Q2 2020 Clearwater Paper Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to because your Walter <unk> second quarter. Many funny earnings conference call. At this time all participants are in the listen only mode. After the speakers presentation. There will be a selection and answer session asked that question driven to section you will be the.
That's part one on your telephone if you require any forget as he said we split Sars there, though I would now like to handle conference over to your host to be Investor Relations Mr. slow bolin. Thank you. Please go ahead.
Alright, thank you.
Good afternoon, and thank you for joining Clearwater paper's second quarter 2020 earnings Conference call. Joining me on the call today are Arsone kitsch, President and Chief Executive Officer, and Mike Murphy, Chief Financial Officer I.
Financial results for the second quarter 2020 will be released shortly after todays market close.
Were released shortly after todays market close you'll find a presentation of supplemental information, including a slide providing the company's current outlook, which is posted on the investor Relations page at our website Clearwater paper Dot com.
Additionally, we will be providing certain non-GAAP financial information. This afternoon discussion a reconciliation to the non-GAAP information to comparable GAAP information is included in the press release or in the supplemental information provided on our website.
Please note slide two of our supplemental information covering forward looking statements rather than reading. This slide we're going to incorporated by reference into our prepared remarks with that let me turn the call over to Arsone.
Good afternoon, and thank you for joining US today, please turn to slide three.
You saw from our press release Clearwater paper had an outstanding quarter, driven by continued strength in our tissue business.
Stability in paperboard and excellent operational execution.
On a consolidated basis the company reported net sales for the second quarter $480 million and adjusted EBITDA of $79 million, which represents growth of approximately six and 78% respectively over last year.
Our consumer products Division drove results with both higher sales and production volumes to meet increased tissue demand.
Lower input costs, particularly in pull were also a tailwind on a year over year basis.
Together with our customers, we were able to rationalize our SKU offering which increased throughput to meet elevated demand.
Our supply chain team worked closely with customers to fulfill orders with the depleted inventory position after the consumer driven pantry loading in March.
I will speak in more detail to industry conditions in a minute and Mike will provide some additional contracts on operating leverage in his comments.
Another important updates in the quarter is that we are at full production run rate for a new Shelby paper machine, which is on target with our mid 2020 expectation.
We remain on track to achieve the full benefits of the Shelby investment which include achieving full run rate on converting equipment.
Increased sales and supply chain benefits by the end of 2021.
Overall, we continue to realize the benefits from the Shelby investment and are utilizing the resulting free cash flows to delever, our balance sheet and increased value for equity holders.
Our paperboard division produced the stable quarter in Q2, managing through uneven end market segments.
Our backlogs were above seasonal averages at the beginning of the quarter, but are now in line with previous years.
In the second quarter, we used the free cash flows generated to reduce our net debt by $100 million and increased liquidity to 264 million.
As a quick side note, both Mike and I have enjoyed meeting investors and analysts over the past few months and we appreciate the warm welcome that we have received.
We appreciate your feedback your time and your interest in our story and we look forward to our future conversations.
On slide four as I noted last quarter, we continued to focus on our top two priorities.
The health and safety of our employees and the relationships, we have with our customers.
I'm proud to say that our strong operational execution continues to take care of bolt.
We're continuing to operate with appropriate safeguards against cobot, including temperature checks sanitation practices, social distancing guidelines faced covering requirements remote work travel restrictions and enhance benefits.
We successfully focused on business continuity and customer service and did not experience any material disruptions in the quarter.
I want to commend and thank our employees for their commitment to taking care of each other and our customers and persevering through a challenging period to deliver exceptional results.
Our efforts and risk mitigation strategies are making a real difference in helping to reduce the risk of cobot at our sites.
I will now share where we saw for both the tissue and paperboard businesses in the second quarter.
Let's start with our consumer products Division on slide five.
As we have previously noted at home tissue demand has been elevated and has driven unpredictable consumer buying patterns.
We believe that this is being driven by the shift from away from home to add home tissue consumption. As many continued to work from home and state and local economies remain partially closed.
In recent weeks, we have seen retail demand stabilized at about 10% to 15% above pre coated levels.
It remains to be seen how this plays out in the coming months.
Our industry view remains largely the same from our comments last quarter, which I'll summarize and a few key points.
First.
Recall that the market for tissue in the US is traditionally two thirds at home and one third away from home.
Economies began to reopen in many states, which we believe drove some of the normal normalization in demand in June and July.
That said.
It appears for much of the country the path back to normal work school and travel patterns remains uncertain for the rest of this year and even the definition of normal may change.
Second as we noted last quarter SKU rationalization AIDS, our business from an efficiency and throughput perspective.
We are to some extent starting to see customers demand some increases in our product offering.
While we believe that our customers benefit equally from a lower SKU assortment. It remains to be seen what this will look like in the future.
Lastly regarding industry capacity the landscape remains largely the same as at the end of the first quarter.
For the industry and Clearwater paper inventory levels were drawn down to meet the spike in demand in March and early April as production ramps.
Currently we believe the industry is essentially at full production capacity in inventory levels remain below normal levels.
Timing of recovery in inventory levels across the value chain will be driven largely by normalizing demand.
Likely in the fourth quarter of this year.
Now, let's turn to our tissue results over the quarter.
Recall from the first quarter that we shipped over 15.2 million cases, which was roughly 20% higher than our average run rate last year.
In the second quarter, we shipped 16 million cases as demand remained elevated.
So we did observed some demand normalization over the back ended the quarter.
Compared to the second quarter in 2019, our case sales volume was up 28%.
We continue to execute for our customers and are pleased with production efficiency and fixed cost leverage as I mentioned earlier.
We are anticipating both sales and production to be lower in the third quarter versus the second quarter as in stock conditions are improving and inventories are being rebuilt.
As mentioned earlier, the new Shelby paper machine reached full run rate capacity over the last couple of months.
I would like to congratulate and thank our Shelby team, whose dedication and hard work contributed to us reaching this important milestone.
Let me also take a moment to congratulate and recognize our recently appointed senior Vice President and general manager of the consumer products Division.
Joined Shufelt join Clearwater paper in 2012 and has more than 30 years of experience in the paper industry.
We're very fortunate to have Joanne in this role, especially during this unique time for our business.
Let me now provide a few comments on our paperboard business. Please turn to slide six.
As noted earlier, we were pleased to see stable paperboard demand in the quarter with strength in our core end market segments offsetting recessionary pressures.
As you know we estimate that approximately two thirds of our paperboard demand is derived from products that are more recession resilient and one third is driven by more economically sensitive or discretionary products.
Generally our folding carton customers, especially those with exposure to food and healthcare packaging have seen strong demand.
And our foodservice customers, especially those with exposure to quick service restaurants and away from home dining as well as commercial printers have seen weaker demand.
We know that our drink Cup stock sales volumes through June year to date were stable to 2019.
In part due to sales of the Newgard brand of premium Cup stock announced last year.
Our exposure to diverse end markets segments help provide stability to our order book in the quarter.
We would characterize paperboard demand in the quarter to be stable. Despite sales volume declines a 2% compared to the first quarter of 2020, and 8% relative to the second quarter of 2019.
Our production was impacted at Cypress spend by two separate utility outages in the first and second quarters.
Additionally, the second quarter of 2019 benefited from a shift of approximately 5000 tons from consignment to revenue.
While we're encouraged by our stable performance in the quarter, we're navigating through some uncertain market conditions and have seen a softening in our backlogs relative to earlier in 2020.
Bringing them in line with our historical averages for this time of year.
In July Clearwater paper introduced the rematch and brand of SBS folding carton paperboard with up to 30% post consumer recycled fiber that has FDA compliant for food contact.
This follows the successful launch in March of 2019 of our Nuva SBS brand of Cup stock with up to 35% post consumer recycled fiber.
Clearwater paper, whether imagine brand with the remains in a newer brands is meeting our customer and consumer preferences for more recycled content and an already highly sustainable form of paper based packaging.
Without compromising on consumer safety and product quality.
With that I'll turn it over to Mike to discuss our second quarter results.
Thank you our sense.
Please turn to slide seven.
The consolidated company summary income statements instant ticket for the second quarter as well as the first half of 2020 and to constantly.
In the second quarter diluted net income per share was $1.36 cents per share and adjusted EBITDA was $79 million.
The corresponding segment results are on slide eight.
Our paperboard business continues its steady EBITDA performance, while consumer products benefited from significant sales growth and fixed cost leverage associated with production growth and favorable input costs.
Please turn to slide nine where you'll notice that we will speak about our performance a little differently than before in addition to addressing second quarter performance relative to the first quarter of this year. We will also comparing the current quarter with a quarter from a year ago.
The second quarter of 2019, we started shelby too and incurred as anticipated startup costs related to inefficient staffing lower production throughput higher waste and other costs.
While we're not providing a specific dollar amount for these costs. The shelving ramp is an important factor in our performance improvement.
We are benefiting from the volume increases related to the production ramp which is helping meet some of the coated related demand and incremental volume from new customer programs.
Partially offsetting the upside on volume and our cost structure is a mildly negative price mix variance during this timeframe.
Slide 10 is a good representation of the impact of coated demand on our cost structure.
While higher sales had a positive impact on our financials our costs were significantly lower.
Fixed cost leverage was the most significant driver as we produced almost 2 million cases more in the second quarter versus the first quarter.
In addition to the improved cost leverage we also experienced cost benefits in freight and logistics.
As our supply chain team continued to find more efficient ways to meet customer demand.
Slide 11 contains some additional context to the extraordinary performance in our tissue business.
As slide contains IR data, which is a snapshot of retail sales of tissue.
On a year over year basis March sales were 100% higher than the previous year.
Loan to 37% growth in April 19% in May and 11% in June.
We believe that covered 19 initially drove pantry loading by consumers in March in early April.
Elevated demand has subsequently continued due to the shift to at home consumption.
It appears that that demand trends in recent weeks, our tenants at 15% higher than the previous year.
Although we are uncertain, whether this is the new normal in the medium term.
What we do know is that retail in stock levels have improved and inventory levels are being rebuilt across the supply chain.
We are watching all of this closely on our contingency planning for various demand scenarios in the coming months.
Elevated demand drove our sales in the second quarter to 60 million cases, representing a unit growth of 5% versus the first quarter and 20% versus prior year.
Our production in the quarter increased to 15.9 million cases up 14% versus the first quarter and 24% versus prior year.
This increase in production was driven by our efforts to rationalize skews eliminate downtime as well as the ramp of our Shelby assets.
The cost leverage from this significant increase in production along with improved cost and freight and logistics led to materially better results than initially anticipated.
When comparing the second quarter to the first quarter 2020 more than half the EBITDA increase was driven by fixed cost leverage to to improve production.
Slide 12 is a year over year EBITDA comparison for our paperboard business.
Lower pricing, partly driven by Vcs reported price decrease in February was partially offset by favorable mix.
Lower volume was a function of moving some inventory from consignment to revenue in the second quarter of last year.
Some demand weakness at our Manchester industries business.
And lower production due to utility outages at 5%.
Mostly offsetting EBITDA impact of lower volumes were lower input costs, notably in fiber and energy.
On slide 13, we compare second quarter to first quarter of 2020.
A stable price mix as we had mostly experienced a VC reported price impact in the first quarter volumes were largely flat and we benefited from lower input costs and operated more efficiently in the quarter.
Our performance in the second quarter exceeded our expectations with sales and production volumes in tissue driving significant improvements are paperboard business remains largely stable and our costs were generally below expectations. These factors combined with outstanding operational execution delivered significant upside.
Our original expectations.
Slide 14 provides a perspective on our third quarter outlook.
Tissue outlook is largely a function of sales demand.
While we believe that demand will remain elevated versus historical averages. We do expect about a 10% decline in cases sold in the third quarter versus the second.
Relative to the second quarter for also anticipating higher supply chain costs as we rebuild finished goods inventories.
Input costs are expected to be largely benign.
As we previously mentioned our paperboard business remained stable in total and while we continued to prepare for potential kobin recession related weakness our portfolio of customers and end market exposures continues to position us well through the end of July.
If the assumptions around demand as well as largely stable prices and raw material inputs full we would anticipate third quarter EBITDA to be in the range of 64 to 74 million.
This range also assumes that we continue to operate our assets without significant cobot related disruptions.
Given the current market uncertainties, we're not in a position to confidently share expectations on EBITDA for the full year.
For the full year of 2020, we continue to anticipate interest expense between $40 million to $50 million.
Capital expenditures between 4500 50 million.
Patient between 109 and $112 million not to be cash taxpayer.
As it relates to Shelby, we're on track to achieve our operational production goals for 2020 with more to come in 2021.
And given current market conditions, we expect to meet or exceed our impact of 20 to 25 million in 2020 from this project.
Slide 15 outlines our capital structure.
We utilized approximately 100 million and free cash flow to reduce our net debt, which included a 60 million dollar voluntary payment to our term loans and improved our liquidity to $264 million.
As a result of the strength of the quarter and our debt repayment activities. We wanted to point out a few items first our term loan debt pricing dropped the LIBOR plus 300 basis points from LIBOR, plus 325 basis points as a result of our leverage ratio declining to 3.6 times.
Second.
The debt maturity profile improved with no scheduled principal payments over the next two years and third Moody's reiterated their corporate credit rating of BA to stable.
It's worth noting that our cash on the quarter was aided by substantial net working capital timing as first quarter sales ramp later in the quarter with accounts receivable increasing.
This generated cash flow benefits for Clearwater in second quarter as we collected those abnormally high accounts receivable.
We turn the call back to Hearts and to conclude our call today with Clearwater paper value proposition as we see it and a few concluding remarks.
Thanks, Mike, Let's turn to slide 16.
I would like to reiterate our investment proposition, which we discussed on our previous earnings call and mentioned to investors throughout the quarter.
First we believe Clearwater paper is very well positioned across too attractive and complementary businesses.
Our consumer products division as a leader within the growing private branded tissue market.
From our vantage point, we believe the key strengths of this business or the following first we have a national footprint with an ability to supply a wide range of product categories and quality tiers, which is an attractive sales proposition to our customers.
Our expertise to manufacturing supply chain and transportation is a key differentiator, especially during challenging times like today.
Second there are long term trends away from branded products to private brands. This is amplified during recessions private brand tissue share in the us has risen to over 30% in 2019 up from 18% in 2011.
While these trends are impressive we're still a long way from where many European countries are where private brands represent over half of total tissue share.
Lastly.
Tissue as an economically resilient in need based product.
Historically demand has not been negatively impacted by economic uncertainty.
Turning to our Paperboard division.
We believe that the key strengths of this business or the following first we operate well invested assets with a geographic footprint, enabling us to efficiently service customers on both coasts.
We have a diverse customer base that served end markets that have largely stable demand.
Second not being vertically integrated enables us to focus on independent customers with unparalleled service and quality commitment.
Lastly, we believe the business is well positioned to take advantage of trends towards more sustainable packaging and foodservice products.
Our paperboard business has demonstrated an ability to generate good margins and solid cash flows.
Overall, our large capital investments are behind us and we're prioritizing cash flows to reduce debt.
As we demonstrated in the second quarter with a net debt reduction of approximately $100 million.
We intend to continue to do so by delivering benefits from our Shelby investment continuing with operational improvements aggressively managing working capital and prudently allocating capital.
We believe that this strategy is the best way to create value for equity and debt holders in the near term.
I also want to add we prioritize the sustainability of both the products, we make and the way we make them, which is a key part of our investment proposition.
Before we take your questions I want to express my deepest gratitude to our employees have responded to the cobot related issues that are impacting our personal and professional wise.
And to our customers vendors and local officials continue to work together with us in partnership to navigate continued uncertainty.
So with that we will end our prepared remarks and take your questions.
Jeremy minded to ask the question you will need to press star one on your telephone again far one on your telephone can we grow your question first about hash key please San Diego, we compile that you any roster.
Your first question comes from the line is Adam Josephson. Your line is now open.
Our son and Mike Good afternoon.
Good afternoon Adam.
Congratulations on a nice quarter App, a couple on SBS and I'll ask one or two on tissue on the inventory issue into Q I don't recall hearing anything a year ago about the treatment of consigned inventory.
Artificially boosting volumes.
In the release or on the call last year I. Appreciate that you guys were not in Europe.
Physicians a year ago, but can you just help me understand what happened in why there was no mention of this a year ago. If it was a big deal affecting volumes.
I think Adam.
Yes.
To answer your question directly and then I'll pull back a little bit.
Roughly 5000 tons Scott recognized into revenue in the second quarter of last year.
I can't speak to why.
It was not called out specifically Ben Ben.
When we look at the period year over year, both from a quarterly standpoint, and a six month standpoint.
We don't see huge differences, but that was one thing that popped out one we were looking at the data that we wanted to make sure that we called out.
We do have some mild and negatives in the quarter, primarily in the commercial print industry.
And the second quarter of this year.
That's showing up a bit in our Manchester industries business as well as a little bit in the foodservice business, but.
We've had pretty stable volumes year over year, when you isolate that.
Yes, I call in movement from inventory to revenue last year.
Got it thanks, Bacon and just also on Sps and you're seeing largely stable trends would you characterize the industry's largely stable.
As you know industry backlogs are arts multiyear lows. Your two largest competitors ARPO have both announced the market downtime in the third quarter, owing to weakness in commercial print and cop stock.
What gives you confidence that market conditions in Sps will hold up through year end.
Given everything we're hearing and seeing.
So I can't speak to our competitors what will we will tell you as we started with backlogs we started in the quarter with backlog so were higher than than historical averages.
We have normalized towards the end of the quarter at to towards historical averages and we've held around those averages through through the month of through the month of July.
So our.
Our end market segments of the strength and folding carton and and food and food packaging applications that appears to be offsetting some of the weakness in commercial commercial print and foodservice, although it's pretty hard to predict how this plays out for balance of the year, but as of right now we're seeing a relatively stay.
Table backlog is that our comparable to historical averages.
Got it thanks, Harrison and on the tissue side can you just.
Talk about what you were thinking three months ago, and you gave the EBITDA guidance. So.
Yes, 50 to 55, and then obviously you upsize that quite a bit and then you see even that that much higher range I mean, presumably at the time in its not presumably you knew how good tissue demand was.
In may and potentially into June and yet obviously, you're you ended up dramatically raising your guidance I guess, because the impact of bay higher production on your fixed costs as much greater than what you're expecting but what exactly was so much played out so much differently on the tissue.
Side than what you're expecting given how positive view on tissue demand trends even back then.
So two things so when we when we provided that guidance would with what we knew us what would March and April looked like.
May and June we're we're still a bit unknown to us and we were anticipating June demand to to start slowing down.
Considerably and it Didnt June demand was still I was still very strong and our volumes were very high up quarter over quarter.
That's the first pieces. The second piece is our production was able to keep up with those elevated elevated.
Quarters, So we shipped $60 million, we produced 15.9 million.
And the benefit the cost benefit the cost benefit of that increased production was was very substantial. So I think there were two two positive surprises for us. It's the continued strength in demand heading into June.
As well as our ability to produce produce to those orders as well as the cost absorption positives that we experienced.
Thanks, just last one on just the topic of guidance. So just given what happened in twoq and the extent to which.
You put up just dramatically higher EBITDA than what youre guiding to what is your confidence level and your third quarter guidance ranges.
And do you think it's worth giving EBITDA guidance, even for the current quarter, given what seems to be a lack of visibility.
Adam and Spike I definitely appreciate the spirit and then the intent of the question and Im not going to accuse you of not asking for guidance.
Hi, Thanks.
Part of what our son's commentary was as we learned what we were capable of doing it's one thing to see it in theory. It's another thing to see it shows up on the bottom line and Thats what happened in the second quarter.
I think again, we're pointing to the third quarter, it's largely going at the a function of demand now that we know if were able to do on the production side of things.
And we are calling for the markets to cool off a little bit.
Just given the read of what we have in July.
I think tissues coming in a little bit stronger and we would have anticipated.
And.
He is kind of in that same ballpark as where we had expected to be so thats.
So it gives us comfort, but yes we're.
God.
I understand again, the spirit and the intent of your question.
Appreciate him I am just last one on tissue pricing at price mix was a drag year over year and it was pretty flattish sequentially. I think some investors would have expected you to get more price just given the extraordinary demand that you saw in the last couple of quarters, who can you just talk about.
The relationship between demand and pricing in this industry and how your pricing mechanism works and whether you think you will eventually get pricing as a result of this exceptional demand that you've seen since March.
Adam generally speaking, we don't talk about future pricing, but let me just comment on the pricing mechanisms and tissue. They're not is to these are not a dynamic spot Mike market prices. These are generally agreements with with set pricing that are being renegotiated on on a regular basis.
So as we look into the future we certainly have.
As a market channel volume strategies around our agreements of how we plan to reshape our business and in the future, but we're not going to comment on future pricing.
Thanks Arsone appreciate it.
Your next question comes from the line is taking share from Davidson. Your line is now open.
Yes, thanks, and good afternoon, everyone.
On an exit.
Hi, I just wanted to start on the guidance. So if we were to try to think about the impact of cost absorption in tissue as demand normalizes I mean is that really the biggest driver in.
The $10 million EBITDA decline Q3 versus Q2 are there any other big moving factors, we should be aware of.
I think that together with.
Freight costs. So we had an interesting dynamic in the second quarter, where we were shipping direct to customers more so than we usually would which had a lot of freight cost down.
As we rebuild inventories to service our customers at the levels there used to being service staff thats going to add back some costs are a freight.
And then we have some other I'm kind of puts and takes in there, but those are the two Dick's trackers.
Got it okay. That's helpful.
And I guess kind of sticking with that input cost I mean, how should we think about fiber and maybe energy in the second half ash those continue to be.
Pretty nice tailwind that lease on the fiber side.
If you look at the latest forecast the public forecast that are out there a pull pricing is is it is expected to be largely flat maybe down slightly in the second half versus the first half.
I think other input costs.
Around energy, they're relatively relatively benign transportation has rolled benign.
We are experiencing an interesting dynamic with with some of our wood fiber costs and the paperboard business with lumber Mills lumber mills ramping up to meet increased demand.
We're seeing more more chips more chips available more residuals available to us Tom so that that could provide a tailwind for us in the second half, but largely largely benign with maybe some some upside on.
On the residual cost and paperboard.
Got it okay.
Then if we were to look at SSG ne.
I guess about 6 million year over year over kind of the biggest components in that increase.
Sure.
One that we're happy to talk about two years.
Employee bonus our compensation related to the outstanding performance.
And so do we had the appropriate accrual in the first quarter, but when you have this amount of fee. If you will and the second quarter wait for accruing at a much higher level for the rest of the year and there is a onetime catch up that you need.
We also had some.
Higher than normal professional services fees up flowing through during the second quarter on those were the two primary components.
Got it Okay. I guess the first one is not really that problem to have.
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Okay and then.
I guess lastly.
Kind of outlined the major maintenance schedule here for 2021, I mean are there any smaller projects or impacts we should be mindful of kind of entering the second half any sort of deferred maintenance activity just given.
The strength here in the first half.
We we do those pretty regularly.
And we do have no.
Okay, and addition that maintenance minor pickup central App at along the way.
But nothing that I would call out net would be truly noteworthy.
Okay. That's helpful. Alright, Thank you I'll turn it over.
Your next question comes from the line of micro mill from BMO capital markets. Your line is now Ofone.
Good afternoon person Michael.
Hey, good afternoon Mark.
Two questions will Mike.
You could just give us a little more color.
On where you see the working capital opportunities that you flagged in the presentation and sort of order of magnitude on them.
Then.
We just had another.
Big East Coast private label.
Private brand.
Pretty sure announced a couple of new machines. So I guess I wondered how directly you competed with them.
And maybe if you could just deal with the ish who.
Of incremental capacity still coming into the private label market.
Sure. So I'll handle the first one on networking capital Arsone, we'll talk about tissue.
So and Mike networking capital commentary market is may be backward looking to the second quarter, which as I hope covering your question.
But we had a net working capital benefit in the second quarter of just under $45 million.
The biggest benefit there was accounts receivable trade accounts receivable coming down by approximately $21 million.
We had inventory coming down in the quarter as well close to $5 million.
Accounts payable on crude liabilities went up by 15 million I'd point out to you Mark.
Net if you look at our capital structure, we make our bond interest payments in the first in the third quarter net save cash payment of about $14 million. So we're a beneficiary of that from a working capital standpoint in the second quarter, we will be again in the fourth quarter, but in the third quarter just expected change.
Yes by that order of magnitude.
Okay ill turn it over but but.
Right.
Go ahead anything else on the working capital I'm, just going to say you know kind of looking forward.
Maybe you could talk about any.
Introduce you see on the working capital side.
We it started off the year Mark it at thinking that we would need a use of working capital of 20 to 25 million, we will do that from our guidance last quarter, we're still trying to sort through what's the right inventory level is that we need to service our customers appropriately I.
I think in the paperboard business, we understand that and we're pretty close to that level I think and tissue, we understand it but we're still operating at a pretty low level and so the expectation I would have the back half the year is that we're going to build inventory and so were a net consumer of networking capital.
Okay funnel so.
So mark on that on the tissue capacity and I'll.
I'll stay away from commenting on specific announcements by competitors, but more general comments about tissue capacity at the markets about 10 million tons.
Gross largely with with population Cc about 100000 call. It 100000 tons a year of additional capacity needed to meet.
To meet demand Thats, one to two additional paper machines per year to keep the market.
Between balanced between supply and demand. So if you look at this year. There is approximately 200 250000 tons of capacity that's coming online next year, it's somewhere in the 150 160.
And then beyond that in 20 to 23, it's still it's still largely largely unknown, but thats, how I think about the supply and demand you need about 100, maybe 150000 tons year to keep to keep the market debt to keep to keep up with demand.
In terms of in terms of competition, it's a highly competitive market it has been.
Or for a number of years. So I would say we are you should expect us to be a competing across the board where national player across multiple quality tiers across across all channels.
So we are we're constantly competing with with with with many players in this in this market.
Okay I will just one other question you mentioned.
Ramp up in Canada chip supply.
It's kind of more lumber production I think this is particularly acute over in the Pacific Northwest does that wind up rippling back to you guys in the inner mountain region of all of that.
It does.
And Mark we have some flex capacity as it relates to.
Our fiber within that footprint, but we consumed both software chips on Svod us on the software chips, we'd have the flexibility.
To pivot to have up to 50% of whole lot shipping we are close to that level in the first quarter now obviously that given what's happened in that fiber basket, we're able to swing much slower.
And so as you well know the chip pricing has a lot lower than the whole log pricing that we get.
Yeah, Bill lumber guys on the coastal moaning most.
[laughter].
Alright, Okay for me [laughter].
Yes.
Our next question comes from the line of fall clean from RBC capital markets Your line.
Yeah, Thanks, very much Bonnie.
Good afternoon, Arsone, Mike it's been a.
In a long day here.
I guess I'll start with the Shelby.
Two you'd mentioned that you're hitting the run rate will kind of mix improvement can we see over the next next number quarter two years.
It's a good good question. So we are.
We are doing right now so theres two things happening amps ison number one right now our demand in tissue.
You May expect has as far as far exceeded our historical averages and frankly as has is exceeding our multiyear projections with the Shelby ramp.
So what we're trying to sort out right now what does what is what are the next few quarters looks like from a volume perspective, and how do we mix out mix out that that machine right. Now every case coming off those lines is spoken for.
And we're selling it.
And the sales team is working right now on a multiyear strategy of how do we how do we improved the mix on that machine to more ultra as it is an ultra capable machine. So it's a bit of a complicated answer there is a short term.
Need this elevated demand and make as many as possible and then long term trying to figure out where does demand what does this growth settle out at and then how do we mix out that machine from a customer and a product perspective to maximize profitability.
Okay.
And then maybe just stick lung tissue and disciplined inventory into distribution chain as well as to the consumer consumer side, where do you anticipate that is right now and.
I guess your year, you're expecting will slow down in Q4, but.
We're currently inventory shut.
Yes so.
Probably the right way to think about that is in stock conditions and stores EPS. If you look at April in the paper in the paper space and saw conditions were somewhere in that 30, 35% range.
They recover to about 75% in stock on the shelf.
The normal average and consumer products, it's about 90% so.
I think you're starting to see inventory being rebuilt on the shelf, which means it's going to start being rebuilt that are at our retailer warehouses and we're seeing some modest increases in inventory in our in our own system as well.
But I would say, where maybe maybe a third of the way there in terms of our recovery.
For for inventory and tissue, so it's going to take us thats going to take us through at least Q4, we believe.
To get to get back in stock and it's going to be largely dependent on on demand demand continues to be very robust I think that recovery period that gets delayed.
Okay, and then just flip flipping over to paperboard negates, the and others have signaled commercial print in some areas in food service has been weak.
Do you think that does recover or are we are weaken or coverage.
Lower lower level going forward.
So Paul it's Mike.
I think I've been.
More focused on the potential of a reception here.
At some point I think Mike sales team and Tpd will accuse me as being the CB predicting nine of the last five recessions.
So I think what we've seen in the past.
This market could be down upper single digits close to 10%.
And.
While the market is stable as we see it and as we're performing were also contingency planning to see if the market where the weekend curious what will happen.
I think it's anybody's guess in terms of how the economy's going to play out.
And so I know thats not a direct answer for you, but I think so long as we have over the hanging over us I think we're going to have limitations on the commercial print demand and limitations on the food service demand.
Okay Fair enough XL corridor good luck.
Thank you. Thank you.
You have a follow up question from Adam Josephson from Keybanc. Your line is now Okay and then.
Our son of Mike. Thanks, So much for taking my two follow ups Arsone isn't funds back to.
Boxboard for a moment you talked about.
Your your lack of integration actually being in your mind a competitive advantage.
As you know some of your larger competitors have made a concerted effort to be to get as integrated as possible. So can you just talk about.
Just expand on on why that is your strategy and why you think it differs quite considerably from others in the industry along those lines.
Adam SBS is still the majority of SBS demand is still.
Non integrated with that with independent converters.
So we're focused squarely on that on that market, especially in folding carton and the value proposition for us for them is that we are focused on their needs and where there for them whether demand is strong or or not.
So between our service proposition, our our ability to deliver volume and our quality proposition has has been an advantage for us as frankly, if you're an independent converter on it you would probably rather not byproduct from from someone who as you are who is your competitor.
So that has been an advantage I think as we look into the future I think we have to continue to reassess is what is the right strategy for our paperboard business.
Up to this point, we believe it's been it's been an advantage for us.
Got it no. Thanks for that and just I know, it's early days talking about next year, but.
You have obviously maintenance expenses going to be quite a bit higher next year and then you've had this extraordinary year in tissue, obviously would you.
Would you care to share any preliminary thoughts about next year is it reasonable to expect this level of tissue performance to persist next year is that unreasonable I guess it all depends on once view the economy as Mike was talking about earlier, but any thoughts you would share with us just about the sustainability.
Of these earnings levels in your mind based on whatever fact, you're aware of at the moment.
Adam I appreciate a followup question in light of the earlier question on how confident are you in your third quarter guidance.
[laughter].
The.
I think it's too early to tell Adam I know Thats something thats important so everybody who's on the line and our investors I think at the appropriate time, we'll come back out and talk to you about it.
I think and tissue, it's a it's going to be a demand story and how much of this shift of demand has moved from away from home.
At home.
And how long is back in to sustain and what the new normal lives.
And I think as the year plays out we'll have some better estimates there, but they still just the estimates.
And then as the economy plays out I think we'll be able to update you on the paperboard business.
And look we recognized the importance of the question I think.
As you think about a model for us.
We would.
Point to that outage number that Curt had referenced before.
Yes, so we know thats going to repeat difference in 2021 than 2020.
And we'll talk further about refining that estimate here and that hopefully not too distant future.
Absolutely well again kudos on a terrific quarter and best of luck this quarter both of you.
Thank you.
I don't see any questions on the Q I will turn Niccolo. Thank you Mr. Anderson kits for any closing remarks.
Thank you all again, we appreciate your interest and support and we look forward to speaking again soon have agreed.
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