Clearwater Paper Corporation (CLW) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Clearwater Paper 4Q ‘20 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Sloan Bohlen, Investor Relations. Thank you. Please go ahead.

Thank you, Marianna. Good afternoon and thank you for joining Clearwater Paper’s fourth quarter 2020 earnings conference call. Joining me on the call today are Arsen Kitch, President and Chief Executive Officer and Mike Murphy, Chief Financial Officer. Financial results for the fourth quarter of 2020 were released shortly after today’s market close. 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. 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 2 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. And with that, let me turn the call over to Arsen.

Good afternoon and thank you for joining us today. Please turn to Slide 3. As you saw from our press release, Clearwater Paper had another outstanding quarter, driven by strength in both our tissue and paperboard businesses and excellent operational execution. On a consolidated basis, the company reported net sales for the fourth quarter of $453 million and adjusted EBITDA of $72 million, which represents growth of approximately 4% and 38%, respectively, over the fourth quarter of last year. A few business highlights to mention. Our tissue business drove results with both higher sales and production volumes year-over-year to meet volatile demand, which exceeded our expectations. Our production in the quarter was similar to our sales. Our paperboard business delivered strong performance as well. Our backlogs are robust, which contributed to our decision to announce a price increase of $50 per ton across our SBS portfolio, starting on February 2. In the fourth quarter, we used the free cash flows generated to reduce net debt by an additional $58 million. On Slide 4, as I 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 our customers. Our efforts and risk mitigation strategies are making a difference in helping to reduce the risk of COVID at our sites. Our human resources and manufacturing leadership teams are doing an exceptional job of proactively monitoring the health of our workforce and ensuring that we have the proper staffing levels in place. Our people’s diligence to date has been key to our success and will continue to be so. As a recognition of the work by our entire team during this challenging time, we paid out a onetime discretionary bonus of $1,000 in November to over 2,800 of our people. We are also strongly encouraging all our people to get the COVID vaccine with a $200 incentive. I would like to express my deepest gratitude to our entire team for their extraordinary efforts and perseverance through this challenging time. As we start to see the benefits from a broader vaccine rollout, I want to encourage maintaining high levels of vigilance until COVID is under control and behind us. I will now share what we saw for both the tissue and paperboard businesses in the fourth quarter. Let’s start with our Consumer Products division on Slide 5. As we had previously noted, at home tissue demand was volatile during the quarter. New waves of the pandemic caused significant spikes in demand mid-November through mid-December. While we originally anticipated demand at or below levels that we saw in the fourth quarter of 2019, we were reminded of how unpredictable demand can be for essential products during this time. Mike will expand further on demand patterns in the fourth quarter during his comments. Our team and customers are doing a great job working through this volatility and we benefited from higher than anticipated sales and production volumes in the fourth quarter. Our industry view remains largely the same, which I will 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, with limited manufacturing production capability to swing between the two. As consumers have been more homebound, there has been a shift towards at-home consumption. Demand swings have and will continue to be driven by consumer behavior. Our expectation is that as COVID vaccines are administered and infection rates decrease, that we will see a shift back to away-from-home consumption, which we expect will negatively impact us as we’re primarily focused on the at-home market. With that said, it is unclear if there will be a lasting impact on consumer behavior in a post COVID environment. Second, while it is too early to discern private branded share trends, we continue to note that paper towel demand is tracking ahead of the overall tissue category, while facial demand is lagging. Private brands have had a good track record of gaining share relative to branded products over the past decade, a trend that we would expect to continue. 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 in previous quarters, SKU rationalization has occurred, aiding additional production. We believe that lower SKU counts benefit both retailers and manufacturers like us. While we have seen some customers desiring a recovery of SKUs, we do not anticipate SKU counts to go back to pre-COVID levels in the near to medium term. Our tissue results in the fourth quarter were robust. We shipped 13.9 million cases, which was up around 5.3% compared to the fourth quarter of 2019. This was a positive surprise driven by a spike in consumer demand that started prior to Thanksgiving and lasting for a few weeks. Sales were down 4.2% relative to the third quarter of 2020. As we mentioned on our third quarter earnings call, we exited several customers to reduce complexity and improve our network, which impacted the fourth quarter results and is expected to impact first quarter 2021 results as well. We are encouraged by our pipeline of sales for the remainder of 2021. Please turn to Slide 6 so that I can share a few comments on our paperboard business. As you recall, we estimate that approximately two-third of paperboard demand is derived from products that are more recession-resilient and one-third is driven by economically – by more economically sensitive or discretionary products. Our folding carton customers, especially those with concentrations in food or health care packaging, continue to see strong demand and our food service customers, especially those with concentrations in quick service restaurants and away-from-home dining, continue to see weaker demand. We are pleased with the market reception of our sustainability focused brands of NuVo Cup and ReMagine folding carton. Both are playing a meaningful role in our favorable market position. We’re encouraged by our solid performance in the quarter and continued strong demand for our products. We made an announcement last week about the natural gas curtailment in Arkansas that caused us to temporarily suspend production in Cypress Bend. Natural gas deliveries were curtailed to the point where we could no longer operate. We are now back up and running, thanks to the tremendous efforts by our team to protect our assets from significant damage due to the cold weather. We estimate that the costs associated with the weather event across our paperboard system, including lost production, repairs and spikes in natural gas prices, could impact us in the first quarter by approximately $6 million to $8 million. We continue to experience the same fundamental supply and demand dynamics that led us to announce a $50 per ton price increase in January. Demand remains robust and our backlogs have grown since beginning of the year. Price increase implementation has begun, and we expect that it will take several more months to fully implement the increase. With that, I will turn it over to Mike to discuss our fourth quarter results.

Thank you, Arsen. Please turn to Slide 7. The consolidated company summary income statement shows fourth quarter as well as the full year 2020 and 2019. In the fourth quarter, diluted net income per share was $1.34 per share and adjusted EBITDA was $71.6 million and full year diluted net income per share was $4.61 per share, and adjusted EBITDA was $283.2 million. These represent significant increases over the prior periods, which were driven by tissue demand due in large part by consumer COVID-related behavior as well as the benefits from our Shelby investment, favorable raw material pricing and the lack of a major planned outage in our paperboard division. 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. Before we speak in more detail about our divisional performance, I want to note changes in how we portray our financial bridges. Previously, we have 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. The cost category will better reflect the changes in raw material input pricing and inflation. We also made a small change related to our paperboard business in the presentation of our volume and sales price to remove the impact of our contract sheeting. This sheeting is a service that distorts our sales price of our base paperboard products. Additionally, we have decided to make some accounting changes that will impact our financials starting in 2021, but we want to note them for you today. You can also review these changes and the pro forma impact in our 8-K filing. Our bail pulp sales from our Lewiston mill to third parties have been recorded in our tissue business. These sales will now be recorded in our paperboard business. Bail pulp sales from Lewiston to our tissue operations will be transferred at market price going forward as opposed to cost. We believe this change will better reflect the economics associated with the business. We will still transfer slush pulp from the Lewiston pulp mill to the Lewiston tissue operations at cost given the located nature of these assets. These accounting changes will take effect in our first quarter 2021 reporting and all prior periods will be recast and has no impact on our financial information reported in our press release or our 10-K, which we filed today, and the bridges that follow. Please turn to Slide 9, where we provide a year-over-year comparison of the fourth quarter 2020 relative to the fourth quarter of 2019 for tissue. As a reminder, in the second quarter of 2019, we started our new 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. We achieved the targeted production rate of our new paper machine in the second quarter of 2020 and we’re continuing to capture the benefits associated with the project, including ramping our converting lines, realizing supply chain savings and achieving sales wins and mix improvements. While we are not providing a specific dollar amount for these costs and benefits, the continued realization of the Shelby investment is an important factor in our performance improvement. Our mix continues to improve as Shelby 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 helped to meet elevated demand. Overall, lower input costs, improved mix and fixed cost leverage from increased production possibly impacted our tissue business in the fourth quarter of 2020 relative to the fourth quarter of 2019. You can also review a comparison of our fourth quarter 2020 performance relative to third quarter 2020 on Slide 17 in the appendix. Slide 10 contains some additional context on tissue related to the volatility of demand and its impact on our financial performance. The IRI panel data, which is a snapshot of retail sales of tissue measured in dollars, depicts what our customers and we have observed from consumer demand patterns, with the line showing changes on a year-over-year basis, while the data in the box shows a quarterly review versus last year. As we exited the third quarter, we anticipated an elevated but stable demand pattern. Based on that demand profile, ample inventory levels at our customers, and slowing demand from our customers in October, we expected to see softness in our fourth quarter sales. But the consumer-driven demand spike in mid-November into December that changed rapidly. This period of volatility, both the October pullback, which we noted on our third quarter earnings call, and strong orders in November and December, are a good reminder that we may not return to a stable order pattern until after COVID-related volatility is behind us, impacting our ability to forecast the business. We added an additional slide in the appendix of the supplemental materials that details the weekly volatility in IRI panel data that our customers and supply chain have experienced. Our sales in the fourth quarter were 13.9 million cases, representing a unit decline of 4.2% versus the third quarter and unit growth of 5.3% versus prior year. Our production in the quarter was $13.9 million cases or down 9% versus the third quarter and up 2.4% versus prior year. Production levels have benefited from the Shelby ramp and SKU rationalization. The cost leverage from this significant increase in production, along with improved costs in freight and logistics, led to continued strong results year-over-year. Slide 11 is a year-over-year adjusted EBITDA comparison for our paperboard business. Lower pricing, which RISI reported in February 2020, was partly offset by favorable mix. The absence of a planned major outage at our Cypress Bend mill was also a driver of year-over-year improvement. Overall, our team ran our operations well in the quarter and continued to deliver strong results. You can review a comparison of our fourth quarter 2020 performance relative to third quarter 2020 performance on Slide 18 in the appendix. Slide 12 provides a perspective on our first quarter outlook and some other key drivers for full year 2021. As previously discussed, tissue outlook is largely a function of sales demand. Tissue shipments in January were 4.6 million cases, and our shipments in February are trending to below 4 million cases. At this pace, we are expecting first quarter shipments to be below levels experienced in the first quarter of 2020, when COVID initially impacted consumer buying patterns, and down versus the fourth quarter of 2020. As we mentioned previously, our paperboard business announced a price increase of $50 a ton across our SBS grades effective February 2. Given the nature of our agreements and discussions with customers, we expect that the benefit of this will be reflected in the next couple of quarters with limited benefit expected in Q1. The unexpected weather-related outage at our Arkansas mill, which caused lost production and repairs as well as natural gas price increases across our paperboard system, is expected to negatively impact the quarter by approximately $6 million to $8 million. If our assumptions are correct, we would anticipate the first quarter adjusted EBITDA to be in the range of $51 million to $59 million. This range also assumes that we continue to operate our assets without significant COVID-related disruptions. While we are not prepared to provide specific annual guidance for 2021, there are several drivers, assumptions and variables that we would like to address. We are expecting a positive impact from the previously announced SBS price increases. We are anticipating tissue volumes to drop high single to low double-digit percentages. This assumes continued normalization of consumer buying patterns, but is highly dependent upon the course of the pandemic. We are encouraged by our sales pipeline, which we anticipate will have a positive impact on the second part of the year. Paperboard volumes are expected to be largely stable. We are expecting higher input costs, including pulp, packaging, energy and freight. While these variables are difficult to predict today, raw material inputs in total could be a $40 million to $50 million headwind this year, with more than half the total coming from pulp. In our paperboard business, planned major maintenance outages are expected to reduce our earnings for 2021 compared to 2020 by $25 million to $30 million. We have updated this guidance on Slide 23, where we broke out the timing by quarter, which reflects our current plan. In light of the Cypress Bend weather event, we are evaluating timing of our outage schedule and may update you in the coming quarters. For the full year 2021, we’re also anticipating the following: interest expense between $38 million and $40 million. Depreciation is expected to be between $106 million and $110 million. Capital expenditures are expected to be between $60 million and $65 million, which is closer to historical trends as we expect to execute against some projects that were delayed in 2020. 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. Slide 13 outlines our capital structure. We utilized approximately $50 million of free cash flow to reduce our net debt, including making voluntary prepayments on our term loan, and our liquidity was $250 million at the end of the year. We continue to make strides in reducing our net debt and increasing our financial flexibility as we target a net debt to adjusted EBITDA ratio of 2.5x, assuming adjusted EBITDA after COVID benefits and with a normal amount of outages. Let me turn the call back over to Arsen to conclude our call today.

Before wrapping up with our value proposition, I wanted to reflect on some of our key accomplishments in 2020 on Slide 14. Our team did an outstanding job managing through COVID. We mitigated risks in our facilities with a focus on health and safety and continue to run our assets and serve our customers. We rapidly adjusted to demand volatility to build stronger relationships with customers. We ramped our new Shelby paper machine and are on track to fully ramp the overall site by the end of this year. We delivered outstanding financial results, reduced net debt by $200 million, refinanced our near-term debt maturities and strengthen our balance sheet. At the same time, we went through several leadership transitions, including my promotion to CEO, a hiring of a new CFO and a new leader of our CPD business. It was certainly an interesting year to say the least, and I’m proud that we can make this many changes and perform at the levels that we did. We believe we are well positioned heading into 2021 to continue driving an improvement in our business and focusing on our near-term strategy of paying down debt while developing options for long-term capital allocation. Let’s turn to Slide 15 and wrap up our prepared remarks. 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 2 attractive and complementary businesses. Our Consumer Products division is a leader within the growing private branded tissue market. From our vantage point, we believe the key strengths of this business are the following: first, we have a national footprint with an ability to supply a wide range of product categories in quality tiers which is an attractive sales proposition to our customers. Our expertise in manufacturing, supply chain and transportation is a key differentiator, 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 U.S. 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 of 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 operated 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 commitments. Third, we believe 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. Overall, our large capital investments are behind us and we are prioritizing cash flows to reduce debt as we demonstrated in the fourth quarter with a net debt reduction of approximately $58 million, bringing our net reduction in 2020 to over $200 million. We intend to continue to deleverage by delivering benefits from our Shelby investment, continuing operational improvements, aggressively managing working capital and prudently allocating capital. While we expect to have lower tissue shipments in the first part of the year, we’re making sound strategic moves to support our customers and their success and continue to position our business for success in the long term. We believe that this strategy is the best way to create shareholder value. With an adjusted EBITDA impacted by normal outages and reduced COVID benefits, we do not anticipate achieving our 2.5x leverage target this year. We continually engage with our Board on future capital allocations. Beyond deleveraging, we expect to explore a variety of means of creating shareholder value, including: first, internal investments in our operation that improve competitiveness. Second, external investments that deliver synergies and improve our market position; and third, returning capital to our shareholders. So with that, we will end our prepared remarks and take your questions.

[Operator Instructions] Your first question comes from Mark Wilde with Bank of Montreal. Your line is open.

Thanks. Good afternoon, Arse and good morning, Michael.

Good afternoon.

I wondered if you could talk about, Arsen, the impact of these higher pulp costs in the first quarter and then as we move through the year?

Yes, Mark. So what we have seen since the end of last year is pulp going up about – over $100 a ton and there is further announcements out there, further cost increases. We think the impact in Q1 is modest, given how pulp flows through our system and we believe that, that impact will be really felt in Q2 through Q4. In our full year outlook, we mentioned that we expect inflation to be $40 million to $50 million with more than half of that coming from pulp. That’s our best estimate today, but it’s highly unpredictable given the volatility in this market right now.

And how – I mean, pulp is quite volatile, Arsen, but I have to say what we have seen in the last couple of months is even volatile for a volatile commodity, how do you intend to respond to this? I mean, is it a matter of starting to reduce sheet counts? Is it raising prices, how do you think this plays out?

Mark, we have a number of levers from a cost perspective around using different grades of pulp, changes to our products as long as they need quality requirements. So there is a number of levers that we have internally to focus on our cost. In terms of price, Mark, the market ultimately sets the price. It’s supply and demand-driven. So we will be working with our customers throughout the year to ensure that they are well serviced and we are in a good position.

Okay. And then turning to the paperboard market, this – the SBS hike was not recognized in the February trade papers. Assuming that it is in March, how can you help us think about the cadence of that rolling in over the next 6 to 9 months?

So, Mark, it’s Mike. I will jump in and take that. I think the majority of our business is more spot market, but it takes time to get that pricing fully implemented and then we do have, call it, anywhere from a quarter to a third of our business is contract-based. And so as I would think about it, I think we can get the implementation fully done over the course of a couple of quarters, but it’s going to take us a bit of time to get that done.

Okay, alright. That’s helpful. And then if we look at the fourth quarter numbers, is that $2.8 million in one-time bonus is that spread between the two segments or how did you account for that, Michael?

So, $2.8 million, just to correct it. Mark, it was focused on most of our employees. We have about 3,300 people at Clearwater and so that incentive or that discretionary bonus was aimed at most of our folks that aren’t eligible for the normal incentive programs.

And Mark, to add to that we had accrued for that bonus in the third quarter, so if you are looking to put it into your model that was something – an expense that we took in the third quarter.

Okay, alright. That’s exactly what I was looking for. And then finally, Michael, I’m just curious, I know in some of the proposals in Washington, there has been talk about changes for some multi-employer pension programs. Can you just – can you update us on what you’ve seen there? And what you think a reasonable outcome might be? How it would impact Clearwater?

Sure. And I’ll remind you, Mark that we filed our 10-K today, and so we’ve updated some of our disclosures as it relates to the multi-employer plans. I think what you’re speaking to is the legislation that’s out there. So the House has included provisions to address multi-employer pension plans that are facing insolvency as part of the COVID-19 stimulus legislation. This proposed legislation could make PIUMPF eligible for substantial financial relief from federal government in an amount intended to allow to – sorry, remain solvent for the next 30 years. It’s uncertain whether – or to the extent at which the proposed legislation would reduce the amount of liability Clearwater would incur if Clearwater were to withdraw from PIUMPF. However, we’ve seen this proposal as being promising. PIUMPF’s long-term solvency would be a positive outcome, both for Clearwater and our workers and retirees. We’ll continue to monitor the state of the legislation. We’d be enthusiastic about its passage.

Okay, alright. Sounds good, Michael. I'll turn it over. Thanks very much.

And your next question comes from Adam Josephson with KeyBanc. Your line is open.

Arsen and Mike, good afternoon.

Adam.

Hello, Adam.

Good to talk to you both. On the tissue – your tissue expectations, I missed a couple of numbers, but your cases produced in the fourth quarter were 13.9 million. I think you said February was a touch below 4 million. I didn’t catch what you said about January, but can you help me with what cases were in Jan and Feb? And then I think you said you expected tissue volume to drop high- single to low- double-digits in the quarter. I assume that was a sequential comment, but please correct me if I misheard you there?

Yes. So what we talked about is shipments in January were 4.6 million cases, and February is trending to be below 4 million cases. The best way to think about our production is roughly matching our sales. There may be some fluctuations. But largely, we’re aiming to have our production match our sales this year. The low – the high-single to low double-digit volume expectations were for the full year, and they are really highly dependent on what happens with COVID. We’re assuming that normalization continues, and at some point we get to a more normalized state at that. If that is different, if some of these COVID variants prove to be more resilient to vaccines that could lead to a different outcome.

And I just – I appreciate that. Just – so compared to that full year outlook of high single – down high single to low double-digit, what is your – what’s embedded in your 1Q guidance year-over-year in terms of the percentage decline?

We didn’t explicitly state that. What we said is it’s going to be below prior year and below prior quarter.

So Adam, the prior year, we shipped 15.2 million cases. This was when the COVID kind of demand really kicked in. And then we did 13.9 million in the fourth quarter so below both of those numbers. And again, 4.6 million in January and trending to below 4 million cases in February is the current run rate that we’re on.

Got it. Okay. And you don’t think there is anything particularly unusual in those January and February numbers, in other words, not any notable destocking or anything along those lines?

Adam, it’s hard to tell. So, if you look at what happened in October, we saw some softness in October, and we thought that, that was an adjustment month. Then we saw a spike in November into December. January was fairly healthy, and we’re seeing a fairly soft February. So this could be another adjustment month as retailers and consumers work through inventories. We’re having a hard time predicting this and so are our retailers. It’s so dependent on what happens with COVID, but this certainly could be another adjustment month.

Got it. I appreciate that, Arsen. Also in terms of the 1Q guidance, so at the midpoint, you’d be down, I believe, $17 million sequentially of which weather is, call it, $7 million. So the other items you called out would account for $10 million. Can you just quantify that remaining $10 million in terms of how much is lower tissue volume? How much is the modest inflation, etcetera?

Adam, we haven’t broken that out. And certainly, all those are variables, but we haven’t specifically broken out those individual elements.

Right. Okay, Arsen. I appreciate that. Can you – just – I know you have that – the quarterly breakdown of the outage expense. But Mike, can you quantify what that is by quarter just for modeling – to help us with modeling?

Sure. And I’m going to give some round numbers here, Adam. In the second quarter – so let me refer to the chart here on Page 23. The second quarter estimated outage expenses is going to be in the low $20 million area. And then the third quarter outage in a couple million dollar area, and then the fourth quarter outage, kind of in that $3 million to $5 million area. Now I hope those add up to the $25 million to $30 million guidance, but I’m just giving you some context in terms of what we’re expecting.

Yes, that’s perfect, thank you. Just two more for me. One on the inflation to which you are guiding, so if it’s $40 million to $50 million of which pulp is more than half, so let’s say, it’s $25 million, $30 million. How much of the rest is freight? And what is the remainder comprised of exactly?

Yes. Adam, we haven’t broken out the specific dollars, but it’s transportation and its energy. Mike, am I missing...

Those are the two biggest raw material input inflation, Adam that we are seeing.

And are you expecting to see the brunt of it – those fully in 1Q, unlike in pulp?

So I think for Q1, what we said it’s – we expect fairly modest inflation. So really, that implies that most of that is yet to come in Q2 through Q4.

Right. Okay. So it applies to all of pulp, freight and energy? Okay. And then just lastly on boxboard, I think you mentioned your backlogs are improving, but it sounds like you expect fairly flattish demand this year. So I’m just trying to square those two statements. Can you help me with – are you expecting demand growth? Are you not? And if you are not, why might the backlogs be improving?

So Adam thanks for the question. We sell what we produce, I guess, is the best way to state it. And so last year, we didn’t take any market-related downtime, we didn’t slow down at all either. And so this year, when we talk about volumes being similar to last year, it’s – essentially the conclusion is we plan to run full. On the backlog statement, actually, our backlogs were increasing at the end of last year into the start of this year before any sort of supply side issues cropped up across the industry. And so we felt very strong about the business in general, which led us to the price increase announcement that we made.

Got it. Thanks Mike.

Thanks, Adam.

Thanks, Adam.

[Operator Instructions] Your next question comes from Roger Spitz with Bank of America. Your line is open.

Thank you. Good afternoon. So I’ll just make sure I’m off mute. Can you give any guidance on 2021 cash taxes or are there any cash rebates or attributes that you might expect?

Sure, Roger. Thanks for the question. So from a tax attribute standpoint, and you’ll see this in the 10-K that we have in our current assets, the taxes receivable of about $16 million. And so I would use that from a cash flow perspective. And then from an effective tax rate for modeling purposes, I’d use 25% to 26%.

So that – so what you’re saying is that $16 million, you might crystallize that all in 2021 was part of the implication. Is that correct?

That’s our current expectation.

Okay. And then that’s the refund, presumably, for prior periods or the regulation as far as it – to use that – presumably you might be paying – would you be paying other tax to reduce that $16 million inflow?

Outside of paying back a modest amount of payroll taxes. As you recall, the part of the CARES Act, we were able to defer some payroll taxes this is a number slightly north of $5 million. Outside of that, I don’t think that there is anything too esoteric with tax expectations for this year.

So maybe like I think you’re suggesting, look at $16 million inflow, maybe less $5 million repayment or $11 million inflow might be the net. Is that a fair characterization?

It’s $11 million to offset the effective taxes that you would otherwise model into 2021.

Okay. Okay. Perfect. And then in terms of working capital source use for Q1 and then 2021, what kind of guidance can you provide on that?

Roger, we haven’t offered any guidance this year on working capital. And so I think we’re going to stay away from providing guidance at this juncture for capital.

Okay. That’s fine. And just to give a sense, I know you haven’t given any 2022 CapEx guidance, at least I don’t think you have. But would you say that if we start with ‘21 CapEx, that would be a good starting place, perhaps because there is not a lot of major puts and takes from that, from looking 2021, ‘22 or is there some specific things that we should think about when we compare 2021 to 2022 CapEx?

So I think what we said about 2021 is we’re returning to a more normalized CapEx run rates. Certainly, in the future, there may be larger projects that we’ll look at. But I think a good starting point is this more normalized run rate on capital.

Got it. Alright. Thank you very much.

Thank you.

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

Yes, thanks so much. And I appreciate the detail on some of the guidance. Just a question around the inflation, the $40 million to $50 million you expect in the half. If you assume – you guys have stated pulp’s half and you basically purchased about 300,000 tons. It kind of assumes that you expect pulp prices to be up about $75 a ton. Is that the math on...

You are doing the math correctly. We’re probably a little vaguer in terms of the range, but you’re thinking through that correctly. And I’ll remind you, Paul, you probably already know this, our exposure is more to hardwood. So of that 300,000 that, call it, the vast majority of that is hardwood pulp that we’re buying.

Okay. So, if we see price rises well north of $100, it’s not encompassing it will be upwards on inflation?

We would see – yes, we’d see higher inflation. And Paul, you’re aware of how the pricing mechanisms work. It’s – we’re mostly tied to RISI with a discount attached to it, and it resets on a monthly basis. So we would be – we would be subject to that. If you look at some of the forecasts for balance of the year that they are anticipating some easing in the second half, although I think there is a lot of uncertainty right now about where this pulp market goes.

Okay. And given, not just your exposure, but the rest of the industry, especially on the tissue side to pulp, have you heard of anybody that’s announced price increases in North America to offset this?

Paul, we don’t talk at future pricing. What I’ll tell you is the market sets the price and it’s supply and demand-driven. So we will certainly be working with our customers to make sure they are in a good position and we are in a good position as well.

Okay. And then just lastly on capital allocation, besides reducing debt, what else – have you looked at any incremental bolt-ons or anything like that? Is that of interest or it’s more internal targets?

So what we mentioned is it’s unlikely that we’ll get to our 2.5x leverage this year. So we are still focused on that de-leveraging strategy. We are looking at internal projects, ones that are small to medium-size that deliver the right returns in the next – over the next – over 12 to 24 months. We will be exploring external opportunities that provide synergies and put us in a good competitive position. But that’s – we are working with our Board through all those various scenarios and developing those strategic options.

Okay. And just lastly, just the SKU reduction that we saw last year in tissue, how much pushback do you expect to see in ‘21 here? I mean, of the reduction, how much is going to come back?

We think it’s good for us and it’s good for our retailers. But our retailers have different – different retailers have various strategies in terms of what they want on their shelves. So those discussions are ongoing, and we’re working with our retailers. We don’t expect all those SKUs to come back in the near to medium term, but those discussions are certainly ongoing, especially as the impact of COVID eases.

Alright. That’s all I had. Thanks very much.

Thank you, Paul.

Your next question comes from Mark Wilde with Bank of America. Your line is open.

Well, maybe Bank of Montreal. But let’s try that. Mike, I’m just curious. So I go to Page 15 on the slide deck. You’ve got this bullet about aggressively managing working capital. Like, I understand you don’t want to give us a working capital number for the year. But can you talk about what’s in that aggressive management, what the main elements are?

I think, Mark, it’s kind of standard stuff in terms of terms with customers that we’re trying to make sure that we maintain the right discipline there, with vendors, obviously trying to push that out. And then on inventory management, I think we did a good job in 2020, when you look at our financial statements, and it’s maintaining that continued diligence on the inventory management front. Those are the levers that we’re looking to pull.

Are there any things that you would call out that you’ve kind of looked at and you said, well, this is clearly an area where we can do better?

Mark, in 2020, we managed to provide good service to our customers with lower inventory levels. So that is certainly an area that we’re looking at in improving our supply chain and network planning to see how we can deliver the right service levels at lower inventory levels. That’s certainly an area where there is quite a bit of focus.

Okay. And then Arsen, I’m just curious, if you thought about that 30% of the market that’s private label tissue right now, do you have any ballpark estimate for how much of that 30% might be nonintegrated and exposed to kind of rising pulp prices? I mean you’re clearly not 100% exposed yourselves, but if you just looked at that slice of the market, any sense of integrated versus nonintegrated?

Mark, I don’t have the specific numbers. I would say that most private branded players – pure private branded players, outside of us, are not integrated. There are some larger players that do both brands and private brands that are integrated. But I don’t have a specific number for you.

Okay. That’s all I was looking for. Thank you.

Your next question comes from Adam Josephson with KeyBanc. Your line is open.

Thanks for taking my follow-up, Arsen. Just one for me on pulp, so Arsen, the January World 20 data came out yesterday. Shipments were down 5%. Producer inventories are not particularly low, in fact, they are slightly above average. Operating rates are not above average. So it’s kind of hard from the outside to understand what is driving this historic surge other than Chinese futures prices having skyrocketed for whatever reason. Just – I know you’re close to the market, can you talk about what you think might be happening? And how sustainable you think it’s likely to be just based on your time following this market?

There is a lot of various signals out there. And so you can look at improving economic conditions, you can look at improving demand for pulp-based products, you can look at trends and value of the dollar, you can look at what’s happening in China, you can look at the potential outages that we’ve seen over the last several quarters and with some of the pulp suppliers. So there is a lot of variables out there. It’s hard to pinpoint a specific one that says that that’s the one that’s driving the pulp markets. There is certainly been a – these increases have been significant and quite – if you look at the forecast later in the year, they are anticipating for that to ease. But I don’t think I’ll pretend to be an expert in forecasting pulp prices.

And then – and how do you – in terms of I think someone asked earlier about responses to the surge in terms of will you adjust your prices or sheet count accordingly. I mean how do you plan for that when you really have no idea how sustainable this surge is? And for all we know it could reverse in the next 3 months.

There is some longer term things that we need to continue to work on, whether pulp is on the upswing or the downswing, which is optimizing the pulp grades that we use, optimizing our products. We have a number of cost levers in our tissue business that we need to continue to pull, and potentially pull harder when pulp prices are going up. As I mentioned, about pricing, and ultimately, the supply and demand will set the market price but we’ll continue to work with our customers to make sure that they are well positioned and we’re well positioned in the short and long run.

I appreciate that. And just one last one, Arsen, on tissue supply demand, can you just remind us how much supply you think is being added in North America this year and next compared to your demand expectations, obviously, a great deal changed last year from the norm. There had been an oversupply situation for many years. That quickly changed last year. It presumably will settle into some degree of normalcy this year. So I’m wondering how you’re thinking about supply/demand under the assumption that we’ll revert to some semblancy of normal trends this year?

If you take the macro view, it’s a 10 million-ton market growing let’s call it, 1% a year, give or take, with population. So 100,000, 150,000 tons of demand growth, which is one to two paper machines. This year, if you look at RISI, there is about 160,000 tons that’s coming online. It’s – the majority of that is aimed at the private branded space. So in total, it’s – demand should be growing in that 100,000 tons a year range and supply that’s being added this year, it’s about 160,000 tons.

Great. Thanks a lot, Arsen. Best of luck.

Thank you.

This concludes the Q&A portion of today’s call. I will now turn it over to Arsen Kitch, President and Chief Executive Officer for closing remarks.

I again want to thank our Clearwater teammates for their integrity and commitment to each other, our company, our customers and our communities during this challenging time for everyone. We appreciate our customers and vendors working through us during these atypical times. We also appreciate our shareholders’ interest and support in us. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.