Hello, welcome to the Clearwater Paper Corporation's first quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's comments, there will be a question-and-answer session. If you would like to ask a question during this time, simply press Star One on your telephone keypad. I will now turn the conference over to Sloan Bohlen, Investor Relations. Please go ahead.
Thank you, Sarah. Good afternoon, and thank you for joining Clearwater Paper's first quarter 2023 earnings conference call. Joining me on the call today are Arsen Kitch, President and Chief Executive Officer, and Mike Murphy, Chief Financial Officer. Financial results for the first quarter of 2023 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 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 two of our supplemental information covering forward-looking statements.
Rather than rereading this slide, we are going to 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. Please turn to slide three. We had a solid first quarter in 2023, with better results as compared to the first quarter of 2022. We reported net sales of $525 million and Adjusted EBITDA of $66 million. Let me share a few highlights. Prices increased in both paperboard and tissue as compared to the first quarter of 2022. Private branded tissue share strengthened as consumers sought to offset inflation. Paperboard demand softened as customers managed down their inventories. We resolved the operational issues that we experienc ed in the fourth quarter of last year. Inflation moderated as compared to the fourth quarter, particularly in pulp, energy, and transportation. Finally, we repurchased $1.7 million of shares during the quarter and have $23 million remaining on our buyback authorization.
With that, let's discuss some additional details about both of our businesses. Let's start on slide four with a few comments on our paperboard business. In 2021 and 2022, the industry experienced high operating rates with strong demand. As a result, RISI reported price increases for the U.S. market that totaled $250 per ton in 2022. Based on our previously announced price increases, we expect year-over-year improvements to carry into 2023. As previously noted, we experienced a softening in paperboard demand late in the fourth quarter. That trend continued in the first quarter of 2023 and into April. We believe that this is due to customers reducing their inventories as well as a slowdown in consumer spending. Based on the most recent AF&PA data, this softening has resulted in lower backlogs and operating rates across the industry.
Our backlogs also fell, and our inventories increased in the first quarter. As a result, we reduced production in the second quarter to manage our inventory levels. It is our intent to balance supply and demand for the remainder of the year and normalize inventory levels. While we're experiencing a softening in demand, we continue to believe that paperboard is economically resilient given the end use of our products. Our portfolio skews more heavily towards consumer applications such as food packaging, pharmaceuticals, and cosmetics. In addition, we expect the shift to paper-based products to continue, and we're optimistic that demand for paperboard will improve in the second half of this year. Operationally, our performance improved in the first quarter, with a major maintenance outage and operational issues experienced in the fourth quarter now behind us. Please turn to slide five for additional comments on our tissue business.
The underlying performance of the business was strong. We continue to see consumers shift their demand to private branded tissue products to help offset the impact of inflation. Private branded share of the market approached 35% in March based on IRI panel data. We shipped 12.7 million cases in the first quarter, which was 700,000 cases higher than the first quarter of 2022 and slightly lower than our fourth quarter shipments of 13 million cases. As we previously mentioned, cost inflation has outpaced price increases in our tissue business over the past two years, leading to margin compression. Our team has focused on recovering margins through cost reduction initiatives and implementing the previously announced price increases. As a result, we saw higher pricing in the first quarter and expect additional sequential price benefits in the second quarter.
With pulp prices and other input costs decreasing, we expect to see further margin recovery in the coming quarters. We are encouraged by the trends and expect a strengthening of our tissue business this year. I will now ask Mike to discuss our first quarter results in more detail.
Thank you, Arsen. Please turn to slide six. The consolidated company summary income statement shows first quarter 2023 and 2022. In the first quarter of 2023, we recorded a net income of $24 million, and net income per diluted share was $1.40, and adjusted net income per diluted share was $1.47. The corresponding segment results are on slide seven. Slide eight is a year-over-year segment income and Adjusted EBITDA comparison for our pulp and paperboard business in the first quarter. We benefited from our previously announced price increases, which were partly offset by higher raw material costs, freight, and labor inflation. Volumes were lower compared to last year as demand softened. You can also review a comparison of our first quarter 2023 performance relative to the fourth quarter on slide 14.
Please turn to slide nine, where we provide a year-over-year comparison for our tissue business in the first quarter. In addition to the implemented price increases, we also realized some mixed benefits. Our sales volumes of converted products were higher than last year as well. These benefits were largely offset by higher costs due to inflationary pressures. You can review a comparison of our first quarter 2023 performance relative to the fourth quarter on slide 15. Slide 10 outlines our capital structure. Liquidity was $288 million at the end of the first quarter. We did not generate free cash flow during the quarter. This was due to typical large first quarter cash outflows, including semiannual cash interest payments on our bonds and annual incentive payouts, as well as payments related to our fourth quarter major maintenance outage.
Our inventories also increased, notably in paperboard, which negatively impacted cash flows. We intend to manage our inventories by balancing supply with demand and expect net working capital to be a source of cash in the coming quarters by over $10 million. We also repurchased 51,000 shares at an average price of just above $34 per share for a total of $1.7 million in the quarter. We have approximately $23 million remaining on our share repurchase authorization and expect to continue buying back shares during the year. Slide 11 provides a perspective on our second quarter 2023 outlook and building blocks for 2023 full year expectations. Our current expectations for the second quarter is Adjusted EBITDA of $58 million-$68 million. That midpoint of the range is $63 million and assumes the following relative to the first quarter.
Margin improvement in tissue from previously announced price increases and lower input costs. Lower paperboard volumes as we balance our supply with demand and address inventory. The following are our building blocks for 2023 relative to 2022. We believe that our operational results will improve by approximately $42 million in 2023, primarily due to lower major maintenance outage expenses and improved operating performance. As anticipated, we are seeing sequential quarterly declines in pulp prices. As a reminder, it takes us approximately three months to realize these benefits in our earnings. As a result, these decreases should be more beneficial in the second half of 2023 relative to the first half. Currently, the strength that we're seeing in tissue is mitigating some of the demand softness in paperboard. We expect another strong year overall, and we'll update you on our latest thinking in the coming quarters.
We're also anticipating the following for 2023. Interest expense between $27 million and $29 million. Depreciation and amortization between $98 million and $101 million. On capital expenditures, we expect to spend $70 million-$80 million in 2023. Our Lewiston recovery boiler replacement project, which is estimated to require a capital expenditure approaching $40 million, is expected to be completed in early 2024, concurrent with our planned major maintenance outage. We spent $4 million in 2022 and expect to spend an additional $8 million of the estimated cost in 2023 on this project. In addition to the Lewiston project, we are also expecting to spend a total of approximately $45 million in capital on a planned precipitator replacement project to be installed at our Cypress Bend mill in 2025.
This is an important emissions control device that is approaching the end of its useful life. Approximately $8 million of that spend is expected this year and is included in our total 2023 capital expectations. Our effective tax rate for the full year is expected to be 25%-26%. Based on current expectations for 2023, our cash tax payments are expected to be slightly higher than our effective tax estimates. This assumes that we will utilize our current rebates and refunds to largely offset some timing differences between book and tax depreciation, which is expected to cause our future cash tax rate to modestly exceed our effective tax rate. Let me turn the call back over to Arsen.
Thanks, Mike. I want to spend a few minutes discussing our key priorities for shareholder value creation. As shown on page 12, we have prioritized our capital allocation as follows. Our top priority is to sustain the competitiveness of our asset base. We believe this requires an average of $60 million-$70 million of capital expenditures annually, excluding large projects. We expect to invest above that target level in the near to medium term in projects such as the recovery boiler tube replacement in Lewiston and the precipitator replacement in Cypress Bend. Second, we intend to maintain a balance sheet that provides us with financial flexibility. While we have a target long-term leverage ratio around 2.5x, we may continue to deleverage further to create greater financial flexibility.
A strong balance sheet provides us with the ability to take advantage of investment opportunities, including in a potential downcycle. Third, we will look at various opportunities to create value through investments and opportunistically returning capital to shareholders. We will evaluate value-accretive internal and external investments. Given the current business environment, we're likely to prioritize incremental cost reduction projects and add-on acquisitions versus large greenfield or brownfield capacity expansions. We will compare these potential investments relative to opportunistically returning capital to shareholders based upon our share price. We also expect to buy back shares to mitigate the impact of dilution from share grants to our employees. We were active again in the first quarter buying back shares. I would like to emphasize that we will continue to be disciplined allocators of capital, and we'll seek out the right opportunities to create value across both of our businesses.
The team is focused on delivering strong free cash flows in 2023, despite a slower start in the first quarter. In closing, I would like to thank our people for all that they do to keep our operations running safely and efficiently and for servicing our customers. I also want to thank our shareholders for their continued support and our customers for placing their trust in us. With that, we will end our prepared remarks, then take your questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star one on your telephone keypad. One moment please for your first question. Your first question comes from the line of Paul Quinn with RBC Capital Markets. Please go ahead.
Yeah, thanks. Good afternoon, thanks, guys. Just maybe start on the pulp side. That three-month delay in sort of realizing lower pulp pricing, can you remind us how much you're buying in pulp? Is it 100% on the hardwood side? Did you see any benefit to that in Q1?
Paul, we buy almost 300,000 tons a year of pulp on the open market. The vast majority of that is hardwood-based. You know, we have, you know, seen a little bit of a downtick in the P& L of late, but I think we're gonna see more pronounced benefits both in the second quarter and, more importantly, the third quarter. As you saw prices drop in pulp in February and March timeframe, that, you know, kicks in a little bit at the end of the second quarter, but really will positively impact us in the third quarter.
Paul, to add to that, pulp prices were increasing throughout last year. If you look at, for example, eucalyptus, went from $12.45 to $16.10, between January and December, and it started falling here in, in largely in Q1. We expect to start seeing these benefits play themselves out here in later in the year.
Yeah, no, I expect that as well. If we were trying to look at a benchmark hardwood grade for you, is that eucalyptus? You buy a lot more eucalyptus than you buy North American hardwood.
I think that's the right way to think about it. We do use a North American hardwood as well, but eucalyptus is the grade that's primarily used in the tissue market for bath primarily.
Paul, to add to that, there's a list price and a spot price. I think no secret on the list price, most buyers buy at a substantial discount to the list price. The spot price might be closer to maybe where the market quote unquote is. As you're looking at the changes, you know, I think look a little bit more towards that spot price versus the list price.
Yeah. I think I figured that out over the last 30 years. Yeah, I think I've got that one. Maybe, just the paperboard downtime that you've taken, in Q2 here, how material is that and what have you sort of baked into your Q2 guidance?
You know, we haven't, I don't think we're prepared to share what that downtime is. I think what we said in our comments is, it's our intent to balance supply and demand here for balance of the year. There is, we're also gonna manage inventories, and I think what we said is, we grew our inventories, and we expect for net working capital to be a source of cash for balance of the year. I think we're gonna stay away from commenting on specific tons.
Okay. maybe you can comment on just your expectation or what's the confidence behind your expectation that paper will really improve in the second half?
Yeah, I think here's what we think is happening. There's a few pieces moving around. I think the first one is customers are managing their inventories as supply has become more available. That's what we're hearing in the market is inventories were quite high heading into the end of last year, and they remained high and customers are managing those inventories down. I think that's the first piece. The second piece is there's some softening in consumer spending happening that's probably having an impact. We're also seeing pockets of increased import activity and penetration in our markets. That's probably due to some of the supply constraints that we saw last year and customers seeking out alternative sources of supply.
From where we stand today, we think those three pieces will sort themselves out and we believe we'll have Demand will start recovering in the second half. Certainly, we've seen softness here in Q1 as well as in April.
Just on consumer products, I noticed that price is up kind of almost 12% year-over-year from Q1 this year to Q1 last year. You're now given, you know, sort of where pulp prices are falling to, your costs are coming down. How much of that increase that you got over the last year do you expect to give up or do you expect to give up any going forward here?
You know, I think we'll start with this. You know, in both markets, including tissue, I think supply and demand will ultimately drive that price. As you saw here over the last couple of years, we were not able to pass through the cost increases into price and tissue, and our margins were compressed. We're in the process of recovering margins to more healthy levels. I don't think it's a direct correlation between price going up, price going down on pulp and price falling in the market. I think ultimately it's gonna be supply and demand driven. We think demand is strong and, you know, if you look at RISI data, supply additions have slowed.
It's, I think operating rates are going up in tissue and we are approaching some of our constraints in our tissue production as well.
All right. That's all I had. Best of luck, guys. Thanks.
If, Paul, if you don't have any, follow questions, I think that will conclude our call.
Thank you everyone for joining. You may now disconnect your line.