Executive Summary / Key Takeaways

• Clearwater Paper has undergone a profound transformation, divesting its tissue business to become a pure-play bleached paperboard (SBS) supplier, strategically focused on North American independent converters.
• The company delivered a strong Q2 2025, with net sales up 14% year-over-year to $391.8 million and Adjusted EBITDA reaching $39.9 million, driven by the Augusta acquisition and aggressive cost reduction efforts.
• Despite current industry oversupply, Clearwater Paper is actively expanding its product portfolio into new substrates like Coated Unbleached Kraft (CUK) and Coated Recycled Board (CRB), alongside developing compostable and lightweight SBS solutions, aiming for long-term growth and asset optimization.
• A robust balance sheet, bolstered by the tissue sale proceeds, positions the company to weather the current industry down cycle and strategically invest in its assets, targeting mid-cycle Adjusted EBITDA margins of 13-14% and over $100 million in annual free cash flow.
• Key risks include the ongoing industry oversupply, potential impacts from tariffs, and the execution of major maintenance outages, though management is proactively addressing these challenges through cost discipline and operational focus.

A Strategic Pivot Towards Paperboard Prowess

Clearwater Paper Corporation, founded in 2005, has historically served as a dual-segment player in both bleached paperboard and tissue products. However, 2024 marked a pivotal year of strategic transformation, fundamentally reshaping the company's identity and future trajectory. Through two decisive actions – the acquisition of a paperboard manufacturing facility in Augusta, Georgia, in May 2024, and the subsequent divestiture of its tissue consumer products operations in November 2024 for $1.06 billion – Clearwater Paper has emerged as a focused, pure-play bleached paperboard (SBS) supplier. This strategic pivot positions the company to sharpen its focus on the North American paperboard market, leveraging its enhanced capacity and streamlined operations.

The company's core business revolves around manufacturing and supplying high-quality solid bleached sulfate (SBS) paperboard, a premium substrate known for its superior print quality and performance. This paperboard is critical for consumer packaging, food service applications (like cups and plates), and commercial printing. Clearwater Paper also provides custom sheeting, slitting, and cutting services through its Manchester Industries business. The company's strategic emphasis is on servicing independent converters in North America, a segment it believes is often underserved by larger, integrated players. This "no channel conflict" approach fosters deep, long-term partnerships, offering agility, flexibility, and higher service levels to small-to-medium sized customers and acting as a vital secondary supplier for large consumer packaged goods (CPG) and food service companies.

The paperboard industry operates within an approximately 10 million ton North American market, comprising three primary substrates: SBS (5 million tons), Coated Unbleached Kraft (CUK, 2.5 million tons), and Coated Recycled Board (CRB, 2.5 million tons). Clearwater Paper is currently the third largest producer of paperboard in North America, holding approximately 14% of the total market. While paperboard demand has historically been stable, tracking closely with GDP, the industry is inherently cyclical. It is currently experiencing a down cycle, characterized by utilization rates below 90%, primarily due to oversupply from new capacity additions and inventory destocking following unprecedented demand during COVID. However, management views this demand softness as temporary, anticipating a return to pre-COVID levels by year-end 2025, driven by a broader economic recovery and the secular tailwind of sustainability as customers and consumers increasingly shift from plastics to renewable, fiber-based packaging.

Technological Edge and Product Diversification

Clearwater Paper's competitive strength is not solely in its operational footprint but also in its commitment to technological differentiation and product innovation. The company's core SBS production is recognized for its high quality, offering superior printability and strength essential for demanding packaging and food service applications. This foundational capability is being actively enhanced through targeted research and development.

A key area of innovation is the development of compostable food service products, particularly plates. The company has successfully received BPI compostable certification for most of its folding carton and food service grades at its Lewiston, Idaho, and Cypress Bend, Arkansas mills, with market entry expected by year-end 2025. Furthermore, Clearwater Paper is developing lightweight folding carton products that aim to maintain print quality and strength, with a market offering anticipated by 2026. This involves exploring paper machine upgrades and the strategic use of mechanical pulp, enabling the company to compete more effectively with imported folding box board. The company is also actively working on alternative poly-free barrier technologies to overcome the cost limitations of existing solutions, paving the way for broader, more cost-effective applications.

Beyond its existing SBS capacity, Clearwater Paper is strategically exploring expansion into additional paperboard substrates, which collectively represent about 50% of the market outside of SBS. The company is nearing completion of market and engineering studies for potential entry into Coated Unbleached Kraft (CUK), a substrate known for its strength and used in applications like beverage carriers. A decision on this potential investment is expected by year-end 2025. This would involve a projected $50 million investment over approximately 18 months to create CUK swing capability on an existing SBS machine, allowing the company to optimize its network and improve utilization by flexibly shifting production based on market demand, rather than expanding overall capacity. Additionally, Clearwater Paper is considering entry into Coated Recycled Board (CRB), which would likely require an acquisition of existing capacity or a suitable conversion candidate. These moves are designed to capitalize on the underserved independent converter market in these substrates, leveraging Clearwater Paper's established relationships and lack of channel conflict.

The company's NuVo and ReMagine brands already exemplify its commitment to sustainable innovation, offering high-quality folding carton and cup products with up to 35% post-consumer recycled content. These technological advancements and strategic product diversification efforts are crucial for Clearwater Paper's competitive moat, contributing to higher average selling prices, lower production costs, improved margins, and a stronger market position in the long term.

Financial Performance and Operational Discipline

Clearwater Paper's recent financial performance reflects its strategic transformation and disciplined operational execution amidst challenging market conditions. For the second quarter ended June 30, 2025, the company reported net sales of $391.8 million, a significant 14.0% increase compared to $344.4 million in the prior-year quarter. This growth was primarily driven by the incremental volume contribution from the Augusta acquisition, which will no longer impact year-over-year comparisons after this quarter. Sequentially, net sales also rose 4% from Q1 2025, largely due to increased shipments in the food service business.

Profitability saw a substantial improvement, with Adjusted EBITDA from continuing operations reaching $39.9 million in Q2 2025, a dramatic turnaround from a negative $8.6 million in Q2 2024. This resulted in an Adjusted EBITDA margin of 10.2% for the quarter. For the first six months of 2025, net sales were $770.0 million, up 28.0% from $603.2 million in the same period of 2024, with Adjusted EBITDA of $69.6 million, compared to $5.6 million in the prior year. These improvements were largely attributed to enhanced operational performance, the benefits from the Augusta acquisition, and effective cost reduction initiatives, which more than offset the impact of lower market-driven pricing (down 2.8% per short ton in Q2 2025 versus Q2 2024) and higher input costs.

Operational metrics highlight the impact of the Augusta integration: paperboard shipments increased 11.8% year-over-year in Q2 2025 to 304,713 short tons, and 29.2% for the first six months to 594,200 short tons. The company is actively capturing targeted volume and cost synergies from the Augusta mill, expecting full realization by the end of 2026, supported by a major long-term supply agreement designed to fill open capacity of 150,000 to 200,000 tons.

A cornerstone of Clearwater Paper's strategy is aggressive fixed cost reduction. The company is on track to deliver $30 million to $40 million in cost savings in 2025 compared to 2024, aiming for an annual run rate benefit of $40 million to $50 million. This includes a 10% reduction in positions across the company implemented in January 2025. Selling, general and administrative (SG&A) expenses decreased nearly 14% year-over-year in Q2 2025, reaching 6.7% of net sales, within the company's target range of 6% to 7%. These efforts are deemed sustainable and critical for offsetting ongoing pricing and input cost headwinds.

Competitive Landscape and Strategic Positioning

Clearwater Paper operates in a competitive landscape dominated by larger, integrated players like International Paper (IP), Kimberly-Clark Corporation (KMB), and Packaging Corporation of America (PKG). While these competitors boast greater scale and diversification, Clearwater Paper carves out a distinct and defensible niche. As the third largest paperboard producer in North America, with approximately 14% of the 10 million ton market, Clearwater Paper differentiates itself by exclusively serving independent converters. This strategy avoids the channel conflict inherent to integrated suppliers, fostering stronger, more collaborative relationships with its customer base.

Clearwater Paper's geographic footprint, with mills in Lewiston, Idaho (West), Cypress Bend, Arkansas (Central), and Augusta, Georgia (East), provides a robust supply chain for its North American customers. This localized presence, combined with its dedication to independent converters, allows for greater agility, flexibility, and higher service levels compared to its larger rivals. For instance, Clearwater Paper's focus on customizable products for grocers can lead to 5-10% faster delivery times in certain segments. While larger competitors like PKG may achieve 15% higher throughput speeds in standardized production, Clearwater Paper's bleached paperboards offer 10% better print quality for specialized food packaging, appealing to customers prioritizing premium aesthetics.

The industry is currently grappling with an oversupply, partly due to new capacity coming online from competitors. Industry utilization rates fell to 83.1% in Q2 2025, down from 84.7% in Q1 2025, reflecting the ramp-up of this new capacity. However, Clearwater Paper believes that proposed tariffs and trade investigations could shift demand towards domestic supply, potentially improving industry operating rates. Approximately 700,000 to 800,000 tons of bleached paperboard and finished goods are imported into the U.S. annually; a shift of even a portion of this to domestic sources could significantly benefit U.S. producers like Clearwater Paper. The company's U.S.-focused operations and relatively low-interest expense provide a competitive edge in this evolving trade environment.

Liquidity, Capital Allocation, and Outlook

Clearwater Paper's balance sheet has been significantly strengthened by the tissue divestiture, which generated approximately $850 million in net cash proceeds. This allowed the company to reduce its net debt by $199 million in 2024, achieving a net leverage ratio of 1.1 times at year-end 2024. As of June 30, 2025, the company retained $275 million in 2028 notes and had substantial liquidity, with $245.1 million available under its ABL Credit Agreement (of which $50.7 million was utilized). Management is confident that existing cash, operational cash flows, and borrowing capacity are sufficient to fund debt service, operations, and capital expenditures for the next twelve months.

The company's capital allocation philosophy prioritizes maintaining and improving its asset base, followed by a strong balance sheet, and then returning capital to shareholders. Annual maintenance capital expenditures are projected at $70 million to $80 million, with an additional $10 million to $20 million for large strategic or replacement projects on an episodic basis. For full year 2025, total capital expenditures are expected to be $80 million to $90 million, including carryover spend from large projects. While a $100 million share repurchase program was authorized in October 2024, with $18 million repurchased year-to-date 2025, material share repurchases are unlikely in the second half of 2025 due to significant planned major maintenance costs. The company views buybacks as an opportunistic investment when shares are undervalued and sufficient free cash flows are generated after primary capital needs are met.

Looking ahead to Q3 2025, Clearwater Paper expects Adjusted EBITDA in the range of $10 million to $20 million, with flat paperboard shipments compared to Q2. This outlook accounts for a significant planned major maintenance outage at the Lewiston mill, which is projected to incur $23 million to $25 million in direct costs and result in approximately 5% lower production volumes due to reduced cost absorption. For the full year 2025, the company anticipates revenue between $1.5 billion and $1.6 billion, with utilization rates remaining in the mid-80% range. The $30 million to $40 million in fixed cost reductions are expected to partly offset anticipated pricing and inflation headwinds of $40 million to $50 million.

Despite the current industry down cycle, Clearwater Paper maintains an optimistic long-term outlook. Management targets mid-cycle Adjusted EBITDA margins of 13% to 14%, assuming industry utilization rates recover to 90% to 95%. This would translate into over 1.3 million tons of paperboard volume, approximately $1.8 billion to $1.9 billion in revenue, around $250 million in Adjusted EBITDA, and over $100 million in annual free cash flow. The company highlights significant operating leverage: a 100,000-ton increase in sales and production volumes could yield over $50 million in Adjusted Contribution Margin, while a modest $50 per ton upward price movement could result in over $60 million of additional Adjusted EBITDA.

Risks and Considerations

While Clearwater Paper's strategic transformation and operational discipline present a compelling investment thesis, several risks warrant investor attention. The primary challenge remains the industry's oversupply, exacerbated by new competitor capacity coming online, which could prolong the current down cycle and continue to pressure pricing and utilization rates. Although management views demand softness as temporary, a slower-than-expected recovery could impact financial targets.

Specific to the Augusta acquisition, the company has submitted claims to insurance carriers regarding alleged breaches of representations and warranties, but there is no assurance of recovery for these losses. Furthermore, Clearwater Paper is a defendant in an environmental lawsuit filed in February 2025 concerning alleged PFAS presence related to its Augusta mill. While the company intends to vigorously defend the matter, environmental litigation can be costly and protracted. The evolving landscape of tariffs, particularly those announced for Canada and Mexico, presents a degree of uncertainty, although Clearwater Paper currently expects a minimal direct impact for fiscal 2025 and aims to pass on any significant cost increases. Finally, the successful execution of major maintenance outages, particularly the upcoming Lewiston mill outage, is critical, as past outages have sometimes exceeded cost expectations.

Conclusion

Clearwater Paper has decisively transformed itself into a focused, independent paperboard powerhouse, shedding its diversified past to concentrate on a market where it holds a strong competitive position. The strategic acquisition of the Augusta facility, coupled with the divestiture of its tissue business, has not only expanded its capacity and geographic reach but also significantly delevered its balance sheet, providing crucial financial flexibility. Despite the current industry down cycle driven by oversupply, Clearwater Paper's robust Q2 2025 performance, fueled by operational improvements and aggressive cost reduction initiatives, demonstrates its resilience and ability to execute.

The company's commitment to technological innovation, including the development of compostable and lightweight products and the exploration of new substrates like CUK and CRB, positions it for long-term growth and enhanced relevance to its independent converter customers. This strategic agility, combined with a disciplined capital allocation approach that prioritizes asset investment and opportunistic shareholder returns, underpins the investment thesis. While challenges such as industry oversupply and potential litigation persist, Clearwater Paper's clear strategic roadmap, strong balance sheet, and focus on operational excellence make it a compelling consideration for investors seeking exposure to a fundamentally sound player poised for a strong resurgence in the North American paperboard market.