Executive Summary / Key Takeaways

• Clearwater Paper has undergone a significant transformation, divesting its tissue business and acquiring the Augusta paperboard facility to become a focused, independent bleached paperboard supplier in North America.
• The company is navigating a cyclical industry downturn marked by oversupply, yet strong operational execution and aggressive fixed cost reductions are helping to offset market pressures, with $50 million in savings projected for 2025.
• Strategic initiatives include expanding its product portfolio into compostable, lightweight, and barrier technologies within SBS, and exploring new substrates like Coated Unbleached Kraft (CUK) and Coated Recycled Board (CRB) to better serve independent converters.
• Despite a Q3 2025 net loss driven by a non-cash goodwill impairment, Clearwater Paper maintains a strong balance sheet with $455 million in liquidity and a net leverage ratio of 2.7x, prioritizing financial strength over immediate capital-intensive expansion.
• The long-term outlook remains optimistic, with management targeting 13% to 14% Adjusted EBITDA margins and over $100 million in annual free cash flow upon market rebalancing, supported by forecasted industry capacity reductions and potential import shifts.

A Transformed Foundation in North American Paperboard

Clearwater Paper Corporation (NYSE:CLW) has fundamentally reshaped its identity, emerging as a premier independent manufacturer and supplier of bleached paperboard to North American converters. This transformation, largely completed in 2024, saw the strategic divestiture of its tissue operations for $1.06 billion, followed by the pivotal acquisition of the Augusta, Georgia paperboard manufacturing facility. The Augusta acquisition significantly bolstered Clearwater Paper's capacity by approximately 70% and enhanced its geographic footprint, establishing a clear focus on the paperboard sector. This strategic pivot positions the company to capitalize on the robust demand fundamentals for sustainable and renewable packaging solutions.

The paperboard industry is inherently cyclical, driven by the delicate balance of supply and demand. Currently, the Solid Bleached Sulfate (SBS) market is experiencing a downturn, characterized by utilization rates in the low 80% range, significantly below the historical cross-cycle average of 90% to 95%. This oversupply is partly due to a competitor ramping up new SBS capacity, potentially adding up to 10% more supply to the industry. Such conditions have led to margin pressure and returns that are unsustainable for a capital-intensive industry. However, Clearwater Paper believes this to be a temporary condition, anticipating a rebalancing through forecasted capacity reductions, potential shifts from imports to domestic supply due to tariffs, and industry participants swinging capacity to other grades.

Clearwater Paper operates as the third-largest paperboard producer in North America, holding approximately 14% of a 10 million-ton market. The company's competitive positioning is rooted in its role as an independent supplier, which allows it to avoid channel conflict and prioritize serving independent converters—a segment management believes is underserved by larger, integrated players in other substrates like Coated Unbleached Kraft (CUK) and Coated Recycled Board (CRB). This focus on independent converters, coupled with its geographically advantaged manufacturing footprint, provides a distinct market advantage.

Technological Edge and Product Innovation

Clearwater Paper's strategic roadmap is heavily influenced by its commitment to technological differentiation and product innovation within the paperboard sector. The company's core technology centers on the efficient and high-quality production of Solid Bleached Sulfate (SBS) paperboard, a versatile material used across food service, folding carton, and liquid packaging applications. This foundational capability is being continuously enhanced through targeted research and development initiatives.

A key area of innovation is the development of compostable food service products. The company has achieved BPI compostable certification at its Lewiston and Cypress Bend mills for most of its folding carton and food service grades, with market entry expected by the end of 2025. This initiative directly addresses growing consumer and regulatory demand for environmentally friendly packaging, aiming to capture market share in a rapidly evolving segment. Furthermore, Clearwater Paper is developing lightweight folding carton products designed to maintain print quality and strength. This offering is anticipated to be in the market by 2026, potentially involving paper machine upgrades and the incorporation of mechanical pulp. The goal is to provide customers with more material-efficient solutions without compromising performance. The company is also actively working on alternative poly-free barrier technologies. While current poly-free products exist, their high production costs limit broader application. The ongoing R&D aims to develop scalable barrier technologies with a more favorable cost structure, which could unlock significant new market opportunities and enhance the company's competitive moat by offering superior, sustainable packaging solutions.

For investors, these technological advancements are crucial. They contribute to Clearwater Paper's competitive moat by offering differentiated, high-value products that meet evolving market demands for sustainability and performance. This can lead to stronger customer relationships, potentially higher average selling prices for specialized products, and a more resilient market position against competitors. By focusing on these innovations, Clearwater Paper aims to drive future financial performance through enhanced product margins and increased market relevance.

Financial Performance and Operational Resilience

Clearwater Paper's financial performance in the third quarter of 2025 reflected both the challenging industry environment and the benefits of its strategic transformation and cost reduction efforts. The company reported adjusted EBITDA of $18 million, landing at the higher end of its guidance range. Year-to-date, adjusted EBITDA from continuing operations significantly increased to $87 million, up from $26 million in the same period last year. This improvement was largely driven by the fixed cost reduction initiatives and the incremental contribution from the Augusta facility.

Net sales in Q3 2025 grew by 1% year-over-year to $399 million, propelled by a 3% increase in paperboard shipment volumes, though partially offset by lower market-driven pricing. For the nine months ended September 30, 2025, net sales reached $1,169 million, a 17.31% increase from the prior year, primarily due to the Augusta acquisition. However, the company recorded a net loss from continuing operations of $54 million, or $3.34 per diluted share, in Q3 2025. This loss was predominantly due to a $48 million non-cash goodwill impairment charge, which fully impaired its remaining goodwill. The impairment was attributed to sustained paperboard market softness, increased market capacity, and a decline in market capitalization relative to the book value increase from the tissue divestiture.

Operational efficiency remains a key focus. Cost of sales increased by 5% in Q3 2025 compared to Q3 2024, influenced by the timing of a major maintenance outage, but was mitigated by cost reduction activities. Input costs saw a mixed bag, with lower fiber costs offset by higher energy and chemical expenses. Selling, general and administrative (SG&A) expenses decreased by a notable 22% in Q3 2025 and 11% year-to-date, reflecting the success of planned cost reduction efforts. SG&A as a percentage of sales stood at 6.2%, at the lower end of the company's target range of 6% to 7%, demonstrating a lean operational structure.

Clearwater Paper's fixed cost reduction initiatives are exceeding expectations, tracking towards approximately $50 million in savings for 2025, surpassing the initial estimate of $30 million to $40 million. These savings are critical in offsetting margin pressure during the current industry downturn. The company also successfully completed all three planned major maintenance outages for 2025, with execution significantly improved over the prior year, reinforcing the benefits of an annual, more predictable outage cadence.

Liquidity and Capital Allocation Discipline

Clearwater Paper maintains a strong financial position, crucial for weathering the current industry cycle and funding future strategic growth. The company generated $34 million in cash from operations and approximately $3.5 million in free cash flows during Q3 2025. While net cash flow from operating activities for the nine months ended September 30, 2025, was a use of $7.30 million, this was primarily due to a $57 million payment for 2024 income tax liability related to the tissue divestiture.

The company's net leverage ratio was 2.7x in Q3 2025, with substantial available liquidity of $455 million. Management emphasizes that despite the increase in leverage due to the industry down cycle, aggregate debt levels have remained stable, underscoring a commitment to balance sheet strength. Capital expenditures for 2025 are projected to be between $85 million and $90 million. The ABL Credit Agreement, maturing in November 2027, provides a $375 million revolving loan commitment, with $213.90 million available as of September 30, 2025. Clearwater Paper was in compliance with its ABL covenants and expects to remain so, although it acknowledges risks if market conditions deteriorate.

Share repurchases are viewed as an opportunistic investment when shares trade at a discount and sufficient free cash flow is generated. The company repurchased $2 million of shares in Q3 2025, bringing the total to $20 million against its $100 million authorization. However, future repurchases are contingent on clear visibility to free cash flow generation, prioritizing asset investment and balance sheet strength.

Strategic Outlook and Growth Vectors

Clearwater Paper's outlook is shaped by a blend of cautious near-term expectations and optimistic long-term strategic initiatives. For Q4 2025, adjusted EBITDA is guided between $13 million and $23 million, reflecting anticipated seasonal declines in sales volumes and a 3% to 4% lower production volume, leading to less cost absorption. Energy costs are also expected to rise seasonally, and the Augusta major maintenance outage incurred $16 million in costs.

Looking to 2026, the company projects revenue of $1.45 billion to $1.55 billion, with a capacity utilization rate in the mid-80% range. Productivity and cost reductions are expected to offset 2% to 3% of cost inflation. Capital expenditures are forecasted at $65 million to $75 million, and a target of over $20 million in working capital improvements, primarily from inventory reduction, is planned for the second half of 2026. Notably, due to newly enacted tax legislation, Clearwater Paper does not expect to be a net cash taxpayer in 2026. RISI forecasts an increase in SBS folding carton prices by $30 per ton and cup stock by $40 per ton in the first half of 2026, predicated on an industry capacity reduction of approximately 350,000 tons.

A significant strategic initiative involves exploring diversification into additional paperboard substrates. The company is nearing completion of studies for adding Coated Unbleached Kraft (CUK) swing capability to its Cypress Bend, Arkansas mill. This $50 million investment, with a 12- to 18-month lead time, is projected to yield over 20% return by trading up lower-end SBS volume to CUK. The goal is to capture approximately 100,000 tons of CUK volume, utilizing about one-third of Cypress Bend's capacity. However, the final decision on this project is on hold to prioritize balance sheet strength, as it would require debt financing and would not generate cash flow for over two years. The company is also considering entry into Coated Recycled Board (CRB), likely through acquisition. These expansions aim to broaden the product portfolio and better serve independent converters in markets where they are currently underserved.

Risks and Challenges

Despite its strategic repositioning, Clearwater Paper faces several pertinent risks. The ongoing industry oversupply in SBS continues to exert pressure on margins and returns, making it challenging to support investments. While the company was in compliance with its ABL Credit Agreement covenants as of September 30, 2025, a deterioration in financial performance or market conditions could jeopardize future compliance.

Environmental litigation, specifically the PFAS-related lawsuit involving the Augusta facility, presents a legal and financial risk, though the company intends to vigorously defend itself. Labor contract negotiations at the Lewiston, Idaho facility, with a union agreement expiring in Q3 2025, could result in retroactive wage adjustments upon ratification. Furthermore, the uncertainty surrounding new U.S. tariffs, including a 10% universal baseline and 25% on certain imports from Canada and Mexico, could impact costs, although Clearwater Paper does not anticipate a significant effect on its 2025 financial results. The company also has an outstanding representation and warranty insurance claim related to the Augusta acquisition, with no assurance of recovery for alleged breaches.

Conclusion

Clearwater Paper Corporation stands at a pivotal juncture, having successfully transformed into a focused paperboard enterprise. Its strategic divestiture of the tissue business and the acquisition of the Augusta facility have laid a strong foundation for growth in the North American bleached paperboard market. While navigating a cyclical downturn characterized by industry oversupply and margin pressures, the company's disciplined approach to operational excellence, aggressive cost reduction initiatives, and a robust balance sheet position it for resilience.

The long-term investment thesis for Clearwater Paper is compelling, underpinned by its commitment to product innovation in compostable, lightweight, and barrier technologies, and its strategic exploration of new substrates like CUK and CRB to serve an underserved independent converter market. Management's guidance for 2026, including revenue targets and a focus on working capital improvements, signals a clear path towards improved financial health. As the industry rebalances through anticipated capacity reductions and shifts in import dynamics, Clearwater Paper's high-quality assets, lean cost structure, and expanding product portfolio are expected to drive significant free cash flow generation and strong Adjusted EBITDA margins, making it an attractive prospect for discerning investors seeking exposure to the evolving paperboard packaging sector.