Q3 2020 Clearwater Paper Corp Earnings Call
After 2020 <unk> earnings conference call.
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Oh Investor Relations. Thank you. Please go ahead.
Thank you Mike.
Afternoon, and thank you for joining Clearwater papers third quarter 2020 earnings Conference call. Joining me on the call today are Arsone catch President and Chief Executive Officer, and Mike Mercy, Chief Financial Officer.
Actual results for the third quarter 2020, released shortly after todays market close you will find a presentation of supplemental information, including a slide providing the companys current outlook, which is posted on the Investor Relations page at our website <unk> Clearwater paper Dot com.
Neat. Additionally, we will be providing certain non-GAAP information in this afternoons discussion a reconciliation of the non-GAAP information to comparable GAAP information is included in the press release or in the supplement supplemental information provided on our website <unk>.
Please note slide two of our supplemental information covering forward looking statements rather than reading. This slide we are going to incorporated by reference into our prepared remarks with that let me turn the call over to Archie.
Good afternoon, and thank you for joining us today I'm pleased.
Please turn to slide three.
As you saw from our press release Clearwater paper had another outstanding quarter, driven by strength in our tissue business stability in paperboard excellent operational execution.
On a consolidated basis the company reported net sales for the third quarter for a $457 million, an adjusted EBITDA of $77 million, which represents growth of approximately 3% and 145% respectively over the third quarter of last year.
A few business highlights to mention.
Our tissue business drove results with both higher sales and production volumes to meet elevated demand.
Lower input costs, particularly in pulp were also a tailwind on a year over year basis.
Our service levels and tissue started to recover to three corporate levels as we continued to work with customers to fulfill orders and replenish inventory levels.
Oh paperboard business continued to deliver stable performance managing through uneven end market segments with solid execution.
Our current backlogs are in line with previous years.
Yes, we launched Reimagine reimagined folding carton brand offering recycled content and announced the sport.
In the third quarter, we used the free cash flows generated to reduce our net debt by an additional $40 million.
Refinanced or 2023, now with a new 2020.
On slide four as I noted these last two quarters, we remain focused on our top priorities churn Cohen.
Okay and safety of our employees safely operating our assets to service our customers.
We continue to operate with appropriate safeguards against Cowen.
Including temperature checks quarantine protocol sanitation practices, social distancing guidelines based covering requirements remote work travel restrictions and enhanced benefits.
Our human resources and manufacturing leadership teams are doing an exceptional job proactively monitoring the health of our workforce and ensuring that we have the proper staffing level in place.
Our efforts and risk mitigation strategies are making a difference and helping to reduce the risk of cold at our sites.
I would like to express my deepest gratitude to all of our people for their extraordinary efforts and perseverance through this challenging time.
I will now share of what we saw for both the tissue and paperboard business or core.
Let's start with our consumer products Division on slide five.
As we have previously noted at home tissue demand remained elevated during the quarter.
We continue to believe that this is being driven by the shift from away from home to at home consumption as many people continue to work and learn from home.
We noted on our previous earnings call.
That's a decent assumption changes, we were seeing retail sales per buyer right panel data stabilize above pre corporate levels.
In the third quarter that resulted in low double digit retail sales growth relative to the 2019 core.
We expect a year over year increase may continue to moderate as retailers replenish their inventories consumers de stock our pantries and people at just 11 with the pandemic.
Our industry do you remain largely the same which I'll summarize a few key points to provide some context.
First recall that the market for tissue in the U.S. has traditionally served at home and one third away from home.
Many state economies began to reopen.
We drove some of the normalization in demand in the third quarter.
We expect continued uncertainty associated with these reopening and travel patterns.
Making it challenging to predict demand drivers for these end markets during the next few quarters.
It is also difficult to predict when a new normal might look like a pandemic eventually some size.
Second.
While it is too early to discern trends on branded share relative to private branded share. We're noticing that paper towel demands tracking ahead of the overall tissue category well facial demand is lacking.
We will continue to monitor these trends in the coming months and quarters due to the continued uncertainty in consumer demand associated with Cowen.
Third as we noted last quarter SKU rationalization has occurred eating additional production.
We believe that lower skew counts benefit both retailers and manufacturers like us.
While we have seen some customers desiring a recovery of skews, we do not anticipate skew counts to go back to pre corporate levels in the near to medium term.
Our tissue results in the third quarter were robust.
Shipped 14.5 million cases, which is which was up around 10% compared to the third quarter of 2019, but.
But down 9% over the second quarter of 2020 as expected.
We continue to execute for our customers and are pleased with production efficiency.
Cost lever to achieve.
We have largely replenished inventories throughout the supply chain and are seeing in stock conditions improved.
In addition to meet peak demand trend the pandemic, we believe that some of our customers made short term commitments to alternative suppliers and tertiary brands to meet demand, including imported products. As a result, we believe that these customers have greater than normal inventory levels in several.
Not of categories that they are now working to reduce.
We have also adjusted our sales and customer mix over the last six months to better position our business for growth in the long run.
That has let us to exit several customers to reduce complexity and improve our network.
Well, we have a robust pipeline of new business for next year. These strategic moves are expected to have a volume dropped in the next couple of quarters.
Mike will further address the impact of these trends on our business and financial outlook section of our discussion.
Please turn to slide six so that I can share a few comments on our paperboard business.
As you recall, we estimate that approximately two thirds of paperboard demand is derived products that are more recession resilient and one third is driven by more economically sensitive or discretionary products.
Our business, including customer demand has been stable despite economic uncertainties.
Our folding carton customers, especially those with exposure to food and health care packaging.
10, you to see strong demand at our food service customers, especially those with exposure to quick service restaurants and away from home dining as well as commercial printers continue to see weaker demand.
Our exposure to diverse end market segments help provide stability for our order book in the quarter.
We did not have a planned major maintenance outage in the third quarter of 2020 like we did in 2019, which drove improved operations.
Our current sales backlogs are consistent with previous years, indicating stable demand.
While we're encouraged by our solid performance in the quarter were navigating through some uncertain market conditions.
On our last earnings call, we introduced the Reimagined brand of Sps folding carton paperboard.
With up to 30% post consumer recycled fiber that is F.D.A. compliant for food contact.
Together with our new boat SBS Brenda Cup stock with up to 35% post consumer recycled fiber, we're meeting our customers and consumer preferences for more recycled content and 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 third quarter results.
Thank you our son, please turn to slide seven the consolidated company summary income statement as depicted by the third quarter as well as the first three quarters of 2020 and 29.
In the third quarter diluted net income per share was $1.28 cents per share and adjusted EBITDA was $77 million.
The corresponding segment results are on slide eight.
Our paperboard business continued its strong.
Adjusted 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 we provide a year over year comparison of the third quarter 2020 relative to the third quarter of 2019 for tissue.
In the second quarter of 2019, we started our Shelby North Carolina paper machine and incurred as anticipated startup costs related to lower production throughput higher waste and other costs, which persisted during the remainder of 2019.
As a reminder, we achieved the targeted production rate of our new paper machine in the second quarter of 2020 and.
And we are continuing to capture the benefits associated with the project, including ramping our converting lines, realizing supply chain benefits and achieving sales wins and mix improvements.
While we're not providing a specific dollar amount for these costs and benefits.
Continued realization of the sales will be investment is an important factor in our performance improvement.
Our mix continues to improve the Shelby has come online more than offsetting some year over year price impacts.
We are benefiting from the volume increases related to the production ramp which helped to meet elevated demand.
Overall fixed cost leverage from increased production lower input cost and improved mix positively impacted our tissue business in the third quarter 2020 relative to the third quarter of 2019.
You can review a comparison of our third quarter 2020 performance relative to second quarter 2020, <unk> on slide 16 in the appendix.
Slide 10 contains some additional context to the outstanding performance in our tissue business.
And we are building off the data we shared last quarter.
The slide contains Iraq panel data, which is a snapshot of retail sales of tissue measured in dollars.
The line shows monthly change on a year over year basis, while the data in the box shows a quarterly view versus last year.
It's estimated that dollar retail sales grew 34% in the first quarter, 23% in the second quarter and 12% in the third quarter.
You can see in the data that pantry loading phenomena at the end of the first and be getting the second quarters that has given away to a more stable demand picture for our retail customers.
During our last quarter's call, we anticipated the IRI panel data to be up in the 10% to 15% range in the third quarter and it was close to 12%.
In the fourth quarter, we would expect year over year sales growth to continue to moderate.
Expectations highly uncertain and dependent on consumer behavior retail buying patterns and cobot related restrictions.
Our sales in the third quarter were 40.5 million cases, representing a unit decline of 9% versus the second quarter.
And unit growth of 10% versus prior year as expected.
Our production in the quarter was 50.3 million cases were down 4% versus the second quarter and up 19% versus prior year.
Our production levels have benefited from the Shelby ramp and SKU rationalization.
The cost leverage from the significant increase in production along with improved cost and freight and logistics led to continued strong results.
Slide 11 is a year over year adjusted EBITDA comparison for our paperboard business.
Our pricing reflected in receipts reported price decrease in February was partially offset by favorable mix.
Since of the planned major maintenance outage at our Idaho Mill was also a major driver of year over year improvement.
Overall, our team ran our operations well in the quarter and continued to deliver stable results.
You can review a comparison of our third quarter 2020 performance relative to the second quarter 2020 performance on slide 17 in the appendix.
Our performance in the third quarter exceeded our expectations with stronger sales and production volumes and tissue and continued stability and paperboard despite weak economic conditions.
These factors combined with outstanding operational execution delivered robust results.
Slide 12 provides a perspective on our fourth quarter outlook.
As previously discussed tissue outlook is largely a function of sales demand.
As our son mentioned, we recently exited some customers.
And specific products to better position us for the future addition.
Additionally, several of our large customers place orders with us and other suppliers in the third quarter, leaving them with high inventories in several product categories.
As a result, we're seeing order pace slow in October as customers are adjusting their supply chains.
Our October shipments were around 4 million cases, which is down from an average of 4.8 million cases per month in the third quarter of 2020.
4.4 million cases per month in the fourth quarter of 2019.
We are anticipating our tissue sales to be at or below fourth.
Fourth quarter 2019 levels.
Our production will also decline to meet this level of demand so that our inventories do not exceed targeted levels, which will impact our fixed cost absorption that had benefited clearwater throughout much of 2020.
Input costs are expected to continue to be largely benign except for something creasing freight expenses.
As we mentioned previously our paperboard business remains stable in total.
And while we continue to prepare for potential coded recession related weakness our portfolio of customers and end market segment exposure continues to position us well through the end of October.
Dip assumptions around demand as well as largely stable prices and raw material inputs hold we wouldn't anticipate fourth quarter adjusted EBITDA to be in the range of $52 million to $62 million.
This range also assumes that we continue to operate our assets without significant cobot related disruptions.
For the full year 2020, we anticipate the following.
Interest expense between 46, and $48 million, which is a slight decrease due to past expectations due to debt repayments. So.
Depreciation is expected to be between 109 and 112 million.
Capital expenditures are trending towards 45 million.
We still do not expect to be in that cash tax payer in 2020.
While we're not prepared to provide specific guidance for 2021, there are several variables to keep in mind.
Planned major outage expenses are expected to reduce our earnings in 2021 compared to 2020 by $25 million to $30 million.
Weve updated this guidance on slide 22, which represents a slight increase relative to prior guidance of 23 million to 27 million.
This is due partly to a new project to replace a head box on one of our Lewiston paper machines, which will require some additional downtime.
Based on third party forecasts, we are anticipating around a $50 per ton increase in pulp.
As a reminder, we purchased approximately 300000 tons of pulp each year.
Capex is expected to trend closer to our historical averages approximately $60 million.
Slide 13 outlines our capital structure.
We utilized approximately $40 million and free cash flow to reduce our net debt which included.
$40 million voluntary prepayment of our term loans and our liquidity was $277 million.
In the quarter, we refinanced our 2023 notes with a new 2028 note maturity, providing approximately five and a half additional years of tenor at a rate we deemed to be attractive at 4.75%.
We also achieved a modest amendment to our ABL facility, providing some reporting and other flexibilities.
S&P recognized our improving credit trends and remove us from negative outlook.
We continue to make strides in reducing our net debt and increasing our financial flexibility.
Let me turn the call back to Arsone to conclude our call today, but the real our paper value proposition as we see it in a few concluding remarks.
Thanks, Mike, Let's turn to slide 14.
I would like to reiterate our value proposition, which we discussed on our previous earnings call and mentioned to investors throughout the quarter.
We believe Clearwater paper is very well positioned across two attractive and complementary.
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 are the following.
First we have a national footprint with an ability to supply a wide range of product categories in quality tiers.
She has an attractive sales proposition to our customers.
Our expertise and manufacturing supply chain and transportation as a key differentiator, especially during challenging times like today.
Second there are long term trends away from branded products to private brands.
These are typically been amplified during recessions private brand tissue share in the us rose 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 with an economically resilient need based product.
Demand has not been negatively impacted by economic concerns.
Turning to our Paperboard division.
We believe that the key strengths of this business for the fall.
First we operate while invested assets with the geographic footprint, enabling us to efficiently service customers on both coasts.
We have a diverse customer base served end markets largely stable demand.
Second knocking vertically integrated enables us to focus on independent customers with unparalleled service and quality commitment.
Third we believe the business is well positioned to take advantage of trends towards more sustainable packaging and food service products.
Lastly, our paperboard businesses demonstrated an ability to generate good margins 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 third quarter with a net debt reduction of approximately $40 million.
And your net reduction thus far 2022 over $140 million.
We intend to continue to de leveraged by delivering benefits from our Shelby investment continuing with operational improvements aggressively managing working capital and prudently allocating capital.
While we expect to have lower tissue shipments in the coming quarters, we're making sound strategic moves to support our customers and their success and continuing to position our business for success in the long run.
We believe that this strategy is the best way to create value for our equity and debt holders.
Before we take your questions.
I want to thank our people for their integrity and commitment to each other our company our customers and our communities. During this challenging time for everyone.
Add to our customers and shareholders for working with and we now.
So with that we will end our prepared remarks and take your questions.
At this time I would like to remind everyone in order to ask a question press star one on your telephone to withdraw your question press the pound or hash key please standby, what we compiled acuity roster.
Your first question comes from Adam Josephson from Keybanc capital markets.
Our son, Mike Good afternoon.
Good afternoon now.
Congrats on another really good quarter both of you.
On the quarter itself might this may be better for you.
I just want to make sure I heard you I think you were saying you expected the IR Io panel data to be up.
10% to 15% in the quarter and it was up 12, which sounds like it would have been in line with your expectation. So if that was indeed the case can you just help me with.
What about your volume and production was appreciably better than you were expecting.
Great question, there is a one to one correlation between the higher IP panel data versus our sales data.
Hi panel data is is all encompassing and its dollar sales at the retail level, which includes rebates and discounts and all that bad.
We were encouraged in terms of our own sales in the quarter relative to our initial expectations. So while I IRI data came in within the range, we performed a little bit better than we initially anticipated.
Got it okay and just on the same topic, Mike can you just again reiterate what you said about October why you think shipments were lower in October than the third quarter average and why you presumably expect that to continue.
Why don't I take that this is arsone sure sure if what we've seen as a some normalization in demand from consumers and I think there is some consumer.
Restocking taking place.
Retailers order pretty heavily in Q2 and Q3, if you look at our year to date shipments theyre up around 17% versus versus 2019.
And retailers also brought in some tertiary brands and other suppliers to meet to meet peak demand.
So what you're I think what you're seeing right now is an adjustment in their supply chains as their.
Their inventories have grown and I think they are managing through their inventories in certain product categories and they.
They've reduced their orders in the month of October to adjust their inventories. So I think this is an adjustment month.
That we've just gone through.
And are you anticipating another demand surge related to this obviously surgeon cobot cases that we've seen in recent weeks or how are you thinking about that issue as it relates to your fourth quarter guidance.
You know, it's hard it's hard to predict what consumers will do onward retailers will do what we're expecting is for our for our volume to be at or below Q4, 2019 levels. So we're anticipating continued normalization and this inventory adjustment by our retailers too.
To continue and of course.
Of course, if there is a dramatic change in consumer demand.
I will hop that will have an impact on us, but we're expecting work expecting continued normalization.
And inventory management by retailers.
I appreciate that arts and just two more one on Paul I know you said, you're expecting it to be up 50 Bucks a ton on average next year is that just based on a risi forecast or is there anything you're actually seeing in terms of notable pull price inflation.
So Adam again, it's premature for us to give a lot of guidance for 2021, we look at a composite view of a bunch of different providers of public expectations and we're just pointing out.
On average what we're seeing is expectations in the marketplace of $50 per ton higher pulp price levels next year versus this year.
Just to be is it and based on anything you're actually seeing at the moment or is it much more about well. These third party forecasters are saying, it's it's going to happen next year. So we'll just assume that for now.
Great clarifying question, we're not seeing anything at the moment right. It's just more helping you and the other analysts and investors out there calibrate what you should be thinking about for 2021 I. Appreciate if I can just last one for me on paperboard. So I appreciate your candor in characterizing the industry is high.
Having what you call the uneven end market segments. If I, just think about what's been happening in the industry since last year.
P. shot 40% of its capacity the largest producer this year is shutting 10% of its capacity obviously, the two largest producers took significant market downtime in the third quarter.
Does the ongoing need among major producers to shut this much capacity just tell you something about underlying demand patterns in this market and if so what is that.
Adam let let let me let me take that so we won't comment on what our competitors are doing I have their businesses to run their making nice and good decisions for themselves.
What we're seeing as a stable order book.
And were seeing our customers have especially.
In the folding carton space have good solid demand here.
Here over the last couple of quarters and Thats continued into October. So that's what we're seeing we're running we're running our business to our orders and to our customers and we continue to see a very stable order book.
Thanks, Chris.
Your next question comes from Steven Chercover from D.A. Davidson. Please go ahead.
Hi, good afternoon, everyone.
Great.
So.
Start since we have the sense that to tissue inventories are normalizing and.
You said that demand is still elevated but I'm almost freight to ask this question, but at what stage will the new Shelby couple.
Capacity be sold out and then.
How do you would contemplate addressing that in that eventuality.
Good question, Steve said as we said previously we ramped the paper machine in the second quarter of this year, but converting will continue to ramp through through 2021.
And we're assuming a full run rate production and benefits in 2022.
So we're continuing on that trajectory.
As you may imagine over the last few quarters.
It's been a fairly tumultuous market and we've we've done everything we can to service our customers across.
Across our network. So what we're not doing right now is splitting out specific shelby impacts Shelby as part of our broader network and part of our strategy to service. Our customers. We are we're on pace to ramp the asset and we're selling through the capacity that's coming off those those lines and we're going to continue to do.
That.
And we'll make we'll make the right.
Decisions around our network in terms of loading and where where our volume is going to be placed.
So.
Is the tissue machine, so running at designed capacity and that means that you'll be internalizing.
Current rules that are currently going to third parties.
So yes, we ramped ramp the machine at the end of Q2, and with Q2 and Q3 Ellen.
Elevated demand and production, we needed that paper to service our to service our customers.
As as our production slows in Q4.
We will be making making good decisions around our network in terms of what we do with what we do with paper and as as you recall in previous years, we have used parent roll sales.
As an outlet for or additional inventory. So we'll be looking to make the right financial decisions around our mix of case sales apparel sales.
Okay. Thank you and switching to paperboard.
Hopefully not duplicating.
His question, but.
Given the proximity of the Texas facility.
To where you are in Arkansas, I mean in the Grand scheme of things. It's reasonably close are you seeing any enquiries from folks who might be concerned that.
There is there are sources is going away.
We're seeing any any outreach.
Yes.
Thats a fair question, it's Mike.
I think what we're seeing is again, what our snack commented on before a pretty stable flow of orders in a pretty stable order book.
As you recall as we said in the past were and independent player and so I think that serves to our strengths in terms of servicing customers.
I can't speak to specific actions by our competitors and how that impacted our customers, but I think our customers recognize that we're here for them.
And in a very difficult time here with Covance.
Yes, and then last question.
I mean, I think your performance in containerboard sort in wheat board has been superbowl over the years and.
[music].
The figure probably remain that way. So are you satisfied with your results both operationally and financially from your.
Small independent fleet.
I think especially in this quarter, Steve our team had a great quarter in paperboard.
Operationally, which you can't always see in the numbers. It was one of our better quarters. So.
So kudos to our mill managers and the engineering teams.
And our sales team really had another great quarter, and I'd say in a very uneven or choppy market that we're in.
Yes, who knows indeed, okay. Congratulations thank you.
Thank you.
Your next question comes from Paul Quinn from RBC capital markets.
Yeah, Thanks very much.
Hey, guys.
Afternoon.
Sounds like a Adam and Steve and I are in the same boat were kind of confused on the drop in tissue and I suspect it's around.
We've adjusted the customer.
Your customer mix to improve.
In 2021 is it.
Is that why.
It's coming down.
I think its a contributing factor, but I think theres broader broader trends that are being reflected here in Q4 and as I mentioned previously I think our customers ordered heavily in Q2 and Q3 and to meet their peak demand. They also brought an additional.
Suppliers, both domestic and imports as well as tertiary brands to get products on their shelves ups I think they are we believe they are working through through that inventory. So while demand remains elevated.
We're being impacted by that inventory.
Adjustment this quarter.
Okay, and then if I could just try to understand Shelby to any in the converting capacity. There you can bring capacity how much like what percentage of that can bring capacity is converting it versus parent roll sales.
So the facility was designed with the paper machine and adequate converting capacity to convert to convert the paper coming off that machine. So we've ramped we've ramped the machine, we're still ramping our converting assets some of that paper is moving to other sites.
For for converting as we ramp our converting assets more and more of that paper will stay will stay within Shelby.
We needed that pay for the last couple of quarters two to service our service our customers.
And as I mentioned previously we will be making the right financial decisions here in the next couple of quarters as we adjust our production to maintain the right levels of inventory.
Okay. Maybe just further clarify then how much is being converted at Shelby how much is being converted within the Clearwater network and what's a percentage.
I'll say role.
Roll sales.
So I I believe.
You look at our Q3 results, 96% of our sales were shipments were retail sales. So the vast majority of our overall production.
His paper production is being converted with that within our own sites.
[music].
On the margin we sold a few tons over last couple of quarters, but most of that paper was converted internally.
Okay. Okay. One last one just just to kill it but if you are 96% retail in Q3 and you're ramping over 2012 at two.
2021 on converting does that mean, you're going from 96 to 100.
I think what we mentioned previously is about 50% of Shelby capacity is going to be dedicated to network optimization. So.
So we'll be looking to do is to move converting from other from other geographies and to shelby to be closer to customers.
And.
And help with our network optimization initiatives.
Okay.
I think I'm getting closer to the entry level.
Let me let.
Let me switch off to something else and just try to understand your capital allocation priorities I suspect that is one of them leverage is probably somewhere around three times now and you've got a goal at 2.5. So is that still number one and if thats number one whats number two three and four.
So Paul Thanks for the question, so you're right our leverage has come down.
Yes, I think we need to look at the leverage target in the context of a normal kind of non cove at year end, a year in which we have an appropriate amount of outages.
So right now were closer to 2.8 times, but but I'd argue on a year, where we had a couple of things going in our favor.
And so it's going to be a while yet before we reach that two and a half times call. It more of a normalized EBITDA.
Okay, That's fair and then.
After debt pay down with what are the priorities.
So we're still talking part to our board about what's our strategy going forward as we get closer to achieving that target, it's not something that we've disclosed but it is an entirely fair question and we look forward to getting it on the next quarterly call.
Well.
Alright, Thats all thanks.
Your next question comes from Mark Wilde from BMO capital markets.
Good afternoon, Arsone revenue Mike.
Good afternoon.
Hi, first I wonder if we could start just by.
Talking about tissue imports and also the impact of the of new entrants into the tissue market do you have some way to help us quantify how much you're seeing imports up over the last quarter or two.
So we'll get back to you with that data here in a moment. So we have seen an increase in and.
An important it's not a it's not a big number but it is happening it is having a bit of an impact.
In terms of in terms of new new entrants. This year, if you look at overall capacity additions.
It's about the latest as about 160000 tons not added.
To to tissue to tissue capacity this year.
As we mentioned previously this this this market grows at about one 1.5%, which would indicate it would need about 100 150000 tons of of new tissue capacity to meet demand and this year. If you look at the puts and takes.
It's about a 160000 tons of net net adds this year.
150000, I mean.
This year. Another 160000 next next year.
Okay is it also possible for you to just help us in general terms I think about what the issues are as we get away from home tissue producers trying to toggle from volume over into that.
Consumer market, what what are they capable of and what do they have a harder time with.
So.
A lot of the away from home products are not applicable in the at home retail market. So thinking about the big giant goals of paper towels holding that can sell lots. So we we believe that a large chunk of that capacity is not really applicable to the at home market now there are some higher.
Hi around.
From a products bath tissue that may be applicable and I'm assuming that.
That our competitors that have both both sides of the business.
We are looking to to move some of the capacity to the retail markets. It's difficult to say what percentage that is but we believe that the majority of of away from home capacity you'd be rather difficult and costly to converted to capacity.
Okay, Alright, Thats fair markets, it's Mike just on the import question that you asked before yes.
I think the best third party data source that we have to point you to us receipt.
And so just looking at the first quarter to the second quarter. There were really notable in imported volumes of both parent rolls and converted tissue product.
And kind of eyeballing the graphs here I think in the quarter were up close to 50000 tons worth of converted product.
And on the parent rolls it looks like were up close to maybe 20 25000 tons first quarter to second quarter.
That's that the best kind of third party data that we have other than that we get worried that we're sharing anecdotes in terms of what our customers might have purchased during the period.
We'd rather rely on third party data, yes, I think that's a that's a good practice, if we just toggle over to the bleached.
The bleach board market.
I'm just curious about.
How you think about the knock on effect from these pricing.
Pricing initiatives that are underway in both the TNK Borden CRB Board right now.
So.
Mark I.
I don't think that there's a very strong correlation amongst the three different markets.
It's obviously not a negative for SBS for.
Converters on the March and who can choose amongst the three grades yes.
I went.
Yes, we don't comment on forward pricing at.
At all do you think that they are three reasonably different markets that.
The folding carton producers purchase from.
Okay, all right and it seems like the UK guys. In particular are quite tight right now and at least one of the two producers has been talking about trying to toggle people over to SBS as a substitute or are you getting any benefit from that kind of behavior.
You know we.
We won't comment on what the competitors are doing with will tell you is that we're continuing to service our customers will continue to see some pretty robust demand from from our customers and stable stable order book.
So hard for us to tell what knock on effect.
The various moves are making but what we do know is our is our is our customers are seeing good solid.
End market demand and it's enabling us to maintain a solid order book as we head into October Okay. And then just two final ones, Mike what was the third quarter benefit.
From a from lower pulp costs.
We didnt break that out.
Mark.
It was one of those looking at year over year I put that.
As less important than the fixed cost leverage that we have so this slide nine we kind of rank order those.
Yeah, Okay all.
All right and then the last one for me did I hear you say that the.
Impact from more normal maintenance next year is about a 25 to 30 million dollar increase year to year did I get that correct.
That's correct, we have it on slide 22 of the deck.
Mark for your reference and we also put out 2022 estimates as well, okay. All right sounds good I'll turn it over thank you. Thank you next.
Your next question comes from the line.
Roger Spitz from Bank of America.
Thank you good afternoon.
Good afternoon.
Well what are you expecting in Q4.
For our working capital, presumably working capital release.
So Roger it's Mike, we haven't specifically talked to fourth quarter net.
Networking expectations I think you heard our us to talk about in the script that we've largely rebuilt our inventory and.
So I think that you should expect less of that.
Central drag there.
Other than that we haven't commented on networking capital expectations for the fourth quarter.
Okay.
When you say less potential drag that suggests.
You may be putting.
It will be an outflow as opposed to an inflow.
And I would have thought if you are.
Slowing down your machines.
See less volumes sales volumes.
You actually might see an inflow as opposed to an outflow on working capital I am I thinking about that correctly.
Yes.
If that does happen you are thinking about it correctly, but theres a lot of other puts and takes that happen along the way.
And I didn't mean to imply one direction or the other in my previous statement.
As you May recall, our bond interest payments are in the first and the third quarter and so generally you expect the accrual for the interest expense to go higher in the fourth quarter Theres. Some things that you could predict that will naturally happen here.
In the fourth quarter as you try to predict.
Cash flows, which I think is where ultimately you are trying to go with the question.
Okay, Yes.
In terms of the 300000.
Tons of purchase pulp.
Could you remind me what the split is between hardwood and softwood on that.
We don't break it out the majority of it is going to be hard wood.
We're long to some extent softwood and our mill in Idaho that were able to supply the rest of our system.
And lastly, I.
Any any impact.
From the West Coast Forest fires on your operations, obviously, there's tonight.
Nothing of note.
Okay.
Thank you very much.
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Your next question comes from Adam Josephson from Keybanc capital markets.
Thanks, Carsten Mike Thanks for taking my two last questions here are so not to beat a dead horse too much but just on the implied.
For Q2 sequential decline in tissue profitability just in the context of your results in the past two quarters, which were above your expectations.
Would you characterize this guidance any differently, perhaps than the last two.
Quarterly guidance as you gave and in other words is there a reason to think that this is the quote right guidance, whereas you did considerably better in the last two quarters than what you were thinking on the tissue side.
Adam when we when we provide guidance we aim for the center caught in the last couple of quarters have exceeded our expectations were continue to we're continuing to aim for the center core than that that's what the $52 million to $62 million guidance Guidances if tissue demand is more robust than we're anticipating.
Yeah.
Our our input costs are lower certainly that will be that could go higher but at this point the way we see it it's the right.
The right range.
Okay and just last question, our son I think he both took over your current jobs really at the start of the pandemic. So whatever you were expecting this year to be I'm sure. It has not played out quite as you are thinking.
But even serious question is how much I mean, you've obviously bed. The company has been an enormous beneficiary from this pandemic both in the form of historically, good tissue to man and very low Paul input costs and then it's been just a perfect combination.
So it's hard to see how much whatever you've implemented has has changed the company for the better versus the company simply having benefited from extraordinarily favorable conditions that were out of your control can you just talk about it.
What what influence Youve had thus far and what what the company's done differently before versus just the benefit from these the external environment.
Good question, so certainly the tailwinds from input costs and corporate related demand are helping this year.
But the team has done an outstanding job of continued to manage manage our assets managed this business.
Worked with our customers to to take advantage of these set to take advantage of these trends that we're seeing Additionally, as you know Adam I was in the <unk>.
The tissue business before this and we spent quite a bit of time getting our network right getting our customer mix getting the right pipeline of volume.
And some of that as place certainly playing out this year and our paperboard business continues to execute really well and execute through some really uncertain.
Market conditions, so certainly.
Certainly that the Tailwinds are helping but the team has done an outstanding job of working through a really difficult really difficult environment to deliver outstanding results. This year.
All the best of luck and stay safe.
Thank you.
Your next question comes from Steven Chercover from D.A. Davidson.
Thanks didn't really need to get back in the queue, but.
So.
We were going there in any event.
I want to put it in the context of the containerboard market, where some producers.
View, the optimal integration level to be 100% and others want to be.
10, 15% below that so with respect to your tissue.
System do you do you have an optimal.
Integration level would you actually like to be buying parent rolls in a perfect world.
No we haven't spoken to that to that previously what we've said is we're in the business of retail case sales.
That's our that's our primary business.
We will sell parent rolls.
As necessary to balance our network, but we're aiming to do is to maximize retail case sales as long as they make economic sense.
So we we've been over 90% over the last several several quarters.
We we like this performance and were aiming to continue to drive to drive our case sales over the next couple of years to consume the vast majority of our of our can produce.
Okay sounds good thanks again.
Thank you.
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That was our last question at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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