Q1 2021 Clearwater Paper Corp Earnings Call
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Good day and thank you for standing by welcome to the Clearwater paper, one keys of '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.
Ask the question during the session and meet the 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 from Bohlen Investor Relations.
Thank you Christine.
Good afternoon, everyone and thank you for joining Clearwater paper's first quarter 2021 earnings conference call. Joining me on the call today are some kitch, President and Chief Executive Officer, and Mike Murphy, Chief Financial Officer.
Financial results for the first quarter of 2021 were released shortly after today's market closed along with the filing of our 10-Q, you will find the presentation of supplemental information, including the slide provided and the company's current outlook posted on the Investor Relations page of our website and Clearwater paper Dot Com and <unk>.
Italy, we will be providing certain non-GAAP information and this afternoons discussion a reconciliation of the non-GAAP information to comparable GAAP information is included in the press release or on the supplemental information provided on our website. Please note slide two of our supplemental information covering forward looking statements rather than rereading. The slide we are going to incorporate.
And then by reference into our prepared remarks, and with that 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 of the financial performance for the first quarter was strong despite some challenges impacting both of our businesses.
On a consolidated basis the company reported net sales for the first quarter of $426 million and adjusted EBITDA of $54 million.
A few highlights to mention.
Our paperboard business continued to experience strong demand, particularly and our folding carton segment.
Based on that strong demand, we announced and began to implement price increases across our Sps product portfolio.
Our operations were affected by the February cold weather event and the south.
Natural gas curtailments impacted production and increased energy prices.
<unk> this negatively impacted our adjusted EBITDA by approximately $6 $5 million.
Our tissue business saw lower orders and shipments, reflecting overall market trends.
IRI market data showed and nearly 20% decline and overall tissue dollar sales and the first quarter of 2021.
And as compared to the fourth quarter of 2020.
Consumers were destocking of their pantries and retailers, we're working through elevated inventory levels.
With the decrease in demand or production outpaced sales, resulting in above target inventory levels.
And we're taking downtime on our assets to reduce and manage inventories, particularly with today's elevated pulp prices.
With regards to our balance sheet, we used the free cash flows generated during the first quarter to reduce our net debt by $21 million.
We're experiencing significant cost inflation and a temporary decrease and tissue demand, Mike and I will discuss both in detail later in our prepared remarks <unk>.
Including actions, we're taking to address these market driven market driven headwinds across our businesses.
As noted over the previous quarters, we remain focused on our top priorities during COVID-19, the health and safety of our people and safely operating our assets to service customers.
Our People's focus has been key to our success and will continue to be so.
And partnership with local health agencies, we have offered onsite COVID-19 vaccinations across several of our facilities.
And we're continuing to offer of $200 incentive to each employee to become vaccinated.
Let's discuss some additional details about both of our businesses.
Please turn to slide for so that I can share a few comments on our paperboard business.
As you recall, we estimate that approximately two thirds of the paperboard demand is derived from products that are more recession resilient.
And one third is driven by more economically sensitive or discretionary products.
We continue to observe strength and demand from our folding carton customers and are starting to see a recovery and foodservice segments.
Demand for food packaging product and retail paper plates has remained healthy throughout the pandemic.
We're also pleased with the market reception of our sustainability focus brands of Newbuild Cup and rematch and folding carton.
Both are playing a role and our favorable market position.
Our strong order book, which predates industry supply disruptions continues to be robust.
We are diligently working to implement the previously announced price increases.
Fast markets Risi of third party industry publication has recognized of $50 per ton increase and folding carton and.
And the $20 per ton increase and foodservice grades and its March and April publications.
During our fourth quarter earnings call, we noted that the cold weather event and the south impacted operations at our Cypress Bend, Arkansas Mill.
This resulted in the $6 5 million direct impact to our adjusted EBITDA.
I want to again, thank our team for their actions to minimize the impact on our mill and for quickly resuming operations to service our customers.
While the while the weather event, primarily impacted the first quarter other potentially longer lasting impacts on input costs are included the separately and our revised inflation expectations.
As you are aware, we scheduled our largest planned maintenance outage for 2021 during the second quarter at our Lewiston, Idaho Mill.
We recently completed that work and are back up and running.
We would like to think of our Lewis and team for safely completing this important outage on time and on budget.
The overall economic impact from this outage to our adjusted EBITDA and the second quarter is projected to be between 21 and $24 million as originally expected.
Please turn to slide five with some additional comments on the tissue business.
Our industry view remains largely the same.
But I wanted to discuss the inventory overhang from 2020, and the expected temporary impact on volume and 2021.
The market for tissue and the U S is traditionally two thirds at home and one third of away from home with around 10 million tons per year of total demand.
As consumers spend more time at home and 2020, there was a shift towards at home consumption.
Throughout the pandemic, we witnessed consumer pantry loading and retailers responding by placing higher orders with existing suppliers and seeking out tertiary suppliers, both the both domestic and international to meet demand.
It is difficult to estimate the level of inventory overhang of the consumers and customers as there is no third party data available for this metric.
Based on recent tissue ship and data for 2020, and some assumptions on consumption trends, we estimate that the industry is currently faced with more than a month of excess inventory between consumers and retailers.
While it is difficult to predict the timing for the resolution of the inventory overhang. It is likely that both consumers and retailers are working through much of the excess inventory during the first and second quarters of this year.
We have entered a new phase of the pandemic with consumers starting to return to more normal lifestyles.
This may involve increased the away from home consumption of tissue and Destocking of consumer pantries.
Based on IRI market data consumer purchases of tissue slowed considerably in the first quarter, but have now started to recover to pre pandemic levels.
Retailers have responded to these trends by managing down their higher inventory levels, reducing their orders to suppliers like us.
This is likely of temporary adjustment after a very robust 12 months of pandemic driven demand.
While the inventory adjustment is temporary and it may result in at home industry tissue shipments dropping to below 2019 levels in 2021.
With that said, we expect long term consumption growth to continue between 1% to 2% per year with private brands continue to gain share.
Our tissue volume trends and the first quarter and heading into the second quarter appear to reflect these industry dynamics.
We sold $11 7 million cases, and the first quarter, which was down around 23% and 16% compared to the first and fourth quarters of 2020 and down 5% relative to the first quarter of 2019 sales of $12 3 million cases.
We're continuing to closely monitor channel and customer trends to ensure that we're aligned with areas and the market with the highest growth prospects.
Let's turn to our production and inventory levels.
While we did take some asset downtime and the first quarter, our production exceeded sales and inventory levels increased.
We're taking more substantial substantial downtime and the second quarter to reduce inventory levels to get closer to our targets.
While this will have a negative impact on our fixed cost absorption and will help us avoid producing excess inventory at todays elevated market pulp prices as well as increased supply chain costs.
As Mike and I discuss our outlook for the second quarter, we will go into some additional detail on actions that we're taking as we face the normalization and tissue demand and significant cost inflation.
With that I'll turn it over to Mike to discuss our first quarter results. Thank.
Thank you Allison.
Please turn to slide six and <unk>.
Consolidated company summary income statement shows first quarter as well as the first quarter of 2020.
And the first quarter, our net income was $12 million diluted net income per share was <unk> 71 per share and adjusted income of 69 per share.
The corresponding segment results for on slide seven and our pulp and paperboard business was impacted by the weather event, while consumer products on lower demand and partly offset by the benefits from the Shelby expansion of.
Before we speak in more detail about our divisional performance I wanted to remind you of some of the changes we started making last quarter and how we portray our financial bridges.
<unk>, we had shown the impact of production volume changes and associated fixed cost leverage impact and our cost category.
We have modified and approach and our including production volume changes and our volume category. We believe that this change will enable investors to better understand sales changes as we expect to produce similar quantities of product that we sell which will all be in the volume category and tissue production exceeded sales and the first quarter of 2020.
One and the reverse was true and the first quarter of 2020, which complicate comparisons to prior periods.
The cost category will better reflect the changes and raw material input pricing and inflation.
We also made a change related to our paperboard business and the presentation of our volume and sales price to remove the impact of our contract sheeting business is.
This contract shooting business as a service and distorts our sales price of our base paperboard products.
Additionally, as a reminder, we have moved our bale pulp sales to external customers back to the producing segment.
From consumer products division to the pulp and Paperboard Division.
We've also started transferring bale pulp from our pulp and paperboard division to consumer products division at market price.
We believe this change will better reflect the economics associated with the business.
These accounting changes have taken effect with our first quarter 2021 reporting and the prior periods have been recast as a reminder, we filed the recast numbers as part of our 8-K associated with our fourth quarter earnings announcement, where we recast the prior three years of this policy.
Past eight quarters.
Slide eight is a year over year adjusted EBITDA comparison for our pulp and paperboard business.
We are implementing of the previously announced the price increases and our Sps business and are starting to see some of the benefits relative to a year ago and have a positive shift and our mix.
Our sales and production volumes were slightly off due to the impact of the weather event and the South and February.
Our costs were elevated and part due to the weather and debt.
Slightly offset by lower year over year input costs.
You can review the comparison of our first quarter of 2021 performance relative to fourth quarter 2020 performance on slide 14 in the appendix.
Please turn to slide nine where we provide a year over year comparison of the first quarter of 2021 relative for the first quarter of 2020 for tissue.
We continue to see the benefits of the positive mix shift due to our Shelby expansion and related commercial moves.
Our sales of converted product and the first quarter were $11 7 million cases, representing of unit decline of 23% versus prior year.
Our production of converted product and the quarter was $13 5 million cases or down 3% versus the prior year. This mismatch and sales and production has led to increases and our inventory.
We had favorable year over year costs as we benefited from ramping our Shelby mill and realized benefits from SKU rationalization and from some lower input and freight costs.
You can review of comparison of our first quarter of 2021 performance relative to fourth quarter of 2020 on slide 15, and the appendix.
We have also added finished good production and other financial data on a quarterly basis to slide 16.
Slide 10 outlines our capital structure.
We generated approximately $20 million $21 million and free cash flow to reduce our net debt and our liquidity was $282 7 million at the end of the first quarter.
We continue to make strides and reducing our net debt and increasing our financial flexibility.
Over the past couple of years, we've worked on our financial flexibility. So that we could be well positioned during times of uncertainty and our business, we prioritize capital allocation and repaying debt and bolstering our liquidity and turning on our debt maturities.
Since assets to our ABL facilities based loosely on accounts receivable and inventory levels and advanced rates and our term loan is covenant light.
The maintenance financial covenants do not present of material constraint on our financial flexibility.
The net result is that we believe that we have a stable financial structure with ample liquidity and a few years before we have any required principal payments.
Slide 11 provides a perspective on our second quarter outlook and some other key drivers for the full year 2021.
And our expectations assume that we continue to operate our assets without significant COVID-19 related disruptions.
As previously discussed demand visibility and tissue as well as inflation expectations.
We have and will continue to be challenging and unpredictable for awhile.
As we mentioned previously our pulp and paperboard businesses and diligently working to implement the previously announced price increases.
We expect that the benefit of this will continue to be reflected in the next couple of quarters.
The planned major maintenance outage at Lewiston and April which is included in our paperboard business is complete and is expected to impact earnings by 21% to $24 million consistent with our initial expectations.
Tissue demand is expected to weaken further from the first quarter shipments of $11 7 million cases.
Our shipments in April for at $3 1 million cases, compared to our monthly average and the first quarter of 2021 of $3 9 million cases.
To address our elevated inventory levels.
And expected lower demand from our customers in the short term, we are materially reducing production flow anticipated shipments and the second quarter.
To put this in the context the amount of quote unquote lack of order downtime and the second quarter of 2021 is expected to exceed one third of our peak.
Demonstrated production of $15 9 million cases, and the second quarter of 2020.
The lack of fixed cost absorption and related expenses are expected to be meaningful period costs and the second quarter due to the magnitude of the downtime.
We started observing raw material price inflation, and the first quarter and expect it to.
<unk> net to accelerate into the second quarter.
We estimate that the impact to be approximately 9 million to $13 million and the second quarter relative to the first quarter.
Due to tissue sales and production declines.
Second quarter outage costs and higher inflation, our second quarter adjusted EBITDA could be close to breakeven.
While we're not providing specific annual guidance for 2021, there are several drivers assumptions and variables that we'd like to update from our commentary during our fourth quarter call.
We're expecting continued positive impact from the previously announced SBS price increases.
And our paperboard business planned major maintenance sounded just the expected reduced earnings for 2021 compared to 2020 by 25% of $30 million similar to our previous guidance.
And the impact of the weather event and the South we've decided to move the Cyprus and outage from the fourth quarter into the third quarter.
Of updated this guidance on slide 20, where we broke out the timing of that quarter, which reflects our current plan.
And then the negative impact from the weather event and the first quarter of 2021 of $6 5 million.
Previously, we spoke to our anticipated tissue volume declines of high single to low double digit percentages year over year.
Considering the demand to date.
And we're revising the assumption to mid double digit decline year over year for 2021 is the consumer and retailer pullback has been more significant than anticipated.
And while demand forecast and continues to be challenging as the market works through the inventory overhang. We believe these issues to be temporary in nature. While we are encouraged by our sales pipeline given the pullback in demand across channels.
Demand ramp from these wins will be delayed as customers are working through existing inventory and their supply chains with flatter consumer demand.
We're expecting even higher input cost, including pulp packaging energy and freight versus our previous expectations of 40% to $50 million or.
For our revised estimate based on our current assessment of the market and.
The $65 million to $75 million of inflation in 2021 versus 2020.
Pulp continues to be the main driver.
We're taking various proactive measures to reduce costs and improved sales and manage inventories, which are some will address in his closing remarks.
For the full year 2021, and we're also anticipating the following.
We expect interest expense between 68% to 30 30.
And 36 and $38 million.
We continue to expect depreciation and amortization to be between $106 $110 million.
We have revised our capital expenditure expectations downward from 60 to 65 million to $55 million to $60 million.
And our effective tax rate is expected to be 25% to 26%.
And we expect to utilize some of our current tax attributes, which amounts of $16 million to reduce cash taxes. We.
We did receive approximately $8 million of that $16 million of the first quarter and an additional $3 million and April let.
Let me turn the call back over to <unk> to conclude our call today.
Thanks, Mike I would like to discuss the actions that we're taking across the company to combat higher inflation and lower tissue demand.
And our paperboard business, we're focused on implementing the previously announced paperboard price increases and maximizing production to meet demand.
And our tissue business, we're working with customers to offset higher costs through previously announced price increases and upcoming product changes.
We have a robust pipeline of new tissue volume and are actively pursuing additional sales opportunities.
Across both businesses, we're working through ways to reduce costs, both in the short and long term.
And from looking at our network cost structure to optimize and pulp mix to lower variable cost.
We're managing our cash flows by taking significant downtime across our tissue operation and the careful slowdown and planned capital expenditures in 2021.
At the beginning of the second quarter. We also launched the transformation effort focused on improving our core operations and the medium to long term.
The transformation team is made up of dedicated internal resources supported by a top tier consulting firm aimed at achieving the full potential of the Clearwater paper over the next several years.
The team is now focused on identifying and evaluating opportunities for improvement across the company.
I look forward to discussing this effort with you on the upcoming quarters.
We have and will continue to take appropriate actions to position our business for the future.
Balancing the needs to respond to current market conditions.
Let me remind you of why I think these businesses are well positioned and the long run.
For our Paperboard Division, we believe that the key strength of this business of the following 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, which serves and markets that are largely stable demand.
Second.
And not being vertically integrated enables us to focus on independent customers with unparalleled service and quality commitment.
Third we believe through product and brand development of the business is well positioned to take advantage of trends towards more sustainable packaging and foodservice products.
Lastly, our paperboard business has demonstrated an ability to generate good margins and solid cash flows.
Our consumer products division as the leader within the growing private Brian of tissue market from our vantage point, we believe the key strengths of this business for the following.
First we are of 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.
There are long term trends away from branded products and private brands.
Private brand tissue share and the U S rose to over 30% up from 18% and 2011.
While these trends of our impressive we're still a long way from where many European countries are for private brands represent over half of total tissue share.
Lastly, tissue with and economically resilient and need based product historically demand has not been negatively impacted by economic uncertainty.
After we get beyond the temporary distortions and our tissue supply chain at the retailer and consumer level. We are optimistic that this business will generate meaningful cash flow and returns over the long run.
While we are faced with some headwinds in 2021, we're building our business to be successful both in the near and long term and believe that we will come out of 2021 of better operation and where we started.
Our balance sheet is well positioned to support us with strong liquidity limited financial maintenance covenants and debt maturities, which are few years away.
We're working with our board to develop for medium to long term capital allocation plan and.
And look forward of sharing those thoughts, including internal investments external investments and the return of capital to shareholders as we approach our two five ex target leverage ratio.
So with that we will and our prepared remarks and take your questions.
Thank you as a reminder to ask the question you may differ from the tier one on your telephone.
On your question price per pound or cash Keith Please standby, we compile the Q&A roster.
Your first question comes from the line of Mark Wilde from BMO capital markets. Your line is open.
Thanks, Good evening Orison, Michael and good evening.
I wondered if you could the <unk>.
First of all just help us on the roll through of the SBS pricing increase.
Think about the cadence.
So mark I think we've talked about it previously being.
About two quarters to get the price increase fully through.
And.
The extending your question a little bit further we have about a quarter to a third of our business.
<unk> directly tied to that re see sorry, the VC fast markets index price.
And.
Okay. So the rest of it is kind of the.
It's not contractually tied but should.
Move directionally with the.
With the announced price increases are of whats grade papers are showing is that correct.
That's correct.
Okay, and then Michael is it possible when you when you showed us that the second quarter bridge.
Bridge.
Can you just help us work through the.
The cost of the the impact of lower sales of amendment big production cuts.
So when you say the second quarter for the second quarter outlook commentary, yes.
Yes, yes.
And you basically you've quantified most of the other pieces there I'm just.
We'd like a little bit of help on the.
The fourth one which is lower sales and the production cuts.
Sure. So I think mark just to do the math for the benefit of the.
The people on the phone and start with just over $54 million of EBITDA and the second quarter and add back $6 5 million of the weather event that we would not see repeating so we're just north of $60 million.
Take the.
Outage costs call. It 22, 5 million and the midpoint of the range take the inflation $11 million and the midpoint of the range and after that and Youre left with the number and the high twenties of millions and so if you said.
We're approaching breakeven what does that all mean.
The positive there is some of the benefits from the paperboard price increase and then the rest of that is.
On the let's call it both sales declines and maybe more materially the volume of production declines that we're going to experience within the quarter.
Another way to kind of think about it is.
<unk> the clock to last year.
We're producing $15 9 million and the second quarter of last year this year.
And we're going to take over a third of that production capacity down.
It's a lot of fixed cost that we're going to need to absorb here in the quarter.
Okay Alright.
Really really helpful. Michael.
Can you talk about what youre doing in terms of.
The weather's tissue pricing sheet count whatever the sort of mitigate the impact.
Of these rising costs.
I mean, it seems like the among the brand the.
Players there and Theres.
And Theres, a pretty wide dispersion of strategy some people have announced nikes and some people have done nothing.
Now let me, let me take that one mark.
<unk>.
Across both of our businesses.
The price is determined by supply and demand.
And if so if you look at the paperboard market dynamics, there are quite favorable and I think youre seeing that reflected and the price increases that we've announced and are implementing.
And frankly, thats, less so and and tissue with with the slowdown in consumer demand and some of that inventory overhang that we're seeing.
We're working through this customer by customer.
Don't have specific additional comments on.
What that would mean for us on the tissue side.
But we're working through this with our customers that's on the pricing and on the product changes on D. Sheeting, I would say the majority of our customers.
Follow what we call and MBE strategy, which is national brand equivalent. So the aim to have there the private branded and private branded products.
On closely.
Closely resemble the branded products and.
And so we're working through product changes.
With our customers.
To follow that to fall of that <unk> strategy here and the upcoming and the upcoming quarters. So that's certainly something that we have done and we will continue to do that.
But from a pricing perspective, I think and.
In the long haul, it's that supply and demand equation thats going to drive price and both of our businesses.
Okay, Alright, and the last one for me.
Yes.
And we just had an announcement of a week or so ago that.
One of the other SBS producers is acquiring a <unk>.
A large independent cart and producer with about seven facilities.
Can you tell us whether you currently have SBS volume and.
And of the particular card and producer.
I don't think were were going to.
Quantify that and if it is its not its not large exposure.
I think if we step back and look at our and.
And look at our strategy and where we are and the market, we continue to be positioned well with with independent converters.
Especially through through the time like this where demand is really strong.
And it takes the strong strong relationship and partnership with and Sps producer to continue to service these independent of <unk>.
Converters. So I think we're well positioned I think our exposure is fairly limited.
Okay, Alright, very good I'll turn it over thank you.
Your next question comes from the line of Adam Josephson from Keybanc. Your line is open.
Thanks, Austin, and Mike Hope you're well.
And one more on the the tissue production cut into Q and you mentioned that you think there is over a months months' worth of inventory.
Are you anticipating that the downtime youll take the sufficient.
To fully clear of that overhang by the end of the second quarter or is that still not clear to you.
I think with somewhat unclear is exactly how much of that overhang.
Out there between consumers and retailers.
Let me provide a little bit of data that we're seeing.
And we saw consumers pull back call it the right around 20% and Q1, we're starting to see some.
Some positive signs in April with consumer demand picking up and returning back to pre COVID-19 pre COVID-19 levels.
I think that suggests that the consumer is destocking and may have largely destock in Q1.
The retailers retailers pullback of the orders in Q1, we think they had.
Well above target inventory levels at the end of Q1.
They are still working through those and I think thats reflected in our April order book, which.
Which was $3 1 million cases, well below where we've been.
Historically, so I think it's unclear exactly how long it takes to play through this to play through the overhang.
And we contemplate that by the second half, but at the beginning of the second half we will we'll start to realize some some sort of normal and this space, but it really depends on exactly what those consumer and retailer shopping and ordering patterns of patterns look like the downtime we're taking.
Theres two purposes number one it's to match up with demand and the second quarter, which which is which is a week.
But also to start reducing some of the some of our own inventory overhang and.
And our system and frankly with the with record pulp prices. This was the right time to take to take these curtailments across our system and not not make inventory that we don't need and high pulp prices and paint paint the stores. So I think it's the right decision.
It does create the fixed cost absorption issues within the quarter, but it's the right thats the right business decision.
Understood Thanks for and it speaking of high pulp prices.
My second question I asked you three months ago, what you've made of what was going on because it seems to me like demand wasn't very good and yet pulp prices were hitting all time highs and China and here. We are three months later, you are having to take tissue downtime printing and writing demand remains weak globally.
The shipment data hasnt been good and yet pulp prices keep going higher do you of any better sense of what is driving this record search and pulp prices.
And China, and then by extension elsewhere and.
Where do you see this going.
Yeah.
I think we've we've stopped trying to predict where pulp prices are going to go. This year. There's a number of a number of factors and they are out there and the industry publications. So we don't need to.
And we revisit that if you look at the forecast that are that are out there for the second half of their they are indicating some some softening of pulp prices.
Still it still at really high levels of softening from from these from these peak peak prices bolt and softwood and hardwood.
Grades and.
And so hard to predict but I think the forecast out there anticipating some some easing of the second half.
Right. Thanks for the two others. One is if you look at your consumer product segment over the years the.
The high was $150 million of EBITDA few years ago, and then <unk>.
Well all the way to call. It six day and then it nearly tripled last year.
What would you consider normal.
And the extent there is such a thing would be just given the dramatic volatility and the profitability of that segment over the air So it's really hard to.
Determined what's normal on just would love any thoughts you have along those lines.
There's a few variables to think about it I think the first one that we.
And that we.
<unk> last year is the power of them.
Volume and fixed cost absorption through our through our system. So that that's the lesson learned on.
On our part and certainly part of our longer term thinking and planning. So theres. The volume piece. There is the pricing piece that we've seen over the last several years and then there is the the volatility and.
And and primarily pulp, but also and transportation and a few other input costs.
So.
Over the last couple of over the last few years, we've seen we've seen this we've seen this volatility and it's been driven by those by those variables and and.
And this year, what we are experiencing is post.
Post COVID-19, we had a really robust 12 months.
This is the this is the adjustment period.
And and just also happens to be at the same time as we're experiencing peak pulp prices. So those of the things that have been moving this business silver over the years.
I'm not going to attempt to predict at this point, what the normal would look like but we are focused.
We're focused and the long run on improving this business structurally.
We will get the benefit benefits of the Shelby the Shelby expansion.
We will make the right decisions about products and customers and channels and our cost structure and the long run. So the things we control those of those are the things. The work that we're focused on but we're certainly going to be subject to some of the market.
The market headwind and tailwind as the happen.
Yes, Thanks, sorry, and just one last one on your guidance and our philosophy and then all year last year you are.
Exceeding your guidance pretty significantly and.
The conditions were quite fluid, but you kept providing quarterly guidance, albeit dramatically exceeding it and now you're no longer providing quarterly guidance, just because the conditions remain fluid, but and the opposite direction of last year. So what is your philosophy of regarding quarterly guidance is that something you plan to resume doing next.
Quarter or what are you thinking along those lines.
Adam It's Mike I'll take that question I think.
We mentioned in our prepared remarks that we could approach breakeven EBITDA sort of.
The second quarter and so we think that we've provided that and in response to an earlier question. We think we helped provide some of the data points to get you there.
So the bass.
And that's what we're doing here and the second quarter and terms of our philosophy.
Given the dramatic changes that the business had gone through quarter to quarter.
I think we have to give at least the investment community our expectations of <unk>.
And might happen.
The biggest variable that we had all last year was demand and I'm not sure who did a wonderful jamba predicting demand and the tissue category.
This year, we have both of that demand issue and we have the inflation issue and we're trying to do our best to give you and the investors out there. What we think is going to play out here for the quarter.
Alright, Thanks, Mike.
Your next question comes from the line of Paul Quinn from RBC capital markets. Your line is open.
Yeah, Thanks, very much good afternoon, and artisan and Mike.
Paul.
And if I could just try to understand sort of what's happening and the tissue I mean, you'd describe it as two thirds of consumer and you've got heavy leverage to that component. So the downtime that youre going to be taken in Q2 or the lack of.
Orders.
Of that 22% year over year drop in Q1 is that related to people getting back to work and more away from home and <unk>.
<unk> or is that just a.
The destocking and the consumer channel.
Loan and and you still got the second level drop as people get back to work and consume more tissue at the office.
And I think I think it's I think both are playing both are playing into it.
And we can certainly from the data that we can see out there there was certainly more more shipments of tissue last year.
And then you would expect.
And for consumption growth to absorb so we think based on that there is at least a month of overhang.
And between between consumers and retailers I think much of the much of the U S has been getting back to normal here here recently, so I think that's certainly playing into it.
But we think there's that inventory overhang.
That is.
<unk> taking of below 2019.
Purchasing patterns with with consumers as they work through what's what's within their homes.
Okay and then.
Obviously this is like almost of 180 degree market turn over the course of the year last year.
With customers on.
So on the allocation on the tissue side, you were able to significantly reduce skus now and you've got a period, where youre not getting the order files are these customers coming back to you and pushing really hard to increase skus, which was a significant cost savings dealogic.
And I think we're working through that customer by customer and what I said last year throughout last year, as we think SKU rationalization and beyond beyond COVID-19.
And as appropriate for for most of that for most of our customers.
We think that makes their shelves and more productive and it's better for our customers and our consumers. So those conversations.
Continuing with our customers, where certainly the reintroducing some skus as customers as we work through it with with customers.
It is our intention.
Post COVID-19 not to return to pre COVID-19 pre COVID-19 SKU level, but obviously.
Our customers have to have to agree with our position on that.
Okay.
Alright, and then just on the capital allocation side I take it your first priority is still debt reduction and and maybe you could just remind me what what.
The net leverage target is and when that might move to some different areas.
Sure.
Sure and Paul we're still targeting of two five times leverage ratio over call. It a more normalized EBITDA.
Whether it would be.
Of COVID-19 related or outage related.
So thats the target that first of all working towards.
And I think we can repeat what we said on the last call. We don't expect to achieve that and this year.
Okay fair enough.
And that's all I had the best of luck.
Thanks, a lot of things.
Your next question comes from the line of Mark Wilde from BMO capital markets. Your line is open.
Thanks, Michael.
I just wondered if we could get some update around that.
Measure and the stimulus bill it would potentially impact multiemployer pension.
Sure. Thanks for the question.
And I think mark as we.
We look at it and <unk>.
For the benefit of those on the phone. This is the American recovery plan and act, which includes provisions to provide the financial relief for these financially troubled multiemployer plans.
I think we're moving from this legislation which is very welcome.
Two how does it get implemented and it's uncertain, whether or to the extent of which the legislation will reduce the amount of liability that Clearwater has two pounds.
So like like everyone else for assessing the impact of the legislation we are waiting for the PBGC rules that will establish the guidelines and procedures for pension plans to apply for funding the.
And the PBGC Hasnt told.
Early July to come up with these rules Mark. After then I think we'll have clearer visibility in terms of what this could potentially mean.
But we still need and.
Some color.
And we would expect to apply for that sometime after the rules are outlined for them.
And then some clarity following.
And applying for those of potential funds.
Okay, and just two of the real quick ones are you out with the second increase on the.
Folding carton grades of Bleach board.
We've announced Mark we've announced several several price increases.
To our customers and we're implementing and we're implementing of those those those credit previously announced price increases.
Okay, and then I notice and the deck thats sort of afternoon that the.
<unk>.
Non retail sales price.
And of tissue.
It was down about 9% year on year and down about 20% to 25% from the Earth.
The first COVID-19 levels I know, it's not a big chunk of your business, but what's going on there.
So we combine both parent roll sales as well as away from home converted.
<unk> sales there or so.
One of the or.
Misleading figures, where you get a mix shift where more of parent rolls were sold and the current period and.
And the previous comparison periods.
Okay, Alright, and so really perhaps not on apples to apples there.
Correct.
Okay, Alright sounds good I'll turn it over thanks, a lot and thank.
Thank you.
The next question comes from the line of Adam Josephson from Keybanc. Your line is open.
Thanks Arts and and I appreciate it Mike just to follow up on that the leverage question and the normalized EBITDA. So.
Next year should have fairly average outage expenses, I think youre guiding to 19% to $23 million and then presumably next year would be a more normalized tissue ebay.
The EBITDA year and it doesn't seem like last year wasn't and this year won't be either so how would you help us think about.
And when.
When you are at normalized EBITDA and consequently when used.
Achieved your target leverage ratio to your satisfaction and consequently, we will do.
Something with your capital be it.
Dividends repurchases what have you.
Adam I think thats. The good question I think as we essentially set up expectations for next year and we can try to figure out if that's a good year as a point of comparison for that quote unquote normalized EBITDA from which we can come up for that.
Leverage target.
And I like the way that you framed it.
And thank you for that.
No problem and just the Capex reduction I know, it's minor, but what is what is that.
We're going through a list of projects for the year and given given some of the some of the had been headwinds, we're taking a bit of a deeper scrub on which projects, we're going to implement and not implement.
The CRM, it's a small reduction so I think we're still.
We're still able to execute on.
All of our critical a critical projects that we need to execute.
Alright, Thanks, and just one last one of ours and on the tissue capacity Frank can you just remind us.
And what you see coming on and this year.
And if there's a way for us to I mean last year was so anomalous in terms of tissue demand so that the.
The supply demand equation was out of whack and then this year is kind of be similarly anomalous.
The anomalous.
Can you help us level set where you may exit this year of the industry that is in terms of the supply demand balance just based on.
Whatever demand might be by year end compared to what supply has been added by that point.
If you look at if you look at <unk> <unk> data on capacity additions.
The $19 2021.
Each of those years, if you added up there is between.
And between 160, and 170000 tons roughly of capacity that's been added.
So there is 160000 of slated to be out of this year and it's all it's all tied on capacity.
And there is a few other announcements out there for 'twenty, two 'twenty, three and even EBIT for 'twenty four.
And much of that is ultra tap capacity as well so hard for me to say exactly what that supply demand balance looks like at the end of this year, but hopefully that provides some color in terms of capacity addition, I think what we said previously.
The demand grows that roughly one maybe 2% 2% per year and on a 10 million ton market.
100 of 200000 tons of of.
The capacity. So if you look at the last the last few years, it's been about 160 170000, and that's been added.
Per year.
Your next question comes from the line of Paul Quinn from RBC capital markets. Your line is open.
Yes, thanks for letting me in.
The question here so on the bonus round and just wanted to ask you about the downtime you are taken on tissue is that at a higher cost facility or two or is that of rotating downtime at all and.
And then maybe you could just help me understand that.
Great question.
So we are.
We're looking at it obviously.
And we're looking at our demand we're looking at our inventory, we're looking at it where where our customers are and where the orders are and then we're also looking at the cost structure of the assets. So yes, a lot goes into those decisions.
Not it's not simply a rotating.
Outage across across our system of these are these are targeted.
These are targeted downtime across our system based on based on inventory based on demand and based on based on cost structure.
And so as an example, during the Lewis and major outage.
We took downtime and Lewiston.
Given that the side, what's going through the major maintenance outage.
It made sense for us to take some downtime at our Lewiston tissue operation.
And that went along with the major outage and our paperboard business. So we're managing through this pretty carefully.
Okay.
Let's pull up on that what is the most efficient way to do that.
The week of downtime.
Or is that like is that two weeks or.
And what is that the length of time net.
You still got to act of work for US and you are able to bring back the machine to a pretty quick operating capacity after the shut.
It depends on whether it's the paper machine, our converting assets converting assets I think Ken.
And can be brought up quicker and go down quicker of paper machines.
You can't do that day in and.
One day down and other day, so on paper machines the.
The the tendency is for us the plan Lengthier Lengthier outages.
And so it really depends on the asset depends on it depends on demand depends on the inventory. So there's not a there's not one answer for you, but just hopefully that gives you a bit of a bit of flavor for how we think about it.
Alright, Thats really helpful. Thanks, guys best of luck.
Thanks, Paul.
There are no further questions at this time I will turn the call back over to Ashton for closing remarks.
Thank you everyone for joining us today.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
And.
Given the.
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