to think about it at a high level. About half of our volume is tied to RISI and the other half is spot or open-market negotiated. So 50% of our volume is tied to RISI. It is going to take a couple of quarters for that to play through, just like it did from 2025 into 2026. The open-market negotiations are arm-wrestling matches that our team is doing daily with customers. We expect the impact to start in Q3, be bigger in Q4, and by early next year we ought to see the full run rate of benefit across our RISI-linked tons and, over time, on negotiated tons as well.
That is very helpful. So to put a bow on it, you are expecting $10 million to $20 million impact this year and $50 million to $60 million annualized next year. Correct?
Yes. From an annualized perspective. It will start in Q3, be larger in Q4, and by early next year you should see the full run rate impact.
Your next question comes from the line of George Staphos with BofA Securities. Your line is open. Please go ahead.
Thanks very much. Hey, Arsen, hey, Sherri. I want to come back to the question I asked earlier on volume and how you gauge it relative to customers trying to be strategic with their buys and prebuying. You said you are sold out, which is good. But what does that actually suggest about whether customers are or are not prebuying? What gives you comfort that you are not borrowing some demand from Q3 or Q4 into Q2? And then I had a couple of questions on CIRCA.
George, that is a really good question and it is hard to answer unless you have good visibility into your customers' inventories as well as their customers' inventories. What we look at is backlogs. Our backlogs are as strong now as they were in the last few months. If there was a major prebuy effort in Q1 or Q2, you would start to see the backlogs trailing off. We are not seeing that. Again, I do not know what will happen tomorrow, but at the moment our backlogs are strong. We do not usually report our backlogs; it is more of a qualitative comment. Our backlogs are strong and, frankly, the team is struggling to deliver product on time to our customers right now.
Understood. There is no penalty from customers for canceling an order, though, right? So a backlog is as good as long as the customer has not canceled. Is there a penalty if a customer ordered from you and then said they did not need the order?
How would that work? I do not think there are firm penalties that exist as a standard. I would have to go back and recall the last time we had a large amount of orders canceled by customers. I do not expect cancellations at this point. I think customers are buying what they need. Historically, when price moves, you may see some customers prebuying ahead of increases, so that is not atypical. I just do not think we are seeing a major prebuy right now.
Okay. Arsen, fair enough. On CIRCA, strategically I understand why you are bringing it to market based on the value proposition you offered customers after selling tissue. On the other hand, CRB has experienced compression and it is one of the grades you have been battling against in the market. Why bring in CRB that is presumably attractively priced when ultimately you have the integration and value add in bleached board? Help me understand how CIRCA ultimately helps Clearwater and helps you improve your returns over time, particularly in bleached board.
George, I would say many of our customers buy CRB and CUK in addition to SBS. Right now, all we can sell them is SBS and they have to go to our competitors to buy the other two, often to integrated competitors where they are not a priority. We think having a more complete solution from an independent supplier has long-term value in this market. There are dynamics at play with substitution and various operating-rate trends across substrates, but in the long run our goal is to be able to deliver a more complete solution to our customers so they can buy all substrates from one independent supplier versus splitting up their buying.
Fair enough. I appreciate that. Lastly, what effect do you think some of the tariffs in the market might have on product coming into the U.S.? Given some checking around, we think maybe around 150 thousand tons from Canada and elsewhere of folding box might have a more difficult time coming into the U.S. What are you seeing in the market right now and how should we think about it from Clearwater's perspective?
Thanks, George. Tariffs have been notoriously difficult to predict. The latest 50% tariff on Canadian products as we read it would include paperboard imports from Canada but not market pulp. There is a bleached paperboard mill in Canada. It is hard to tell exactly what impact it will have on the North American market. Ten percent of everything we buy and sell is global, so these things have a more limited impact on us. We have to see how USMCA negotiation plays out and whether there will be retaliation or negotiations. There are a lot of moving pieces.
Okay. Fair enough, Arsen. I will turn it over.
Thank you. There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.