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In March, I believed that Clearwater Paper Corporation (NYSE:CLW) was making bolt moves. The company was doubling down its focus on its paperboard business, while it announced its intention to exit the tissue business.
The company is now delivering on this exit, one which will create a focused business, all while the company fetches a nice price for these assets. With pro forma net debt being modest and earnings power being solid, I am growing more upbeat on Clearwater here, even as shares have continued to move higher and quite some remains uncertain.
At current levels, I look forward to learning more about the pro forma implications with an upbeat and curious stance here, as well as an intention to get involved with the shares here.
On Clearwater — Changes Coming Up
Clearwater Paper was about a $2 billion business in 2023, comprised out of two roughly equally large paperboard and consumer products businesses.
The company is a top 5 manufacturer of paperboard, serving a wide range of end markets with ever more sustainable products. These include items like cartons, cups & plates, among others. These activities generated $1.06 billion in sales while posting EBITDA margins of 19%, with segment margins reported at 16% of sales.
The other business was a consumer products business in which Clearwater provides tissue products, benefiting from trends towards private brands and resilient consumer demand. Products include towels and bath products, and to a smaller extent, facial products and napkins.
With a $1.02 billion sales contributions, the unit is roughly equal to the paperboard business in terms of sales, yet it is somewhat smaller in terms of profitability. EBITDA margins were reported around 15% with segment margins reported at just 9%. This comes as its 6% market share is too small to effectively compete against the likes of Georgia-Pacific, Kimberly-Clark (KMB) and Procter & Gamble (PG), among others.
Combined, Clearwater posted 2023 sales at $2.08 billion with operating profits reported at $177 million, working down to margins equal to 8.5% of sales. GAAP earnings came in at $107 million, equal to $6.30 per share, based on a share tally of just over 17 million shares.
Net debt of $463 million was equal to 1.7 times EBITDA of $281 million. Trading at just $40 per share, the company was awarded a $680 million equity valuation and $1.14 billion enterprise valuation, with equity trading at just 7 times earnings.
A Big Transaction
Earlier this year, the company announced a huge $700 million deal to acquire Augusta, the paperboard manufacturing facilities of Graphic Packaging (GPK), a massive deal given the prevailing enterprise valuation at the time.
The deal was set to add 600 thousand tons of bleached paperboard capacity, expected to add $140-$150 million in EBITDA by 2026, up from a current number around $100 million. A current 7 times EBITDA multiple should fall to 4.5 times based on increased utilization, but even then, this marks a premium to the 4 times sales multiple at which the business traded itself. At the same time, Clearwater announced that it would consider strategic options for the tissue business.
That would be welcomed as I calculated net debt at $1.16 billion on a pro forma basis, with EBITDA seen just below $400 million, for a 3 times leverage ratio. While shares were anything but expensive, the long-term performance was uneven as well, making me take a wait-and-see approach.
Another Massive Deal
Since earlier this year, shares have gradually moved up to the $50 mark in recent times, as shares now trade up 10% to $55 in response to the announcement of the sale of the tissue business.
In April, the company posted resilient first quarter results as end markets were normalizing. Sales were down 6% to $496 million, as GAAP earnings fell by thirty-eight cent to $1.02 per share, still marking solid earnings power in relation to the valuation of the business.
The pulp and paperboard business saw a soft performance with first quarter sales down 12% to $244 million as operating margins of just over 10% were cut in half. This was attributed to lower sales prices and an adverse weather impact at its Idaho facility. The consumer product business actually saw revenues increase by 2% to $253 million, as margins of 12% compared to just a barely profitable performance this time last year. This makes that the near term performance stands in direct conflict with the strategic direction of the firm here.
Early in May, the company announced the closing of the Augusta deal, relatively soon after the deal was announced in February.
The big deal arrived in July as Clearwater announced a $1.06 billion deal to sell the tissue business to Sofidel. Net proceeds are pegged at $850 million, making that pro forma net debt comes in around $300 million here. This net debt load actually fell just below a quarter of a billion if we factor in the net debt load as of the end of the first quarter.
What Now?
The modeling here is a bit difficult to do, amidst the many moving parts. The 17 million shares of the company have risen from $50 to $55, which implies an $85 million share price gain on the back of the transaction announcement, equal to 10% of the net proceeds of the sale.
The current equity value of $935 million boils down to a less than a $1.2 billion enterprise valuation here. This valuation is applied to a $1.06 billion pulp and paperboard business of 2023, which now includes the added activities from Georgia-Pacific as well, with the standalone business generating operating income of $169 million.
In comparison, the tissue business generated a similar $1.02 billion in sales but generated just $92 million in operating income in 2023, which tells me that the deal looks rich at just over 1 times sales. Assuming a $169 million pulp & paperboard profit contribution in 2023, assuming no reduction in corporate cost allocation of $78 million, and including about a similar earnings contribution of the Georgia deal, and we can construct the pro forma P&L.
If we factor in a 5% cost of debt on about a quarter of a billion net debt load, the business might easily post pre-tax profits of $150 million, with after tax profits coming in around $6.50 per share. This values the business at just 8-9 time earnings, while leverage is very modest and the paperboard business has become a lot more focused.
This might actually reveal upside from here, as there are some conservative assumptions in this calculation as well. Nonetheless, much has been priced into Clearwater Paper Corporation shares here, and amidst all of this I am very keen to keep a close eye on the developments, with a full intention to buy a dip here.
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