Clearwater Paper Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Clearwater Paper Third Quarter 2020 Earnings Conference Call. At this time, all participants are in listening mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would like to hand the conference over to your speaker today, Sloan Bowen, Investor Relations. Thank you. Please go ahead.

Thank you, Mike. Good afternoon, and thank you for joining Clearwater Papers' third quarter 2020 earnings conference call. Joining me on the call today are Arsene Kitsch, President and Chief Executive Officer, and Mike Mercy, Chief Financial Officer. Financial results for the third quarter 2020 were released shortly after today's market closed. You will find a presentation of supplemental information, including a slide providing the company's current outlook, which is posted on the investor relations page at our website at clearwaterpaper.com. Additionally, 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 or 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 Arsene. Good afternoon, and thank you for joining us today. Please turn to slide three. As you saw from our press release, Clearwater Paper had another outstanding quarter driven by strength in our tissue business, stability in paperboard, and excellent operational execution. On a consolidated basis, the company reported net sales for the third quarter of $457 million and adjusted EBITDA of $77 million, which represents growth of approximately 3% and 145% respectively over the third quarter of last year. A few business highlights to mention. Our tissue business drove results with both higher sales and production volumes to meet elevated demand. Lower input costs, particularly in pulp, were also a tailwind on a year-over-year basis. Our service levels and tissues started to recover to pre-COVID levels as we continued to work with customers to fulfill orders and replenish inventory levels. Our paperboard business continued to deliver stable performance, managing through uneven end-market segments with solid execution. Our current backlogs are in line with previous years, and we successfully launched Reimagine Folding Card brand, offering recycled content in an SPS board. In the third quarter, we used the free cash flows generated to reduce our net debt by an additional $40 million, and we refinanced our 2023 notes with a new 2028 notes. On slide four, as I noted these last two quarters, we remain focused on our top priorities during COVID, the health and safety of our employees, and safely operating our assets to service our customers. We continue to operate with appropriate safeguards against COVID, including temperature checks, quarantine protocols, sanitation practices, social distancing guidelines, face covering requirements, remote work, travel restrictions, and enhanced benefits. Our human resources and manufacturing leadership teams are doing an exceptional job of practically monitoring the health of our workforce and ensuring that we have the proper staffing levels in place. Our efforts and risk mitigation strategies are making a difference in helping to reduce the risk of COVID at our sites. I would like to express my deepest gratitude to all of our people for their extraordinary efforts and perseverance through this challenging time. I will now share what we saw for both the tissue and paperboard businesses in the third quarter. Let's start with our consumer product division on slide five. As we have previously noted, at-home tissue demand remained elevated during the quarter. We continue to believe that this is being driven by the shift from away from home to at-home consumption as many people continue to work and learn from home. We noted on our previous earnings call that because of these consumption changes, we were seeing retail sales per IRI panel data stabilized at above pre-COVID levels. In the third quarter, that resulted in low double-digit retail sales growth relative to the 2019 quarter. We expect that year-over-year increase may continue to moderate as retailers replenish their inventories, consumers destock their pantries, and people adjust to living with a pandemic. Our industry view remains largely the same, which I'll summarize in a few key points to provide some context. First, recall that the market for tissue in the U.S. is traditionally two-thirds at home and one-third away from home. Many state economies began to reopen, which we believe drove some of the normalization in demand in the third quarter. We expect continued uncertainty associated with these reopening and travel patterns, making it challenging to predict demand drivers for these end markets during the next few quarters. It is also difficult to predict what a new normal might look like as the pandemic eventually subsides. Second, while it is too early to discern trends on branded share relative to private branded share, we are noticing that paper towel demand is tracking ahead of the overall tissue category, while facial demand is lagging. We will continue to monitor these trends in the coming months and quarters due to the continued uncertainty in consumer demand associated with COVID. Third, as we noted last quarter, skew rationalization has occurred, aiding additional production. We believe that lower skew counts benefit both retailers and manufacturers like us. While we have seen some customers desiring a recovery of skews, we do not anticipate skew counts to go back to pre-COVID levels in the near to medium term. Our tissue results in the third quarter were robust. We shipped 14.5 million cases, which was up around 10% compared to the third quarter of 2019. but down 9% over the second quarter of 2020, as expected. We continue to execute for our customers and are pleased with production efficiency and fixed cost leverage achieved. We have largely replenished inventories throughout the supply chain and are seeing in-stock conditions improve. In addition, to meet peak demand during the pandemic, we believe that some of our customers made short-term commitments to alternative suppliers and tertiary brands to meet demand, including imported products. As a result, we believe that these customers have greater than normal inventory levels in several product categories that they're now working to reduce. We have also adjusted our sales and customer mix over the last six months to better position our business for growth in the long run. That has led us to exit several customers to reduce complexity and improve our network. While we have a robust pipeline of new business for next year, these strategic moves are expected to have a volume drag in the next couple of quarters. Mike will further address the impact of these trends on our business in the financial outlook section of our discussion. Please turn to slide six so that I can share a few comments on our paperboard business. As you recall, we estimate that approximately two-thirds of paperboard demand is derived from products that are more recession resilient, and one-third is driven by more economically sensitive or discretionary products. Our business, including customer demand, has been stable despite economic uncertainties. Our folding cart customers, especially those with exposure to food and healthcare packaging, continue to see strong demand, and our food service customers, especially those with exposure to quick service restaurants and away from home dining, as well as commercial printers, continue to see weaker demand. Our exposure to diverse end market segments help provide stability for our order book in the quarter. We did not have a planned major maintenance outage in the third quarter of 2020 like we did in 2019, which drove improved operations. Our current sales backlogs are consistent with previous years, indicating stable demand. While we're encouraged by our solid performance in the quarter, we're navigating through some uncertain market conditions. On our last earnings call, we introduced the Rematchit brand of SBS folding carton paperboard with up to 30% post-consumer recycled fiber that is FDA compliant for food contact. Together with our Nubo SBS brand of Cove stock with up to 35% post-consumer recycled fiber, We're meeting our customers and consumer preferences for more recycled content in an already highly sustainable form of paper-based packaging without compromising on consumer safety and product quality. With that, I'll turn it over to Mike to discuss our third quarter results. Thank you, Arson. Please turn to slide seven. The consolidated company summary income statement is depicted under the third quarter as well as the first three quarters of 2020 and 2019. In the third quarter, diluted net income per share was $1.28 per share, and adjusted EBITDA was $77 million. The corresponding segment results are on slide 8. Our paperboard business continued its strong adjusted EBITDA performance, while consumer products benefited from significant sales growth and fixed cost leverage associated with production growth and favorable input costs. Please turn to slide 9, where we provide a year-over-year comparison of the third quarter 2020 relative to the third quarter of 2019 for tissue. In the second quarter of 2019, we started our Shelby, North Carolina paper machine and incurred, as anticipated, startup costs related to lower production throughput, higher waste, and other costs, which persisted during the remainder of 2019. As a reminder, we achieved the targeted production rate of our new paper machine in the second quarter of 2020, and we are continuing to capture the benefits associated with the project, including ramping our converting lines, realizing supply chain benefits, and achieving sales wins and mix improvements. While we're not providing a specific dollar amount for these costs and benefits, the continued realization of the CELB investment is an important factor in our performance improvement. Our mix continues to improve as CELB has come online, more than offsetting some year-over-year price impacts. We're benefiting from the volume increases related to the production ramp, which help to meet elevated demand. Overall, fixed cost leverage from increased production, lower input cost, and improved mix positively impacted our tissue business in the third quarter of 2020 relative to the third quarter of 2019. You can review a comparison of our third quarter 2020 performance relative to the second quarter of 2020 on slide 16 in the appendix. Slide 10 contains some additional context to the outstanding performance in our tissue business. and we are building off the data we shared last quarter. The slide contains IRI panel data, which is a snapshot of retail sales of tissue measured in dollars. The line shows monthly change on a year-over-year basis, while the data in the box shows a quarterly view versus last year. It is estimated that dollar retail sales grew 34% in the first quarter, 23% in the second quarter, and 12% in the third quarter. You can see in the data that pantry loading phenomena at the end of the first and beginning of the second quarters, that has given a way to a more stable demand picture for our retail customers. During our last quarter's call, we anticipated the IRI panel data to be up in the 10% to 15% range in the third quarter, and it was close to 12%. In the fourth quarter, we would expect year-over-year sales growth to continue to moderate. This expectation is highly uncertain and dependent on consumer behavior, retail buying patterns, and COVID-related restrictions. Our sales in the third quarter were 14.5 million cases, representing a unit decline of 9% versus the second quarter and unit growth of 10% versus prior year, as expected. Our production in the quarter was 15.3 million cases. We're down 4% versus the second quarter and up 19% versus prior year. Our production levels have benefited from the Shelby ramp and skew rationalization. The cost leverage from the significant increase in production along with improved costs in freight and logistics led to continued strong results. Slide 11 is a year-over-year adjusted EBITDA comparison for our paper board business. Lower pricing reflected in RACI's reported price decrease in February was partially offset by favorable mix. The absence of a planned major maintenance outage at our Idaho mill was also a major driver of year-over-year improvement. Overall, our team ran our operations well in the quarter and continued to deliver stable results. You can review a comparison of our third quarter 2020 performance relative to the second quarter 2020 performance on slide 17 in the appendix. Our performance in the third quarter exceeded our expectations with stronger sales and production volumes in tissue and continued stability in paperboard despite weak economic conditions. These factors combined with outstanding operational execution delivered robust results. Slide 12 provides a perspective on our fourth quarter outlook. As previously discussed, tissue outlook is largely a function of sales demand As Arson mentioned, we recently exited some customers and specific products to better position us for the future. Additionally, several of our large customers placed heavy orders with us and other suppliers in the third quarter, leaving them with high inventories in several product categories. As a result, we're seeing order pace slow in October as customers are adjusting their supply chains. Our October shipments were around 4 million cases, which is down from an average of 4.8 million cases per month in the third quarter of 2020 and 4.4 million cases per month in the fourth quarter of 2019. We are anticipating our tissue sales to be at or below fourth quarter 2019 levels. Our production will also decline to meet this level of demand so that our inventories do not exceed targeted levels, which will impact our fixed cost absorption that had benefited Clearwater throughout much of 2020. Input costs are expected to continue to be largely benign, except for some increasing freight expenses. As we mentioned previously, our paperboard business remains stable and total. And while we continue to prepare for potential COVID recession-related weakness, our portfolio of customers and end market segment exposure continues to position as well through the end of October. If assumptions around demand as well as largely stable prices and raw material inputs hold, we would anticipate fourth quarter adjusted EBITDA to be in the range of $52 to $62 million. This range also assumes that we continue to operate our assets without significant COVID-related disruptions. For the full year 2020, we anticipate the following. Interest expense between $46 and $48 million, which is a slight decrease to debt repayments. Depreciation is expected to be between 109 and 112 million. Capital expenditures are trending towards 45 million, and we still do not expect to be a net cash taxpayer in 2020. While we're not prepared to provide specific guidance for 2021, there are several variables to keep in mind. Planned major outage expenses are expected to reduce our earnings in 2021 compared to 2020 by $25 to $30 million. We've updated this guidance on slide 22, which represents a slight increase relative to prior guidance of $23 million to $27 million. This is due partly to a new project to replace a head box on one of our Lewiston paper machines, which will require some additional downtime. Based on third-party pulp forecasts, we're anticipating around a $50 per ton increase in pulp. As a reminder, we purchase approximately 300,000 tons of pulp each year. CapEx is expected to trend closer to our historical averages of approximately $60 million. Slide 13 outlines our capital structure. We utilized approximately $40 million in free cash flow to reduce our net debt, which included a $40 million voluntary prepayment of our term loans. And our liquidity was $277 million. In the quarter, we refinanced our 2023 notes with a new 2028 note maturity, providing approximately five and a half additional years of tenor at a rate we deemed to be attractive at 4.75%. We also achieved the most amendment to our ABL facility, providing some reporting and other flexibilities. S&P recognized our improving credit trend and removed us from negative outlook. We continue to make strides in reducing our net debt and increasing our financial flexibility. Let me turn the call back to Arson to conclude our call today with clear allotted paper value proposition as we see it and a few concluding remarks. Thanks, Mike. Let's turn to slide 14. I would like to reiterate our value proposition, which we discussed on our previous earnings call and mentioned to investors throughout the quarter. We believe Clearwater Paper is very well positioned across two attractive and complementary systems. Our consumer products division is a leader within a 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, especially during challenging times like today. Second, there are long-term trends away from branded products to private brands. These have typically been amplified during recessions. Private brand tissue share in the US rose to over 30% in 2019, up from 18% in 2011. While these trends are impressive, we're still a long way from where many European countries are, where private brands represent over half the total tissue share. Lastly, Tissue is an economically resilient and need-based product. Historically, demand has not been negatively impacted by economic uncertainty. Turning to our paperboard division, we believe that the key strengths of this business are the following. First, we operate well-invested assets with a geographic footprint enabling us to efficiently serve as customers on both coasts. We have a diverse customer base which serves end markets 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 the business is well positioned to take advantage of trends towards more sustainable packaging and food service products. Lastly, our paperwork business has demonstrated an ability to generate good margins and solid cash flows. Overall, our large capital investments are behind us, and we're prioritizing cash flows as we demonstrated in the third quarter with a net debt reduction of approximately $40 million, bringing our net reduction thus far in 2020 to over $140 million. We intend to continue to deliver by delivering benefits from our Shelby investment, continuing with operational improvements, aggressively managing working capital, and prudently allocating capital. While we expect to have lower tissue shipments in the coming quarters, we're making sound strategic moves to support our customers and their success and continue to position our business for success in the long run. We believe that this strategy is the best way to create value for our equity and debt holders. Before we take your questions, I again want to thank our people for their integrity and commitment to each other, our company, our customers, and our communities during this challenging time for everyone. And to our customers and shareholders, for working with and believing in us. So with that, we will end our prepared remarks and take your questions.

At this time, I would like to remind everyone, in order to ask a question, press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from Adam Josephson from KeyBank Capital Markets.

Carson, Mike, good afternoon. Good afternoon, Adam. Congrats on another really good quarter, both of you. On the quarter itself, Mike, this may be better for you. I just want to make sure I heard you. I think you were saying you expected the IRI panel data to be up 10% to 15% in the quarter, and it was up 12%. which sounds like it would have been in line with your expectations. So if that was indeed the case, can you just help me with what about your volume and production was appreciably better than you were expecting? Great question, Adam. There isn't a one-to-one correlation between the IRI panel data versus our sales data. The IRI panel data is all-encompassing, and it's dollar sales at the retail level, which includes – rebates and discounts and all of that, we were encouraged in terms of our own sales in the quarter relative to our initial expectations. So while IRI data came in within the range, we performed a little bit better than we initially anticipated. You got it. Okay. And just on the same topic, Mike, can you just, again, reiterate what you said about October, why you think shipments were lower in October than the third quarter average and why you Presumably expect that to continue. I Why don't I take that this is arson sure sure it's what we've seen as a some normalization in demand from from consumers And I think there's some consumer D stocking taking place Retailers order pretty heavily in q2 and q3 if you look at our year-to-date shipments, they're up around 17% versus versus 2019 and And retailers also brought in some tertiary brands and other suppliers to meet peak demand. So I think what you're seeing right now is an adjustment in their supply chains as their inventories have grown. And I think they are managing through their inventories in certain product categories. And they've reduced their orders in the month of October to adjust their inventories. So I think this is an adjustment month that we've just gone through. And are you anticipating another demand surge related to this, obviously, surge in COVID cases that we've seen in recent weeks? Or how are you thinking about that issue as it relates to your fourth quarter guidance? You know, it's hard to predict what consumers will do and what retailers will do. What we're expecting is for our volume to be at or below Q4 2019 levels. So we're anticipating continued normalization and this inventory adjustment by our retailers to continue. And of course, if there is a dramatic change in consumer demand, that will have an impact on us. But we're expecting continued normalization and inventory management by our retailers. I appreciate that, Arsene. Just two more. One on pulp. I know you said you're expecting it to be up $50 a ton on average next year. Is that just based on a receipt forecast, or is there anything you're actually seeing in terms of notable pulp price inflation? So, Adam, again, it's premature for us to give a lot of guidance for 2021. We look at a composite view of a bunch of different providers of pulp expectations, and we're just pointing out, on average, what we're seeing is expectations in the marketplace of a $50 per ton higher pulp price levels next year versus this year. Is it based on anything you're actually seeing at the moment, or is it much more about, well, these third-party forecasters are saying it's It's going to happen next year, so we'll just assume that for now. Great clarifying question. We're not seeing anything at the moment. Right. Just more helping you and the other analysts and investors out there calibrate what you should be thinking about for 2021. I appreciate it. And just last one for me on paperboard. So, yeah, I appreciate it. your candor in characterizing the industry as having what you call the uneven end-market segments. If I just think about what's been happening in the industry since last year, GP shut 40% of its capacity. The largest producer this year is shutting 10% of its capacity. Obviously, the two largest producers took significant market downtime in the third quarter. Does the ongoing need among major producers to shut this much capacity just tell you something about underlying demand patterns in this market? And if so, what is that? Adam, let me take that. So we won't comment on what our competitors are doing to have their businesses to run. They're making nice and good decisions for themselves. What we're seeing is a stable order book, and we're seeing our customers have, especially in the folding cart space, have good solid demand here over the last couple of quarters, and that's continued into October. So that's what we're seeing. We're running our business to our orders and to our customers, and we continue to see a very stable order book.

Thanks, Arthur.

Your next question comes from Steven from DA Davidson. Please go ahead. Good afternoon, everyone. So to start, since we have the sense that tissue inventories are normalizing and you said that demand is still elevated, but I'm almost afraid to ask this question, but at what stage will the new shell capacity be sold out?

And then how do you...

contemplate addressing that in that eventuality?

Good question, Steve. As we said previously, we ramped the paper machine in the second quarter of this year, but converting will continue to ramp through 2021. and we're assuming a full run rate production and benefits in 2022. So we're continuing on that trajectory. As you may imagine, over the last few quarters, it's been a fairly tumultuous market, and we've done everything we can to service our customers across our network. So what we're not doing right now is splitting out specific Shelby impacts at Shelby as part of our broader network, and part of our strategy to service our customers. We're on pace to ramp the asset, and we're selling through the capacity that's coming off those lines, and we're going to continue to do that, and we'll make the right decisions around our network in terms of loading and where our volume is going to be placed. So is the tissue machine itself running at design capacity, and that means that you'll be internalizing current rules that are currently going to third parties? So, yes. So we ramped the machine at the end of Q2, and with Q2 and Q3, elevated demand and production, we needed that paper to service our customers. As our production slows in Q4, we will be making good decisions around our network in terms of what we do with paper. And as you recall in previous years, we have used payroll sales as an outlet for additional inventory. So we'll be looking to make the right financial decisions around our mix of case sales and paranormal sales. Okay. Thank you. And switching to paperboard, hopefully I'm not duplicating Adam's question, but, you know, given the proximity of the Texas facility to to where you are in Arkansas. I mean, in the grand scheme of things, it's reasonably close. Are you seeing any inquiries from folks who might be concerned that their source is going away?

Are you seeing any outreach?

Steve, it's a fair question. It's Mike. I think what we're seeing is, again, what Arsene commented on before, a pretty stable flow of orders and a pretty stable order book. As you recall, as we've said in the past, we're an independent player, and so I think that serves to our strength in terms of servicing customers. I can't speak to specific actions by our competitors and how that impacted our customers, but I think our customers recognize that we're here for them. and in a very difficult time here with COVID.

Yeah, and then last question.

I mean, I think your performance in fleet support has been superb over the years, and, you know, I think it will probably remain that way. So are you satisfied with your results both operationally and financially from your small independent fleet? I think especially in this quarter, Steve, our team had a great quarter in paperboard. Operationally, which you can't always see in the numbers, it was one of our better quarters. So kudos to our mill managers and the engineering teams. Our sales team really had another great quarter, and I'd say in a very uneven or choppy market that we're in. Kudos indeed. Okay, congratulations. Thank you.

Thank you.

Your next question comes from Paul Quinn from RBC Capital Markets.

Yeah, thanks very much. Good afternoon, guys. Good afternoon.

It sounds like Adam and Steve and I are in the same boat. We're kind of confused on the drop in tissue, and I suspect it's around you've adjusted your customer mix to improve in 2021.

Is that why it's coming down?

I think it's a contributing factor, but I think there's broader trends that are being reflected here in Q4. And as I mentioned previously, I think our customers ordered heavily in Q2 and Q3. And to meet their peak demand, they also brought in additional suppliers, both domestic and imports, as well as tertiary brands to get products on their shelf. So I think they are, we believe they're working through that inventory. So while demand remains elevated, we're being impacted by that inventory adjustment this quarter.

Okay. And then if I could just try to understand, Shelby, too, in the converting capacity there, you've got converting capacity.

How much, like what percentage of the converting capacity is converting versus payroll sales? And so the facility was designed with a paper machine and adequate converting capacity to convert the paper coming off that machine. So we've ramped the machine. We're still ramping our converting assets. So some of that paper is moving to other sites for converting. And as we ramp our converting assets, more and more of that paper will stay within Shelby. We've needed that paper the last couple of quarters to service our customers. And as I mentioned previously, we'll be making the right financial decisions here in the next couple of quarters as we adjust our production to maintain the right levels of inventory. Okay. Maybe just to further clarify then, how much is being converted at Shelby? How much is being converted within the Clearwater network? And what's the percentage of off-site roll sales? So I believe if you look at our Q3 results, 96% of our sales were shipments were retail sales. So the vast majority of our overall production is paper production is being converted within our own sites. On the margin, we sold a few tons over the last couple of quarters, but most of that paper was converted internally.

Okay, one last one just to kill us. But if you're 96% retail in Q3 and you're ramping over 2021 on converting, does that mean you're going from 96 to 100?

I think what we mentioned previously is about 50% of Shelby capacity is going to be dedicated to network optimization. So what we'll be looking to do is to move converting from other geographies into Shelby to be closer to customers and help with our network optimization initiatives.

Okay. I think I'm getting closer to the answer. Let me switch off to something else and just try to understand your capital allocation priorities.

I suspect debt is one of them. Leverage is probably somewhere around three times now, and you've got a goal at 2.5. So is that still number one? And if that's number one, what's number two, three, and four? So, Paul, thanks for the question. So you're right, our leverage has come down. I think we need to look at the leverage target in the context of a normal kind of non-COVID year in a year in which we have an appropriate amount of outages. so right now we're closer to 2.8 times but but i'd argue on a year where we had a couple of things going in our favor um and so it's going to be a while yet before we reach that two and a half times on you know call it more of a normalized ebitda okay that's fair and then uh after debt pay down what are the priorities with cash So we're still talking, Paul, to our board about what's our strategy going forward as we get closer to achieving that target. It's not something that we've disclosed, but it is an entirely fair question, and we look forward to getting it on the next quarterly call as well.

All right. That's all I have.

Thanks.

Your next question comes from Mark Wild from BMO Capital Markets.

Good afternoon, Arson. Good afternoon, Mike.

Good afternoon.

Arson, I wonder if we could start just by talking about tissue imports and also the impact of new entrants into the tissue market. Do you have some way to help us quantify how much you're seeing imports up over the last quarter or two? So we'll get back to you with that data here in a moment. So we have seen an increase in imports. It's not a big number, but it is having a bit of an impact. In terms of new entrants, this year, if you look at overall capacity additions, The latest is about 160,000 tons net added to tissue capacity this year. As we mentioned previously, this market grows at about 1%, 1.5%, which would indicate it would need about 100,000, 150,000 tons of new tissue capacity to meet demand. And this year, if you look at the puts and takes, it's about 160,000 tons of net adds this year. That adds this year another $160,000 next year. Is it also possible for you to just help us in general terms, think about what the issues are as we get away from home tissue producers trying to toggle some volume over into the consumer market? What are they capable of and what do they have a harder time with? A lot of the away-from-home products are not applicable in the at-home retail market. So think about the big giant rolls of paper towels, folded napkins, and so on. we believe that a large chunk of that capacity is not really applicable to the at-home market. Now, there are some higher-end, away-from-home products, bath tissue that may be applicable, and I'm assuming that our competitors that have both sides of the business are looking to move some of the capacity to the retail markets. It's difficult to say what percentage that is, but we believe that the majority of of away-from-home capacity, it would be rather difficult and costly to convert it to at-home capacity. Okay. All right. That's fair. Mark, it's Mike. Just on the import question that you had asked before, I think the best third-party data source that we have to point you to is RECEI. And so just looking at the first quarter to the second quarter, there were really notable imported volumes of both parent rolls and converted tissue product. And kind of eyeballing the graphs here, I think in the quarter, we're up close to 50,000 tons worth of converted product. And on the parent rolls, it looks like we're up close to maybe 20,000, 25,000 tons first quarter to second quarter. that's the best kind of third-party data that we have. Other than that, we get worried that we're sharing anecdotes in terms of what our customers might have purchased during the period. We'd rather rely on the third-party data. Yeah, I think that's a good practice. If we just toggle over to the bleachboard market, I'm just curious about how you think about the knock-on effects from these pricing initiatives that are underway in both CNK board and CRB board right now? So, you know, Mark, I don't think that there's a very strong correlation amongst the three different markets. It's obviously not a negative for SPS, for, you know, converters on the margin who can choose amongst the three grades.

Yeah, yeah.

I went, you know, we don't comment on Ford pricing at all, but I do think that there are three reasonably different markets that folding carton producers purchase from. Okay. All right. And, you know, it seems like the CUK guys in particular are quite tight right now, and at least one of the two producers has been talking about trying to toggle people over to SBS as a substitute. Are you getting any benefit from that kind of behavior? You know, we won't comment on what the competitors are doing. What we'll tell you is that we're continuing to service our customers. We're continuing to see some pretty robust demand from our customers and a stable order book. So hard for us to tell what knock-on effect the various moves are making, but what we do know is our customers are seeing good solid end market demand, and it's enabling us to maintain a solid order book as we head into October. Okay. And then just two final ones. Mike, what was the third quarter benefit from lower pulp costs? We didn't break that out, Mark. You know, it was one of those looking at year over year, I put that as less important than the fixed cost leverage that we have. So the slide nine, we kind of rank ordered those. Yeah, okay. All right. And then the last one for me, did I hear you say that the impact from more normal maintenance next year is about a $25 to $30 million increase year to year? Did I get that correct? That's correct. We have it on slide 22 of the deck, Mark, for your reference. And we also put out, you know, 2022 estimates as well. Okay. All right. Sounds good. I'll turn it over. Thank you. Thank you.

Your next question comes from the line of Roger Spitz from Bank of America.

Thank you. Good afternoon. Good afternoon. What are you expecting in Q4 for a working capital, presumably working capital release?

So, Roger, it's Mike. We haven't specifically talked to fourth quarter network expectations. I think you heard Arson talk about in the script that we've largely rebuilt our inventory. And so I think you should expect less of a potential drag there. But other than that, we haven't commented on network and capital expectations for the fourth quarter.

Okay. When you say less potential drag, that suggests you may be putting, it'll be an outflow as opposed to an inflow. And I would have thought if you are slowing down your machines, we may see less volumes of sales volumes. you actually might see an inflow as opposed to an outflow on working capital. Am I thinking about that correctly?

Yeah, if that does happen, you are thinking about it correctly. But there's a lot of other puts and takes that happen along the way. And I didn't mean to imply one direction or the other in my previous statement. As you may recall, you know, our bond interest payments are in the first and the third quarter, and so generally you'll expect the accrual for the interest expense to go higher in the fourth quarter. There's some things that you could predict that will naturally happen here in the fourth quarter as you try to predict cash flows, which I think is where ultimately you're trying to go with the question.

Okay. Yes. In terms of the $300,000 in terms of purchased pulp. Could you remind me what the split is between hardwood and softwood on that?

We don't break it down. The majority of it is going to be hardwood. We're long to some extent softwood in our mill in Idaho that we're able to supply the rest of our system with.

And lastly, any impact from the West Coast forest fires on your operations? Obviously, it was denied at home.

Nothing of note. Okay.

Thank you very much.

Thanks.

Your next question comes from Adam Josephson from KeyBank Capital Markets.

Thanks, Arson. Thanks for taking my two last questions here. Arson, not to beat a dead horse too much, but just on the implied question 4Q sequential decline in tissue profitability, just in the context of your results in the past two quarters, which were above your expectations. Would you characterize this guidance any differently, perhaps, than the last two quarterly guidances you gave? In other words, is there a reason to think that this is the, quote, right guidance, whereas you did considerably better in the last two quarters than what you were thinking on the tissue side? Adam, when we provide guidance, we aim for the center cut, and the last couple of quarters have exceeded our expectations. We're continuing to aim for the center cut, and that's what the $52 million to $62 million guidance is. If tissue demand is more robust than we're anticipating or our input costs are lower, certainly that could go higher. But at this point, the way we see it, it's the right range. Okay. And just last question, Arson. I think you both took over your current jobs really at the start of the pandemic. So whatever you were expecting this year to be, I'm sure it has not played out quite as you were thinking. A serious question is, the company has been an enormous beneficiary from this pandemic, both in the form of historically good tissue demand and very low pulp input costs. It's been just a perfect combination. It's hard to see how much whatever you've implemented has changed the company for the better versus the company simply having benefited from extraordinarily favorable conditions that were out of your control. Can you just talk about what influence you've had thus far and what the company's done differently before versus just the benefit from the external environment? Good question. So certainly the tailwinds from info costs and COVID-related demand are helping this year. But the team has done an outstanding job of continuing to manage our assets, manage this business, work with our customers to take advantage of these trends that we're seeing. Additionally, as you know, Adam, I was in the run-up to tissue business before this, and we've spent quite a bit of time getting our network right, getting our customer mix, getting the right pipeline of volume, and some of that is certainly playing out this year. And our paperboard business continues to execute really well and execute through some really uncertain market conditions. So certainly the tailwinds are helping, but the team has done an outstanding job of working through a really difficult environment to deliver outstanding results this year. All the best of luck and stay safe. Thank you.

Your next question comes from Steven Cherkova from DA Davidson. Thanks. Didn't really need to get back in the queue, but we were going there in any event.

I want to put it in the context of the container board market where some producers view the optimal integration level to be 100%, and others want to be, you know, 10%, 15% below that. So with respect to your tissue system, do you have an optimal integration level? Would you actually like to be buying parent roles in a perfect world? You know, we haven't spoken to that previously. What we've said is we're in the business of retail case sales. That's our primary business. We will sell parent roles as necessary to balance our network, but what we're aiming to do is to maximize retail case sales as long as they make economic sense. We've been over 90% over the last several quarters. We like this performance, and we're aiming to continue to drive our case sales over the next couple of years to consume the vast majority of our paper produced.

Okay. Sounds good. Thanks again.

Thank you.

That was our last question at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.