Clearwater Paper Corporation

Good day, and thank you for standing by. Welcome to the Clearwater Paper 1Q20 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Sloan Bullen, Investor Relations.

Thank you, Christine. Good afternoon, everyone, and thank you for joining Clearwater Papers' first quarter 2021 earnings conference call. Joining me on the call today are Arsene Kitsch, President and Chief Executive Officer, and Mike Murphy, Chief Financial Officer. Financial results for the first quarter 2021 were released shortly after today's market close, along with the filing of our 10Q. 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 clearwaterpaper.com. Additionally, we will be providing certain non-GAAP information in this afternoon's discussion. The 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 the slide, we are going to incorporate it by reference into our prepared remarks. And with that, let me turn the call over to Arson.

Good afternoon, and thank you for joining us today. Please turn to slide three. As you saw from our press release, the financial performance for the first quarter was strong, despite some challenges impacting both of our businesses. On a consolidated basis, the company reported net sales for the first quarter of $426 million and adjusted EBITDA of $54 million. A few highlights to mention. Our paperboard business continued to experience strong demand, particularly in our folding carton segment. Based on that strong demand, we announced and began to implement price increases across our SBS product portfolio. Our operations were affected by the February cold weather event in the south. Natural gas curtailments impacted production and increased energy prices. Collectively, this negatively impacted our adjusted EBITDA by approximately $6.5 million. Our tissue business saw lower orders and shipments, reflecting overall market trends. IRI market data showed a nearly 20% decline in overall tissue dollar sales in the first quarter of 2021 as compared to the fourth quarter of 2020. Consumers were destocking their pantries and retailers were working through elevated inventory levels. With a decrease in demand, our production outpaced sales, resulting in above target inventory levels. We're taking downtime on our assets to reduce and manage inventories. particularly with today's elevated poll prices. With regards to our balance sheet, we used the free cash flows generated during the first quarter to reduce our net debt by $21 million. We're experiencing significant cost inflation and a temporary decrease in tissue demand. Mike and I will discuss both in detail later in our prepared remarks, including actions we're taking to address these market-driven headwinds across our businesses. As noted over the previous quarters, we remain focused on our top priorities during COVID, the health and safety of our people and safely operating our assets to service customers. Our people's focus has been key to our success and will continue to be so. In partnership with local health agencies, we have offered onsite COVID vaccinations across several of our facilities, and we're continuing to offer a $200 incentive to each employee to become vaccinated. Let's discuss some additional details about both of our businesses. Please turn to slide four 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. We continue to observe strength in demand from our folding card customers and are starting to see a recovery in food service segments. Demand for food packaging products and retail paper plates has remained healthy throughout the pandemic. We're also pleased with the market reception of our sustainability-focused brands of Nuvo Cup and Reimagine folding carton. Both are playing a role in our favorable market position. Our strong order book, which predates industry supply disruptions, continues to be robust. We are diligently working to implement the previously announced price increases. Fast Markets Recy, a third-party industry publication, has recognized a $50 per ton increase in folding carton and a $20 per ton increase in food service grades in its March and April publications. During our fourth quarter earnings call, we noted that the cold weather event in the south impacted operations at our Cypress Bend, Arkansas mill. This resulted in a $6.5 million direct impact to our adjusted EBITDA. I want to again thank our team for their actions to minimize the impact at our mill and for quickly resuming operations to service our customers. While the weather event primarily impacted the first quarter, other potentially longer lasting impacts on input costs are included separately in our revised inflation expectations. As you're aware, we scheduled our largest planned maintenance outage for 2021 during the second quarter at our Lewiston, Idaho mill. We recently completed that work and are back up and running. We would like to thank our Lewiston team for safely completing this important outage on time and on budget. The overall economic impact from this outage to our adjusted EBITDA in the second quarter is projected to be between 21 and $24 million as originally expected. Please turn to slide five with some additional comments on the tissue business. Our industry view remains largely the same, but I wanted to discuss the inventory overhang from 2020 and the expected temporary impact on volume in 2021. The market for tissue in the US is traditionally two-thirds at home and one-third away from home, with around 10 million tons per year of total demand. As consumers spent more time at home in 2020, There was a shift towards at-home consumption. Throughout the pandemic, we witnessed consumer pantry loading and retailers responding by placing higher orders with existing suppliers and seeking out tertiary suppliers, both domestic and international, to meet demand. It is difficult to estimate the level of inventory overhang with our consumers and customers as there is no third-party data available for this metric. Based on re-sea tissue shipment data for 2020 and some assumptions on consumption trends, we estimate that the industry is currently faced with more than a month of excess inventory between consumers and retailers. While it is difficult to predict the timing for the resolution of the inventory overhang, it is likely that both consumers and retailers are working through much of the excess inventory during the first and second quarters of this year. We have entered a new phase of the pandemic with consumers starting to return to more normal lifestyles. This may involve increased away-from-home consumption of tissue and destocking of consumer pantries. Based on IRI market data, consumer purchases of tissue slowed considerably in the first quarter, but have now started to recover to pre-pandemic levels. Retailers have responded to these trends by managing down their higher inventory levels, reducing their orders to suppliers like us. This is likely a temporary adjustment after a very robust 12 months of pandemic-driven demand. While the inventory adjustment is temporary, it may result in at-home industry tissue shipments dropping to below 2019 levels in 2021. With that said, we expect long-term consumption growth to continue between 1% to 2% per year with private brands continuing to gain share. Our tissue volume trends in the first quarter and heading into the second quarter appear to reflect these industry dynamics. We sold 11.7 million cases in the first quarter, which was down around 23% and 16% compared to the first and fourth quarters of 2020 and down 5% relative to the first quarter of 2019, sales of 12.3 million cases. We're continuing to closely monitor channel and customer trends to ensure that we're aligned with areas in the market with the highest growth prospects. Let's turn to our production and inventory levels. While we did take some asset downtime in the first quarter, our production exceeded sales and inventory levels increased. We're taking more substantial downtime in the second quarter to reduce inventory levels to get closer to our targets. While this will have a negative impact on our fixed cost absorption, it will help us avoid producing excess inventory at today's elevated market pull prices, as well as increased supply chain costs. As Mike and I discuss our outlook for the second quarter, we will go into some additional detail on actions that we're taking as we face a normalization in tissue demand and significant cost inflation. With that, I'll turn it over to Mike to discuss our first quarter results.

Thank you, Arson. Please turn to slide six. The consolidated company summary income statement shows first quarter as well as the first quarter of 2020. In the first quarter, our net income was $12 million. Diluted net income per share was 71 cents per share and adjusted income of 69 cents per share. The corresponding segment results are on slide seven. Our pulp and paper board business was impacted by the weather event. while consumer products saw lower demand partly offset by the benefits from the Shelby expansion. Before we speak in more detail about our divisional performance, I wanted to remind you of some of the changes that we started making last quarter and how we portray our financial bridges. Previously, we had shown the impact of production volume changes and associated fixed cost leverage impact in our cost category. We have modified that approach and are including production volume changes in our volume category. We believe that this change will enable investors to better understand sales changes as we expect to produce similar quantities of product that we sell, which will all be in the volume category. In tissue, production exceeded sales in the first quarter of 2021, and the reverse was true in the first quarter of 2020, which complicates comparisons to prior periods. The cost category will better reflect the changes in raw material input pricing and inflation. We also made a change related to our paperboard business in the presentation of our volume and sales price to remove the impact of our contract sheeting business. This contract sheeting business is a service and distorts our sales price of our base paperboard products. Additionally, as a reminder, we have moved our bailed pulp sales to external customers back to the producing segment from consumer products division to the pulp and paperboard division. We've also started transferring bailed pulp from our pulp and paper board division to consumer products division at market price. We believe this change will better reflect the economics associated with the business. These accounting changes have taken effect with our first quarter 2021 reporting, and the prior periods have been recast. As a reminder, we filed the recast numbers as part of our 8K associated with our fourth quarter earnings announcement where we recast the prior three years as well as the past eight quarters. Slide eight is a year-over-year adjusted EBITDA comparison for our pulp and paper board business. We are implementing the previously announced price increases in our SBS business and are starting to see some of the benefits relative to a year ago and have a positive shift in our mix. Our sales and production volumes were slightly off due to the impact of the weather event in the south in February. Our costs were elevated in part due to the weather event, slightly offset by lower year-over-year input costs. You can review a comparison of our first quarter of 2021 performance relative to fourth quarter 2020 performance on slide 14 in the appendix. Please turn to slide 9. where we provide a year-over-year comparison of the first quarter of 2021 relative to the first quarter of 2020 for tissue. We continue to see the benefits of a positive mix shift due to our Shelby expansion and related commercial moves. Our sales of converted product in the first quarter were 11.7 million cases, representing a unit decline of 23% versus prior year. Our production of converted product in the quarter was 13.5 million cases, or down 3% versus the prior year. This mismatch in sales and production has led to increases in our inventory. We had favorable year-over-year costs as we benefited from ramping our Shelby mill and realized benefits from speed rationalization and from some lower input and freight costs. You can review a comparison of our first quarter of 2021 performance relative to fourth quarter of 2020 on slide 15 of the appendix. We have also added finished good production and other financial data on a quarterly basis to slide 16. Slide 10 outlines our capital structure. We generated approximately $21 million in free cash flow to reduce our net debt, and our liquidity was $282.7 million at the end of the first quarter. We continue to make strides in reducing our net debt and increasing our financial flexibility. Over the past couple of years, we've worked on our financial flexibility so that we could be well-positioned during times of uncertainty in our business. We prioritized capital allocation, repaying debt, and bolstering our liquidity, and terminating our debt maturities. Since access to our ABL facility is based loosely on accounts receivable, inventory levels, and advance rates, and our term loan is covenant-like, maintenance financial covenants do not present a material constraint on our financial flexibility. The net result is that we believe that we have a stable financial structure with ample liquidity in a few years before we have any required principal payments. Slide 11 provides a perspective on our second quarter outlook and some other key drivers for the full year 2021. Our expectations assume that we continue to operate our assets without significant COVID-related disruptions. As previously discussed, demand visibility and tissue, as well as inflation expectations, have and will continue to be challenging and unpredictable for a while. As we mentioned previously, our pulp and paper board business has been diligently working to implement the previously announced price increases. We expect that the benefit of this will continue to be reflected in the next couple of quarters. The planned major maintenance outage at Lewiston in April, which is included in our paper board business, is complete, and it's expected to impact earnings by $21 to $24 million, consistent with our initial expectations. Tissue demand is expected to weaken further from the first quarter shipments of 11.7 million cases, as our shipments in April were at 3.1 million cases compared to a monthly average in the first quarter of 2021 of 3.9 million cases. To address our elevated inventory levels and expected lower demand from our customers in the short term, we are materially reducing production below anticipated shipments in the second quarter. To put this into context, the amount of quote unquote lack of order downtime in the second quarter of 2021 is expected to exceed one third of our peak demonstrated production of 15.9 million cases in the second quarter of 2020. The lack of fixed cost absorption and related expenses are expected to be meaningful period cost in the second quarter due to the magnitude of the downtime. We started observing raw material price inflation in the first quarter and expected to, expecting that to accelerate into the second quarter. We estimate that the impact to be approximately $9 million to $13 million in the second quarter relative to the first quarter. Due to tissue sales and production declines, second quarter outage costs, and higher inflation, our second quarter adjusted EBITDA could be close to break even. While we're not providing specific annual guidance for 2021, there are several drivers, assumptions, and variables that we'd like to update from our commentary during our fourth quarter call. We're expecting continued positive impact from the previously announced SPS price increases. In our paperboard business, planned major maintenance outages are expected to reduce earnings for 2021 compared to 2020 by $25 to $30 million, similar to our previous guidance. Due to the impact of the weather event in the south, we've decided to move the Cypress Bend outage from the fourth quarter into the third quarter. We've updated this guidance on slide 20, where we broke out the timing by quarter, which reflects our current plan. The negative impact from the weather event in the first quarter of 2021 of 6.5 million. Previously, we spoke to our anticipated tissue volume declines of high single to low double digit percentages year over year. Considering demand today, we're revising this assumption to mid double digit decline year over year for 2021 as the consumer and retailer pullback has been more significant than anticipated. While demand forecasting continues to be challenging as the market works through the inventory overhang, we believe these issues to be temporary in nature. While we're encouraged by our sales pipeline given the pullback in demand across channels, the demand ramp from these winds will be delayed as customers are working through existing inventory in their supply chains with lighter consumer demand. We're expecting even higher input costs, including pulp, packaging, energy, and freight versus our previous expectations of 40 to 50 million. Our revised estimate based on our current assessment of the market is 65 to 75 million of inflation in 2021 versus 2020. Pulp continues to be the main driver. We're taking various proactive measures to reduce costs, improve sales, and manage inventories, which Arsene will address in his closing remarks. For the full year 2021, we're also anticipating the following. We expect interest expense between $36 and $38 million. We continue to expect depreciation and amortization to be between $106 and $110 million. We have revised our capital expenditure expectations downward from $60 to $65 million to $55 to $60 million. And our effective tax rate is expected to be 25% to 26%. And we expect to utilize some of our current tax attributes, which amount to $16 million, to reduce cash taxes. We did receive approximately $8 million of that $16 million in the first quarter and an additional $3 million in April. Let me turn the call back over to Arson to conclude our call today. Thanks, Mike.

I would like to discuss the actions that we're taking across the company to combat higher inflation and lower tissue demand. In our paperboard business, we're focused on implementing the previously announced paperboard price increases and maximizing production to meet demand. In our tissue business, we're working with customers to offset higher costs through previously announced price increases and upcoming product changes. we have a robust pipeline of new tissue volume and are actively pursuing additional sales opportunities. Across both businesses, we're working through ways to reduce costs, both in the short and long term, from looking at our network cost structure to optimizing pulp mix to lower variable cost. We're managing our cash flows by taking significant downtime across our tissue operation and a careful slowdown in planned capital expenditures in 2021. At the beginning of the second quarter, we also launched a transformation effort focused on improving our core operations in the medium to long term. The transformation team is made up of dedicated internal resources supported by a top-tier consulting firm aimed at achieving the full potential of Clearwater Paper over the next several years. The team is now focused on identifying and evaluating opportunities for improvement across the company. I look forward to discussing this effort with you in the upcoming quarters. We have and will continue to take appropriate actions to position our business for the future while balancing the needs to respond to current market conditions. Let me remind you of why I think these businesses are well positioned in the long run. For our paper board 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 service 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 through product and brand development the business is well positioned to take advantage of trends towards more sustainable packaging and food service products. Lastly, our paperboard business has demonstrated an ability to generate good margins and solid cash flows. Our consumer products division is a leader within a growing private brand and 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 brand tissue share in the US rose to over 30%, 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 of total tissue share. Lastly, Tissue is an economically resilient and need-based product. Historically, demand has not been negatively impacted by economic uncertainty. After we get beyond the temporary distortions in our tissue supply chain at the retailer and consumer level, we're optimistic that this business will generate meaningful cash flows and returns over the long run. While we're faced with some headwinds in 2021, we're building our business to be successful both in the near and long term and believe that we will come out of 2021 a better operation the more we started. Our balance sheet is well positioned to support us with strong liquidity, limited financial maintenance covenants, and debt maturities which are a few years away. We're working with our board to develop our medium to long term capital allocation plan and look forward to sharing those thoughts, including internal investments, external investments, and return of capital to shareholders as we approach our 2.5x target leverage ratio. So with that, we will end our prepared remarks and take your questions.

Thank you. As a reminder, to ask a question, you need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by. We compile the Q&A roster. Your first question comes from the line of Mark Wild from BMO Capital Markets. Your line is open.

Thanks. Good evening, Arson.

Michael? Good evening. I wondered if you could, first of all, just help us on the roll-through of that SBS pricing increase, how you would think about the cadence. Sure. Mark, I think we've talked about it previously being, you know, call it about two quarters to get the price increase fully through. And, you know, extending your question a little bit further, we have about a quarter to a third of our business that's directly tied to that REC, or sorry, the REC Fast Markets index price. Okay, so the rest of it is kind of a, is not contractually tied but should move directionally with the, you know, with the announced price increases or with what the trade papers are showing. Is that correct?

That's correct.

Okay. And then, Michael, is it possible, you know, when you showed us that second quarter bridge, can you just help us work through the cost of the impact of lower sales and then the big production cuts. So when you say the second quarter bridge, is the second quarter outlook commentary? Yes, yes. Sure. Basically, you've quantified most of the other pieces there. I just would like a little bit of help on the fourth one, which is lower sales and the production cuts. Sure. So, you know, I think Mark, just to do the math for the benefit of the people on the phone, start with just over $54 million of EBITDA in the second quarter and add back $6.5 million of the weather event that we would not see repeating. So we're just north of $60 million. Take the outage costs, call it $22.5 million, the midpoint of the range. Take the inflation, $11 million, the midpoint of the range. Off of that, And you're left with a number in the high 20s, millions. And so if you say, hey, we're approaching break-even, what does that all mean? A positive there is some of the benefits from the paper board price increase. And then the rest of that is what's called both sales declines and maybe more materially the volume or production declines that we're going to experience within the quarter. Another way to kind of think about it is, you know, rewind the clock to last year. We're producing, you know, $15.9 million in the second quarter of last year. This year, you know, we're going to take over a third of that production capacity down. It's a lot of fixed costs that we're going to need to absorb here in the quarter. Okay. All right. That's really, really helpful, Michael. Okay. Can you talk about what you're doing in terms of, you know, whether it's tissue pricing, sheet count, whatever, to sort of mitigate the impact of these rising costs? I mean, it seems like among the branded players, there's, you know, there's a pretty wide dispersion of strategy. Some people have announced dykes and some people have done nothing.

Let me take that one, Mark. So across both of our businesses, price is determined by supply and demand. So if you look at the paper board market dynamics, they're quite favorable, and I think you're seeing that reflected in the price increases that we've announced and are implementing. Frankly, that's less so in tissue with slowdown in consumer demand and some of that inventory overhang that we're seeing. We're working through this customer by customer. Don't have specific additional comments on what that would mean for us on the tissue side, but we're working through this with our customers. That's on the pricing end. On the product changes on desheeting, I would say the majority of our customers are follow what we call an NBE strategy, which is national brand equivalent. So they aim to have the private branded products closely resemble branded products. And so we're working through product changes with our customers to follow that NBE strategy here in the upcoming quarter. So that's certainly something that

we have done and we will continue to do but from a pricing perspective i think in you know in in the long haul it's that supply and demand equation that's going to drive price in both of our businesses okay all right the last one for me um we just had an announcement a week or so ago that one of the other sbs producers is acquiring a large independent carton producer with about seven facilities Can you tell us whether you currently have SBS volume into that particular carton producer?

You know, I don't think we're going to quantify that. And if it is, it's not large exposure. I think if we step back and look at our strategy and where we are in the market, you know, we continue to be positioned well with independent converters. especially through a time like this where demand is really strong, and it takes a strong relationship and partnership with an SPS producer to continue to service these independent converters. So I think we're well positioned. I think our exposure is fairly limited.

Okay. All right. Very good. I'll turn it over. Thank you.

Your next question comes from one of Adam Josephson from KeyBank. Your line is open.

Thanks, Arson and Mike. Hope you're well. Yep. Arson, one more on the tissue production cut in 2Q. You mentioned that you think there's over a month's worth of inventory. Are you anticipating that the downtime you'll take be sufficient to fully clear that overhang by the end of the second quarter, or is that still not clear to you?

I think what's somewhat unclear is exactly how much that overhang is out there between consumers and retailers. But let me provide a little bit of data that we're seeing. So we saw consumers pull back, call it right around 20% in Q1. We're starting to see some positive signs in April with consumer demand picking up and returning back to pre-COVID levels. I think that suggests that the consumer is destocking and may have largely destocked in Q1. Retailers pulled back their orders in Q1. We think they had well above target inventory levels at the end of Q1. They're still working through those, and I think that's reflected in our April order book, which was 3.1 million cases, well below where we've been historically. So I think it's unclear exactly how long it takes to play through this overhang. We contemplate that by the second half, by the beginning of the second half, we'll start to realize some sort of normal in this space, but it really depends on exactly what those consumer and retailer shopping and ordering patterns look like. The downtime we're taking there's two purposes. Number one, it's to match up with demand in the second quarter, which is a week, but also to start reducing some of our own inventory overhang in our system. And frankly, with record pull prices, this is the right time to take these curtailments across our system and not make inventory that we don't need at high pull prices and paying to store it. So I think it's the right decision. It does create the fixed cost absorption issues within the quarter, but it's the right business decision.

Yeah, understood. Thanks. And speaking of high pulp prices, my second question, I asked you three months ago what you made of what was going on, because it seemed to me like demand wasn't very good, and yet pulp prices were hitting all-time highs in China. And here we are three months later. You're having to take issue downtime. Printing and writing demand remains weak globally. the shipment data hasn't been good, and yet pull prices keep going higher. Do you have any better sense of what is driving this record surge in pull prices in China and then by extension elsewhere? And where do you see this going?

You know, I think we've stopped trying to predict where pull prices are going to go this year. There's a number of factors in there out there in the industry publication, so we don't need to revisit them. If you look at the forecasts that are out there for the second half, they're indicating some softening of pull prices, still at really high levels, but a softening from these peak prices, both in softwood and the hardwood grades. So hard to predict, but I think the forecasts out there are anticipating some easing in the second half.

Right. Thanks, Harrison. Two others, One is if you look at your consumer product segment over the years, the high was $150 million a few years ago, and then it fell all the way to call it $60 million, and then it nearly tripled last year. What would you consider normal to the extent there is such a thing? I mean, just given the dramatic volatility and the profitability of that segment over the years, it's really hard to determine what's normal. I would love any thoughts you have along those lines.

I think there's a few variables to think about. I think the first one that we experienced last year is the power of volume and fixed cost absorption through our system. So that's a lesson well learned on our part and certainly part of our longer term thinking and planning. So there's the volume piece. There's the pricing piece that we've seen over the last several years. And then there's the volatility. and primarily pulp, but also in transportation and a few other input costs. So over the last few years, we've seen this volatility, and it's been driven by those variables. And this year, what we are experiencing is post-COVID, we had a really robust 12 months. This is the adjustment period, and it just also happens to be at the same time as we're experiencing peak pull prices. So those are the things that have been moving this business over the years. I'm not going to attempt to predict at this point what the normal would look like, but we are focused in the long run on improving this business structurally. we will get the full benefits of the Shelby expansion. We will make the right decisions about products and customers and channels and our cost structure in the long run. So the things we control, those are the things that we're focused on, but we're certainly going to be subject to some of the market headwinds and tailwinds as they happen.

Yeah, thanks. And just one last one on your guidance and a philosophy. And then, you know, all year last year you were, exceeding your guidance pretty significantly. And conditions were quite fluid, but you kept providing quarterly guidance, albeit dramatically exceeding it. And now you're no longer providing quarterly guidance just because conditions remain fluid, but in the opposite direction as last year. So what is your philosophy regarding quarterly guidance? Is that something you plan to resume doing next quarter? Or what are you thinking along those lines? Adam, Mike, I'll take that question. I think we mentioned in our prepared remarks that we could approach break-even EBITDA for the second quarter. And so we think that we've provided that. And in response to an earlier question, we think we helped provide some of the data points to get you there. So that's what we're doing here in the second quarter. In terms of our philosophy here, I think given the dramatic changes that the business has gone through quarter to quarter, I think we have to give at least the investment community our expectations of what we think might happen. The biggest variable that we had all last year was demand, and I'm not sure who did a wonderful job of predicting demand in the tissue category. This year we have both that demand issue and we have the inflation issue, and we're trying to do our best to give you and the investors out there what we think is going to play out here for the quarter. Thanks, Mike.

Your next question comes from the line of Paul Quinn from RBC Capital Markets. Your line is open.

Yeah, thanks very much. Good afternoon, Arson and Mike. Hi, Paul. If I could just try to understand sort of what's happening in the tissue, I mean, you describe it as two-thirds consumer, and you've got heavy leverage to that component. So the downtime that you're going to be taking in Q2 or the lack of orders, you know, that 22% year-over-year drop in Q1, is that related to people getting back to work and more away from home consumers? consumption, or is that just a destocking in the consumer channel alone, and you still got this second-level drop as people get back to work and consume more tissue at the office?

Yeah, I think both are playing into it. We can certainly, from the data that we can see out there, there were certainly more more shipments of tissue last year than you would expect for consumption growth to absorb. So we think based on that there is at least a month of overhang. between consumers and retailers. I think much of the U.S. has been getting back to normal here recently, so I think that's certainly playing into it. But we think there's that inventory overhang that is potentially taking us below 2019 purchasing patterns with consumers as they work through what's within their homes.

Okay, and then, you know, obviously this is like almost a 180-degree market turn over the course of the year. Last year, you know, with customers, you know, almost on allocation on the tissue side, you were able to significantly reduce SKUs. Now you've got a period where you're not getting the order files, or at least customers coming back to you and pushing really hard to increase SKUs, which was a significant cost savings to you last year?

I think we're working through that customer by customer. What I said last year and throughout last year is we think SKU rationalization beyond COVID is appropriate for most of our customers. We think that makes their shelves more productive, and it's better for our customers and our consumers. So those conversations are continuing with our customers. We're certainly reintroducing some SKUs as customers as we work through it with customers. But it is our intention, you know, post-COVID not to return to pre-COVID SKU levels, but obviously our customers have to agree with our position on that.

All right. And then just on the capital allocation side, I take it your first priority is still debt reduction, and maybe you could just remind me what that leverage target is when that might move to some different areas.

Sure. Paul, we're still targeting two-and-a-half times leverage ratio over a more normalized EBITDA, whether it be COVID-related or outage-related. So that's the target that we're still working towards. And, you know, I think we can repeat what we said on the last call. We don't expect to achieve that this year. Okay.

Fair enough.

That's all I had. That's all I got, guys.

Your next question comes from the line of Mark Wilde from BMO Capital Markets. Your line is open.

Thanks. Michael, I just wondered if we could get some update around that measure in the stimulus bill that would potentially impact multi-employer pensions? Sure. Thanks for the question. I think, Mark, as we look at it, and for the benefit of those on the phone, this is the American Recovery Plan Act, which includes provisions to provide the financial relief for these financially troubled multi-employer plans. I think we're moving from this legislation, which is very welcome. to how does it get implemented. And it's uncertain whether or to the extent to which the legislation will reduce that amount of liability that Clearwater has to PIEMF. So like everyone else, we're assessing the impact of the legislation. We're waiting for the PBGC rules that will establish the guidelines and procedures for pension plans to apply for funding. The PBGC hasn't told early July to come up with these rules, Mark. After then, I think we'll have clear visibility in terms of what this could potentially mean. But we still will need some color as we would expect PIEMP to apply for that sometime after the rules are outlined for them. And then some clarity following PIEMP applying for those potential funds. Okay. All right. That's fine. Just two other real quick ones. Are you out with a second increase on folding target rates of bleachboard?

You know, we've announced, Mark, we've announced several price increases to our customers that we're implementing those previously announced price increases. Okay.

And then I noticed in the deck this afternoon that the Not retail sales price of tissue was down about 90% year on year and down about 20% to 25% from the first quarter 19 levels. I know it's not a big chunk of your business, but what's going on there? So we combine both parent role sales as well as away from home converted product sales there. Mark, so it could be one of the more misleading figures where you get a mixed shift where more parent roles were sold in the current period than in the previous comparison periods. Okay. All right. So really perhaps not an apples to apples there. Correct. Okay. All right. Sounds good. I'll turn it over. Thanks a lot. Thank you.

Your next question comes from the line of Adam Josephson from KeyBank. Your line is open.

Thanks, Arson and Mike. Appreciate it. Mike, just to follow up on that leverage question and the normalized EBITDA. So next year should have fairly average outage expenses. I think you're guiding to 19 to 23 million. And then presumably next year would be a more normalized tissue EBITDA year. It doesn't seem like last year wasn't and this year won't be either. So how would you have us think about When you're at normalized EBITDA and consequently when you've achieved your target leverage ratio to your satisfaction and consequently will do something with your capital, be it dividends, repurchases, what have you. Adam, I think that's a good question. I think as we potentially set up expectations for next year, we can try to figure out if that's a good year as a point of comparison for that, quote, unquote, normalized EBITDA from which we can come up with that leveraged target. And I like the way that you framed it. So thank you for that. No problem. And just the CapEx reduction, I know it's minor, but what is that?

We're going through a list of projects for the year, and given some of the headwinds, we're taking a bit of a deeper scrub on which projects we're going to implement and not implement this year. It's a small reduction, so I think we're still able to execute all of our critical projects that we need to execute.

Right. Thank you. And just one last one, Arson. On the tissue capacity front, can you just remind us, What you see coming on this year, and if there's a way for us to, I mean, last year was so anomalous in terms of tissue demand so that the supply-demand equation was out of whack. And then this year is going to be similarly anomalous. But can you help us level set where you may exit this year, the industry, that is, in terms of the supply-demand balance, just based on whatever demand might be by year-end compared to what supply has been added by that point?

If you look at RSEI data on capacity additions, 19, 20, 21, each of those years, if you add it up, there's between 160,000 and 170,000 tons roughly of capacity that's been added. There's 160,000 that's slated to be out of this year, and it's all TAD capacity. There's a few other announcements out there for 22, 23, and even for 24. And much of that is ultra TAD capacity as well. So hard for me to say exactly what that supply and demand balance looks like at the end of this year, but hopefully that provides some color in terms of capacity addition. I think what we said previously, You know, demand grows at roughly one, maybe 2%, 2% per year. And on a 10 million ton market, that's 100,000 to 200,000 tons of capacity. So if you look at the last few years, it's been about 160,000, 170,000 that's been added per year. Awesome.

Your next question comes from the line of Paul Quinn from RBC Capital Markets. Your line is open.

Yeah, thanks for letting me. Bonus question here. So in the bonus round, just want to ask you about the downtime you're taking on tissues. Is that at a higher cost facility or two? Or is that a rotating downtime at all? And maybe you could just help me understand that.

Great question. So we are We're looking at our demand. We're looking at our inventory. We're looking at where our customers are and where the orders are. And then we're also looking at the cost structure of the asset. So, yes, a lot goes into those decisions. It's not simply a rotating outage across our system. These are These are targeted downtimes across our system based on inventory, based on demand, and based on cost structure. So as an example, during the Lewiston major outage, we took downtime in Lewiston. Given that the site was going through a major maintenance outage, it made sense for us to take some downtime at our Lewiston tissue operation. that went along with the major outage in our paperboard business. So we're managing through this pretty carefully.

Okay, so just to follow up on that, what is the most efficient way to do that? Is that like a week of downtime, or is that two weeks? What is that length of time that you still got an active workforce and you're able to bring back the machine to a pretty quick operating capacity after the shutdown?

Yeah, I think it depends on whether it's a paper machine or converting assets. Converting assets, I think, can be brought up quicker and go down quicker. Paper machines, you can't do that day in and up one day, down another day. So on paper machines, the tendency is for us to plan lengthier outages. So it really depends on the asset, depends on demand, depends on inventory. So there's not one answer for you, but just hopefully that gives you a bit of flavor for how we think about it.

Great. That's really helpful. Thanks, guys. Best of luck. Thanks, Paul.

There are no further questions at this time. I turn the call back over to Arsene Kitsch for closing remarks.

Thank you, everyone, for joining us today.

This concludes today's conference call. Thank you for participating. You may now disconnect.