Q1 2022 Clearwater Paper Corp Earnings Call
Good day my name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the Clearwater paper's first quarter 2022 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again pressing star one thank you.
Phone Bohlen Investor Relations you May begin your conference.
Thank you and good afternoon, and thank you for joining Clearwater paper's first quarter 2022 earnings conference call. Joining me on the call today are some catch president and Chief Executive Officer, and Mike Murphy, Chief Financial Officer financial results for the first quarter of 2022 were released shortly after today's market closed along with the filing of our 10-Q, you will find it presents.
Patient as supplemental information, 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 on this afternoon's discussion a reconciliation of the non-GAAP information to comparable comparable GAAP information is included in the press release and in 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 with that let me turn the call over to <unk>.
Good afternoon, and thank you for joining US today, please turn to slide three.
As you saw from our press release, we had an outstanding first quarter that exceeded our original expectations.
On a consolidated basis, we reported net sales of $488 million, which.
Which was 15% higher than prior year.
Adjusted net income was $18 million and adjusted EBITDA was $59 million.
A few highlights to mention.
Strong paperboard demand continued and prices increased.
Tissue demand was stable while prices increased <unk>.
Inflation continued to be a headwind across most of our input costs, particularly pulp chemicals energy and freight.
We continue to focus on offsetting inflation with price increases and better operating performance in both businesses.
And finally, we reduced net debt by $31 million in the quarter.
As a result of our strong first quarter performance and our improved outlook for the year, we're now anticipating achieving our debt leverage targets sooner than anticipated and are resuming our previously authorized share buyback program.
The program has approximately $30 million remaining.
With that lets 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 demand across various end markets, even with higher SBS pricing as reported by Risi.
Since the beginning of 2021 Risi reported price increases for the U S market that totaled $400 per ton.
$250 of that was in 2021 $100 in the first quarter of 2022.
And in an additional $50 per ton in April of 2022.
As a reminder, it typically takes us up to two quarters for price changes to be 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 pricing later in our comments.
Please turn to slide five for some additional comments on our tissue business.
Demand was stable and we believe that we're beyond the impact of Covid barring the effects of any future waves.
We're starting to see signs of inflation and economic uncertainty impact consumer buying patterns.
As an example, private branded share climbed to a high of 34, 5% in Q1, which we believe is an indication that consumers are prioritizing value to offset inflation.
We will follow these trends closely in the coming quarters.
Our shipments were in line with industry trends, we shipped 12 million cases in the first quarter higher than the $11 7 million cases shipped in the first quarter of 2021, which included approximately 400000 cases of away from home sales.
The business, which we have exited.
Sales were slightly down from the $12 4 million cases, which we sold in the fourth quarter.
We entered 2022 with what we believe to be the right inventory levels after carefully managing production in 2021.
As a result, we were able to achieve good capacity utilization during the quarter.
Improved pricing and better fixed cost absorption led to adjusted EBITDA for CPD that more than doubled versus the fourth quarter.
Both of our businesses continued to experience substantial inflation across most cost categories.
In addition to price increases we continue to focus on improving operating and supply chain performance to maintain margins.
Our operating performance improved versus previous periods, despite the well known supply challenges.
Our focus on internal initiatives is delivering and helping offset some of the headwinds that we cannot control.
We will discuss the impacts of these later during our call.
I will now ask Mike to discuss our first quarter results in more detail.
Thank you <unk>, please turn to slide six.
The consolidated company summary income statement shows first quarter for 2022 and 2021 and.
In the first quarter of 2022, our net income was $17 million diluted net income per share was <unk> 97, and adjusted net income per share was $1 <unk> the corresponding.
<unk> segment results are on slide seven.
Slide eight is a year over year adjusted EBITDA comparison for our pulp and paperboard business in the first quarter.
We benefited from our previously announced price increases, which were partly offset by higher inflation across most of our spend categories.
Please recall that we were impacted by a freezing weather event in the first quarter of last year that did not repeat in 2022.
This was partly offset by a capital project installation and related maintenance outage in this quarter.
In total the paperboard business delivered adjusted EBITDA of $60 million you can review a comparison of our first quarter 2022 performance relative to fourth quarter on slide 14 in the appendix.
Please turn to slide nine where we provide a year over year comparison for our tissue business in the first quarter.
We implemented previously announced price increases and realized some mixed benefit in the quarter.
Our volume improved versus prior year, when the market was experiencing COVID-19 pantry destocking.
You can review a comparison of our first quarter 'twenty two performance relative to our fourth quarter on slide 15 in the appendix.
Slide 10 outlines our capital structure, our liquidity was $283 million at the end of the first quarter, we reduced net debt by $31 million with our free cash flow in the quarter, we utilized free cash flow to reduce our term loan balance to $30 million.
Maintenance financial covenants do not present, a material to strengthen our financial flexibility and we do not have any near term debt maturities.
Our net debt to adjusted EBITDA at the end of the first quarter 2022 was three one times, we continue to make progress on our targeted net debt to adjusted EBITDA ratio of two five times, which we now expect to achieve this year.
Effective after this earnings announcement, we have decided to resume repurchases under our existing share buyback program, which has $29 8 million outstanding.
As we approach our target leverage ratio, we expect to begin communicating our longer term capital allocation strategies and priorities.
Slide 11 provides a perspective on our second quarter 2022 outlook with key drivers and some assumptions for the rest of 2022.
Our expectations assume that we continue to operate our assets without significant COVID-19 related or other supply chain related disruptions.
While supply chain issues manifest themselves as higher cost during recent quarters. There are concerns about certainty of supply of raw materials that may not be solved by paying higher prices are using substitutes and could impact production our ability to ship products in a timely fashion.
We want to reiterate that our price realization and cost inflation will continue to be difficult to predict.
Our current expectation for the second quarter as adjusted EBITDA of $54 million to $64 million.
The midpoint of the range for the second quarter is similar to the first quarter adjusted EBITDA of $59 million with price increases partially offsetting inflation with the following details.
Previously announced paperboard and tissue pricing are expected to positively impact us during the quarter by $12 million to $16 million in total.
Paperboard impact could be $10 million to $12 million and tissues impact could be $2 million to $4 million.
We expect volumes to increase in paperboard.
We expect continued inflation, particularly in fiber chemicals energy and freight to cost us an additional $14 million to $17 million.
We want to comment on some of the key operational assumptions for 2022 to provide you with a framework to think about our potential performance.
If our previously announced paperboard and tissue prices remain at current levels. Throughout 2022, we would expect a full year benefit of $200 million to $230 million with a $170 million to $190 million in paperboard and $30 million to $40 million in tissue.
This represents an increase from our prior guidance based on upon continued strength in paperboard and some momentum and tissue pricing.
We expect growth in converted tissue volume, but the benefits will largely be offset by higher supply chain costs.
We do have new contractual wins and are working through our renewals later in the year.
Cost inflation, including pulp fiber freight chemicals, and energy is expected to be $150 million to $170 million.
Which is also significantly higher than previous expectations.
We also expect some labor inflation net of cost mitigation efforts, which we estimate to be a $10 million headwind.
In our paperboard business planned major maintenance outages are expected to have a similar financial impact is in 2021.
In total.
Our outlet for price realization from previously announced increases net of inflation is $45 million at the midpoint and reflects a $20 million improvement relative to our prior estimates for the year.
We'd like to reiterate that volatility in our markets has also increased.
For the full year 2022, we're also anticipating the following interest expense between 35% to $37 million.
Depreciation and amortization between 101 and $104 million.
Capital expenditures of approximately $60 million to $70 million in line with our historical average excluding extraordinary projects.
And some projects that have moved out of 2021 to 2022 due to some timing issues.
And our vendors continue to experience some supply chain issues, which may cause further delays.
And our effective tax rate to be 26% to 27%, which is an increase in past expectations. As a result of a state income tax law change.
And we expect to be a cash taxpayer in 2022.
In last quarter's earnings call, we mentioned that we have a larger than normal maintenance outage in 2023 at our Lewiston mill to address our recovery boiler screen twos.
Which are at the end of their useful life.
Maintenance major maintenance outage EBITDA impact estimates for 2023 remain unchanged on slide 20.
The replacement will also require additional capital expense, which will likely exceed $30 million.
Timing of this outage may also be impacted by the availability of supplies and contract labor.
We look forward to updating you on timing cost and capital later this year let.
Let me turn the call back over to <unk>.
Mike our.
Our ability to offset inflationary pressures as key to our success in 2022, we have successfully offset these pressures in our paperboard business with a combination of previously announced price increases and operating improvements.
While we have not been able to fully offset inflation in our tissue business, we're starting to see some progress.
We implemented a tissue price increase late last year and announced and announced another price increase on April 1st of this year, which we are currently implementing.
In addition to these price increases were also deceiving our products to offset inflation.
We expect that these actions will have an annualized run rate benefit in the mid to high single digits with a full implementation by the third quarter.
As I mentioned last quarter, we have some significant tissue customer agreements up for renewal in 2022.
We're focused on these renewals as well as pursuing new volume opportunities.
Our discussions with key customers are progressing and we also experienced new wins that should improve our sales volumes later this year.
We will continue to update you on our progress.
Finally, there was a capacity reduction announcement in the tissue industry. Risi is reported at the facility to be closed is 154000 tons of conventional tissue capacity.
As I conclude my prepared remarks, I wanted to emphasize some of our key priorities for Clearwater paper shareholder value creation.
Our free cash flow generation is essential for shareholder value creation.
To drive cash flow generation, we're focused on commercial operational and supply chain improvements in both of our businesses.
We're doing this through an intense focus on internal improvement efforts and capital investments to maintain to maintain and improve the cost position of our assets.
We believe that these actions will continue to demonstrate a compelling free cash flow story for our investors.
Our current capital allocation focus remains the reduction of our net debt to improved financial flexibility.
We demonstrated this by reducing our net debt by nearly $300 million in the last two years.
This has allowed us to improve our liquidity and largely paid down our term loan.
As we mentioned previously given our size and the cyclicality of our business. We believe that our target leverage ratio of two five times is a good point from which to communicate longer term capital priorities.
These priorities will include a balanced and opportunistic approach to return capital to our shareholders possible M&A thoughtful capex and further deleveraging.
As mentioned earlier in the call, we're moving forward with the resuming share buyback under our existing program. This decision reflects our improved outlook for the business and robust cash flow generation we.
We look forward to communicating our more comprehensive capital allocation plan with you later in the year.
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 in particular I would like to thank our team for coming up with clever solutions to some very challenging supply chain issues to continue running our assets and service to our customers.
I also want to thank our shareholders for their continued support and our customers for choosing us with.
With that we will end our prepared remarks and take your questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Cause for just a moment to compile the Q&A roster.
Your first question today comes from the line of Adam Josephson with Keybanc capital markets.
Your line is now open.
Good afternoon Adam.
That's on a really.
Really good quarter.
A few questions for you one is just on your guide the change in your guidance. So your price cost spread expectations have improved by $20 million I just wanted to confirm that that is.
Really everything that's changed in terms of your full year outlook.
And relatedly of the pricing improvement of $85 million, how much is paperboard.
Versus tissue I assume the vast majority of paperboard, but any.
Information you can give me there would be helpful.
Adam It's Mike Thanks for the questions. So on part one of the question, yes, the price less cost improvement, we're expecting $20 million for the year.
And our first quarter relative to the midpoint, we were better by $7 million most of that was price mix.
The remainder of the year.
And totaled $20 million.
When we look at the SBS pricing guide that we gave at the end of last year. It was 110 to 120 or now in the $1 70 to 190 area.
And tissue pricing, we had guided previously in that 10 to 20 or now in the 30 to 40.
When we talked about inflation and this is raw material input and freight not labor. Our inflation was 90 to 100 at the end of last year. It's now 150 to 170.
So those are the components that go into that.
Proved outlook as it relates to that price less input cost number.
That's perfect. Thank you Mike for clarifying that a couple of others have your cash flow expectations changed at all with this improved EBITDA outlook or not necessarily because inflation is taking a bite out of working capital.
Yes, I think Adam on the margin or cash flow expectations are improving we haven't guided to cash flow publicly but yes, we're seeing an uptick in terms of our cash flow expectations and added two things that we mentioned on the call as well as we expect to get to our target leverage ratio a bit quicker.
Than we initially expected.
And we're also resuming our share repurchase program so.
As our outlook has improved and our cash flow generation is robust we can we can do both.
I appreciate that yes on the comment you made are soon about the reduction of about 150000 tons of conventional tissue capacity can you just frame for us how consequentially you think that is in the Grand scheme of things just given the.
The supply demand imbalance that you've referenced in the private label tissue industry previously how.
How far does this closure go in.
<unk> that problem just to give us some perspective.
Adam It's a difficult question to answer it's approximately 150000 tons of capacity, what we don't know how much of that capacity was actually operating.
It's also hard to tell how much of that capacity was in the private branded space versus versus the branded space. If you look at the total market and you assume.
It's a 354 million a conventional ton market, both branded and private branded.
It's somewhere in the low to mid single digit percentages, but it really depends on how much of that mill is operating and how much of that capacity was going towards private private branded the private branded market.
You look at total capacity changes.
Over the last several years.
Between 100, and 170000 tons per year has been added.
If you look at this announcement this year, it's essentially flat to down a bit in <unk>.
Next year, we're expecting to see 70000 more tons of capacity being added.
So certainly it makes a difference in terms of the overall balance and the additions versus versus the closures that are taking place.
I appreciate that.
One other tissue related question, you mentioned indications that consumer buying behavior is being affected by inflation and you referenced private brand market share rising to now above 34% can you just give us some frame of reference for what it's been historically, what you've seen in previous such PRA.
Via either recessions or just.
Real income decline just give us some frame of reference for previous such periods and where private label share is now compare to historical levels et cetera.
And what that means for you I assume that's that's good for you, but also just what do you think that means for Clearwater. If this were to continue.
It's a great question I'd say historically, we would expect inflationary.
Inflationary or recessionary environments to drive higher private branded growth. Although if you look over the last 10 plus years private brands have gone from 20 around 20% share to now at 34% share and most of that time, we've seen very strong economic conditions around around the U S.
But we certainly saw a bump here over the last over the last three months with share I'm moving from I'll call. It 33% at the end of last year to about 34, 5% of this year.
Clearly looking at various consumer trends that are taking place and we would assume private branded Sherwood improve we're also looking at product mix to consumers trade down.
Quality tiers do they trade down between pack sizes, and what happens in the channels.
<unk> club grocery and dollar channels. So we're it's a bit too early to tell how this.
This potential inflationary environment is going to impact <unk>.
Branded trends, but certainly the early read is share has has bumped up.
Pretty quickly.
Here in the last in the last three months.
For us as we've said before we're more heavily weighted towards the grocery channel in the dollar channel than the rest of the industry.
So for us it's going to be.
How those channels do in this market environment is going to drive drive or drive our fortunes.
More.
Broadly speaking more broadly speaking.
I think we will see.
We will see stronger demand for private branded share and if capacity at capacity.
<unk> slow like they appear to be slowing we could see a better supply and demand position industry in the coming years.
I really appreciate that and just one last question from <unk>.
You talked about.
Tissues, economic sensitivity or lack thereof.
You talked about SBS in that same context, I know there are many end markets for SBS, some are more economically sensitive than others.
Would you frame for us how SBS demand has held up in previous economic downturns and how is that informing your view.
What is most likely to happen to SBS demand over the next year, where we to go into some kind of economic contraction.
Adam It's Mike I'll chime in there I think historically, we've talked about SBS is having about two thirds of the demand that we see is economically resilient and.
And the other third might be exposed to economic cycles that we were not a converter. So we don't have perfect visibility into all the end markets.
I think where we sit now.
The SBS markets in an oversold position.
And so I'm not sure that there is a fair comparison to let's say the 2007 2008 time horizon I suspect that we've got to as an industry a stronger order book, a stronger backlog than we did call it dozen years or so ago.
Thanks, a lot Mike.
Your next question comes from the line of Mark <unk> with BMO capital markets. Your line is now on muted.
Hi, Mike.
Hey, Mark.
I wanted to start despite seasonality comment arts and made.
In the.
And of course with his comments and that was about.
Raw material supply chain risks and that may be rippling to you in terms of your production ability can you put a little more color on that.
Yes.
So what we are challenged with and I think the industry is challenged with right. Now is just purely managing through the supply chain are key inputs. So for example, mark chemicals right.
So as you know in this in this space there is quite a few specialty chemicals truecar to run through on our assets.
Those chemicals, a lot of times the components come from from overseas.
So we are I think the industry overall.
Is beginning to be challenged in terms of ensuring continuity of supply we managed through it and I think we've been pretty creative.
In doing so, but we wanted to call it out as a as a as an issue that we're facing and we assume the industry facing in total and I am just using chemicals as an example.
I mean is there a particular chemical or something that you see particularly you see a keen risk with.
Nothing nothing in particular, there is a number of specialty chemicals I would say the issue is also in places like pulp alright, you've had.
Rice of pulp has gone up and it's really more driven by the transportation issues than underlying demand issues. So it's ensuring the right flow of pulp from from key suppliers up.
Up in Latin America, and Canada.
Well it due to some of the transportation bottlenecks that exist I think it's across the.
Across the board, we're managing we're managing through them and I think it's one of our one of our strengths.
As a business is to manage through those types of.
Disruptions, but thats certainly something we are facing right now.
Okay, and then secondly, you flagged some contractual wins so far this year, but you also noted that you've got a lot of stuff.
In negotiation right now is it possible to get a sense of just at this point in the year, where you are at in terms of both wins and retention.
Versus what you would've considered your baseline.
So let's start with the wins. So these are primarily wins with existing customers, where we're expanding distribution of our products.
If you were to estimate if nothing else changes in the business. This should be a north of a 5% increase in our baseline volume.
Later in the year. So we've had some nice wins with customers, but as I mentioned on the previous call up to up to half of our business.
<unk> is up for renewal this year and those conversations those conversations are continuing as you may imagine given and given all the supply chain disruptions those conversations are a bit different than they had been in previous in previous years and I think we're emphasizing the importance of.
Stability of supply and the capabilities that we bring to the table to ensure that we can get product on the shelves on the tissue side. So we're working through those and we'll update you later in the year as we as those draw to a conclusion.
Okay and then.
I've never seen a period with more price hikes, particularly over in the SBS market can you just walk us through sort of.
Cadence thing on both SBS and tissue hikes, you mentioned a couple around the tissue hikes as well, but just give us some sense of.
How we should expect this to roll through.
Sure so.
Mark I think there is greater clarity on the paperboard front, where.
Fast markets Risi publishes their indices and what we talk about there as it takes.
Typically two quarters to achieve the vast majority of those benefits and from a modeling standpoint.
Indices arent perfectly representing the products so order of magnitude, maybe 75% to 80% of that Youll see impacting our top line.
On tissue.
A bit more challenged because we don't have that third party index.
You heard us talk about late last year that we were implementing.
Price increases those are flowing through to our customers here.
Largely tail end of the first quarter into the second quarter. We also undertook some seating activities that are starting to impact us here in the second quarter through the rest of the year and then on April 1st we took action again in terms of an additional price increase and thats going to take us a little bit of time to implement <unk> do you want.
To add onto that.
If you look at if you look at tissue, we're expecting year over year, 30, 40 million impact from from pricing as well as the sheeting. So that's a that's not an annualized number that's an actual improvement improvement year over year and I also said that we should expect to see a mid to high single digit.
Pricing revenue improvement in tissue on an annualized basis as well so hopefully that provides a bit more context on tissue.
Okay Alright.
Are you and Mike have been pretty vocal about the.
Industry structure challenges I'm, just curious I mean, we're definitely having these conversations in the investment community.
But within the industry and the industry management, just give a sense that there is more discussion of that.
That topic today than there was say 12 months ago.
No Mark I think we'll stay away from commenting on industry industry chatter I think we will we will reiterate as I think we continue to believe that consolidation is.
As needed to improve to improve scale and returns in our business.
As you know the industry has a large number of family family owned businesses and they likely have different incentive expectations, then than we do as a public company, so really not clear.
How or whether consolidation will occur or can occur, but it's certainly something that we.
We think as needed.
Okay fair enough I'll turn it over.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad. Your next question again comes from the line of Adam Josephson with Keybanc capital markets. Your line is now open.
Senator Mike Thanks, very much for taking my follow ups.
Can one of you just address the paperboard share gain issue we've heard from other producers.
From fast markets Risi that paperboard is taking share from plastic even though theres been one prominent example of a fast food chain moving in the opposite direction of late so can you just talk about the degree to which you are experiencing that shift from plastic to paperboard and just give us some examples.
That that we'd be familiar with in our daily lives to suite kind of better understand.
This shift is actually happening.
So Adam.
Thanks for the question.
In terms of the shift I would say.
At the moment.
Not clear given the supply chain issues and given that.
I think the SBS industry is sold out.
And so I think you have people.
Customers, who are ultimately just trying to source lets say a cup.
Whether it's paper plastic they just need to get a cut on the shelf for foodservice.
I don't think at this juncture that we have really good data to say what is that share gains I think if we were to be in a market where.
There is some opportunity for SBS capacity to be sold through that we could potentially see some some better evidence of those share gains.
So have there been any notable examples in the last I don't know 12 months or so Mike that you can think of or it's not not readily apparent.
I think that you have that active dialogue, Adam, but I'd hesitate to comment on it because I think we have a lot of converter customers, saying if you can only give us more board, we can pull it through especially on the foodservice side.
Adam.
Looking at the longer run I think what's important for us is to continue to innovate and bring products.
The market beyond beyond this this time that that are relevant right. So as you look at our post consumer recycled content.
Some of the coating innovation that we've rolled out I think we have a good pipeline of.
Products that will ultimately.
As we get through this this time, we will have.
We will have it will have a strong demand in the market right and we're seeing that and we could sell more if we could make more of this at this point.
Yes.
A couple of other way I appreciate that so just a couple of them.
Mark mentioned your previous comments about the private label tissue industries need for more consolidation have any of the recent.
The capacity reduction you reference the slowing pace of capacity additions.
The shift towards private brand at least in the last couple of months.
Have those events changed your thinking at all or your thoughts.
Unchanged from three months ago.
In any meaningful way.
I think we still we still believe that consolidation is needed. If you look at the capacity Thats been added over the last number of years outpacing demand growth.
I think we are perhaps a bit more optimistic as we look out over the next several years in terms of the supply and demand balance with private branded share growing and maybe the capacity additions.
Additionally, slowing and even potentially some slowdown of <unk>.
Imports due to some of the supply chain issues that are taking place, but it hasn't fundamentally changed our perspective.
Got it and just one last one speaking of industry structure as Mark was mentioning earlier, there's been this unprecedented wave of SBS price increases over the past.
Year, and few months and coincidentally or not there was a major capacity addition announced now it won't hit until I guess 2025, the first wave of it but.
Do you think.
Industry returns have reached a point at which they are and scenting new capacity and is that affecting how you're thinking about putting more capital.
Into that business why or why not.
Hey, Adam It's Mike I think it's a good question.
I think we take a longer term view on what's going to play out here in paperboard.
And as we're looking at capital allocation, we can't.
Assume that whatever is happening today in 2022 is going to persist for the next decade.
And so.
So we'll see how things play out.
And obviously, we had a competitor that announced that there may be others, who can make a similar sort of an announcement, we don't know that would just be speculation.
Yes.
I am sorry go ahead Aartsen go ahead.
Overall, it's what we said last time.
The industry is the supply demand is exceeding supply right now there is a shift from plastic to paper thats a longer term trend demand is growing so there is natural demand growth.
We think I think we said this last time could be between 400 and 800000 tons by the end of by the end of the decade, and so I think we remain positive on the industry, but certainly we are looking.
Looking at the various changes that are on the horizon, and making sure that we're well positioned positioned to whatever happens.
Completely understood and just one last one in terms of cap allocation.
Here youre going to be able to resume repurchases youre expecting to hit your leverage target earlier.
Than you previously did by yearend.
All of which is good and can you just update us on when you plan to come out with some.
Strategic plan in terms of what your next big move might be in terms of cap allocation. Once you hit that two five times level and you think that youll remain there or perhaps go even lower then you'll be in a position to do something of consequence.
I think what we mentioned as we approach that target that we'll communicate a more a more comprehensive plan and we said we will achieve that target by by year end.
Assuming the next next several quarters, we'll communicate it.
Longer term capital allocation strategy.
I think it's going to include things like further deleveraging, it's going to be.
<unk> things like return return of capital to shareholders.
As you know.
M&A is something Thats.
It's difficult to plan for.
We're obviously going to be open to it if it enhances and creates value and if it doesn't then we wont.
But there will be a combination of a few things that will likely include <unk>.
Deleveraging returning capital will continue to invest in our assets and looking over the horizon for potential M&A opportunities.
That's terrific. Thanks, again, and congratulations again on a really nice quarter and best of luck in this quarter.
<unk>.
Your next question comes from the line of Paul Quinn with RBC capital markets. Your line is now open.
Yes, thanks, very much afternoon, guys just wanted to follow up on one of Mark's questions on.
The tissue contracts at <unk> that you talked about half of them being up this year. We've gone through one quarter did you make any progress on that or are they still in negotiation I just wanted to clarify.
Yes.
There are still negotiations I think there is there are several of them in there they're spread out throughout the year. So there is some active negotiations that were engaged in and there are some negotiations will have later in the year.
So no.
Those have not been concluded and we will communicate those hopefully in the next couple of quarters.
Okay. So based on that schedule will get an update next quarter on that.
Potentially potentially I mean, obviously, we'd like to get some of these some of these.
Concluded in behind Us, but.
Many times, we are at the mercy of our of our customers in there.
Okay, and then just staying with tissue.
I actually went through Covid a lot of tissue companies yourselves included we were able to reduce the amount of skus that you had and really sort of.
I guess get rid of those less profitable skus and I'm just wondering.
Now that hopefully fingers and toes crossed that we're through COVID-19 .
What's the level of Skus that you're currently showing your customers now relative to pre COVID-19 levels.
Good. Good question. So we did a couple of things through Covid and that was the first piece is you're right as we significantly reduce skus. The second piece is we.
We exited some smaller customers that had lots of skus.
That just didn't make sense for us I would say some some skus have come back.
As Covid is behind us, but we're certainly below.
Where we were at before before Covid I think our customers saw the benefit of fewer skus skus and so have we.
Probably somewhere between where we were.
A pre COVID-19 and where we were during COVID-19 . So we're still we're certainly seeing the benefits of your skus to our system.
Okay and then just said just so we're on the paperboard side that the 2023 large outage at Lewiston discrete true replace whats your expected caution that.
Yes, I think we have theres two components to it one is the capital and one is in operating.
Component for for the outage that the capital.
It will likely exceed $30 million and the outage the outages total outage for next year, we're estimating at this stage $30 million to $40 million.
So on the outage, we have two outages going on next year, one is for Cypress spend and Paul we havent broken that one out, but that's going to be the smaller of the two and then the remainder is going to be lowest in total is $35 million to $40 million.
And it's a larger than normal outage, just because we're going to have to pick the pulp mill down for a much longer period of time to do the work on the screen.
Okay.
Yes, No go ahead.
I think one piece to note is given given some of the challenges in getting suppliers and contractors the timing of that could change. So we could push it we could push it if we're not comfortable with.
Screen tube replacement next year, we may we may push it but we at this at this stage, we haven't finalized that so we'll communicate that later in the year.
Okay understood and then just sticking with loose and can you remind us what's going on with your digestion or there is that is it operating it at.
Sort of.
Full capacity.
It is it's been operating it's been operating for several years.
We set several years ago was we didn't get the full benefits of that capital project, but the digester itself is operating is operating very well.
Okay.
All I had best of luck. Thanks.
Thank you at this time, we show no further questions in the queue.
That concludes today's call. We appreciate your interest in Clearwater paper.
Have a good evening.
Please wait the conference will begin shortly.
[music].
Okay.
Okay.
Yes.
Okay.
Sure.
Yes.
Okay.
Yes.
Okay.