Q3 2019 Earnings Call
[laughter] Clearwater paper corporations third quarter 2000 lighting earnings conference call.
A reminder, this call is being recorded today October 24th 2019.
I would now like to turn the conference over to Mr. Robin you.
Vice President Investor Relations Clearwater paper. Please go ahead.
Thank you Daniel good afternoon, and thank you for joining Clearwater papers third quarter 2019 earnings conference call joining.
Joining me on the call today are Linda Massman, President and Chief Executive Officer, Bob <unk>, Chief Financial Officer.
Financial results for the third quarter were released shortly after todays market close you will find a presentation a supplemental information, including an updated outlook slide providing the company's current outlook as a certain cost price mix shipment volume and other factors for the fourth quarter of two.
Also in 19 posted on the Investor Relations page of our website and Clearwater paper Dot com.
Additionally, we will be providing certain non-GAAP information in this afternoon discussion.
A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release or in the supplemental information provided on our website.
I would like to remind you that this presentation contains forward looking statement within the meaning of the private Securities Litigation Reform Act 1995 as amended.
These forward looking statements are based on current expectations estimates assumptions and projections that are subject to change and actual results may differ materially from the forward looking statements.
Factors that could cause actual results to differ materially include those risks and uncertainties.
Right from time to time in our filings with the Securities and Exchange Commission.
Including our Form 10-K for the year ended December 31st 2018, and our quarterly filings on Form 10-Q as.
Well as our earnings release.
Middle information.
Any forward looking statements are made only as a b C and the company assumes no obligation to update any forward looking statement.
Linda Massman will begin today's call with a brief review of the third quarter.
Followed by the Q3 financial results from Bob Redman.
Then Linda will conclude our prepared remarks with an update on our strategic projects.
Well it by an overview of the business environment and our outlook for the fourth quarter.
And then we'll open the call for the question and answer session.
Now I'll turn the call over to wind down.
Thank you Robyn Hello, everyone and thanks for joining us today.
I'm pleased to share with you that we had a good third quarter with solid execution across the company.
We're making good progress towards ramping our expanded tissue operation and we saw continued strong performance from our pulp and paperboard operation.
Adjusted EBITDA for the quarter came in at $31 million, which was on the high end of our outlook range for the third quarter.
Our net sales of $445 million, including strong growth in retail tissue due to expanded business with new and existing customers. This was partially offset by paperboard shipments returning to more normalized levels. After a record breaking shipments and itself achieved in the second quarter.
We are managing our strategic capital projects to completion, the new Shelby facility is progressing well and we are servicing customers from the facility. We're still building our production capabilities and are currently producing in the range of 50% to 60% of capacity.
This keeps us on target for reaching the full production run rate by mid 2020.
We had successful planned major maintenance outages at both of our mill, Lewiston, Idaho, and a third quarter and we just completed the cyber spend Arkansas outage in October .
As a result.
We're not planning to schedule any major maintenance outages in 2020, what the next major maintenance scheduled in 2021.
I will provide a more detailed update on our should keep strategic project and outlook for the fourth quarter later in my prepared remarks.
Now I'll turn the call over double.
Thank you wonder.
Q3 was a solid quarter from a financial performance perspective, as we delivered $31 million of adjusted EBITDA, which was on the high end of our outlook range.
Before I get to the specifics of our third quarter 2019 results I'd like to preface my comments by stating that throughout the rest of my remarks.
I will be distinguishing between GAAP and non gap or adjusted result.
The adjusted results exclude certain charges and benefits that we believe or not indicative of our core operating performance.
The reconciliation from GAAP to adjusted results is provided in the press release and supplemental information posted on our website.
For the third quarter of 2019, those items totaled approximately $2.8 million pre tax expense, which includes $1.4 million of non operating pension and other post retirement benefit costs.
$1 million a reorganization related expenses.
And $400000 Mark to market adjustment of directors equity based compensation.
So with that let's discuss our results for the quarter.
Summary of consolidated GAAP result is shown on slide 18, and non-GAAP . Adjusted results are shown on slide 19 of our supplemental slide deck.
Our third quarter net sales came in at $445 million down 1.5% from the second quarter of 2019.
Growth in retail tissue shipment volumes were offset by the return to normalized paperboard shipment volumes.
Third quarter, adjusted gross profit of $26 million or a 5.9% margin declined by 3.4 point.
From the second quarter.
This was mainly due to the planned major maintenance outage at Louis then and higher depreciation.
On the positive side, we saw lower input costs for external Paul and energy.
Adjusted SDMA was $28 million for 6.2% of third quarter net sales, which is up $1 million from Q2.
This resulted in an adjusted operating loss of $1 million and adjusted EBITDA of $31 million for 6.9% of net sales.
Net interest expense of $13 million was up $2 million compared to Q2 due to lower capitalized interest.
Turning to taxes, our Q3 effective tax rate was 44% versus 115% in the second quarter.
Tax affected items in the second quarter of 2019 had a greater impact on a percentage basis of Q2 pretax book income of $2.9 million compared to Q3 pre tax loss of $19.7 million.
As we stated in our last earnings call our annual outlook for the effective tax rate could be highly sensitive to changes in estimates of pre tax earnings and other adjustments, including federal and state credits.
Third quarter 2019, GAAP net loss was $11 million or 66 cents per share and on an adjusted basis, a net loss of $8 million or 50 cents per share.
Which was below our outlook range for Q3 of 24 to 39 cents loss per share due to higher than expected depreciation.
This compares to Q2, adjusted net loss of $400000 or two cents loss per share.
Non cash expenses in the third quarter of 2019 included $32 million of depreciation and amortization an increase of approximately $3 million from Q2 19.
$3 million total equity based compensation and approximately $1 million of non cash pension and retiree medical expense.
Now I'll discuss the segment results.
The consumer products results that I will be referring to can be found on slide six and 20 of the supplemental materials.
Net sales were $229 million for the third quarter of 2019 up $4 million or 1.9 per cent compared to the second quarter.
The improved topline results were primarily due to a 5.4% growth and converted case shipments resolving from expanded business with new and existing customers.
Consumer products operating loss in the third quarter 2019 was $4.4 million versus an operating loss of $5.1 million in the second quarter. This was mainly due to higher retail shipment volumes and favorable pulp costs.
Partially offset by higher depreciation.
As a result consumer products adjusted EBITDA of $15 million was up from $12 million in Q2 2019.
The adjusted EBITDA margin was 6.4 per cent compared to 5.5% in Q2.
Now turning to the pulp and Paperboard division the results I will be referring to can be found on slide seven and 20 in the supplemental materials.
For the third quarter of 2019 pulp and paperboard generated net sales of $217 million and shipped 215000 tons.
Net sales were down 4.8% versus second quarter as paperboard shipments returned to more normal run rates from the record level set in the second quarter.
Pulp and Paperboards operating income for the third quarter, 2019 was $17 million or 7.9% of net sales compared to $34 million or 14.8% of net sales in the second quarter.
Third quarter operating income was impacted by $19 million planned major maintenance expense at the Lewiston, Idaho mill.
Partially offset by a 3 million dollar decrease in maintenance at the Arkansas Mill.
Other positive impacts at our Idaho mill include lower natural gas prices and electrician electricity costs and lower external pulp prices.
This resulted in Paperboards third quarter, EBITDA and margin of $28 million and 13% respectively.
Now turning to the balance sheet.
Cash capital expenditures were $17 million in the third quarter of 2019 and $126 million year to date.
Our total cash Capex for 2019 is expected to come in at the high end of the range previously provided of approximately $130 million to $140 million.
We had $58 million of short term debt outstanding under the $250 million ABL facility.
Long term debt outstanding at September Thirtyth was $875 million, which includes $300 million seven year term loan b.
And $575 million fixed rate senior notes.
We ended the quarter with a total leverage ratio of 5.7 times last 12 months adjusted EBITDA.
As we said last quarter Q3 is expected to be the high watermark for net debt in the fourth quarter, we expect to see a modest decline in total leverage.
With regard to our liquidity, we ended the third quarter with $8 million of unrestricted cash.
During the third quarter, we use $31 million of cash from operations.
Working capital was a 48 million dollar net use of cash primarily due to a significant reduction in trade accounts payable and timing of interest payments on the bonds offset by a 20 million dollar reduction in receivables and inventory.
This concludes my remarks, and I will now turn the call back over to Linda Thank you Bob.
Let me now bring you up to date on our strategic projects provide a brief update on the market environment and conclude with our outlook for the fourth quarter.
I'm pleased with our progress as we shipped product and service customers from our new Shelby facility.
We are making both ultra and conventional products in Shelby that are meeting customer quality expectations.
As I mentioned, we are ramping production and currently producing at approximately 50% to 60% of capacity, which is in line with reaching the full production run rate by mid 2020.
Following that we expect to reach the bull shipment run rate in 2021 and see the full year benefit in 2022.
Until we reached full production run rate keep in mind the production costs will continue to be elevated.
We haven't historically strong customer mix of premium retailers under a meaningful supplier to most of them.
We have continued to gain new customer volume and retain existing customers, albeit in a highly competitive it environment given recent capacity additions.
This is demonstrated by year over year growth of 8% in revenues and 11.6% in case shipments.
Private label continues to gain share and we are positioned to benefit from this positive trend given our leadership position that is indicative of our service and product quality capability.
Regarding the continuous pulp digester project and listen Idaho, we remain on schedule to install and implement the catalyst by the end of the year.
Turning to our view of the market environment for each of our businesses and starting with the North American tissue market. The IRA panel data estimated in dollar terms reflect positive momentum for private brands.
First the total tissue market grew approximately 5.5% year over year.
Second private brands grew 11.3% versus 3% for national brands over the same period.
Third private brands ended the second quarter with 31.5% market share compared to 29.8% a year ago.
And the data continues to point to strong consumer acceptance and growing preference for private brand products, especially in ultra quality category.
Private brand growth in the Ultra segment continues to outpace total category growth for Bath tissue and paper towels.
We see forecast for net new tissue capacity from 2019 through 2021 for the North American market.
It's been lowered by 33000 tons.
The 365000 tons, resulting from that announced closure of another suppliers paper machine in cross in Arkansas.
Over the long term.
Total new capacity averages out to approximately 122000 tons per year, and we believe in line with 1% to 1.5% tissue demand growth per annum.
Assuming all that capacity comes online as scheduled plus net imports and using receive estimate for demand in North America. The demand in North American capacity ratio in 2021 is forecasted to be approximately 98%.
Well there have been no recent announcement announcements of capacity additions if that were to occur we estimate that the earliest any new capacity come online in early 2022.
Turning to North American Paperboard receives outlook for the remainder of 2019 is a balanced market.
According to S&P as of the end of the third quarter the industry operating rate was 92.7% compared to 95.3% a year ago and relatively unchanged from the second quarter operating rate of 92.8%.
Industry backlogs reported by receive our 4.6 weeks and 4.5% lower than backlogs a year ago.
At the end of the second quarter recently reported industry backlog of approximately five week.
We believe the food service segment of the industry is positioned to benefit from the trend of Boxboard away from polystyrene and single use plastics.
The longer term trend for bleached board remains positive as consumer products companies continue to look for more environmentally sustainable packaging alternative.
Now to our fourth quarter 2019 outlook compared to the third quarter of 2019, we expect.
Consolidated net sales to be down 1% to 2% sequentially due to seasonality in paperboard.
Consolidated adjusted operating margin to be in the range of 2.5% to 4.5% due to several key variables.
First maintenance that is expected to be $11 million to $12 million lower as a major maintenance outage at our cyber spend Arkansas mill, ranging cost from $6 million to $7 million second we expect cost to improve up to $3 million due to lower raw material costs.
And last we expect our annual tax rate benefit to be approximately 34%.
We expect this result in.
Adjusted EBITDA in the range of $38 million to $46 million.
In adjusted net earnings per share ranging from a net loss per share a 15 cents to fully diluted net earnings per share of 27 cents.
In conclusion, we are now developing plans focused on internal execution to ensure we are well positioned to improve operational performance and generate cash flow to delever our balance sheet.
With that we'll now take your questions.
Ladies and gentlemen in order to ask a question you only to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the culinary roster.
Our first question comes from Paul Quinn with RBC capital markets. Your line is now open.
Hey, thanks very much.
Good afternoon.
Paul.
Just maybe start on the.
Paperboard side, just you cited receives backlog numbers what are the backlog said clearwater or what is that on a year over year basis up or down.
Yes, I would say, we we usually don't back you don't disclose our specific backlog. So we just tend to follow industry backlog trends I think is that fair statement.
So you're saying your backlogs are consistent with what you're seeing in resi or you just want to disclose it no. The trends are consistent okay trends are consistent and then just.
Kind of confused on what's going on with top right now I've got some guys that see prices picking up in Q4, and then I've got others that expect continuous weakness.
And.
Just wondering what your expectation for how long.
How how long this pipe till this pulp pricing tailwind will will benefit you guys and whether that 270000 tons that you purchase.
Includes the expansion at.
Listen or not.
Yes, so the 270000 tons includes the expansion.
And also.
Under the pulp market I don't really have a strong prediction for you were reading probably very similar information that you are.
We're grateful for the.
For some of the pulp price declines, but we are seeing different indications depending on what type of banker you're talking about whether its software hardwood.
Okay, and then just just on the.
I guess Shelby too I think lend in your comments you mentioned that it's going to Brent full.
Mid.
2020, and then I think I'm on slide eight here we've got.
Full shipment run rate expected 2021, what's what's the six month delta between those.
Yes. So it's it's the full production is when we're actually producing what we expect the targeted production off the machine and then selling through the shipment run rate would be the six month.
Okay got it and then.
That's helpful. And then just lastly, whats any update on on Loosens labor issue.
Yeah.
So the company has presented at its best and final contract offer to our loosened labor unions.
And this week is when they are voting on the contract and we should know an outcome at the end of this week.
No special.
Thanks Roger.
Thank you and our next question comes from Adam Josephson with Keybanc capital markets. Your line is now open.
Thanks, everyone. Good afternoon.
Hi, Adam.
Hi, Linda one more on pulp so is it pretty substantial benefits sequentially in threeq, four and a half million and then the for Q slide deck you have other costs.
Zero to 3 million sequential banter I'm, just wondering how much more Paul savings you have sequentially and into next year just based on.
What you've seen the pulp prices and based on how your contracts are structured.
Okay.
Yes, So let me talk about this so.
When you evaluate pulp prices.
You know you need to take into account.
The.
Price ceilings that we have in our contracts. So just to give you some background.
External pulp prices were flat for us as of the end of Q3 on a year over year basis, because our 2018, Paul contracts had these price ceilings are inflationary cabs and certainly.
At the beginning of the year pricing in those contracts gets re adjusted.
So while we benefited from lower pulp prices in 2019 on a year over year basis, we are actually flat year to date.
So just to give you some additional contacts year to date on a year over year basis, our pulp prices are down about 7% to 10% but.
But from the high water Mark in Q4 of 2018 pulp prices are down about 15% to 20% through the end of September this year.
So given the structure of our contracts, we're not yet at the crossover point.
So hopefully that was helpful.
You can you just explain a bit so I guess I'm not exactly sure what you're saying then for in terms of the implications sequentially into Fourq, you and thereafter.
Yes, so I mean, if pulp prices continue to go down our contracts will be reset and then we would enjoy the benefits.
In the future.
So strange his favorite right.
But if they stay flat from where they are today Bob.
You are saying, there's there are no more sequential benefits to calm.
Adam maybe ill try to explain it so as we experienced increasing pulp cost through 2018, there was accumulation of escalating costs.
In 2019 until the savings on Paul Cross over that cumulative headwind, we won't see a year over year benefit, but it's still benefiting us consult prices are coming down to going into 2020, if that were to hold you see benefit right.
Got it okay, and just one more on 2020 on that topic. So maintenance is going to be 25 million lower next year. Because you now have eliminated your planned maintenance outages at Lewiston next year.
Talked about that the lowest and Paul optimization savings to Shelby expansion and you have your run rate savings targets for Lewiston, and then obviously the EBITDA target for shopping can you talk about just the puts and takes for next year as you see it. Thus far you have 25 million lower maintenance, presumably you have.
Based on your run rate X. amount of Lewiston savings X amount of Shelby EBITDA et cetera can you just help me with with any of that to the extent you can.
Yes, it will as part of our fourth quarter update usually provide some outlook going into 2020. So we'll definitely have a more comprehensive update on the next call, but you did pick up on a number of the the larger items of course, we also talked about Paul and which direction you think thats going to go on a go forward basis into.
2020.
Of course, we also have the pricing environment the competitive environment in both.
Tissue and paperboard.
We said in our in our prepared remarks.
Definitely see a very competitive environment and tissue all be it we're holding our own and attracting new business and retaining our current customers.
And.
Briefly is called for a relatively stable paperboard market. So those two other factors and then maybe the other.
The other big factor just thinking on my feet here would be capex.
And that comes in a more normalized range for us going into 2020 right. Thank you and I just Bob a couple on on balance sheet and cash flow. So working cap was I think it's about a 45 ish million drag in new attributed it to the reduction and accounts payable on the timing of interest payments on the bonds can you just help me a bit more.
Our with was that what you were expecting working capital to be it was a little worse than what we had and why why the reduction in payables.
Yeah, so so basically.
We went through a major refinancing moved to the L. structure.
So.
Through the financing activities, we were in a position where we increased our liquidity.
So then management made a decision with respect to payables.
To change the timing to ensure that we make faster payments to our value customers. So the customer relationships are very important to us.
Another factor as you're thinking about your model through the end of the year.
We've also eliminated our accounts receivable factoring programs, because we're moving too.
Again, the ABL has a lower cost structures and factory.
So we're going to change our outlook for working capital I think previously we communicated that there would be about a 20 million dollar drag year over year for the full fiscal year and we've updated our outlook.
We believe the impact now will be about a $50 million to $60 million drag and the key drivers there would be again movement away from factoring and also timing of our payables.
And then I appreciate that Bob itself, if working cap is going to be 50 $60 million drag. This year, just based on the factory or eliminating factoring what impact should that have on next year should we assume.
Flattish working cap or perhaps another drag or maybe even a source can you just help me a little bit there.
Yeah. So you know Adam I think what we will do on the Q4 call is address our outlook for next year.
But I think we're we're getting back to more normalized level.
Based on previous years.
Okay. Just one last one on your leverage so you're at five seven a corridor and you said it'd be down a touch in Fourq Q. So by year end, maybe albeit 5556 or any thoughts as to how you think that will trend next year, Bob just based on your early thoughts about EBITDA.
Capex working cap attach Rob just how much lower you would expect that to go from.
Call It five six at year end.
Okay. So, yes, I'm not going to give specific targets, but.
I can give you a framework on how to think about next year on year future.
Yes. So if you go back and review our historical performance and.
See you focus on 2016 to 2018.
So on a pro forma basis.
We generated slightly north of 100 million a free cash flow per year on average under the assumption that capex would be $60 million a year and that's our investment target per year for the foreseeable future.
However, the numbers that I just shared don't reflect the more recent challenging competitive pricing and cost environment and CPB.
They also don't include the full benefits from our strategic Capex projects.
And it's also important to note when you focus on 2020, we're not planning a major maintenance outage. So there's certainly a number of other factors that would impact.
Our projected cash flow for 2020, and our plan is to discuss this more during our year end call.
Thanks, so much Bob.
Thank you. Our next question comes from Steve Chercover with D.A. Davidson Your line is no.
Thanks, Good afternoon.
Steve.
This is an easy one what was it pushed depreciation up by 3 million in Q3 and that will pull it back down by the same amount in Q4.
Yes, so basically we had a slight increase the depreciation expense in Q3.
This was primarily due to.
Counting adjustments related to our fixed assets. So companies generally do a routine annual fixed asset cleanup.
Work and.
This adjustment to depreciation resulted from that.
So the adjustment in total is not material to the company.
And we view it as just a slight increase for the quarter.
28 million, probably a decent run rate going forward now the shelby's up and running.
I think so yes.
Yes, Shelby that the annual run rate for Shelby should be around 17, and a half million.
Okay. Thanks for that.
And then with respect to Lewiston, a new catalyst being implemented.
By the end of the year.
So first of all its any downtime for maintenance associated with that change over time and you have to Perjure flush showed any systems.
Yes, Steve we've dial the maintenance a major maintenance for in doing those done on was completed already this year. So it is just a matter.
Given the catalyst and implementing it into the system.
Okay. So that's what we dealt with in Q3.
Okay, and I mean is that a step function change that 25 to 30 million or is there any kind of ramp.
As that catalyst is functional.
I would expect the ramp.
Again, it's a new piece of equipment for us it.
But difficult to predict but generally speaking when something like this is.
Implemented theres always learning curve and and things that need to get adjusted as we progressed does expect some sort of a ramp.
Okay, and I think Adam tried to get at this but with respect to the ramp in Shelby.
The exit rate.
Point is 60 million in 2021, you think you'll get third or half next year, how would you I guess to think of that.
Yeah I think.
I will comment on that in the fourth quarter call when we have.
Another quarter under our belt and another quarter of operating the equipment, there, but I think.
If I used to say, we feel good about where we are running currently at 50% to 60% production run rate versus our target and on track it keeps us on track to getting to our full run rate by mid 2020.
So with another quarter, we should be able to give give a little bit better indication of that.
Okay, and then hopefully I can even articulate this but in your earnings bridges pulp was in the slides than it was out now it's back in so with the $3 million benefit first of all.
The tissue that anticipated in your Q3 guidance.
So yes, yes that would have been baked into our outlook.
Okay and.
I guess is up to us to to make our assumptions going forward and then.
The same thing on on pulp and paperboard.
You know presume be outside pulp sales to the extent they are already would have been reflected in price mix, but then you've got a benefit of 1.5 million. So.
Little confused there.
Outside pulp sales are de Minimis about so nothing that needs to be models.
Worried about.
So the one and a half million that we see on slide seven benefit from Paul.
I guess, where does that come from or is that.
So.
So you're looking at.
Slide seven lower external pulp prices.
Right.
So why would that be benefit.
That would be outside Paul.
You are buying to put into that helped bleached board.
Got it.
Yes, okay.
Alright, thank you.
Thank you Steve.
Thank you as a reminder, ladies and gentlemen that Star then once asked a question.
Our next question comes from Chip Dillon with vertical research. Your line is now open.
Thank you very much I and thanks for the details.
My first question has to do with I. Appreciate you it was mentioned.
That leverage would come down slightly in the fourth quarter and I just didn't know if if you.
Yes.
Yes.
HM.
Well.
Okay.
Yes.
Okay.
Okay.
Okay.
Yeah.
Okay.
Yes.
Okay.
Okay.
I would be up which actually looks like it's going to be down. So I would have to assume that based on your guidance. Because you did 47, a year ago. So I guess my question is.
You are telling us that debt or at least cashel build how much would that likely be.
Yes. So so let me let me walk you through this because it's this can be a little bit complicated. There's the net leverage ratio and then there's net debt. So so basically for Q4, we expect to see a modest decline in our net debt for our total leverage or do you want to look.
Got it and we've actually started paying down our ABS all in Q4.
But also in Q4, if you focus on the net leverage ratio, we're expecting that to stay flat or potentially have a modest decline.
And the reason for the slight difference.
Component of this calculation is the last 12 months adjusted EBITDA. So basically if you look at last year Q4 of last year. We came in at the high end of our outlook range for Q4 of 2019.
So this is the reason why we might potentially.
Stayed flat.
In terms in that leverage ratio.
But.
You're spot on we're focused on solid predictable execution and driving strong operating cash flow and one of our top priorities is to pay down our debt. So this is going to continue into the future.
Gotcha and is.
60, or 65 million sort of a good number to use for Capex next year.
Yes, we said 60 million basically the split would be 50 million of maintenance Capex and 10 million of strategic.
Okay, and then on the Lewiston project I know the expected.
Adjusted EBITDA benefit from everything is 25 to 35 million and can you tell us how much we've seen already and how therefore, how much more should we get from the catalyst project.
Yes, so so basically we started receiving benefits from the L. pop back in 2018 so.
So we had about $10 million of cost savings.
Primarily related to energy and chemical costs. So.
Our forecast for 2019 is to achieve the same level of benefit so basically 10 million per year.
So then.
With once the catalyst is installed in calibrated. Our view is then we would achieve the additional benefits we've provided arrange for that.
15 to 25 million.
Okay got you said the 10 is not sunlight 10, plus tenants like 10 in each of 18 and 19 and then it jumps up to 25 to 35, so that came out pretty meaningful next year right.
Okay. So so I mean, I'm not trying to pin you down, but you're saying so I understand you. There's 15 to 25 from that there's the 25, which I know will reverse in 21 from the lower maintenance.
Costs and then there's the other moving pieces that we've talked about as we think about next year is that is that fair.
Yes, that's right and will okay. There about that on the fourth quarter call, which is when we typically provide more color.
Okay and the question about on the factoring.
S situation.
Did you have you always factored and now you're not factoring your receivables and is the reason because I know rates are low because you've had to collateralize those receivables somewhere else, which I guess.
Even though you may not be factory now they they have to sit on your balance sheet.
Yes, so so basically.
The factoring program.
Started because.
We needed additional liquidity, but since we've revamped our capital structure.
We've been able to phase out that program, because the l. revolvers price very attractively.
So I don't know if that answers your question, yes, no I think it does yet so.
Gotcha.
And then lastly, when when you think about.
Yes, I know you gave us and by the way. Thank you forgiveness. This maintenance schedule. That's very helpful. As we think about 21 and 22.
Do you see anything.
That would require your capex to go much above that 60 million level in other words, you have a a boiler that needs a lot of work, let's say in 21 or 22 or.
Or is it is it reasonable to say that you know.
Adjusting for inflation that you can stay at that level.
In 21, and 22 to achieve the de leveraging you're talking about.
Yes, So I think you know the maintenance schedule that we provided in the Supplementals that's.
Our our most likely outlook based on you know the information that we have today.
Yeah, and chip I would just tell you that our objective is to generate cash to pay down debt and in order to do that we said we would.
Stay within the limits of the $50 million of Capex.
As we work to de lever the balance sheet.
And so you just some clear so so you don't know of any need to spend a much above that through 22, not that you won't because something I know like change, but bursting at this point you don't see a piece of equipment that so big that has to be replace that would knock that materially higher.
That's correct.
Okay. Thank you.
Thank you. Our next question comes from Roger Spitz with Bank of America. Your line is now.
Thank you good afternoon.
On Roger.
Hey, so I.
In the answer to the reduction of the payables. Your first comment was that if I heard correctly.
You just want to reduce our pay faster your payables with your customers.
I guess why did you if I heard that frankly, why did you make that decision obviously, that's a big bite into your cash flow and your cash position.
Yes, so so basically our view is we want to maintain a a good relationship with our vendors and.
We want to.
Hey to meet the you know terms that we've agreed to.
Contractually so that's our that's our intent.
I mean, I'm going to I guess I would.
What I would read into that was maybe that during.
The last few quarters were things a little Marsh Shush. If you will you you were moving the terms out and then you're bringing them back into where they really want to have been is that is that a fair Reid.
Yeah, I think the way I would frame. It is we want to maintain good relationships with our vendors and suppliers.
Okay.
I'm going to ask a few on factoring just to make sure I understand your Q isn't out yet so I'm lucky or Q2 Q.
And the way I read it on page nine.
I I recognize you probably don't have the cure in front of you, but it's at the factoring 16.9 ish.
We assume that as of June Thirtyth that 16.9 factored receivables was deconsolidated from your balance sheet is that the way to read that.
I think Chris yes.
Right, Okay, Okay, and I know you've talked about facing of the number one what was your Q is not yet what was that number in September if it wasn't zero because it was our.
It was gone at September 30.
I'm, sorry, I didn't Miss the first part of the question regarding what the.
For September Thirtyth, what was that outstanding Deconsolidated number if not zero.
Yeah. If you haven't had I think its magaro Q2, yes, yes, you got rid of them from that was we eliminate rate.
Yes, we eliminated certain programs that we had because we move to the ABL structure.
Got it so that's that program was 30 million factoring program that has gone.
Deep deep.
Just at the bottom of that in the Q2.
Suggests that you then entered.
Subsequent to June Thirtyth.
An additional.
Program.
Hi.
It's actually almost sounds like a supply chain financing out except vendors that have signed on to the supply chain financing paragraph. It's under the account purchase agreement did you. When you say subsequent to June Thirtyth you entered into another arrangement with financial third party financial intermediary is any separate.
Factoring program than the 30 million program that you've got rid of.
Roger that's related to a customer program <unk>.
<unk>.
Yeah, we can take advantage of of of supply chain financing from a customer.
Okay. So that so that actually refers to supply chain because the next part of town, which under the word under the heading supply chain financing.
That one in the same you have a supply chain financing program that youve him. It's a similar program it depends on whats, though the equation you're on in this particular case to be.
Program with our customer right.
Okay and in the supply chain financing, which in the Q.
Two is actually you're referring to.
Back to December 2018 for some reason, but it has 20.8 million Dennis has that's on your balance sheet is your supply chain financing actually.
On balance sheet and not deconsolidated.
Yes, that's also been unwound and and because of the.
Terms and conditions in which we agreed at some of that ended up on the balance sheet as debt.
Okay, So I'd and I'm, just trying to figure out where your.
Total quote unquote debt like.
Is should we assume since you entered into this $30 million facility factoring facility.
In are about June 2018.
The only thing Thats really been deconsolidated.
That's anything outstanding under your 30 million dollar factoring facility and that any other things such as supply chain financing.
Or any other arrangements have all been on balance sheet.
Yes, I think you can look at our IR at our debt balances when the.
And that will sell the inclusive of debt I think thats, a fair way to look at it and you'll see in a in the.
Detailed that there are zero balances on supply chain financing in factory that's right.
Okay.
Got it and if I can.
Move on from there is.
Thank you very much for the demand raw materials, you purchase and in the presentation.
Turning to polyethylene purchase is that used you purchase.
Code the inside of your cup stock or is that.
Paulison film that you used to package or tissue or is that.
It's the coding for Comstock.
Okay and.
He is that more maybe not terribly important. So I was just more curiosity on my part is that more LDP E are LTB or a mix or or do not know because it's not important for.
As much for your company as it might be for things I'm talking about its low density.
Okay.
And lastly, I think you've said that most or all of Shelby to tissue is contracted out if I. If I recall that correctly does that mean that most all of your tissue is.
Contracted out all of your machines.
No I think that will be not not the way to think of it. So we said.
That of the expected benefits related to Shelby.
Roughly half would be optimization of our existing network in half would be incremental.
Volume and then of the incremental volume, we said that about half was already committed to by existing customers.
Roughly.
Thank you and our next question comes from Adam Josephson with Keybanc capital markets. Your line is no.
Thanks, Thanks, everyone for taking my follow up just one more on on Paul sorry to beat a dead horse on this can you and I made asked this question on a previous call, but Bob can you talk about.
How much of a drag pulp was for you when it was up to 300 Bucks a ton and I think you made its mentioned 10 million or so and then how much of a benefit you expect it to be this year and then how much more you think there will be where that came from again if you were just.
The flatline pulp here.
Yes, okay. So.
I covered this a little bit earlier so.
While we certainly benefited from lower pulp prices in 2019 year over year.
On a year to date basis, we're actually flat.
Because of these price caps. So that's 18 versus 19 year to date year over year Yep. So as pulp prices continue to come down sequentially, we will see benefits.
But you know.
Certain contracts were not at the crossover point because cabs.
And Adam I Am just you probably know this chart in here. This is probably the easiest place to go I mean, no. It gets confusing based on the mix of help you use and whatnot, but on page 16, we have that sensitivity works as if if we see a per unit change and Paul and this is just all grade of course is a different.
Hi, good mix for us, but nonetheless, $20 should equate to about five little over $5 million EBITDA.
That's right.
Right. So last year, you had a drag of what it was a 10 million or so if memory serves full year drag.
From higher Paul, Yes, that's pretty quiet and it's been flat. This year. So presumably you would get something on the order, but 10 million benefit if not more so next year is that the right way to think about it if it's been no impact to that yes. Okay. So 10 plotless got it okay, alright, I just because yes.
And then ill start and then on prices as you, so, but yes, all things equal or I'm, just saying if I'm just saying if you flatline, where it is now it should be a nice 10 million plus benefit next year I would thanks, and then just on not on on SBS. Linda. So you had the sappy tons comment earlier. This year you have the GP crossett tons coming out.
Literally this month can you just had been a SBS backlogs are operating excuse me are down quite a bit this year down about 300 basis points as the sappy tons of come in.
Operating rates are on 90% to 93%.
How much of an impact do you expect the the crossett ton exit I haven't would you expect a meaningful uptick and backlogs operating rates next year as a result of that could you characterize the market is balanced even though operating rates have come way down. This year. So just a little more thoughts on where you think this market.
It is and where it may be heading given the capacity shot.
I, we agree with with refi as it relates to relatively balanced market. So.
Some of the tons going out in the tons coming in are relatively balanced pay to use that term again, but it's it's the right way to describe it I think timing is different right because some have come down and others are still coming in.
And I think some of these operating rates I believe are difficult to really surmise.
A lot about the market from because you of course had the mill tonnage going out we took a major down in the third quarter. We know other mills took major down in the third quarter. So while I can't explain exactly what's going on with those operating rate.
I think it's stable market is a good way to describe this right now and into few backlog would.
Generally support that statement.
And so you think the best way to look at the market is the backlogs not necessarily the operating rich.
I think you look at both and you try to discern what conditions are taking place that might have an influence on either one of those two metrics.
I think we have some explanation for why those operating rates.
Might be lower temporarily.
And considering backlogs are relatively stable I think we're feeling fairly comfortable that this is still a good solid market nothing were overly concerned about.
Yep and just it thanks, Glenn and just one last one on tissue.
So obviously you announced price increases last year when pulp was skyrocketing.
Pulp has since plummeted back to where it was before it started to skyrocket.
What impact is that having on tissue pricing I mean, given how competitive the tissue market is particularly the conventional market I would think that prices would naturally come under pressure given the oversupply situation and given that pulp input costs have plummeted, so agree or disagree with that.
Yeah, I wish it was that easy, but generally speaking you would expect some correlation right.
And we did see a positive price move last year that has had a positive impact. This year I'll tell you bite by no means did that cover the increased input costs, we experienced over the last several years. So so we are still under water as it relates to the inflationary costs.
But you're absolutely right the very competitive market and we have very astute retailers and there are always.
Negotiations, taking place around around price that aren't always completely tied to.
Commodity cost changes.
Ladies and gentlemen that does conclude our question and answer session.
At this time I will turn the call over to Mr. massman for any closing or additional remarks.
Great. Thank you for joining us today and for your continued interest in Clearwater paper and everybody have a great day. Thanks.
Ladies and gentlemen that does conclude Clearwater paper third quarter 2019 earnings Conference call. We do appreciate your participation.