Q4 2020 Clearwater Paper Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Clearwater paper for Q 'twenty earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during this session.
You will need to press star one on your telephone if you require any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today Sloan Bohlen Investor Relations. Thank you. Please go ahead.
Thank you Mariano and good afternoon, and thank you for joining Clearwater paper's fourth quarter 2020 earnings Conference call. Joining me on the call. Today are are some catch president and Chief Executive Officer, and Mike Murphy, Chief Financial Officer financial results for the fourth quarter 2020 were released shortly after today's market close you will find a presentation of supplemental information.
Asian, including a slide providing the company's current outlook posted on the Investor Relations page of our website at Clearwater paper Dot Com. Additionally, we will be providing certain non-GAAP information and this afternoons discussion.
Reconciliation of the non-GAAP information to comparable GAAP information is included in the press release or and the supplemental information provided on our website. Please note slide two of our supplemental information covering forward looking statements rather than rereading. This slide we are going to incorporate it by reference into our prepared remarks.
Let me turn the call over to art.
Good afternoon, and thank you for joining US today, please turn to slide three.
As you saw from our press release Clearwater paper had another outstanding quarter, driven by strength and both our tissue and paperboard businesses and excellent operational execution.
On a consolidated basis the company reported net sales for the fourth quarter for <unk>.
And $53 million and adjusted EBITDA of $72 million, which represents growth of approximately 4% and 38% respectively over the fourth quarter of last year.
A few business highlights to mention.
Our tissue business drove results with both higher sales and production volume year over year can be volatile demand, which exceeded our expectations.
Our production and the quarter was similar to our sales.
Our paperboard business delivered strong performance as well on.
Backlogs are robust, which contributed to our decision to announce a price increase of $50 per ton across our SBS portfolio starting on February 2nd.
And the fourth quarter, we used the free cash flows generated to reduce net debt by an additional $58 million.
On slide four as I noted over the previous quarters, we remain focused on our top priority during COVID-19, the health and safety of our people and safely operating our assets to service our customers.
Our efforts and risk mitigation strategies are making a difference and helping to reduce the risk of COVID-19 at our sites.
Our human resources and manufacturing leadership teams are doing an exceptional job of proactively monitoring the health of our workforce and ensuring that we have the proper staffing levels and place.
Our People's diligence to date has been key to our success and will continue to be so.
As a recognition of the work by our entire team. During this challenging time, we paid out a one time discretionary bonus of $1000 and November to over 2800 of our people.
We're also strongly encouraging all of our people to get the Covid vaccine with a 200 dollar incentive.
I would like to express my deepest gratitude to our entire team for their extraordinary efforts and perseverance through this challenging time.
As we start to see the benefits from our broader vaccine rollout I want to encourage maintaining high levels of vigilance and until Covid is under control and behind us.
I will now share of what we saw for both the tissue and paperboard businesses and the fourth quarter.
Let's start with our consumer products Division on slide five.
As we have previously noted at home tissue demand was volatile during the quarter.
New waves of the pandemic caused significant spikes in demand mid November and December.
While we originally anticipated demand at or below levels that we saw and the fourth quarter of 2019, we were reminded of how unpredictable demand can be for essential products. During this time.
Mike will expand further on demand patterns and the fourth quarter during his comments.
Our team and customers are doing a great job working through this volatility and we benefited from higher than anticipated sales and production volumes and the fourth quarter.
Our industry view remains largely the same which I'll summarize and a few key points to provide some context.
First Rick.
Recall that the market for tissue and the U S is traditionally two thirds at home and one third away from home with limited manufacturing production capability to swing between the two.
As consumers have been more homebound, there has been a shift towards at home consumption.
Demand swings have and will continue to be driven by consumer behavior.
Our expectation is that as COVID-19 vaccines are administered and infection rates decrease.
And we will see a shift back to away from home consumption.
Which we expect will negatively impact us as we're primarily focused on the Idaho market.
With that said it is unclear if there will be a lasting impact on consumer behavior and a post COVID-19 environment.
Second while it is too early to discern private branded share trends. We continue to note. This paper towel demand is tracking ahead of the overall tissue category.
While facial demand is lagging.
Private brands have had a good track record of gaining share relative to branded products over the past decade and trend that we would expect to continue.
We will continue to monitor these trends and the coming months and quarters due to the continued uncertainty and consumer demand associated with Covid.
Third as we noted in previous quarters SKU rationalization has occurred aiding additional production, we believe that lower SKU counts benefit both retailers and manufacturers like us.
While we have seen some customers desiring a recovery of Skus and we do not anticipate SKU counts to go back to pre COVID-19 levels and the near to medium term.
Our tissue results from the fourth quarter were robust we shipped $13 9 million cases, which was up around five 3% compared to the fourth quarter of 2019.
It was a positive surprise driven by spike and consumer demand started prior to Thanksgiving and lasting for a few weeks.
Sales were down for 2% relative to the third quarter of 2020.
As we mentioned on our third quarter earnings call, we exited several customers to reduce complexity and improve our network, which impacted fourth quarter results and is expected to impact first quarter 2021 results as well.
We are encouraged by our pipeline of sales for the remainder of 2021.
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 from products that are more recession resilient and one third is driven by economically buy more economically sensitive for discretionary products.
Our folding carton customers, especially those with concentrations and food.
For health care packaging continued to see strong demand.
And our foodservice customers, especially those with concentrations and quick service restaurants and away from home dining and continue to see weaker demand.
We're pleased with the market reception of our sustainability focus brands and woke up and rematch and folding carton.
Both are playing a meaningful role and our favorable market position.
We're encouraged by our solid performance and the quarter and continued strong demand for our products.
We made an announcement last week about the natural gas curtailment in Arkansas and caused us to temporarily suspend production and Cypress Bend.
Natural gas deliveries were curtailed to the point, where we could no longer operate.
We are now back up and running thanks to the tremendous efforts by our team to protect our assets from significant damage due to the cold weather.
We estimate that the costs associated with the west where the weather events across our paperboard system, including loss production repairs and spikes and natural gas prices could impact us and the first quarter by approximately $6 million to $8 million.
We continue to experience the same fundamental supply and demand dynamics that led us to announce a $50 per ton price increase in January.
Demand remains robust and our backlogs have grown since beginning of the year.
Price increase implementation has begun and we expect that it will take several more months to fully implement the increase.
With that I'll turn it over to Mike to discuss our fourth quarter results.
Thank you arson, please turn to slide seven.
The consolidated company summary income statement shows fourth quarter as well as the full year 2020 and 2019.
And the fourth quarter diluted net income per share was $1 34 per share and.
And adjusted EBITDA was $71 6 million and <unk>.
Full year diluted net income per share was $4 61 per share and adjusted EBITDA was $283 2 million.
These represent significant increases over the prior periods, which were driven by tissue demand due in large part by consumer COVID-19 related behavior as well as the benefits from our Shelby investment favorable raw material pricing and the lack of a major planned outage and our paperboard division.
The corresponding segment results are on slide eight.
Paperboard business continued its strong adjusted EBITDA performance.
Consumer products benefited from significant sales growth and fixed cost leverage associated with production growth and favorable input costs.
Before we speak in more detail about our divisional performance I want to note changes and how we prepare financial bridges.
Previously we had shown the impact of production volume changes and associated fixed cost leverage impact and our cost category.
We have modified that approach and are including production volume changes and our volume category. We believe that this change will enable investors to better understand and sales changes as we expect to produce similar plantings of products that we sell which will all be and the volume category. The cost category will better reflect the changes in raw.
Input pricing and inflation.
We also made a small change related to our paperboard business and the presentation of our volume and sales price to remove the impact of our contract cheating.
The shooting as a service and distorts our sales price of our base.
Per board products.
Additionally, we have decided to make some accounting changes that will impact our financials starting in 2021, but.
But we want to note them for you today you can also review these changes and the pro forma impact and our 8-K filing.
Our bale pulp sales from our Lewiston mill to third parties have been recorded and our tissue business. These sales will now be recorded and on paperboard business.
<unk> pulp sales from Lewiston to our tissue operations will be transferred at market price going forward as opposed to cost.
We believe this change will better reflect the economics associated with the business.
We will still transfer slush pulp from the Lewiston pulp mill to the Lewiston tissue operations at cost given the COVID-19 located and nature of these assets.
These accounting changes will take effect and our first quarter 2021 reporting and all prior periods will be recast and has no impact on our financial information reported on our press release.
For our 10-K, which we filed today and the bridges that flow.
Please turn to slide nine where we provide a year over year comparison of the fourth quarter 2020 relative to the fourth quarter of 2019 for tissue.
As a reminder, and the second quarter of 2019, we started our new 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 we.
We achieved the targeted production rate of our new paper machine and the second quarter of 2020, and we're continuing to capture the benefits associated with the project, including ramping our converting lines.
Realizing supply chain savings and achieving sales wins and mix improvements.
We are not providing a specific dollar amount for these costs and benefits. The continued realization of the Shelby investment is an important factor and our performance improvement.
Our mix continues to improve and Shelby has come online more than offsetting some year over year price impacts.
We're benefiting from the volume increases related to the production ramp which helped to meet elevated demand.
Overall, lower input costs, and improved mix and fixed cost leverage from increased production and possibly impacted our tissue business and the fourth quarter of 2020 relative to the fourth quarter of 2019.
You can also review a comparison of our fourth quarter 2020 performance relative to third quarter 2020 on slide 17 in the appendix.
Slide 10 contains some additional context on tissue relating to the volatility of demand and its impact on our financial performance.
The IRI panel data, which is the snapshot the retail sales of tissue measured in dollars depicts what our customers and we have observed from consumer demand patterns, but the lines showing changes on a year over year basis, while the doubt it and the box shows a quarterly view versus last year.
As we exited the third quarter, we anticipate and elevated but stable demand pattern.
Based on that demand profile ample inventory levels at our customers and slowing demand from our customers and October we expected to see softness and our fourth quarter sales.
But the consumer driven demand spike in mid November into December that change rapidly.
This period of volatility both the October pullback, which we noted on our third quarter earnings call and strong orders in November and December are good reminder, that we may not return to a stable order pattern until after covered related volatility is behind us and impacting our ability to forecast the business.
We added an additional slide and the appendix of the supplemental materials that details the weekly volatility and IRI panel data that our customers and supply chain have experienced.
Our sales and the fourth quarter were $13 9 million cases, representing a unit decline for 2% versus the third quarter and unit growth of five 3% versus prior year or.
Our production and the quarter was $13 90, and cases are down 9% versus the third quarter and up two 4% versus prior year.
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 and led to continue strong results share every year.
Slide 11, and this of year over year, adjusted EBITDA comparison for our paperboard business.
Lower pricing, which recently reported in February 2020 was.
It was partly offset by favorable mix and the absence of a planned major outage at our site per spend mill was also a driver of year over year improvement.
Overall, our team ran our operations well on the quarter and continued to deliver strong results.
You can review a comparison of our fourth quarter 2020 performance relative to third quarter 2020 performance on slide 18, and the appendix.
Slide 12 provides a perspective on our first quarter outlook and some other key drivers for full year 2021.
As previously discussed tissue outlook is largely a function of sales demand.
Tissue shipments in January and for $4 6 million cases, and our shipments and February are trending to below 4 million cases.
At this pace, we are expecting first quarter shipments to be below levels experienced in the first quarter of 2020 on COVID-19 and initially impacted consumer buying patterns and down versus the fourth quarter of 2020.
As we mentioned previously our paperboard business announced a price increase of $50 a ton across our SBS grades effective February <unk>.
Given the nature of our agreements and discussions with customers. We expect that the benefits of this will be reflected in the next couple of quarters with limited benefit expected in Q1.
Unexpected weather related outage at our Arkansas mill, which caused loss production and repairs as well as natural gas price increases across our paperboard system is expected to negatively impact the quarter by approximately $6 million to $8 million.
If our assumptions are correct, we would anticipate the first quarter adjusted EBITDA to be and the range of 51 million to $59 million.
This range also assumes that we continue to operate our assets without significant COVID-19 related disruptions.
While we're not prepared to provide specific annual guidance for 2021, there are several drivers assumptions and variables that we would like to address.
We are expecting a positive impact from the previously announced SBS price increases.
We're anticipating tissue volumes to drop high single to low double digit percentages.
This assumes continued normalization of consumer buying patterns, but it's highly dependent upon the course of the pandemic.
We are encouraged by our sales pipeline, which we anticipate will have a positive impact on the second part of the year.
Paperboard volumes are expected to be largely stable.
We are expecting higher input cost, including pulp and packaging energy and freight.
While these variables are difficult to predict today raw material inputs and total could be a $40 million to $50 million headwind this year with more than half the total coming from pulp.
And our paper Port business planned major maintenance outages are expected to reduce our earnings for 2021 compared to 2020 by 25% to $30 million.
We have updated this guidance on slide 23, where we broke out the timing by quarter, which reflects our current plan.
In light of the Cypress Bend weather event, we're evaluating the timing of our outage schedule and May update you in the coming quarters.
For the full year 2021, we're also anticipating the following.
Interest expense between $38 million to $40 million depreciation is expected to be between 160 and $110 million.
Capital expenditures are expected to be between 60, and $65 million, which is closer to <unk>.
Historical trends as we expect to execute against some projects that were delayed and 2020.
And our effective tax rate is expected to be 25%, 26% and we expect to utilize some of our current tax attributes, which amount to $60 million to reduce cash taxes.
Slide 13 outlines our capital structure.
And when you utilized approximately $50 million for free cash flow to reduce our net debt, including making voluntary.
Prepayments on our term loan.
And our liquidity was $250 million at the end of the year.
We continued to make strides and reducing our net debt and increasing our financial flexibility as we target a net debt to adjusted EBITDA ratio of two five times.
Assuming adjusted EBITDA after COVID-19 benefits and with a normal amount of outages.
Let me turn the call back over to <unk> to conclude our call today.
Before wrapping up with our value proposition I wanted to reflect on some of our key accomplishments in 2020 on slide 14.
Our team did an outstanding job managing through Covid, we mitigated risks and our facilities with a focus on health and safety and continued to run our assets and serving customers.
We rapidly adjusted to demand volatility to build stronger relationships with customers.
We ramped our new Shelby paper machine and are on track to fully ramp the overall site by the end of this year.
Delivered outstanding financial results reduced net debt by $200 million.
And we financed our near term debt maturities and strengthen our balance sheet at.
And at the same time, we went through several leadership transitions.
Including my promotion to CEO and hiring of a new CFO and a new leader for our CPE business.
It was certainly an interesting year to say, the least and I am proud that we could make this.
We can make this many changes and perform at the levels that we did.
We believe we are well positioned heading into 2021 to continue driving and improvement in our business and focusing on our near term strategy of paying down debt, while deleverage while developing options for long term capital allocation.
Let's turn to slide 15, and wrap up our paper for prepared remarks, 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 businesses.
Our consumer products Division is a leader within the growing private branded tissue market.
From our vantage point, we believe the key strengths of this business from the following.
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 and manufacturing supply chain and transportation is a key differentiator, especially during challenging times like today.
Second.
And there are long term trends away from branded products to private brands.
These are typically been amplified during recessions.
Private brand tissue share and the U S rose to over 30% and 2019 up from 18% in 2011.
While these trends are impressive and we're still a long way from where many European countries are for private brands represent over half of total tissue share.
Lastly, tissue is and economically resilient and 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 are the following first we operated well invested assets with a geographic footprint, enabling us to efficiently service customers on both coasts.
We have a diverse customer base, which serves and markets that have largely stable demand.
And not being vertically integrated enables us to focus on independent customers with unparalleled service and quality and 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 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 flow to reduce debt as we.
We demonstrated in the fourth quarter with a net debt reduction of approximately $58 million, bringing our net reduction in 2020 to over $200 million.
We intend to continue to deleverage by delivering benefits from our Shelby investment continuing operational improvements aggressively managing working capital and prudently allocating capital.
While we expect to have lower tissue shipments and the first part of the year, we're making sound strategic moves to support our customers and their success and continue to position our business for success and the long term.
We believe that this strategy is the best way to create shareholder value.
With an adjusted EBIT and impacted by normal outages and reduce COVID-19 benefits, we do not anticipate achieving our two five leverage target this year.
We continually engage with our board on future capital allocations.
On deleveraging, we expect to explore a variety of means of creating shareholder value including for.
<unk> internal internal investments and our operation that improve competitiveness.
And second external investments that deliver synergies and improve our market position and third returning capital to our shareholders.
So with that we will and our prepared remarks and take your questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby, while we compile the Q&A roster.
Your first question comes from Mark Wilde with Bank of Montreal. Your line is open.
Thanks, Good afternoon, and good afternoon and Michael.
Good afternoon.
I wondered if you could talk about ours and the impact.
Of these higher pulp costs.
And the first quarter and then as we move through the year.
And Mark So we've seen since the end of last year.
As pulp going up about over $100, a ton and theirs.
Further announcements out there further and further cost increases.
We think the impact and Q1 and.
And is modest given how pulp flows through our system and we believe that that impact will be.
It really felt in Q2 through Q4, and our full year outlook. We mentioned that we expect inflation to be $40 million to $50 million with more than half of that coming from from pulp.
And that's our best estimate today, but it's highly unpredictable given given the volatility and this market right now.
And I mean pulp is quite volatile, but and I have to.
And what we've seen the last couple of months is even volatile for a volatile commodity.
How do you intend to respond to this I mean is it a matter of starting to reduce chic ounces at raising prices. How do you think this plays out.
Mark we have we haven't and a number of levers from from from a cost perspective.
Around.
Using different grades of pulp changes changes to our products as long as they meet the quality requirements. So theres a number a number of levers that we have internally to focus on our cost.
In terms of in terms of price Mark the market ultimately sets sets the.
Price its supply and supply and demand driven and so we'll be working with with our customers throughout the year.
To ensure that they are well serviced and where and a good position.
Okay, and then turning to the to the paperboard market. This.
And the SBS hike was not recognized in the February create papers.
Assuming that it is in March.
How could you help us think about the cadence of that rolling in over the next six to nine months.
So mark it's Mike I'll jump in and take that.
The majority of our business is more spot market, but it takes time to get that pricing fully implemented.
And then we do have call it anywhere from a quarter to a third of our business is contract based.
And so as you.
As I would think about it I think we can get.
Mentation fully done over the course of a couple of quarters, but its going to take us a bit of time to get that done.
Okay, Alright, that's helpful. And then if we look at the fourth quarter numbers is that $2 8 billion and one time bonuses that spread between the two segments or how did you account for that Michael.
So.
$2 8 million.
<unk> market.
Markets It was.
It was it was focused on on most of our employees, we have about 3300 people.
Clearwater.
And so that and that incentive or that discretionary bonus was.
And at and most of our most of our folks that.
Aren't eligible for for the normal incentive programs.
To add to that we had accrued for that bonus and the third quarter. So if you're looking to.
Put it into your model that does something and expense that we took and the third quarter.
Okay, Alright, thats exactly what I was looking for and then finally, Michael I'm just curious.
No and some of the proposals in Washington, and there has been talk about.
Changes for some multi employer pension programs can you just can you update us on what you've seen there and what you think a reasonable outcome might be how it would impact Clearwater.
Sure.
And I'll remind you mark that.
We filed our 10-K today and so we've updated some of our disclosure as it relates to the multiemployer plans.
I think what you are speaking to the legislation that's out there.
And that included provisions to address multi employer pension plan and they are facing and solvency as part of the COVID-19 stimulus legislation.
This proposed legislation could make pie intelligible for substantial financial relief from federal government and and amount intended to allow it to rent sorry.
Alright remained solvent for the next 30 years.
It's uncertain, whether or to the extent at which the proposed legislation would reduce the amount of liability Clearwater would incur.
Clearwater withdraw from clients.
However, we've seen this proposal is being promising.
And so on term solvency would be a positive outcome, both for Clearwater and our workers and retirees will continue to monitor the state of the legislation.
Be enthusiastic about its passage.
Alright sounds good Michael.
And I'll turn it over thanks very much.
And your next question comes from Adam Josephson with Keybanc. Your line is open.
And Mike Good afternoon.
Adam.
Good to talk to you about.
On the tissue tissue expectations for I missed a couple of numbers, but your cases produced and the fourth quarter were $13 9 million. I think you said February was a touch below four I didn't catch what you said about January but can you help me with what what.
We're in Jan and February and then I think you said you expected tissue volume to drop high single to low double digits in the corner I assume that was a sequential comment but please correct me if I misheard you there yes.
Yeah, Adam So what we talked about as shipments in January were $4 6 million cases, and February and trending to be below for 4 million cases.
And that the best way to think about our production is roughly matching our sales there may be some fluctuations but.
Largely and we're aiming to to have our production match our sales for this year.
The low the high single to low double digit.
Volume expectations.
We're for the full year and they're really highly dependent on what happens with Covid, we're assuming that normalization continues and at some point and we get to a more normalized state of that.
And if that is different and some of these COVID-19 variance and approved.
Proved to be more resilient through to vaccines that could that could lead to a different outcome.
And it just I appreciate it and it just so.
So compared to that full year outlook of high single down high single to low double digit what is your.
What's embedded in your <unk> guidance year over year in terms of the percentage decline.
We didn't explicitly state that what we've said is it's going to be below prior year and below prior quarter. So.
Adam prior year, we shipped $15 2 million cases, this was when the COVID-19 kind of demand really kicked in.
And then we did $13 nine and the fourth quarter. So below both of those numbers and again for $6 million in January and trending to below 4 million.
And cases and February is the current run rate that we're on.
Got it Okay and then you don't think there's anything particularly unusual on those January and February numbers and other it's not any notable destocking or anything along those lines.
Adam It's hard it's hard to tell if you look at what happened in October.
We saw some softness in October and we thought that that was an adjustment month.
And then we saw a spike in November and December January was fairly healthy and we're seeing a fairly soft February. So this could be another adjustment month is as retailers and consumers work through work through inventories.
Having a hard time predicting this and so are our retailers.
So dependent on what happens with Covid, but certainly could be another adjustment.
Got it I appreciate that and also in terms of the <unk> guidance and at the midpoint.
Would be down I believe $17 million sequentially.
Of which whether is call. It seven so the other items you called out would account for 10 can you just.
Quantify that remaining $10 million in terms of how much is lower tissue volume how much is the modest inflation.
Tara.
And we haven't broken that out and certainly all of those are variables, but we haven't specifically broken out those individual elements.
Right, Okay, and I appreciate that and can you just I know you have that.
Quarterly breakdown of the outage expense, but Mike can you quantify what that is by quarter just for modeling purpose of modeling.
Sure and I'm going to give some round numbers here on them.
Yes.
And the second quarter or so.
Let me refer to the chart here on page 23.
The second quarter estimated <unk> expenses is going to be in the low $20 million area.
And then the third quarter outage and a couple of million dollars area, and then the fourth quarter outage and kind of on that $3 million to $5 million area.
Now.
Those add up to the $25 million to $30 million guidance, but I'm, just giving some context in terms of what we're expecting.
Yeah. That's perfect. Thank you just two more from me one on the inflation to which you're guiding so if if it's 40 to 50 of which pulp as more than half. So lets say its $25 30, how much of the rest is freight and.
What is the remainder comprised of exactly.
And and we haven't broken out the specific dollars, but it's.
Its transportation and.
And its and its energy.
Mike and I missing.
Those are the two biggest raw material inputs inflation item that we're seeing.
And are you expecting to see the brunt of the day.
Those fully and <unk>, unlike and pulp.
So I think for Q1, what we said is we expect fairly modest inflation.
So really that that implies that most of that is yet to come and Q2 through Q4.
Right. Okay. So it applies to all of pulp for.
Freight and energy, Okay, and then just lastly on Fox Board I think you mentioned your backlogs are improving.
But it sounds like you expect fairly flattish demand this year.
So I'm just trying to square those two statements can you help me with.
Are you expecting demand growth or you're not and if you're not why might the backlogs be improving.
So Adam Thanks for the question.
We we sell.
So what we produce I guess is the best way to state it.
And so last year, we didn't take any market related downtime, we didn't slow down at all either and so.
So this year, when we talked about volumes being similar to last year.
And essentially the conclusion is we plan to run full.
On the backlog statement actually our backlogs were increasing at the end of last year into the start of this year before.
Any sort of supply side issues cropped up across the industry.
And so we felt very strong about the business in general, which led us to the price increase announcement that we made.
Got it thanks, Mike.
Thanks, Tom.
And again it is star one on your telephone keypad to ask a question. Your next question comes from Roger Spitz with Bank of America. Your line is open.
Thank you good afternoon.
So on.
I'll just.
And make sure I'm off mute.
Okay.
Can you give any guidance on 2021 cash taxes or are there any cash rebates or.
Attributes that you might expect.
Sure Roger Thanks for the question so from a tax attribute standpoint, and Youll see this and the 10-K that we have and our current assets and taxes receivable of about $16 million.
And so I would use that from a cash flow perspective, and then from an effective tax rate for modeling purposes, I'd use 25% to 26%.
So that and what Youre, saying is that $16 million you, Mike crystallize that all in 2021 was part of the implication is that is that correct.
That's our current expectation.
Okay and then.
That's the refund presumably for.
Prior periods over and above.
Regulations are.
And can use that presumably you might be paying would you be paying other cash to reduce that $16 million inflow.
Outside of paying back a.
Modest amount.
Payroll taxes as you recall that part of the cares Act, we were able to defer some payroll taxes. This is a number and it's likely north of $5 million.
And out of that I don't think that there's anything to add.
And so terra quit tax expectations for this year.
So maybe Mike.
Youre, suggesting look at 16 million and.
And slow maybe less 5 million repayment for $11 million and flow might be the net is that fair characterization.
$11 million to offset the effective taxes that you would've otherwise model into 2021, okay.
Okay.
Perfect and.
And then in terms of.
Working capital so our Hughes for.
For Q1, and then 2021.
What kind of guidance can you provide on that.
Roger we haven't offered any guidance this year on working capital.
And so on.
I think we're going to stay away from providing guidance at this juncture for.
Sure.
And that's fine.
And just to give a sense I know you haven't given any 2022, capex guidance, which I don't think you have.
And would you say that if we start with 'twenty 'twenty, one capex that would be a good starting place, perhaps because theres not a lot of.
Major puts and takes from that I'm looking 'twenty 'twenty, one 'twenty two 'twenty two or is there some specific things that we should think about when we compare 2021 to 2022 capex.
So I think what we said about 'twenty and 'twenty one as we are returning to more normalized cash.
Capex run rates.
Certainly.
And the future there may be there may be larger projects that will that will look at but I think.
And a good starting point is this is more normalized.
And more normalized run rate on capital.
Got it.
Alright. Thank you. Thank you very much.
Thank you.
Your next question comes from Paul Quinn with RBC capital markets. Your line is open.
Yes, thanks, so much and.
Appreciate the detail and from the guidance just a question around.
We're on the inflation.
And at $40 $50 million you expect in <unk>.
And if you assume.
Guys have stated pulps and Uh huh.
And you basically.
Purchase about 300000 tons of kind of assumed that you expect pulp prices to be up about 75 Bucks a ton is that the math on.
That youre doing the math correctly, we're probably a little vigor in terms of the range, but you're thinking through that correctly and and I'll remind you. Paul you probably already know this our exposures more to hardwood.
So of that 300000 that caused the vast majority of that is hardwood pulp that we're buying.
Okay. So okay.
And if we see price rises well north of $100, that's non encompassing and it'll be upwards on on a policeman.
Okay.
And we'd see we'd see higher inflation and volume.
And Youre aware of how the pricing mechanisms work.
We're mostly tied to risi with a with a discount attached to it and the resets resets on a on a monthly basis. So we would be.
We will be subject to that and if you. If you look at some of the forecast for balance of the year. They are anticipating some easing and a second half although.
I think theres a lot of uncertainty right now on where this pulp market goes.
Okay, and given that just your exposure for the rest of the industry, especially on the tusa side due to pulp and you heard of anybody that's the announced price price.
Price increases and North American offset this.
We don't talk future pricing.
What I will tell you is the market sets the price and its supply and.
And demand driven and so it will certainly be working with.
With our customers to make sure they are and a good position and where and a good position as well.
Okay, and then just lastly on capital allocation and besides reducing debt what else.
Have you looked at any incremental bolt ons or anything like that is that had been threats or is more internal targets.
So what we mentioned is.
Unlikely that we'll get to our two and a half times.
Leverage.
This year. So we're still focused on on that deleveraging strategy and we're looking at internal projects. Once that are small to small to medium size that deliver.
To deliver the right returns and the.
And next over the net over 12 months to 24 months.
We will be exploring.
External opportunities that provide synergies and put us on a.
And a good competitive position.
But that's it's we're working with our fourth through and through all those various scenarios and developing those and those strategic options.
Okay, and just lastly, just the.
The FTE reduction that we saw last year and tissue, how much how much pushback and expect to see.
And 21 here.
And how much is going to come back.
Well, we think it's good for us and it's good for our retailers, but our retailers have different different retailers have various strategies in terms of what they want on their shelf. So those those discussions are ongoing and we're working with our retailers. We don't expect all of the Skus to come back and the near to medium term, but those discussions are certainly.
Ongoing, especially as the impact of Covid eases.
Alright, that's all I had.
Thank you very much thank.
Thank you Paul.
Your next question comes from Mark Wilde with Bank of America. Your line is open.
Well, maybe bank of Montreal, but let's.
Let's try that.
Mike I'm, just curious so and it kind of page 15 on the slide deck.
You've got this bullet about aggressively managing working capital I understand you don't want to give us.
Working capital number for the year, but can you talk about what's in that aggressive management, what the main elements are.
Yes, I think.
Mark it's kind of standard stuff in terms of terms with customers that we're trying to make sure that we maintain the right discipline there.
And with vendors, obviously trying to push that out and then on inventory management I think we did a good job and 2020 when you look our financial statements and that's maintaining that continued diligence on the inventory management front.
Those are in the lab.
Net were looking for.
Are there any things that you would call out that you've kind of looked at it and you said well. This is clearly an area, where we can do better.
Yeah.
Mark.
And 2020, we we manage to provide.
Good service to our customers with with lower inventory levels. So that is certainly an area that.
There, we're looking at and improving our supply chain and network planning tools.
And to see how we can we can deliver the right service levels at lower.
Were at lower inventory levels, that's certainly an area, where there is quite a bit and focus.
Okay and.
And then I'm just curious if you thought about that 30% of the market.
Private label tissue right now do you have any ballpark estimate.
For how much of that 30% might.
It might be non integrated and exposed to kind of rising rising pulp prices I mean, you're clearly not 100% exposed yourself, but if you just looked at that slice of the market.
Any sense of integrated versus non integrated.
Mark I don't have the specific numbers I would say that most private branded players pure private branded players.
I would have us on.
Our non integrated there are some larger players that do both brands and private brands that are there.
And our integrated but I don't have a specific number for you.
Okay. That's helpful for them.
Thank you.
Your next question comes from Adam Josephson with Keybanc. Your line is open.
And thanks for taking my follow up on Us and Mike just one for me on pulp so arson.
January World 'twenty data came out yesterday shipments were down 5% producer inventories are not particularly low and factors slightly above average.
Operating rates are are not above average so it's kind of hard from the outside to understand what is driving this historic surge other than Chinese futures prices, having skyrocketed.
And for whatever reason just I know you are close to the market.
Can you talk about what you think might be happening and how sustainable you think it's likely to be just based on your time following this market.
There is a lot of various signals out there and so you can look at improving economic conditions, you can look at and improving demand for.
For pulp based products.
And you can look at trends and value of the of the dollar and you can look at.
And what's happening what's happening in China, and you can look at.
The outages that we that we've seen over the last several quarters and with some of the pulp suppliers. So there's a lot of there's a lot of variables out there it's hard to pinpoint a specific one that says that that's the one that's driving the pulp markets.
And Theres certainly been a.
These increases have been have been significant and quake.
If you look at the forecast later in the year, they're anticipating for that to for that to ease.
I don't I don't think I'll pretend to be a to b and expert and forecasting pulp prices.
And then and how do you and in terms of I think someone asked earlier about responses to this surge in terms of will you adjust your prices are cheap count Accordingly, and how do you plan for that when you really have no idea how sustainable the surges and for all we know it could reverse in the next three months.
There are some longer term things that we need to continue to work on whether pulp is on.
On the upswing or the downswing.
Which is optimizing the pulp grades that we use optimizing our products.
We have a number of cost levers and our tissue business that we need to continue to pool and potentially pull harder on web.
Pulp prices are going up.
As I mentioned about about pricing and ultimately the supply and demand and we will set will set the market price.
But we'll continue to work with our customers to make sure that they're well positioned and we're well positioned and the short and long run.
And I appreciate that and just one last one arsenal on tissue supply and demand can you just remind us how.
How much supply you think is being added and North America. This year and next compared to your demand expectations. Obviously, a great deal changed last year from the norm and there had been and oversupply situation for many years.
Net quickly change last year.
And presumably will settle and to some degree of normalcy. This year and so I'm wondering how youre thinking about supply demand under the assumption that we will revert to some stable and see of normal trends this year.
And if you take the macro view, it's 10 million ton market growing let's call. It on the percent of year give or take with population. So.
100, and 100000 150000 tons of demand growth, which is one to two paper machines.
This year, if you look at <unk>, there is about 160000 tons thats coming on line.
It's the majority of that is aimed at the private branded space.
So and.
Total.
Demand should be growing and that 100, 100000 ton a year range and supply that's being added this year, it's about 160000 tons.
Terrific. Thanks, a lot art and best of luck.
Thank you.
This concludes the Q&A portion of today's call I will now turn it over to ours, and Kitch, President and Chief Executive Officer for closing remarks.
I again want to thank our Clearwater teammates for their integrity and commitment to each other our company our customers and our communities. During this challenging time for everyone. We appreciate our customers and vendors working through us. During these atypical types. We also appreciate our shareholders shareholder interest and support and us. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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Yes.