Clearwater Paper Corporation Stock

Thank you for standing by. At this time, I would like to welcome everyone to today's Clearwater Paper Second Quarter 2026 Earnings Conference Call. [Operator Instructions]

I'd now like to turn the call over to Cheri Ellison, Investor Relations. Cheri?

Thank you, operator. Good afternoon, and thank you for joining Clearwater Paper's second quarter 2026 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 second quarter of 2026 were released shortly after today's market close, along with the filing of our 10-Q. 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 our supplemental information covering forward-looking statements. Rather than reading this slide, we incorporate it by reference into our prepared remarks.

With that, let me turn the call over to Arsen.

Good afternoon, and thank you for joining us today. I'll begin my comments with a brief overview of our second quarter results. I will also provide some perspectives on industry conditions and discuss actions that we're taking to reduce costs and improve our margins through the cycle. I'll 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 pricing as reflected in the RISI index. Adjusted EBITDA for the quarter was negative $8 million, which was within our guidance range. We faced higher-than-expected transportation costs, partly driven by the Iran war.

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 roles 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 at 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 300,000 tons of reduced SBS production across the industry since the beginning of the year. We're 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're implementing 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 going -- 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 that RISI is forecasting for later in the 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 the 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 the restructuring of our Cypress Bend, Arkansas facility during the second quarter, resulting in a reduction of approximately 20% of roles 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's a high-quality recycled option designed to deliver dependable converting performance, reliable supply and strong value for everyday applications.

Circa was developed through a collaboration with Greenpaper, a global producer of 100% recycled paperboard at a 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're 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're in trials at Cypress Bend with this potential solution, and we'll 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'll 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 negative $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 as a percentage of sales 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 costs. 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 with 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'll 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 long-standing strategic customer relationships that we're 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.

And we're 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'll conclude our prepared remarks and open the call up for questions.

[Operator Instructions] Your first question comes from the line of George Staphos with BofA Securities.

Appreciate all the details. Arsen, Sherri, I guess first question, and if you had 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 2Q and some of the pricing? Or how would you have us think about that?

Yes. 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've received $33 million year-to-date this year. The tax payments that we've received $30 million on a year-to-date basis. And then we're 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've given earlier, we do believe that we have a clear line of sight to positive free cash flow this year.

On the tax refunds, what's left at this juncture? I want to say you said there was $27 million year-to-date, and there was $23 million coming into the quarter, but I just want to make sure I've got my numbers right.

Yes. We got $4 million in the first quarter. We received $26 million in the second quarter. We do have, I'm 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 and then we have a small amount of tax receivable that's 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, I think, decent sized reduction?

And then 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's not just buying ahead of obviously warranted price hikes based on what you said about reinvestment rates?

Let me -- thanks, George. Let me tackle the Augusta question first. So that's the biggest delta this year is we are splitting the Augusta outage into 2 pieces, doing the $5 million, $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, I like the confidence that we were prepared to execute a good outage. So we made the decision to do the most critical things in October and push the rest of it to January and give the team a little bit more time to prepare. We've also made some leadership changes at the mill. So we'd 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're going to revert back to that date moving forward. So the next outage will be in Q1 of 2028. So I think that's the Augusta question.

From a demand perspective, so we saw an 8% volume increase in Q2. Year-to-date, we're seeing a 6% volume increase. I don't view it as a fluke. We have good growth with -- especially in our foodservice business. We have some strategic customers that we are growing with through some new programs, new volumes that we're picking up. So we feel pretty good about where we are from a volume perspective. We are -- our production right now is about 1.2 million tons per year. Our paper machine backlogs are strong, and we're actually oversold on extruded capacity, which is -- which goes into the Cup segment.

Your next question comes from the line of Matthew McKellar with RBC Capital Markets.

Maybe first, just on the collaboration with Greenpaper. Can you maybe 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 with time?

And then I guess with adding that second grade to the portfolio, does that change at all how you think about pursuing that CUK capacity and what that might mean for you strategically? I'll leave it there.

Yes. That sounds great. Good question, Matt. Thank you. So 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 our independent converter customers.

The CRB collaboration, pretty excited about it. I think it's an excellent product. We were -- the facility that Greenpaper runs is outstanding. We think there's 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's hard to tell exactly how much volume we're going to capture, but let's just make -- let's just say it's 10%. That would be somewhere probably in the 40,000 ton range if we were to capture 10% of that independent part of the market.

So we're in the process of talking to our customers about it, and it's going to take a few months for us to get qualified and place volume, but we're 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. So Cypress Bend is where -- is what we're looking at. We have an engineered solution, $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 that would allow us to come to market a lot sooner. What we would sacrifice there is probably some speed, some cost, but what we get is the 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're in trials as we speak in Cypress Bend, and we're not going to go-to-market unless we're confident that we're able to deliver a solution that's as good, if not better, than what the competitive set out there offers.

Very helpful. And then just focusing on CRB again, beyond the benefits of being able to serve your independent converter customers more effectively, I guess, with the additional grade, should we expect, I guess, a meaningful financial contribution from this new arrangement?

I think it's too early to tell. I think it's going to -- it's essentially a distribution agreement. We will sell and distribute this product through our channels. So it's 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.

Your next question from the line of Sean Steuart with TD Cowen.

Arsen, first question on the volume guide. You're guiding to higher quarter-over-quarter production, flat shipments, which is surprising a little bit given you've taken some capacity out at Cypress. Maybe I'm missing something in sort of inventory shift quarter-to-quarter because we don't get the production data directly. But can you give us some context on where you're squeezing tons out of the other mills? And you'd seemingly 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?

Yes, absolutely, Sean. So if you recall, we performed a major maintenance outage at our Lewiston facility in Q2. So we ought to see is a bit of a bump in production without having that downtime in Q3. That's really the extent of it. I think it's as simple as that. So sales would be, I would say, relatively flattish, but we would see a bit more production because we actually took down our inventory here in Q2 through the outage. So it's rebuilding just necessary inventories. We still have our net working capital goal reduction through balance of the year. So the team is focused on that.

Okay. And then on that working capital piece of it, 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 cap declines, and I appreciate there's seasonality to this, but could we qualify the overall objective as conservative at this stage?

I think $20 million to $30 million is the right number. I think you'll see ebbs and flows in inventory. So you saw, I guess, an ebb in Q2. You may see a flow in Q3. But we're focused on getting to the right inventory targets by year-end. There's probably smaller pieces on other inventory buckets as well as accounts payable. So we think we're on track for that $20 million to $30 million reduction.

Okay. One last one. I appreciate the Q4 maintenance shut is being split, and you'll see some of that in Q1 next year. Is the only other outage, the Q4 outage, I think it was at Cypress next year? And if so, do you have an estimate of direct costs for the maintenance program in 2027?

So let's see. So next year, so we will do this -- the portion of the Augusta outage in, let's call it, January. We will do a Lewiston major maintenance outage in Q2, which will be probably a similar level of spending as maybe a little higher than this year with inflation and everything, then we would do a -- at this point, we would probably do a Cypress Bend outage in Q3, Q4 time frame. So probably the delta would be a smaller Augusta outage next year, technically speaking, until we get to 2028 when we have all of our annual outages in full force.

Got it. Okay. All right.

Your next question from the line of Mike Roxland with Truist Securities.

I wanted to follow-up with you Arsen, on the answer to one of George's questions in terms of volume growth. You mentioned some new programs and volumes picking up. Did the volume growth you had this quarter reflect share gains against peers? Or is the growth reflective of growth is coming from existing customers?

It's a good question. So let me think through this. So we saw, call it, 6% year-to-date growth. We haven't seen Q2 industry data yet. Q1 was flat. I would say there's been some capacity changes in the industry, as you know. So maybe that's impacting that a bit. I guess by definition, if our share -- if our volume is growing and the industry is not, that would mean we are picking up share.

Maybe I'll just more -- comment more. It's existing customers, new and existing programs that are driving this growth. So hard for me to pinpoint whether there's some specific win we had against a competitor, but I think you have an industry capacity that has shrunk a bit through -- in the first half, and we've seen some good robust growth on foodservice with some of our existing customers.

Got you. So with the existing programs, it's more like on foodservice, but you actually -- it sounds like you also have maybe some business wins as well. Would that be fair? It sounds like new and existing business, right? So existing business you just mentioned within foodservice, the new business wins came from where exactly?

Listen, I think the growth came from foodservice. So without going into too much detail, I think we're seeing quite a bit of good growth on the foodservice side. We are -- we have relationships, I would say, with essentially every major customer, good relationships, long-standing relationships. So in due course, you pick up programs, you lose programs, and I think we're picking up programs.

Got it. And so when I think about the price weakness in -- during the quarter, with I think you said it was $1,077 a ton, so down from $1,100 a ton in 1Q. Is that all due to RISI pricing? Or is some of that due to maybe the more and more competitive market that you were participating in to help you get some of the -- achieve some of those wins?

I think it's primarily the carryover from last year. So if you recall, RISI reflected about $100 a ton late in the year. And we've said previously, it takes us a couple of quarters for RISI to play through our P&L. So I think that's what you're largely seeing. There was also a bit of a mix impact. Foodservice has various components, including things like plate. So you have a bit of an ASP change because of a heavier foodservice mix.

Got it. One last question quickly. Just going back to -- you mentioned, obviously, 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 in terms of falling carton and the $60 per ton in cup stock, what type of impact should we expect in 3Q and 4Q? My sense is it's probably going to be more of a '27 event. But just any type of color you can provide around how that flows through in 2H would be really helpful.

Okay. I'll give you a little bit of detail here to help through this. Maybe starting at the high level. What we said is this year, we are expecting $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, that first increase and the RISI change will be applicable to all of our tons. And that would be a benefit of $50 million to $60 million on an annualized basis as we head into next year.

So I think it's probably the best way to start thinking about it at a high level. If you drill into it a bit, about half of our volume is tied to RISI. The other half is spot negotiated or open market negotiated. So 50% of our volume is tied to RISI. It's going to take a couple of quarters for that to play through just like it did from '25 into '26. The open market negotiations, those are, frankly, arm wrestling matches that our team is doing on a daily basis with our customers.

Does that help answer your question? Or can I go into more detail?

No, that's very helpful. But you're expecting -- to put it all, you're expecting $10 million to $20 million impact this year from the...

Yes. That's right.

$50 million to $60 million on an annual basis.

I think it's going to start in Q3, probably bigger impact in Q4. And I would expect by early next year, we ought to see the full run rate of benefit across all of our RISI tons as well as our open market tons.

Your next question comes from the line of George Staphos with BofA Securities.

So 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 buying -- prebuying. And you said you're sold out, and that's good. But what does that actually suggest about whether customers are or are not prebuying? And what gives you comfort that you're not borrowing some demand from third quarter, fourth quarter into second quarter? And then I had a couple of questions on Circa.

Yes. George, it's a really good question. It's a hard one to answer unless you have real good visibility into your customers' inventories as well as their customers' inventories. I would say we see price changes flow through in a lot of times all the way down to the customer of the actual product.

What I would say is the numbers we look at is backlogs, right? So our backlogs are as strong now as they were the last few months. So if there was a major prebuy effort in Q1, Q2, you would start to see the backlogs trailing off. We're not seeing that. Again, I don't know what's going to happen tomorrow. But at the moment, our backlogs are strong. We don't usually report our backlogs, so it will be more of a qualitative comment. Our backlogs are strong, and frankly, the team is struggling to deliver products on time to our customers right now.

Understood. There's no penalty though for canceling an order, right? So backlog is as good as long as the customer hasn't canceled, right? Or there's a penalty if I ordered from you and then said, I didn't need the order. How would that work?

I mean, I don't think there's some firm penalties that exist. I don't think that's how we normally operate. I may have to go back in time and try to recall last time, we had a massive amount of orders canceled by customers. So I don't have a good answer for you there, George.

I don't expect, at this point, cancellations of orders. I think customers are buying what they need to buy. Now historically, when price does move, you would see some customers potentially prebuying ahead of price increases. So that is not an atypical pattern. I just don't know if I'm seeing it right now.

Okay. No, Arsen, that's fine. I just want to make sure I understood the parameters.

Now with Circa, strategically, on the one hand, I understand why you're bringing it into the market based on the original value proposition you offered your customers once you sold off tissue. On the other hand, though, because there's been this compression that's occurred with CRB, and that's been one of the grades you've been, to some degree, battling against in the market, why would you bring in CRB that's presumably pretty attractively priced when ultimately you've got the integration and the value add, if you will, in bleach board? What's -- help me understand how Circa ultimately helps Clearwater and helps you improve your return over time, particularly in bleach board?

Yes. George, I would say many, 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 2 and frankly, go to our integrated competitors to buy the other 2 where they're not going to be a priority. So we think having a more, call it, wholesome solution by an independent supplier to independent customers has value in this market over the long haul.

I know there's dynamics at play right now with substitution and various operating rate trends across the various substrates. But I think in the long run, our goal is to be able to deliver a more complete solution to our customers where they can buy all substrates from us from an independent supplier versus splitting up their buying.

Okay. Fair enough, Arsen. I appreciate that.

And then lastly, what effect do you think some of the tariffs in the market might have on product coming into the U.S. given some of the work that we did and checking around, we think maybe 150,000 tons from Canada and elsewhere from folding box might have a more difficult time coming into the U.S. Have us think about it from Clearwater's perspective, what are you seeing in the market right now?

Thanks, George. Tariffs have been notoriously difficult to predict and the impact of those tariffs. So the latest 50% tariff on Canadian products, it will -- it does -- the way we read it, it will include paperboard imports from Canada, but not market pulp. There is a SBS -- there's a bleached paperboard mill up in Canada. Hard to tell exactly what impact it has on the North American market.

We -- about 10% of everything we buy and sell is global. So these things have a more limited impact on us. And -- we're yet to see how the USMCA negotiation plays out, and we're yet to see if there will be any retaliation from Canada for products coming up from the U.S. or if these tariffs will go into effect or if they'll get negotiated. So there's just a lot of moving pieces.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.

Thank you for standing by. At this time, I would like to welcome everyone to today's Clearwater Paper First Quarter 2026 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Cheri Ellison, Investor Relations. Cheri?

Thank you, Ben. Good afternoon, and thank you for joining Clearwater Paper's First Quarter 2026 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 first quarter of 2026 were released shortly after today's market close, along with the filing of our 10-Q.

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 our supplemental information covering forward-looking statements. Rather than reading this slide, we incorporate it by reference into our prepared remarks. With that, let me turn the call over to Arsen.

Good afternoon, and thank you for joining us today. I'll begin my comments with a brief overview of the first quarter. I will also provide some perspectives on industry conditions and outline the actions that we're taking to navigate the current business environment. I'll then turn the call over to Sherri to walk through the financial results in more detail and discuss our outlook.

Let's start with the highlights from our first quarter as well as a few updates from April. Our shipment volumes were up 5%, which was more than offset by lower market pricing, resulting in net sales being down 5% compared to the prior year. We increased share in a highly competitive market environment with continued growth in foodservice. Adjusted EBITDA for the quarter was $2 million, slightly above our guidance of breakeven. This included approximately $15 million in weather-related impacts at our mills earlier in the quarter.

Our team effectively navigated difficult operating conditions with a weather event in the Southeast. We minimized costs, protected our assets and were able to service customers with minimal disruptions. This quarter, we launched Velora, a new lightweight folding carton paperboard brand that is engineered to compete with imported FBB. We restructured our Cypress Bend, Arkansas facility, resulting in a reduction of approximately 20% of roles at the mill. We're planning to run the mill at reduced operating run rates until industry conditions improve.

This action will drive an expected cost reduction of approximately $8 million to $12 million on an annualized basis. Our Lewiston, Idaho union ratified a new 4-year labor agreement. This agreement combines competitive wages and benefits for our employees with significant additional flexibility in how we can operate the mill.

Finally, we received $17.5 million in additional representation and warranty insurance proceeds during the first quarter for a total of over $40 million. We continue to pursue claims against $50 million of the remaining policy limit.

Let me now provide some perspectives on industry conditions and the impact on our business. SBS shipments were nearly flat in the first quarter of 2026 versus the first quarter of 2025, outpacing CRB and CUK, which declined by around 3%. SBS shipments are forecasted to grow by 4% in 2026. We believe that at least part of the strength can be attributed to lower imports and substitution effects as SBS is now the low-cost paperboard substrate on a per square foot basis.

SBS is highly versatile with diversified end-use applications ranging from high-end folding cartons used in pharmaceuticals and cosmetics to food service items for at-home or QSR consumption. From a supply perspective, we started the year with industry capacity substantially exceeding demand by more than 10%. With recent changes in industry capacity, including our restructuring of the Cypress Bend mill, we now believe that the excess industry supply has been reduced by approximately 50%.

RISI is forecasting additional net capacity reductions by the end of this year, resulting in industry operating rates of around 90%. As we've stated previously, margins should start improving to historical cross-cycle averages with industry rates exceeding 90%.

Bleached imports were down by 12% in 2025 versus 2024, driven by higher tariffs and a weaker dollar. European producers are facing additional cost pressures this year with higher energy, chemical and transportation costs driven by the conflict in the Middle East. RISI is forecasting total bleached imports to decrease by an additional 12% in 2026 versus 2025. In terms of our business, we're experiencing solid demand with stability in folding carton and strength in foodservice, particularly in cup and plate.

Backlogs across our paper machines are strong, and we are sold out on extruded products such as cup and polycoated folding carton. With our mill restructuring, we have customer demand to run full across our 3 mill network for the remainder of the year. While we're seeing some positive signs of both demand and supply, current industry operating rates are driving margins that don't produce the necessary cash flow or returns to reinvest in our capital-intensive assets in the long run.

In fact, we believe that today's margin levels are resulting in negative operating cash flow after the CapEx that's required to maintain these assets. This is simply not a sustainable position for us to be in. Against this backdrop, we remain focused on controlling what we can control while anticipating a recovery in industry conditions. First, we're continuing to drive costs out of our business and focusing on operating our assets efficiently. Second, we're protecting share with our strategic customers by delivering the right combination of quality, service and cost. And third, we're looking for ways to recover the increased costs that we've experienced, including the most recent impacts from the Middle East conflict.

Let me provide a bit more context on our actions at Cypress Bend. We reduced roles at the mill by about 20% and improved the mill's cost structure by an expected $8 million to $12 million per year. We're prepared to run and reduce production rates until SBS industry conditions improve or we invest in other capabilities such as CUK. Cypress Bend remains a well-invested and cost-competitive mill that provides us with the optionality to grow in the long run.

It also provides our customers with North America's largest independent paperboard mill network with capabilities to produce a full range of SBS products. In total, we are now focused on producing and profitably selling approximately 1.2 million tons of SBS across all 3 of our mills versus our stated capacity of around 1.4 million tons.

In addition to the industry oversupply that we're facing, we're also experiencing significant cost pressures on certain chemical wood and diesel costs because of the conflict in the Middle East. Altogether, we're projecting $3 million to $5 million of quarterly headwinds from these cost increases until the conflict is resolved and global supply chains have returned to normal.

With these additional cost headwinds and due to our sold-out position in our cup business, we have revised our previously announced price increase on cup and other extruded products to $60 per ton effective in May. This increase impacts approximately 70,000 tons of our extruded business not tied to the RISI price index. The rest of our cup and extruded business, which is approximately 150,000 tons, will move within a couple of quarters of any change to the RISI price index. We see momentum in our cup business, while we continue to face a highly competitive environment in our non-extruded grades such as folding and plate.

We announced a $50 per ton increase on these grades in March, but we found implementation to be challenging given our industry's current oversupply position. We believe that our margins on these grades aren't sustainable in the long run, and we'll continue to look for ways to recover the cost pressure that we faced over the last couple of years.

Before I turn the call over to Sherri, I'd like to briefly update you on our strategic initiatives to further build and diversify our product portfolio. We have successfully launched a new lightweight paperboard product line called Velora. We believe that Velora will compete effectively with FBB and support a wide range of general use packaging applications. While we believe that this type of product has a place in the market, it is not a replacement for a high-quality SBS offering. We continue to evaluate our CUK investment decision as we navigate current industry conditions.

The engineering work is complete with an estimated investment of approximately $60 million and an execution time line of roughly 12 to 18 months. As a reminder, this project would take place at our Cypress Bend, Arkansas mill, and we would target 100,000 to 150,000 tons of CUK volume with this conversion while maintaining our ability to produce SBS. In addition to our focus on lightweight SBS in CUK, we are evaluating opportunities to add CRB to our product portfolio. We believe that offering a full range of paperboard substrates positions us to better meet the needs of our independent converter customers and expand our share of their overall paperboard spend.

With that, I'll turn the call over to Sherri to discuss our first quarter financial results in more detail and provide an outlook for the second quarter.

Thank you, Arsen. Turning to our first quarter financial performance. For the quarter, we reported a net loss from continuing operations of $13 million or $1.29 per diluted share. Our results include $17.5 million of insurance proceeds. Net sales were $360 million, down approximately 5% compared to the first quarter of 2025. Higher shipment volumes were more than offset by lower SBS market pricing. Adjusted EBITDA was $2 million, slightly above our guidance, which contemplated breakeven performance.

As Arsen mentioned earlier, the weather event at our Augusta and Cypress Bend mills impacted EBITDA by approximately $15 million in the quarter. SG&A as a percentage of sales remained below our target range of 6% to 7%, reflecting continued cost discipline. We believe that this is best-in-class in our industry. The conflict in the Middle East is putting pressure on chemical, wood and transportation costs.

As Arsen mentioned, we believe that these additional costs will be in the $3 million to $5 million range per quarter. Oil-derived chemicals have experienced increased price volatility and transportation costs have been impacted by higher fuel prices. We are working to mitigate these impacts through targeted pricing actions and operational productivity, but these dynamics remain a near-term headwind to margins. We will continue to monitor developments closely and provide financial updates as appropriate.

Let me also provide an update on the insurance recovery related to the Augusta acquisition. As a reminder, we obtained representation and warranty insurance with a $105 million limit through multiple insurers. We identified certain matters that were not consistent with representations made to us at the time of the transaction and notified the insurers of these breaches. In the fourth quarter, we received an initial settlement payment of $23 million, including approximately $6 million related to direct operating costs occurred in 2025.

In the first quarter, we received a second settlement payment of more than $17 million, of which approximately $6 million relates to direct operating costs incurred in Q1 of fiscal 2026. As of March 31, approximately $50 million of the policy limit remains. We are actively pursuing the recovery of the remaining claim amount with our insurers, and we'll provide updates in future quarters.

Turning now to our outlook. For the second quarter, we expect adjusted EBITDA in the range of breakeven to negative $10 million. This is being driven by our planned major maintenance outage at our Lewiston facility, which will have a direct cost of $22 million to $24 million. In addition, we expect $5 million to $7 million of higher input costs, including the impact from the Middle East conflict. Partly offsetting those headwinds will be benefits of our cost reduction initiatives and seasonal uptick in shipment volumes.

Our full year assumptions remain as follows: revenue of $1.4 billion to $1.5 billion, flat to modest shipment growth, approximately $70 million carryover impact from 2025 market-driven price decreases, excluding the effect of recent pricing actions or future RISI price index movements. productivity gains, including carryover from 2025, offsetting 2% to 3% of input cost inflation.

Major maintenance outage costs of $45 million to $50 million, consistent with 2025. Please note that the Cypress Bend outage has been moved from Q2 to Q4 of this year. Approximately $6 million of benefit related to the Cypress Bend restructuring, capital expenditures of $65 million to $75 million, targeted working capital improvement of $20 million to $30 million and SG&A maintained towards the lower end of our target range of 6% to 7% of sales.

Importantly, we believe that we have a path to breakeven or better free cash flow for the year. This includes impacts from the cost actions that we are taking, insurance recoveries, a tax refund that we are expecting and reductions in net working capital. As Arsen mentioned earlier, we are focused on controlling the controllables even as we work through a challenging industry environment.

Let me wrap up with a few comments on our balance sheet. We have ample liquidity available to us and are managing to keep our overall debt levels relatively flat. Our 2020 notes go current in the second half of 2027, while our ABL goes current later this year. It is our intent to extend or refinance both instruments before they go current. We are in active discussions with our banking partners, and we'll provide an update in the coming quarters.

With that, I'll turn the call back to Arsen for closing remarks.

Thank you, Sherri. I'm proud that our team has continued to maintain its focus on running safely and effectively while reducing costs across the business. We are a lean and agile company, which is an advantage regardless of what part of the industry cycle that we're in. We have taken important steps to improve our performance, including restructuring the Cypress Bend mill, implementing pricing actions and advancing our product portfolio diversification.

In closing, I'd like to summarize our key priorities for the balance of this year. First, we will continue to focus on operating efficiently and reducing costs. Second, we will protect share with our strategic customers. Third, we're taking actions to be cash flow neutral this year. And finally, we're planning to refinance or extend maturities on our existing debt. I remain confident that this cycle will turn.

Over time, we believe we will return to cross-cycle EBITDA margins of 13% to 14% and generate more than $100 million of annual free cash flow. Most importantly, we will continue to make decisions that drive long-term shareholder value while supporting our customers, employees and the communities in which we operate.

Thank you for joining us today. We'll now open the call up for questions.

[Operator Instructions] Your first question comes from the line of Sean Steuart with TD Cowen.

Arsen, I want to start with the Cypress Bend restructuring. So you're cutting roll production 20% but the indication was you don't expect any overall impact on shipment volumes, which I suppose implies you'll be adding volume at the other mills. I guess the question is, should we consider this to the extent of Clearwater's supply response to a difficult market environment?

And if that's the case, I guess your assessment of the overall industry cost curve, you referenced what RISI is forecasting for capacity cuts through the remainder of the year, your impression of how steep that cost curve is and how quickly the supply response could arrive?

Yes. Thanks, Sean. There's a couple of questions in there, so let me try to tackle them all. So at Cypress Bend, we've reduced our roles at the mill by 20%, so headcount and other and open roles in addition to other costs. So that should drive $8 million to $12 million of annual savings at the mill. We intend to run the mill at reduced operating rates until industry conditions improve.

We are -- given that strategy, we have about 1.2 million tons of volume that we're comfortable with. And at this point, we have about 1.2 million tons of annual production that we're comfortable with after taking this action. So we're now going to be focused on ensuring that we produce that 1.2 million tons and we sell it profitably to our customer base. So given that change, we believe that we're fully utilized for balance of the year.

In terms of broader industry changes, if you look at the first half, the actions that have taken place have reduced production or capacity by 280,000 to 300,000 tons. And if you recall, we stated that this industry is oversupplied by 500,000 to 600,000 tons. So we think that's about 50% of that oversupplied. The industry is forecasted to grow by 4%, which should add a couple of hundred thousand tons of demand and imports are forecasted to come down by 12%, which is probably going to be another 50,000 tons or so.

So if you pull all those things together, RISI is forecasting a 90-plus percent utilization or industry operating rate by balance of the year, which should put us on a path back to a recovery.

Okay. Okay. I think I get that piece of it. Second question is for Sherri. On the free cash flow bridge commentary, I think I understand the insurance piece of it. But you mentioned the tax refund coming. Can you give us perspective on how much that will be and specific quarterly timing there?

Yes. So the overall for the full year would be $27 million to $28 million, of which we received $4 million in the first quarter. So you've got roughly $23 million remaining for the balance of the year.

Okay. And one last question, Sherri. The debt rating downgrade from Moody's, does that have any real bearing on your interest -- your borrowing costs effectively right now? Or is it more subject to future credit facility negotiations, that type of thing?

It would be the latter. It would be more applicable to any future refinancings.

Your next question comes from the line of Matthew McKellar with RBC.

First for me, I think you mentioned $3 million to $5 million per quarter of input cost pressure until the conflict is resolved. Is that essentially a comparison of where costs are today versus where they were in February? And does that embed any potential recovery against higher costs that I think you mentioned, whether that be through price or other mechanisms? And if you could speak to what those might be, that would also be helpful.

Yes. No, good question. So first, yes, it is a sequential comparison. So it's versus where we were at, call it, a month or 2 ago before the conflict started. There's really 3 buckets of cost. Number one is chemicals. Number two is transportation, diesel. And the third one, maybe a little surprising was wood. We think approximately 20% of wood costs actually have to deal with transportation to get the wood out of the forest. So we are seeing some cost pressure on wood as well related to higher diesel costs.

So yes, $3 million to $5 million sequential. In terms of recovery, listen, we're focused on cost reductions. So the Cypress Bend restructure should deliver about $2 million a quarter of cost reduction sequentially. As I mentioned on the call, we're also -- we're in the process of implementing a $60 price increase on our extruded products and our extruded products are polycoated.

So they use more chemicals than non-extruded products for the polycoating. So there we're facing some unique cost pressures on those grades. And we're also sold out on those grades. So I think between the cost reduction in Cypress Bend and the price increase, we are attempting to recover at least some of that cost increase.

Great. That's helpful. Then just a quick one on Velora. Could you just help us maybe understand how that fits into the product portfolio? Are you seeing that uptake from customers who had been on FBB so far? And where would your expectations be in terms of what share of your folding carton and foodservice volumes that product would eventually represent?

Good question as well. So we -- I view Velora, like as you'd imagine, it's another tool in our toolkit to work with our folding carton customers. They're obviously -- they're participating in bids and specs with their customers. So we want to put another tool in their toolkit. It is a grade that includes mechanical pulp. It is a lightweight grade. It is not a replacement for SBS, but it's meant to compete with FBB.

So if our customers' customer is looking at a lightweight FBB product, we have a solution for them. It is not incremental growth. It will take up some of our existing SBS capacity, and we haven't sized it yet in terms of number of tons. We don't expect it to be a large number in the near term. We'll monitor it and see what the uptake is and then we'll figure out what -- how much capacity to allocate to it in the long run.

Your next question comes from the line of Mike Roxland with Truist Securities.

First question, what has the customer response been to the $60 per ton price increase on the extruded products thus far?

I think we're still working through it with our customers. I'm not prepared to comment on feedback yet. I think the important point that I raised during the call is we're facing unique cost pressure on those grades because they're polycoated. And the second piece, we are sold out. So our backlogs on those products are well beyond what we normally see with our customers. So we think between those 2 variables, I think we have a very strong case to implement this price increase.

Got it. Were the backlog just as strong a couple of months ago? I mean if I heard you correctly, and I apologize if I didn't, I mean with another price increase, I think, targeting March which you now pushed out, maybe it's one of the same and if not, so my apologies. But were backlogs the same a couple of months ago, if we're talking about the same price increase? And if not, why do you think the conditions warrant? I mean I understand the wars, you have increasing costs, but why would customers be willing to do it if they're also stretched themself with that?

Yes. So I think our original price increase back in March was $50 on folding and $60 on cup. This is a revision. We are at $60 across extruded -- all extruded products, which includes some polycoated folding carton as well as polycoated cup. And yes, our backlogs on those grades have grown, and we're actually -- we're pressured on how to satisfy customer demand at this point. So they've grown since then and costs have also grown. So that's -- so it's a bit of a revision from what we talked about back in March.

Okay. Got it. In terms of CUK, it sounds like you mentioned the engineering work is now complete. It requires investment $60 million with the time line of 12 to 18 months. I mean, can you give a sense as to whether you're willing to -- like what would get you over the hump to pull the trigger and move forward with producing CUK at Cypress Bend? And secondly, what optionality you have also with CRB? And where would you be looking to do that as well?

Yes. Good questions, Mike. So on CUK, I think, frankly, it just has to do with the balance sheet and cash flows at this point, right? It's a $60 million investment, when we're working very hard at this point in the cycle to remain cash flow neutral. So it's a matter of allocating the capital and the cash, which at this point, would have to borrow. So that's the CUK decision. I think -- we think it's a good project. We think we have a place in that part of the market. It's just figuring out the right time to make the call.

On CRB, as you know, Mike, SBS mills would have a difficult time converting to CRB given the differences in the back end of the mill. So it's a matter of either looking at M&A in the long run or looking at some additional partnerships or supply agreements or something along those lines to get some CRB into our portfolio. So that's -- the CRB one around M&A, I think that's a longer-term thinking because, frankly, right now, we're focused on ensuring that we have a strong balance sheet to get through this part of the industry cycle.

Got it. I appreciate that, Arsen. One, just a quick follow-up. So even with respect to CUK, $60 million is probably unlikely given that you don't want to stretch -- you would not -- I would assume that you would not want to stretch your balance sheet any further given the fact that there is still risk in SBS and a lot of uncertainty with respect to how this excess capacity is going to be absorbed, right? So I mean in other words, the conversion to CUK is probably unlikely in the near term as well because you don't want to stretch yourselves further.

I think we're going to keep reviewing it. We think it's a good project. I think $60 million right now is a bit of a stretch. So we're going to look really hard to see how we can get CUK into our portfolio. At this point, we have an engineer a project. Frankly, we're pushing the team to figure out what other paths we have to create CUK to make CUK in our facilities maybe spending less than $60 million.

Got it. And one final question, I'll turn it over. Just -- I know you're pretty constructive on maybe the conditions getting better by the end of the year, you're citing RISI. If market conditions remain challenging and let's say the biggest player refuses to do anything further with respect to cutting capacity, what else can be done or what can you do from a portfolio perspective?

Listen, Mike, I'm not going to try to speculate what we would or wouldn't do. I think right now, we focused on a few actions. So we talked about price. We talked about cost reductions. We did the Cypress Bend restructure. I think in the long run, we'll continue to assess our cost structure and our assets to make sure that we're in a good spot. But I think we're optimistic that we're seeing enough green shoots for a recovery in our corner of the market and our industry here as we progress through the year.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone. Thank you for joining us, and welcome to the Clearwater Paper Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] I will now hand the call over to Sloan Bohlen, Investor Relations. Please go ahead.

Thank you so much. Good afternoon, and thank you for joining Clearwater Paper's Fourth Quarter and Full Year 2025 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 2025 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 our supplemental information covering forward-looking statements. Rather than reading this slide we'll incorporate it by reference into our prepared remarks. With that, let me turn the call over to Arsen.

Good afternoon, and thank you for joining us today. 2025 was a transformational year for Clearwater Paper. It was our first full year operating as a paperboard focused business, and I'm pleased with how well our team executed even as we faced a challenging industry environment. Let me provide a brief recap of our 2025 performance.

We successfully completed the integration of the Augusta mill and the separation of our tissue business, both ahead of schedule. Net sales increased by 12% year-over-year, driven by a 14% increase in shipments, primarily from operating the Augusta mill for a full year. Adjusted EBITDA was $107 million, an improvement of $71 million versus the prior year, driven by exceptional cost control and execution.

We completed all 3 major maintenance outages in 2025 on schedule with total direct costs of $50 million, marking a significant improvement in execution and cost versus 2024. We delivered more than $50 million in fixed cost reductions including $16 million in SG&A savings, which should improve our long-term earnings potential as our industry recovers. SG&A declined to 6.5% of net sales, down from 8.4% in 2024, which we believe positions us as an industry leader on this metric. We repurchased $17 million worth of shares during the year, with $79 million remaining under our authorization. And importantly, we maintained a strong balance sheet, ending the year with more than $400 million in liquidity. Looking ahead, we will continue to evaluate our options and alternatives to maintain financial flexibility and optimize capital allocation, including refinancing our 2020 notes, which go current in August of 2027.

Let me spend the next few minutes discussing current industry dynamics and the actions that we're taking to position us for return to cross-cycle margins and cash flows. Sherri will then review our financial results in more detail, including our first quarter outlook and key assumptions for 2026. I will then conclude with remarks on our shareholder value proposition.

Let's start with our industry. Paperboard continues to face challenging supply and demand dynamics, particularly in SBS. We believe that there are 3 factors that are driving this imbalance. First, demand recovery for packaging has not materialized as expected. Industry shipments of SBS were largely flat year-over-year based on the latest AF&PA data and down in CRB and CUK. CPD and QSR volumes remain lackluster, pressured by inflation, economic uncertainty and the likely impact of GLP-1 drugs on consumption.

While demand for SBS is relatively flat, a competitor added more than 500,000 tons of new capacity in 2025, representing approximately a 10% increase in industry supply. As a result, industry operating rates decreased to the low 80% range by the end of 2025, leading to pricing and margin pressure. At these margin levels, we do not believe that Clearwater can produce the cash flows and returns that are necessary to reinvest in these types of capital-intensive assets in the long run.

We also believe that these dynamics are beginning to impact other paperboard substrates as there is meaningful overlap in end-use applications. Today, SBS is priced lower on a per ton basis than CUK, even though SBS has higher manufacturing costs and a superior print service. SBS is also priced lower on a per square foot basis versus CRB. Since the heavier weight CRB is required to replicate the performance characteristics of SBS. We are aware of CPD customers that are actively moving their business from CRB to SBS, a trend that we expect to continue at these price levels.

Let me briefly discuss the most recent RISI reported price movements in SBS and the impact on our business. RISI reported a $100 per ton decrease in their SBS folding card index during the fourth quarter. From our vantage point, this change did not accurately reflect industry pricing as the price declined by an average of only $21 per ton from Q3 to Q4 and not $100 per ton. While we disagree with RISI's latest reported decrease, we are faced with a $50 million price headwind as a result.

After the Augusta acquisition, approximately 40% of our volume is now tied to the RISI folding carton Index, while 10% is tied to the RISI Cup Index. In total, including the latest fourth quarter RISI index change, we're faced with an approximately $70 million pricing headwind in 2026 versus 2025.

While the most recent fourth quarter pricing movements were negative, RISI is projecting a recovery in both SBS operating rates and pricing in 2026. Specifically, RISI is projecting operating rates to improve to 90% with a price increase of $60 per ton in 2026 and a total of $130 per ton by the end of 2027. If these projections were to hold, our margins would improve by more than 10% and get us back towards cross cycle returns and cash flows.

As I mentioned previously, this is a supply-driven downturn that is unsustainable. Specifically, we believe that supply now exceeds demand by about 400,000 to 500,000 tons, resulting in industry operating rates being around 10% below historical norms. We believe that this is a temporary condition and that a combination of 3 factors will drive an improvement in the supply and demand balance and get us back to cross-cycle margins and cash flow.

First, SBS demand is forecasted to grow in 2026, and we should benefit from substitutions. Second, imports are forecasted to decrease by 8% in 2026, while exports increased by 5%. And third, RCS forecasted a net capacity reduction of 180,000 tons in 2026. With all these changes, RISI is forecasting industry operating rates to approach 90% by year-end and we believe that these factors will accelerate an improvement in industry conditions going forward.

While the industry environment remains challenging, we're focused on controlling the controllables and assessing our options. First, we continue to focus on running efficiently, reducing costs and maintaining share with our long-standing strategic customers. Second, we recently announced a price increase to our customers of $60 per ton in our cup grades and $50 per ton for all of the products. These increases are necessary to offset the cumulative impact of inflation over the last several years and to enable us to continue to invest in our assets.

These increases impact approximately 50% of our volume that is not tied to the RISI Price Index. The remaining 50% of our volume will move as industry pricing is reflected in the RISI price index. Lastly, we plan to balance Clearwater's supply with demand in 2026, which may include extended curtailments on our assets and variabilizing our costs whenever possible.

In addition, we will look at our manufacturing assets to determine what actions we can take to reduce our costs further and improve our margins and cash flow. Let me wrap up with a few comments on our strategic efforts to diversify our product portfolio. We believe that these efforts will deepen our relationships with our converter customers and allow us to sell incremental volume.

We are preparing to launch VELORA, a new lightweight paperboard product line in the second quarter. This brand incorporates mechanical pulp in the middle layer and is designed to compete with FBB, which represents approximately 10% of North American bleach paperboard demand. We have completed the engineering feasibility for a CUK investment at our Cypress Bend facility with a cost now estimated at $60 million with a 12- to 18-month execution time line. We believe that annual CUK supplies roughly 2.5 million tons in North America, of which 300,000 to 400,000 tonnes is currently sold to independent converters.

With this investment, we believe that we can capture approximately 100,000 to 150,000 of these tons. The remaining 200,000 tons of capacity at Cypress vent would provide flexibility to meet bleached paperboard demand or target additional unbleached products such as white top.

We believe that this project offers an attractive return and enhances our ability to manage through market cycles. We have not made the final decision on this project at this point. In addition, we're continuing to evaluate external options to add CRB to our portfolio, further diversifying our end market exposure. With that, I'll turn the call over to Sherri to walk through our fourth quarter and full year financial results, along with our first quarter outlook and full year assumptions.

Thank you, Arsen, and good afternoon, everyone. Let me start by sharing our results for the fourth quarter. Net income from continuing operations was $3 million or $0.20 per diluted share, including $17 million of insurance proceeds. Net sales were $386 million, flat versus Q4 of 2024 as higher shipments were offset by lower pricing. Adjusted EBITDA from continuing operations was $20 million, above the midpoint of our guidance range of $13 million to $23 million driven by cost reduction efforts and $6 million of insurance proceeds.

We executed the Augusta maintenance outage successfully with $17 million in total direct spending. SG&A remained below our targeted 6% to 7% range, reflecting our continued cost discipline. For the full year, net loss from continuing operations was $53 million or $3.28 per diluted share, primarily driven by a noncash goodwill impairment.

Net sales were $1.6 billion, up 12% versus 2024, with higher shipments from our Augusta acquisition as well as growth from our existing customers. Adjusted EBITDA from continuing operations was $107 million, up $71 million year-over-year driven by strong cost management, leading to a $50 million fixed cost reduction as well as higher volumes and lower input costs.

Total major maintenance outage spending was $50 million, significantly lower than prior year due to improved planning and solid execution. Let me provide a few additional comments on the insurance recovery. As part of the Augusta acquisition, we obtained representation and warranty insurance with a coverage limit of $105 million.

During integration, we identified matters inconsistent with representations made to us and notified the insurers accordingly.

In Q4, we received an initial settlement payment of $23 million of which $6 million is related to operating costs incurred in 2025. We have approximately $75 million remaining of our $105 million coverage limit and continue to work through the claims process with our carriers.

Let us now turn to our outlook for the first quarter. We expect adjusted EBITDA of approximately breakeven for the quarter. We experienced operational disruptions and higher costs due to severe weather at our Odessa and Cypress in facilities in January and February. Our team was able to safely navigate this event without any long-term impact to our assets and we are now back to running normally. As a result of higher energy costs and impact on production, we incurred approximately $15 million to $20 million in incremental costs during the quarter.

We expect flat to slightly lower paperboard shipments versus the fourth quarter. We expect $10 million to $12 million of lower pricing related to Q4 we movements and $11 million to $13 million of lower maintenance expense versus Q4 as there are no major outages in the quarter.

Turning now to our key assumptions for 2026, which include revenue of $1.4 billion to $1.5 billion with flat to modest shipment growth, approximately $70 million in pricing headwinds from 2025 carryover. Importantly, our assumptions do not include any impact from our recently announced price increase or the latest RISI forecast on pricing and operating rate improvements. We expect our net productivity to offset 2% to 3% of input cost inflation. Capital expenditures will be in the $65 million to $75 million range.

We expect approximately $20 million of working capital improvement and we are planning to maintain SG&A at 6% to 7% of net sales. With that, I'll turn the call back over to Arsen for closing remarks.

Thanks, Sherri. To close, I want to emphasize that we operate high-quality assets are executing well and have long-standing strategic customer relationships. We took several difficult but significant actions in 2025, including reducing our overall workforce by more than 10%. This includes a reduction in our corporate SG&A head count of around 40%. Our team is operating with a lean and disciplined mindset, intensely focused on results. We have a strong balance sheet with more than $400 million of liquidity, which positions us to weather the supply-driven downturn.

I remain confident that this cycle will turn and that we will return to cross cycle EBITDA margins of 13% to 14% and generate more than $100 million of annual free cash flow. That said, today's margins and cash flow levels are not tenable for us for an extended period.

This is a capital-intensive industry and adequate returns are required to reinvest in these types of assets over the long term. Simply put, current margins are not sustainable for us. We are taking action, starting with recent price increases being prepared to take market-related downtime to address our operating rates, assessing our costs and assets and continuing to evaluate alternative uses of our capacity including a CUK conversion.

Above all, we will continue to make disciplined decisions that drive long-term shareholder value while supporting our customers, employees and communities. Thank you for your time today. Operator please open the line for questions.

[Operator Instructions] Your first question comes from the line of Mike Roxland with Truist Securities. Please go ahead.

It's good to be here. And to the extent I could say in terms of trying to manage a very difficult environment. Obviously, there's a lot going -- a lot of moving pieces, and it sell the efforts you're putting in terms of managing costs you're seeing some of those benefits flow through. So good job in that regard. Arsen, I wanted to start on great switching that you called out. You commented about it in the slides from CRB to SBS. You mentioned some of your customers are looking at that. Any color in terms of -- or additional color, I should say, in terms of -- have you seen that in your own portfolio? Like to the extent you kind of how many tonnes actually pursued that?

Are you seeing more and more customers line up particularly as a fact given the fact that SBS is now cheaper than the other 2? So just any type of great substitution that you're seeing, that would be very helpful.

Yes. Good question. Listen, I think we're in early, early days of this. We know customers are looking at this. They're facing a lot of cost pressure just like everyone else. And right now, there's an arbitrage with SBS being priced lower than both CUK on a per ton basis and CRB on a per square foot basis. There is a lot of overlap in applications. Frankly, I think there's very few applications where you aren't able to substitute. So I think we're in early days of this, but I know our customers are talking about it. We know competitors are talking about it. But I think we're still in the early days of this. This is not something that happens overnight. .

Got it. Okay. And you mentioned that you expected -- you cited DC in terms of their forecasted demand to improve. Well, you're looking to the confidence that demand will inflect this year? What are you hearing from your customers, some of the comments on a CAGNY weren't a positive this week General Mills just lowered their sales outlook for the year. So what gives you confidence that you're going to see this demand improvement? And if you don't see a demand improvement, I mean, how much additional capacity do you think has to come out of the market for things to balance accordingly?

Yes, a few questions in there. So first and foremost, I think paperboard has been in this volume recession now for a couple of years. And a lot of it is, frankly, inflation in CPD and QSR companies, not promoting and not driving as much innovation as they have historically. Every single CPD and QSR company that you listen to is now talking about growth and foot traffic and volume growth and share. So we think that's a positive sign. Inflation is slowing. That's another positive sign. There are some possible substitutions. That's a positive sign. And our customers are generally optimistic as we head into 2026. .

Now 2025 with 0, call it, 0 shipment growth and SBS was below our expectations. But SBS outperformed both U.K. and CRB. And if you look at those shipments, they were down about 4% and year-over-year. So right now, the forecast is, call it, maybe about 1% growth. We're seeing green shoots, but we need to see that translate into real volume.

Got it. One last one, I'm turning it over. Just you mentioned taking better curtailments if the situation doesn't improve the backdrop. Have you made any concrete decisions like in terms of builds, where, when, how long? Just any color you provided around extended downtime.

Yes, good question. We have not -- we're obviously thinking about it. We'll -- we think we'll have a path forward by the end of Q2 and a strategy by the end of we have been balancing supply and demand over the last year or 2. So that's not new news for us. But we haven't spent much time trying to variabilize those costs. At this point, I think we need to look at it more in the longer run and see where can we actually take out costs as we think about these more extended curtailments.

And so more on this to come.

Your next question comes from Sean Steuart with TD Cowen.

I want to follow up with the supply management piece of this. It sounds like your bias towards taking rolling market-related downtime to supplement the maintenance schedule. Any it feels like the need here is more permanent or indefinite supply closures, same like Smurfit WestRock has stepped up as something small. Any perspective on your portfolio machines that might make sense to curtail on a longer-term basis? And I guess just weighing the cost of permanent or indefinite closures versus this rolling downtime approach, which can be expensive. Any thoughts on that front?

Yes. Thanks, Sean. That's a great question. Listen, we've taken downtime over the last couple of years to balance our supply and demand. It was mostly inventory driven. We've also taken out a lot of cost out of our system, but there's still a fundamental issue with underutilized capacity within the industry and within Clearwater, I'm not prepared to talk about any specific decisions that we are or aren't going to make but we need to look at further cost reductions and we need to look at our assets and see what makes sense for us in the long run. As I mentioned in my comments, at these margin levels and these pricing levels, we're simply not earning enough cash or margin to be able to reinvest in our assets in the long run. We have ample liquidity. We can weather the storm. The question just becomes what are the right decisions to make for the business. .

Okay. Got it. And on that liquidity position, it is healthy. I think the messaging last call was you would consider reengaging on buybacks when leverage ratios have come into at least closer to target ranges long term, has that perspective changed at all? We've seen do you think capitulation in your share price valuation on long-run metrics. Any perspective on appetite for buybacks into a much weaker share price of late?

Yes. Thanks for the question. So first and foremost, we continue to prioritize investing in our assets, strong balance sheet. Those are our top priorities to maintain and preserve both long-term viability and success. We will look at strategic capital in support of strategy. Our potential CUK investment is a good example for this. And then third, we would look at share repurchases as another lever when we have better minus side to more positive free cash flows. .

Okay. Okay. That is all I have for now. .

Your next question comes from Amit Prasad with RBC Capital Markets.

It's Amit on for Matt. Just 1 quick question for me. Thinking about input costs throughout the year. Is there any risk on the fiber cost side in Georgia and North Carolina with kind of reduced pulp would solve the harvest in the year?

No, we haven't identified any risk. We feel that we are in good shape from that perspective.

I think if you look at inflation in general, I mean, I think we're expecting 2% to 3%. A lot of it is labor, some chemicals, maybe some wood, some transportation like rail. But I think we have enough productivity in the pipeline and carry over to be able to offset that, call it, $20 million to $30 million of inflation. .

Okay. Perfect. And then 1 kind of cleanup question. On the working capital improvements, how should we think about the cadence of that kind of $20 million? Should that be kind of evenly split throughout the year? Or any other help there would be appreciated.

It will be heavily weighted towards the back half of the year.

Okay. Perfect. That's all I had. I'll turn it over .

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.

Thank you for standing by. At this time, I would like to welcome everyone to today's Clearwater Paper Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

I'd now like to turn the call over to Sloan Bohlen, Investor Relations. Sloan?

Thank you, Greg. Good afternoon, and thank you for joining Clearwater Paper's Third Quarter 2025 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 third quarter of 2025 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 our Investor Relations page at 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 financial 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 our supplemental information covering forward-looking statements. Rather than reading this slide, we'll incorporate it by reference into our prepared remarks.

And with that, let me turn the call over to Arsen.

Thank you, and good afternoon, everyone. Let me begin with a summary of our third quarter performance highlights. We delivered adjusted EBITDA of $18 million, which is towards the high end of our guidance range of $10 million to $20 million. Year-to-date adjusted EBITDA from continuing operations stands at $87 million, up from $26 million during the same period last year. This increase is driven mostly by our efforts to reduce fixed costs and 4 incremental months of Augusta results included in our P&L.

Net sales grew by 2% versus the prior quarter, driven by a 6% increase in shipment volumes, partly offset by lower market-driven pricing. We successfully completed all 3 of our planned major maintenance outages for 2025. The Lewiston outage was completed in August at a direct cost of $24 million. The Augusta outage was completed in October at a direct cost of $16 million. I'm pleased to report that the execution of our planned major maintenance outages was significantly improved versus prior year. This confirms our belief that an annual cadence delivers generally more manageable and predictable outages.

We've also largely captured the run rate benefits of our fixed cost reduction initiatives. These are now tracking to around $50 million in savings for the year, which would exceed our original estimate of $30 million to $40 million. These savings are helping us offset some of the margin pressure that we're facing during this industry down cycle.

Let's now turn to some commentary on the industry and our key strategic initiatives. While the latest third quarter AF&PA report is not yet available, the trends that we saw in Q2 have largely persisted into Q3. We believe a competitor is continuing to ramp new SBS capacity, which may add up to 10% of additional supply to the industry. Without other changes, this level of new capacity would result in utilization rates in the low 80% range by year-end. This will be well below the normalized cross-cycle average of 90% to 95% and would result in supply exceeding demand by more than 500,000 tons. These low utilization rates have led to margin pressure, resulting in returns that can support investments into our capital-intensive industry. This is simply not a sustainable position to be in for the industry, which is why we believe that the industry will rebalance supply with demand in the medium to long term.

As we previously discussed, there are several potential paths to this recovery. First, RISI is forecasting an approximately 350,000 ton net capacity reduction in the first half of 2026, which would drive utilization rates to above 90%. Second, tariffs and a weakening dollar may put pressure on the price of some of the more than 700,000 tons of imports into the U.S., encouraging customers to seek domestic suppliers. And lastly, industry participants may choose to swing capacity to other grades such as CUK, white top or other non-bleached applications. This could help absorb excess SBS capacity. Without a combination of these supply changes, we believe that it will take more than 5 years of demand growth to fully absorb the excess capacity that exists today.

While the current industry oversupplies primarily limited to SBS, we believe that it is having an impact on the other 2 paperboard substrates. Each substrate has its own strengths and applications, but there's meaningful overlap between them, presenting substitution opportunities to customers. This is why we believe that pricing has been historically correlated between SBS, CUK and CRB. Today, CUK has priced $50 per ton higher than SBS according to RISI, which is not intuitive given SBS' superior print quality and higher bleaching costs. If you look at the 30-year history of this market, it is only in recent years that CUK pricing has exceeded SBS.

CRB today is priced $120 per ton lower than SBS according to RISI, which is a narrower gap than we've seen historically. SBS has superior performance characteristics versus CRB with a higher production cost of more than $200 per ton due to the use of virgin fiber and bleaching. Buying decisions and packaging are driven by several factors, including performance, cost and sustainability. Most importantly, customers by paperboard by area or square feet and not tons. To match the strength performance characteristics of SBS, a customer would need to use a heavier weight of CRB, resulting in a price that we estimate to be equal to or higher on a per square foot basis than SBS in today's market. If these trends persist, we believe that CPG and retail customers will look closely at substitutions, which would support higher SBS demand, put a ceiling on CUK and CRB and return to historical pricing correlations between the 3 substrates.

Let me now shift to some comments on potential CUK investment that we previously discussed. As a reminder, we're exploring adding CUK swing capability to one of our SBS machines. We have nearly completed the engineering work, and now I can share some additional details on the project. The estimated capital required for the investment is approximately $50 million with a 12- to 18-month lead time to complete. At today's prices, the project return is estimated to be more than 20%, largely based on trading up lower end SBS volume to CUK. The returns will be considerably higher if we assume that we're filling up open SBS capacity. Our mill in Cypress Bed, Arkansas is best positioned for this project, given its proximity to customers and access to low-cost softwood fiber required for CUK. We estimate that open market demand for CUK is around 300,000 to 400,000 tons with potential upside if independent converters had reliable domestic supply.

Our goal will be to capture around 100,000 tons of this volume, utilizing about 1/3 of Cypress Bend's capacity. The remaining 2/3 of the capacity would remain in SBS. We see 2 upsides to this project. First, there is a strategic benefit to expanding our product portfolio to better serve our converter customers. Second, it would enable us to more fully utilize our network capacity during an SBS industry downturn. We may conclude in the future that this is a good investment, but we're putting a final decision on hold at this time. We remain focused on running all 3 of our SBS mills, vigorously defending our SBS market share and preserving the strength of our balance sheet.

With that, I'll turn the call over to Sherri to discuss our Q3 financial results in more detail as well as provide an outlook for Q4 and some additional thought -- some initial thoughts on 2026.

Thank you, Arsen. Let's start by reviewing our financial performance in the third quarter in more detail. Net sales were at $399 million, up 1% year-over-year, driven by a 3% increase in paperboard shipment volumes partially offset by lower market pricing.

Net loss from continuing operations was $54 million or $3.34 per diluted share, primarily due to a $48 million noncash impairment of goodwill. This noncash impairment represents all of our remaining goodwill. Most of this goodwill was accumulated through the acquisition of Manchester Industries in 2016. The impairment was driven by the decline in our market capitalization as compared to the increase in our book value, which was driven by the gain from divestiture of our tissue business late last year.

Adjusted EBITDA was at $18 million towards the higher end of our guidance range of $10 million to $20 million. We saw improved cost performance due to our fixed cost reduction initiative, which more than offset lower pricing and higher input costs. SG&A as a percent of sales was at 6.2% at the lower end of our targeted range of 6% to 7% of net sales. We believe that this is at the lower end of our industry benchmark, demonstrating our commitment to running a lean, cost-effective company.

Let's now turn to our balance sheet and capital allocation. We generated $34 million in cash from operations during the quarter and approximately $3.5 million in free cash flows. Our net leverage ratio is at 2.7x, and we have ample available liquidity of $455 million. While our leverage ratio has increased due to the current industry down cycle, our aggregate debt level has remained stable as we continue our focus on maintaining a strong balance sheet. We also repurchased $2 million of shares, bringing our total to $20 million against our $100 million authorization. We will consider additional share repurchases when we have a line of sight to free cash flow generation in the near to medium term.

Turning now to our outlook for the fourth quarter. We expect adjusted EBITDA of $13 million to $23 million. We expect slightly lower paperboard shipments versus the third quarter due to seasonality. We expect 3% to 4% lower production volume, driving less cost absorption than during the prior quarter. We have largely captured the benefits from our fixed cost reduction efforts in previous quarters. And while we will maintain those savings, we do not expect significant additional savings between the third and fourth quarters. We expect other input costs to remain relatively stable, and our guidance includes $16 million of major maintenance outage costs at our Augusta mill, which was completed in October.

And lastly, let me provide you with some of our initial assumptions for 2026. We expect revenue of around $1.45 billion to $1.55 billion and a capacity utilization rate in the mid-80% range. We are also assuming that we'll see the carryover impact from 2025 market-driven price changes into 2026. We expect to generate enough productivity and cost reductions to offset 2% to 3% of cost inflation. We expect capital expenditures of $65 million to $75 million. To generate incremental cash flow, we will target more than $20 million in working capital improvements, primarily in inventory.

And lastly, given newly enacted tax legislation, we do not expect to be a net cash taxpayer next year. The biggest variable that is difficult for us to predict is price changes in 2026. Currently, RISI is forecasting an increase in SBS folding carton price of $30 per ton and cup stock of $40 per ton in the first half of next year. This corresponds to their assumption that utilization rates will improve to over 90% with a net industry capacity reduction of approximately 350,000 tons. Regardless of industry conditions, we remain focused on operating effectively, reducing our costs and maintaining a strong balance sheet.

I'll now turn the call back to Arsen for closing remarks.

Thank you, Sherri. While we're navigating a challenging industry environment, we remain confident in the long-term fundamentals of the paperboard market and our ability to generate strong returns. We have high-quality assets that are geographically well positioned to serve independent customers, and we intend to maintain our market share.

We believe that paperboard packaging has strong demand fundamentals as consumers and customers continue to seek sustainable and renewable packaging solutions. We have a strong balance sheet with manageable debt levels and more than $450 million in liquidity, positioning us to weather this current downturn. In an environment where utilization rates returned to 90% to 95%, we expect to achieve cross-cycle adjusted EBITDA margins of 13% to 14%, resulting in free cash flow conversion of 40% to 50% or over $100 million in free cash flow per year, assuming $1.8 billion to $1.9 billion in net sales.

Let me conclude my remarks by thanking our people for their efforts to remain focused on operating safely and providing excellent service to our customers. 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 Instructions] And it looks like our first question today comes from the line of Sean Steuart with TD Cowen.

Arsen, I want to start with the decision to hold the CUK swing capacity project. I gather, given a pretty strong return profile for that project, this is more around wanting to hit balance sheet targets. Assuming that's correct, can you give us a sense of where you would like to see leverage ratios get to or free cash flow profile for the overall company improved to before you would greenlight that project?

Yes. Good question. So you're right. I think it's a good -- it's likely a good project but we're putting that decision on hold. It would take more than 2 years for us to deliver cash flow from this project, which means we'd have to finance it through debt. And right now, we need to prioritize maintaining a strong balance sheet and focusing on running our SBS mills and defending our market share.

We said previously, we're targeting a leverage ratio in the 1% to 2% range. EBITDA margins cross cycle 13%, 14%. So we'll revisit this decision later. In today's market environment at today's prices, it is a very attractive return, but we have to revisit it in the future and see what those conditions look like and see if we need to update our assumptions.

Okay. Understood on that front. And then with respect to your view on the market outlook for SBS, I gather a lot of this is based on what RISI is forecasting in terms of forthcoming capacity closures. According to their forecast, we would need to see those announcements soon. I guess I'm wondering on your perspective of industry willingness to make these -- to take these initiatives to rebalance the market and the extent to which you're seeing any import relief at this point as tariffs take hold and if that's helping at the margin at all?

Yes, listen, we're not going to comment on what our competitors may or may not do. You're right, RISI is forecasting a first half net capacity reduction of 350,000 tons. So they're assuming a turn in the market. We're certainly hoping for that, but we're planning for tomorrow looking like today. From an import perspective, it's still a bit early to tell. But as we look at European imports July year-to-date, they're down, I believe, approximately 10%. So I think you're starting to see some cracks in the import balance into North America between a 15% tariff and a weakening dollar, absorbing 20% or 30% of additional costs for an importer into North America, I think, is getting harder and harder. And for domestic customers, I think they're looking for more reliable, stable domestic supply. So we're optimistic that this will be a tailwind for us as we head into 2026.

Okay. Just one last one, maybe for Sherri. You went through a bunch of 2026 metrics that you're targeting. Do you have an initial view on what the maintenance schedule is going to look like? And I appreciate you're smoothing this out now with a more regular schedule across the mill platform. Can you give us a perspective on the cadence of anticipated closures in 2026? And are we safe to assume that the overall expense that you're targeting would be similar to 2025 levels?

Yes. So I'll answer the second part first. You should expect the cost to look very similar to what we see in '25. So I would start there. We're still finalizing the schedules for next year, so we'll be able to come out and tell you exactly which facilities and which quarters probably by our February call. And then we'll highlight if there's any overlap in consistencies if we change the quarters.

Sean, maybe one more comment on that. We had our Lewiston outage in late Q2. So it was in August with Augusta in October. Doing an outage in the middle of summer is pretty challenging from just a heat perspective. So we are looking at potentially moving out that outage into earlier in the summer, maybe late Q2 just to make it a safer, more manageable outage. So we're still finalizing those details, but that is the potential for us to have the Lewiston outage a bit earlier in the year, which would mean that we would have 2 Lewiston outages within a 12-month period potentially. But we'll share that with you in February.

Our next question comes from the line of Matthew McKellar at RBC.

First, shipments in the quarter were solidly ahead of where you sort of guided to. It looks like food service sales are pretty healthy, but could you provide some maybe additional perspective on where you saw the incremental strength versus your expectations as of late July? And if you could provide any other broader commentary around relative strength or weakness you're seeing conditions across liquid packaging, folding carton, food service, that would be great.

I think summertime is normal seasonality uptick for food service. We certainly saw some nice strength in food service. And our team is doing a really nice job of competing vigorously in the market and filling out our capacity. I think we've had some optimism from some of our food service customers. I think you may be seeing some import relief helping on things like paper plates that is helping some of our paper plate customers see stronger demand. So I think those are some of the -- I think those are some of the variables that came into play in Q3.

Okay. That's great. And I guess just following up on the second part of that, any other comments around kind of weakness you're seeing into Q4 or strength relatively between those kind of product categories?

I think Q4 is seasonally a little weaker than Q3, and it's typically in food service. Just the seas of the summer season is over. So we're expecting A little bit of seasonality decline as we head into Q4. And I think, as Sherri mentioned, we'll also see a few percentage points less of production as we head into Q4 versus Q3 that we will have some absorption impact in that, as we stated in the last earnings call, absorption is a meaningful component of our P&L. And if you do the math, it could be upwards of $500 a ton of absorption with production changes. So I think that's part of the reason why Q4 is flat versus Q3 as I think it's -- we'll see some impact of absorption.

Okay. And just kind of pulling on that string. It's a fairly large range for guidance on EBITDA in Q4, considering you're through the maintenance. Is it mostly seasonality of demand and maybe energy costs that would take you to the top or the bottom of that range? Do you maybe even see any risks around I guess, the government shutdown and the supplemental nutrition assistance program? What else would you be watching for in terms of variability within that range?

I think energy is right. We did bake in some energy into Q4 versus Q3, but it's very much weather dependent. And some of our -- one of our mills at least is more susceptible to bigger swings in energy prices than the other mills just due to its location. So I think part of it is energy, part of it is just production. 1,000 tons of production is worth upwards of $500,000. And for those folks that spend time in paper mills know that 1,000 tons plus or minus in any given week or given month is a rounding error, but it has a pretty substantial impact on our earnings. So I think it's the nature of being a paperboard focused business with 3 mills.

Okay. Fair enough. And last for me. Just the working capital improvement of $20 million to $26 million. Can you just share a little bit more about how you plan to achieve that? It sounds like it's mostly inventory, but also the timing of when you'd expect to reach that target?

Yes. It will be primarily in inventory. I think you'll see us start to work those pieces down in the second half of next year. So that would be the timing of when I would be looking to achieve those estimates.

And I think back to the production comment, this year, I think we probably built a little bit of inventory and we'll be reducing inventory next year to free up some working capital. So there will be a trade-off between fixed cost absorption and just cash coming off the balance sheet. So there'll be some trade-off as we head into next year. And we'll provide a bit more context on this in the coming quarters.

[Operator Instructions] All right. Ladies and gentlemen, that does conclude today's call. Thank you so much for joining us today, and you may now disconnect.