Q3 2021 Clearwater Paper Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Clearwater paper third quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session and if he would like to ask a question during that time simply press the star one on your telephone keypad.
If any once you require assistance during the conference. Please press Star zero.
I would now like to turn the conference over Q Sloan Bohlen Investor Relations. Please go ahead.
Thank you.
Noon and thank you for joining Clearwater papers third quarter 2021 earnings Conference call. Joining me on the call today are some catch president and Chief Executive Officer, and Mike Murphy, Chief Financial Officer.
Actual results for the third quarter of 2021 were released shortly after today's market closed along with the filing of our 10-Q, you will find a presentation of supplemental information, including a slide providing the company's current outlook posted on the Investor Relations page of our website at Clearwater paper Dotcom.
Really we will be providing certain non-GAAP information in this afternoon's discussion a reconciliation of the non-GAAP information to comparable GAAP information is included in the press release and in the financial or and in the supplemental information provided on our website. Please note on slide two of our supplemental information covering forward looking statements rather than rereading.
Slide we were going to have incorporated by reference into our prepared remarks with that let me turn the call over to or something.
Good afternoon, and thank you for joining US today, please turn to slide three.
As you saw from our press release, our financial performance exceeded our expectations for the third quarter.
On a consolidated basis the company reported net sales of $450 million adjusted net income of $9 million and adjusted EBITDA of $50 million.
A few highlights to mention.
Our paperboard business continued to see strong demand.
And that demand, we implemented previously announced price increases across our SBS portfolio.
As per our expectations, we saw improving trends in tissue orders and shipments.
We completed the last of our major maintenance outages for the year at our Cypress Bend, Arkansas Mill.
We also completed the closure of the high cost Neenah tissue mill and our exit from the away from home tissue segment.
We saw accelerating inflation across both of our businesses, particularly in energy chemicals wood fiber and transportation.
Pulp reached its peak and started to ease.
And finally, we maintained ample liquidity of $270 million at quarter end and reduced net debt by another $7 million.
As noted during 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.
We're monitoring the latest trends and are adjusting protocols and policies to keep our people safe.
Let's discuss some additional details about both of our businesses.
Please turn to slide four for a few comments on our paperboard business.
The industry continues to experience strong backlogs, even with a higher SBS pricing that has been reported by fast markets Risi at third party industry publication.
We have benefited from these industry dynamics.
And previously announced price increases.
Since the beginning of this year fast markets Risi has reported price increases for the U S market that totaled $250 per ton and folding carton and Cup stock.
This includes a $50 per ton increase in October for both grades.
We're continuing to see strong demand from our folding carton customers and a recovery in the foodservice segments.
We're also pleased with the reception of our sustainability focus brands of Newbuild Cup and re imagine folding carton.
Both are helping our customers differentiate themselves in the market.
It typically takes us a couple of quarters for price changes to be fully reflected in our financials.
It is also worth noting that our portfolio includes additional grades and price mechanisms that are not reflected in <unk> reporting.
We will discuss the estimated impact of our previously announced pricing to R 22, or 2021 financials.
Later in our comments.
Finally, we completed a planned maintenance outage at our Cypress Bend, Arkansas mill during the third quarter.
The financial impact from this outage to our adjusted EBITDA was $5 million.
My thanks to the team for completing the outage on time and on budget.
Please turn to slide five with some additional comments on our tissue business.
We continue to operate in a difficult market environment as previously discussed Covid led to significant volatility in tissue demand and retailer behavior in 2000 22021.
With that said, let me provide you with our point of view on the overall market.
In North America, we view tissue demand is being approximately 10 million tonnes.
With annual demand growth of 1% to 2% slightly exceeding population growth.
Pre COVID-19 the market was about two thirds at home and one third away from home.
Using that math the at home market of six to 7 million tonnes of which approximately two thirds is branded and one third is private branded.
We operate in the private branded market, which is approximately 2 million tons and has grown more quickly than the branded market.
In terms of the retailer environment club and mass merchandisers have gained share at the expense of traditional grocers over the years.
As a reminder, we have greater exposure to grocery than the overall market.
In terms of supply tissue capacity additions have primarily targeted the private branded space with capacity growth exceeding demand growth.
Due to this we believe that private branded manufacturers will operate at depressed capacity capacity utilization levels in the next several years.
Let me share some context pertaining to demand trends that we witnessed in the first nine months of the year.
Consumers started to return to a more normal lifestyle in the first half of the year as vaccines were becoming available and restrictions lessened.
This led to a reduction of at home tissue purchases and Destocking of consumer pantries.
Based on IRI market data consumer purchases measured in dollars bottomed out in March.
Due to these consumer trends retailers were faced with higher inventories in the first quarter and into the second quarter in response to reduced orders to manage their inventories.
Based on Risi data retailer shipments of finished goods bottomed out in April.
This is largely consistent with our order patterns.
We observe demand recovery at the retailer level throughout the third quarter. There was a demand uptick in August related to the emergence of the Delta variant that led to higher orders than we anticipated.
September order patterns returned to more normal levels, but we observed another uptick in orders in late October.
This volatility is a reminder of the unpredictable nature of our market during COVID-19.
Let me provide some additional detail on our tissue volume trends, we shipped $12 3 million cases in the third quarter at 21% increase from the $10 2 million cases shipped in the second quarter.
This was a bit higher than our guidance of 10% to 15% growth, partly driven by the August demand uptick.
We expect demand to be flat in the fourth quarter relative to the third quarter, but there is a high degree of uncertainty in consumer and retailer behavior as we head into the holidays.
We will continue to selectively take acid downtime as needed to manage inventories and our cost structure, particularly while pulp prices are at elevated levels.
With that I'll turn it over to Mike to discuss our third quarter results. Thank you art.
Please turn to slide six.
The consolidated company summary income statement shows third quarter 2021, the third quarter of 2020, and the first nine months of each year.
In the third quarter 2021, our net income was $2 million.
Diluted net income per share was <unk> 11.
And adjusted net income per share was <unk> 55.
The adjustments incorporate the impacts from the Neenah mill closure as well as other adjustments.
The impact of the Neenah closure activities in the quarter was $5 4 million, which was related to severance and related expenses.
Responding segment results are on slide seven.
Slide eight is a year over year adjusted EBITDA comparison for our pulp and paperboard business in the third quarter we.
We benefited from our previously announced price increases and a mild improvement with similar sales volumes as last year.
Our costs were impacted by $5 million of major maintenance outage expenses and higher inflation and maintenance expenses.
You can review a comparison of our third quarter 2021 performance relative to second quarter 2021 performance on slide 14 in the appendix.
Please turn to slide nine where we provide a year over year comparison of the third quarter in tissue.
Price and mix or a limited part of the story for tissue or sales of converted product in the third quarter were $12 3 million cases, representing a unit decline of 15% versus prior year.
Our production of converted product in the quarter was $11 4 million cases are down 25% versus the prior year.
Please note that we've largely exited the away from home tissue segment in the third quarter of this year, which historically represented 3% to 4% of our overall case volume.
While inflation pressure was significant the action that we took at Neenah helped offset some of the higher costs that we faced.
You can review a comparison of our third quarter 2021 performance relative to second quarter of 2021 on slide 15 in the appendix.
We also have finished other.
The operational and financial data on a quarterly basis on slide 16 for both businesses.
Slide 10 outlines our capital structure, our liquidity was $270 million at the end of the third quarter during the third quarter, we reduced net debt by $7 million.
Maintenance financial covenants do not present, a material constraint on our financial flexibility and we do not have near term debt maturities.
We continue to target a net debt to adjusted EBITDA ratio of two five times, which we expect to achieve by 2023.
Slide 11 provides a perspective on our fourth quarter and full year 2021 outlook with key drivers.
Our expectations assume that we continue to operate our assets without significant COVID-19 related disruptions.
As previously discussed demand visibility in tissue as well as inflation expectations have and will continue to be unpredictable.
With that said our expectation for the fourth quarter as adjusted EBITDA of $48 million to $56 million.
Let me walk you through that buildup to that range from our third quarter adjusted EBITDA of $50 million.
Previously announced SBS prices is expected to positively impact us during the quarter by $7 million to $9 million.
Which is helping to offset inflation.
Raw material and freight cost inflation is expected to negatively impact us by 7% to $12 million.
There are no planned major maintenance outages, which will benefit us given the $5 million Q3 outage.
Tissue shipments are expected to be flat, while we take additional asset downtime to manage inventories.
We are expected to achieve the full run rate benefit of the Neenah mill closure, which we previously previously stated as being more than $10 million annualized.
If we take actuals for the first nine months.
And at our expectations for the first quarter, we expect adjusted EBITDA of $167 million to $175 million for the full year 2021.
We wanted to comment on some of the key drivers for 2021 relative to 2020.
We are expecting continued positive impact from previously announced SBS price increases, which are expected to result in year over year benefits of $53 million to $55 million.
In our paperboard business planned major maintenance outages are expected to reduce our earnings for 2021 compared to 2020 by $27 million.
Our guidance for 2022 planned major maintenance outages is on slide 20.
We expect to have additional major maintenance outages in 2023, and we will provide an update when we refine our estimates.
Our current view is that our tissue volume declined year over year will be slightly above 20%, which is not adjusted for the impact of our exit from the away from home business.
In total from 2020 to 2021 input cost inflation, including pulp packaging energy and chemicals as well as freight is expected to be $80 million to $85 million relative to our previous estimate of $60 million to $70 million.
Increasing energy chemicals, and wood fiber prices.
So our inflation expectations higher.
While pulp pricing has started to decrease we do not expect for that to have a material impact on our financials until early next year.
The Neenah mill recently generated negative adjusted EBITDA by closing the site will avoid those losses and lower our overall cost structure by producing our retail volume at other lower cost sites.
These actions are helping us to fully realize the benefits of the Shelby North Carolina Mill investment.
In total the benefit from the Neenah closure is expected to exceed $10 million annually.
For the full year 2021, we're also anticipating the following.
Interest expense between 36% and $38 million.
<unk> and amortization between 104 and $107 million.
Capital expenditures of approximately $42 million to $47 million, which is lower than our prior guidance and historical average of around $60 million excluding extraordinary projects.
Our effective tax rate.
To be 26% to 27% let.
Let me turn the call back over to arson. Thanks.
Thanks, Mike.
It has certainly been an interesting year with robust SBS market conditions significant inflationary headwinds and volatility in tissue demand.
As we mentioned previously we believe that supply and demand drive near to medium term pricing and margins.
Our paperboard business is benefiting from new dynamics, while tissue remains challenged.
I am proud of how our people have managed these challenges and opportunities we're committed to a strong finish in 2021 and positioning Clearwater paper for future success.
For the last couple of quarters I spoke about performance improvement efforts focused on our core operations in the medium to long term.
These efforts are well underway and are aimed at offsetting inflationary and competitive pressures that we face in our industry.
It is important for us to invest in these efforts to maintain and grow our cash flows in the longer run.
We're encouraged by the work to date as we start moving from planning to execution and believe that we are well positioned to combat margin compression in the next several years.
Let me remind you why you think these businesses are well positioned in the long run.
For our Paperboard Division, we believe that the key strengths of this business are the following first we operate while invested assets with a geographic footprint, enabling us to efficiently service our customers.
We have a diverse customer base, which serves end markets that are that have largely stable demand.
Second 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. 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 is a leader within the growing private branded tissue market.
From our vantage point, we believe the key strengths of this business are the following.
First we have a national footprint with an ability to supply a wide range of product categories and quality tiers, which is an attractive sales proposition to our customers.
Our expertise in manufacturing supply chain and transportation is a key differentiator.
Second there are long term trends away from branded products to private brands.
Private branded tissue share in the U S rose to over 30% recently up from 18% in 2011.
While these trends are impressive we're still a long way from where many European countries are in which private brands represent over half of total tissue share.
Lastly, tissue is an economically resilient and an essential need based product historically demand has not been negatively impacted by economic uncertainty where.
We're optimistic that this business will generate meaningful cash flows over the long run.
We are committed to improving our business to be successful both in the near and long term.
And I firmly believe that we will come out of 2021, a better and stronger operation than where we started.
In addition in addition to appropriately sustaining our asset base, our capital allocation plan is focused on paying down debt and improving our cost structure and operating performance.
As Mike mentioned earlier with this plan, we will achieve our near term target leverage ratio of two five X by 2023.
Our long term capital allocation prioritizes, maintaining a strong and flexible balance sheet with a focus on shareholder value.
We will share additional perspectives on our long term capital allocation prioritization, when we reach our near term leverage ratio target.
In closing I would like to thank our people for all that they do to keep our operations running safely and efficiently and for servicing our customers.
I also want to thank our shareholders for their continued support.
With that we will end our prepared remarks and take your questions.
Thank you at this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad again that it is Paul wanted to ask a question.
We have your first question from Adam Josephson with Keybanc. Your line is open.
<unk> and Mike Good afternoon.
Good afternoon Adam.
Good to talk to you Mike.
Mike I think you mentioned youre expecting $7 million to $9 million of SBS price benefits sequentially.
Can you talk about just on a full year basis at this point investors are obviously starting to think about next year and so just in annual terms you produce 800000 tons a year of SBS, you mentioned $250 a ton of cumulative price increases in the third quarter in October you mentioned <unk>.
Up to two quarter lag and implementation can you help me with how much of your SBS business is tied to that index that you referenced that's up to ensure and 50 Bucks a ton in the last few months and based on that and based on the lags that you mentioned.
What investors should expect in terms of the potential EBITDA benefit next year.
Given all of that information.
Sure Adam.
I'll give you my best shot and then ask.
Clarifying questions please add to it.
So in terms of the.
The business itself.
Approximately 800000 tons a year.
About a quarter to a third of the business has contracts tied to the fast markets Risi publications. The majority of the business will follow along with those price increases or decreases that we sell on the spot market, but it's just not a 100%.
So we'll have certain grades that arent.
Aligned with those price factors and then certain other issues were.
You might get.
You won't get 100%, but youll get pretty close to that.
If you take your amount of call it $250 per ton on the 100000 tons. Yes, you can get to $200 million, we'd recommend that you back that off by some amount accounting for the fact that.
And not all of the grade is not.
Not all the grade will go along with those price increases.
And then what we've talked about for this year, we believe that we're going to have $53 million to $55 million of the price increases happening here in 2021.
Remainder is something that you would put into our models for 2022.
Adam and just to clarify.
So risi is a it's an index that reports what's taken place.
In the market so as Mike mentioned about a quarter of our volume is tied to the to the Risi index. The rest is spot market.
Mostly and that's what Risi reports on what's already taken place in the market. So it's not a.
It's not as simple as taking $250 times times 800000 tons. There is other grades and theres other pricing mechanisms involved but.
The math that Mike walked you through I think is largely accurate.
No I appreciate that I'm, just asking because obviously that.
That's a huge swing factor next year in terms of your EBITDA because the maintenance will be flattish I think Mike you mentioned youll get $10 million of annual benefits from the neenah closure.
Presuming the tissue market normalizes, obviously that could be a benefit and then you have this potentially.
Very significant SBS price benefit so I would just thank you for clarifying that because.
It's helpful.
On the tissue side, yes, Im sorry, guys.
Just to clarify in neenah.
Patents.
Here in the back half of this year and I think for your model, you'll want to probe a little bit on inflation as well.
You have to make sure that.
Yes, no I hear you Mike.
Back to tissue for one moment or soon can you just talk about the brief demand Spike in August and then in late October.
And how the late October Spike is informing your view of flat shipments sequentially in other words.
Do you expect that strength to hold or what exactly are you expecting and why is this.
Your best guess why is this happening.
These spikes every month or two.
Yes, it's a good question.
So what we saw in what we saw in Q3 versus versus versus Q2 as our volume was up was up 20%. If you look at.
IRI demand. So this is consumer purchases in dollars. It was up about 11%. So the consumer came back and was buying and was buying tissue again I think you saw delta driven at Delta Varian driven spike in August.
And that subsided and into September and now we're seeing another spike of demand coming in late October early November.
It's a little speculative of what's taking place, but I suspect that consumers are are hearing about all of the supply chain challenges that are out there and some of the shortages that are out there and I suspect there is another stock up that's taking place by the consumer as we head into the holidays.
And so what happens when the consumer when the consumer stocks up retailers carry a few weeks of inventory they start.
Bordering much heavier to respond to that to that stock up.
And then.
And then some some manufacturers put put retailers on allocation.
And then the retailers order more in the cycle. The cycle continues until it runs out of steam and the consumer starts Destocking and we saw what happened in Q2, So I think with October under our belt with having a good opening day order book into November.
We're feeling pretty good about having a.
Good Q4, thats comparable to Q3.
Although there has been there's been a tremendous amount of volatility even week over week over month over month, but that's our best that's our best view right now.
I appreciate that one more and then I'll get back in the queue, Mike back to the inflation issue. You mentioned. So you mentioned pulp prices are still elevated for you obviously, they've been coming down quite a bit in China and then more recently in the states.
Just based on on whats happening in that market and what youre seeing with freight chemicals energy.
Et cetera.
Is it reasonable to assume that.
The inflation impact next year will be.
Notably different than that which you are expecting this year.
Can you give us any.
Way to perhaps help frame it.
Sure Adam Thanks for the question.
When we look at our fourth quarter inflation expectations compared to fourth quarter of last year are coming in pretty close to about $40 million year over year.
So a substantial increase.
Energy and chemicals have been the driver of late we.
We used to talk about the majority of our inflation being pulp driven we have since dropped that helps no longer the majority of the driver here.
And so we're seeing some strong inflationary headwinds.
As we end this year and.
The Crystal ball is awfully difficult.
To look at and try to figure out inflation for next year.
But we still can be running at a very elevated level like we are.
Being here in the fourth quarter.
Thanks, a lot Mike I appreciate it.
We have your next question from Mike Wilde with BMO capital markets. Your line is open.
Good thanks, good evening or good evening Mike.
Good evening.
Mike just I wonder if it's possible for you to just help us put a little finer point on the sort of the roll through of these SBS hikes.
In terms of what we might expect in the fourth quarter and then also if you could just address the issue of sort of how you are reading the market right now I think.
One of the two larger players in the market.
<unk> was out late last week with yet another $50.
Yes.
So mark thanks for the question.
We do think quarter over quarter.
Price increase is going to be about $7 million to $9 million better off in the fourth quarter versus the third quarter.
And so that's.
And that's what we're currently expecting today, and obviously, a sizeable increase year over year.
A number just north of $25 million year over year.
Okay. So I guess that works out to about 35% to $45 a tonne.
Using 200000 tons as a quarterly base.
Yes for the incremental improvement Corp.
Italy.
And Mark I think your broader question about what's happening in the SBS market I think we're still seeing even with these price increases demand is outstripping.
Our ability to supply so we're continuing to try to service our existing customers that were allocating volume, we're delaying capital projects into next year to maximize <unk>.
To maximize production I think the market remains very strong as we head into the as we head into the fourth quarter.
We'll talk more about next year in a few months, but the market remains very very robust.
And very strong.
Okay.
One more on SBS is there any scenario that you could see over the next two to three years, let's say.
Where you could see yourselves, making any further investments in the packaging business.
It's a.
Good good question.
<unk> and SBS capacity come in very large increments.
<unk>.
So we haven't talked about our capital allocation a lot of detail. What we have talked about is making small to medium sized investments to improve our operations and efficiency.
<unk> investments and capacity that are material.
Our pretty significant there's certainly opportunity for us to.
Get additional.
Capacity through manufacturing creep through through some smaller projects, but any material.
Increments comment at pretty significant capital investments.
Okay.
Understood and then I Wonder finally from my side.
Your comments.
The kind of the preamble about the prospects for oversupply in the private label.
Consumer tissue market.
Being something that we have to live with for a number of years.
Any thoughts on how the industry does any more than just kind of grow its way out of that situation.
It's a difficult question difficult question to answer so if you look at you look at the last several years.
While the capacity additions.
<unk>.
Peer two to reflect to be balanced with broader demand.
Cross all the 10 million tons, there disproportionally aimed at this market.
They are outpacing that demand growth.
So.
It becomes.
An economic question for the.
The industry.
As.
What happens with with higher cost assets you source you saw us taking out higher cost capacity that was no longer economically viable.
So it is difficult to predict what others are going to do we've done.
Done would make sense for us in terms of in terms of reducing reducing our high cost capacity that was no longer economically viable.
Okay I'll turn it over.
We have your next question from Paul Quinn with RBC capital markets. Your line is open.
Yeah. Thanks, guys good afternoon.
Good afternoon.
To start on the Friday.
Consumer products side just.
You guys ever since I started covering you you've been waiting to the grocery store side, just wondering over the last five years, how much movement you've done too.
Some of these areas that are growing.
Two groceries detriment.
And we've done quite a bit of movement.
We were north of three quarters grocery, we're still more than half grocery, but we've made.
Substantial inroads in to mass.
And to club over the years Theres more to go we're still.
Overweight in grocery and if you look at if you look at just recent data that's out there. If you look at private branded tissue purchases. If you just take the top three.
Three players in the market in all three of them are in club or mass.
They now represent.
Somewhere around 65% of all private branded tissue purchases.
So we're still we're still more weighted towards towards grocery, but thats certainly something we are working on to make sure that we're aligned with where the growth is taking place.
Okay, and then just sticking with that theme of growth I mean, you just shut down neenah.
But you've also had the successful and very well timed startup at Shelby two one is it.
Trying to look at Shelby three year. Another another machine for you guys at some point down the road given the long lead time on ordering equipment.
So I think first things first I think we're sticking with that with our theme of paying down our debt and generating cash flows.
That's our priority we have capacity available to sell so to your to your point. If you look at last year, we peaked at about 60 million cases.
Quarter of sales if you do back of the envelope that would imply 64 65 million cases of capacity we have.
Removed approximately $10 million with the neenah closure, but that still implies capacity in the mid <unk> in terms of cases.
We are probably going to be if you do the math in our in our in our prepared remarks will be somewhere in that 46 47 million cases in 2021. So we still think there is in other.
10, 10 plus percent.
Our capacity that we can sell through to get to utilization rates somewhere in the mid nineties.
Paul I'd also add it its a pretty highly fragmented manufacturer market out there as well and I think we'd have to really challenge ourselves is it better to build versus buy and to consolidate and I think there's probably a lot of good reasons to think about that trade off and something that as we approach our leverage ratio.
We'll have to challenge ourselves with.
Okay.
Thanks for the color on the maintenance schedule at the back of the deck, just wondering how youre thinking about 2003, and if you could remind.
Remind us so.
What that periodically is for maintenance.
Both sites Cypress Bend and listen.
We are going to have a major maintenance outage in 2023, which we commented on in the prepared remarks, Paul we don't have an estimate for you today.
We have a more refined estimate we'll certainly share that with you in the investment community.
Okay, and then just lastly, just on.
On pulp I mean, I understand you've got some cost inflation in energy and chemicals that just about everybody else has seen as well but pulp.
Pulp costs look like they should come down in a material way, Mike correcting assumption that you are still sort of consuming about 300000 tonnes.
I'd side pulp at year end.
So that could be a material tailwind in <unk> and 'twenty two.
Youre right, we consume about 300000 most of that is hardwood are eucalyptus.
If you look at what's happened since the end of last year into middle of this year. If you look at the Risi index on Eucalyptus I mean, it's up 460 Bucks a ton.
Or about 50%, 50% over the last.
A couple of months I think we've seen about a $50 easing.
So for $460 up from $50 down I think they are still there.
Still a ways to go for this to be a more reasonable pulp market for us but in terms of the forecasts that are out there and what were anticipating is a continued easing into into next year, which should benefit US important reminder, it takes us.
Several months for pulp pricing to work its way through our P&L just just in terms of how our inventory cycles work between pulp paper and converted cases it takes about 90 days.
For those price decreases to work their way through our P&L.
Alright, thanks for the help best of luck.
We have your next question from Adam Josephson with Keybanc. Your line is open.
Our son, Mike. Thanks, a lot for taking my follow ups, Mike any update on <unk> I know that the new administration was looking into potentially some changes that could affect <unk> any update there and then and how does your <unk> exposure.
Factor into your thinking about hitting that two five times leverage ratio by 'twenty three in and how much financial flexibility will have at that point given your exposure to this.
Pension fund.
Great Adam Thanks for the question.
So as some of you know.
As our multi employer pension plan that were party to.
There is good disclosure in our 10-K earlier.
Earlier this year the American recovery Plan Act was passed which was.
Intended to provide some financial relief to some of the more troubled multiemployer pension plans that are out there.
Adam I think since that plan has passed.
Still working through the rules in terms of who can apply and how you can apply for these funds. Our expectation is that we will apply for the funds I do think that <unk> is probably lower on the priority list for the PBGC in terms of receiving applications. So this is something that we're closer.
Monitoring and as soon as we get the disclosure that pilot has applied for the funds, we will let our investors know.
So I think that answers the first part of the questions that you have in terms of the second part.
But.
We don't believe that the FDA.
AFD associated with time, it's not factored into our two five times leverage target at target is more a function of.
Our net debt to let's call it a through the cycle our average EBITDA.
So that's what we're focused on when we communicate the two five times leverage ratio target.
I appreciate that.
Just a few others. The capex reduction what was that related to I think came down by about $10 million from last quarter, and that's obviously going to be below your normalized level.
It is below our normalized level.
Say there is we're a smaller company so things will be episodic. This year is coming in a little bit lighter than we thought.
<unk> had mentioned in his comments earlier this year, we made the determination to move one of our outages into the first quarter.
At box project debt.
And that we have that will actually produce a little little bit of incremental volume.
Also I think what we're finding here Adam this year, just is tougher to get stuff done in the Covid environment and I think we saw this last year as well.
Yeah No I appreciate it just a couple of those for you Mike on free cash.
Notable in the fourth quarter versus the first three in other words is there a reason to expect a meaningful bulge and.
And cash flow in the fourth quarter based on working capital or otherwise.
There are a couple of pushes and pulls the two things that we've talked about one bond interest payments are made in the first and the third quarter, roughly a little bit north of $14 million in each of those quarters and no similar payment in the fourth or second quarters.
And then secondly, we do have.
Repayment of the <unk>.
Cares act incentives that was on payroll taxes, and the payroll tax holiday, that's a little bit north of $5 million.
Net the two together, there's probably a little bit better than.
Little bit less than $10 million of cash flow impact quarter to quarter.
Setting aside our projections financial results and other networking capital items.
That's great Mike Thanks.
Got it sorry go ahead.
Oh, Yeah, I was just kind of see.
When we look at last year I think your free cash was north of $200 million. This year. It looks like it's going to be quite a bit below obviously EBITDA is much lower this year, but can you help me with just what.
To the extent there is such a thing as a normalized conversion ratio. What you would expect to convert adjusted EBITDA to free cash flow to on a normalized basis, given that $60 million of Capex that you talked about.
I'm not sure there is an easy rule of thumb Adam.
<unk> catch up later to walk you through various scenarios, but.
Yes.
For EBITDA you have.
I think you're right in highlighting capex of close to $60 million, our cash interest is going to be a little bit below that 36% to $38 million that I mentioned, and then you need to put in a number for cash taxes.
We're going to be a cash taxpayer this year, but a small amount next year to a larger amount.
And then it's whatever assumption you want to put in for working capital.
Where do you see higher inflation.
Networking capital becomes a little bit of a drag and I think that's what we're seeing here in 2021.
Yes, no I appreciate that if I can ask just one last one for you on SBS.
Your business has been quite consistent really dating back to last year, even when some of your larger peers, we're having a much more difficult time in that market, which led obviously some of them to either shut capacity or convert it to another box board grade.
And then fast forward a few months the market is as hot as it's ever been obviously, you mentioned prices are going to be up 250 box in the span of.
Four or five months.
Can you help.
Frame what changed in your mind, what changed so dramatically for the industry.
Over the past year or so im sure some of it was the supply reductions.
But just when the demand when the when demand really started booming for the market and consequently, why the industry's fortune seemed to change so dramatically in a pretty short period of time.
I think I'll set the supply the supply changes aside for a moment.
If you look at the end markets that we plan.
We're much more heavily weighted towards folding carton and retailed Cup and plate than the rest of the market.
When COVID-19 when Covid first happened it had a disproportionate impact on foodservice.
In print grades.
That is not where the majority of our businesses. So our markets end markets remained strong the rest of the industries markets Werent quite as strong now since then some of those markets have come back and you also seen some supply disruptions.
Over the last over the last 12 months that were weather related and other disruptions I think we've done we've done a really good job of managing through through those disruptions and minimizing the amount of downtime that we've had across across our mills I think so.
We have good end markets that have been very favorable through through this and B I think we've done a really nice job of operating through through some of these COVID-19 and weather challenges.
At the mills have had across across the industry.
Okay I appreciate that and actually just one last one for Mike just on your guidance.
I know, it's obviously easy to provide full year guidance at this point should we read the fact that youre, giving you get have that full year guidance is a sign that you might.
Get back to providing full year guidance or is that just something youre doing this quarter given that its already <unk> and you don't expect to get in the habit of doing that.
No Adam this time it just was a function of adding the first three quarters to the fourth quarter.
But thanks for the question.
Thanks, so much Mike.
We have your next question from Mark Wilde Your line is open.
You know Adam did such a good job he nailed the two remaining questions I've got I'm all set thank you.
Thanks, Mark Thanks, Mark.
I am showing no further questions at this time presenters. Please continue.
Thank you for participating in the Clearwater paper third quarter earnings call with that operator, we can conclude the call.
Thank you Sir.
Ladies and gentlemen that concludes today's conference call. Thank you for your participation you may now disconnect.
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