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Clearwater Paper Corp (NYSE:CLW)
Q3 2020 Earnings Call
Nov 3, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Sloan Bohlen, Investor Relations. Thank you. Please go ahead.

Sloan Bohlen -- Investor Relations

Thank you, Mike. Good afternoon and thank you for joining Clearwater Paper's third 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 third quarter 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, 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 Arsen.

Arsen Kitch -- President, Chief Executive Officer and Director

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 in tissue started to recover to pre-COVID levels, as we continued to work with customers to fulfill orders and replenish inventory levels. Our paperboard business continue 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 ReMagine folding carton brand, offering recycled content in SBS 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 proactively 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 these challenging times.

I will now share what we saw from both the tissue and paperboard businesses in the third quarter. Let's start with our Consumer Products 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 earning call that because of these consumption changes, we were seeing retail sales per IRI panel data stabilize 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 had continued to moderate as retailers replenished their inventories, consumers de-stocked their pantries and people adjust to living with the pandemic.

Our industry view remains largely the same, so I will summarize in a few key points to provide some context. First, recall that the market for tissue in the US is traditionally two-third at-home and one-third away-from-home. Many states economies began to reopen, which we believe drove some of the normalization and 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 the 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, SKU rationalization has occurred, creating 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 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 need 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 are 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 a 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 businesses and 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 carton customers, especially those with exposure to food and healthcare packaging continue to see strong demand and our foodservice 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 helped 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 ReMagine brand of SBS folding carton paperboard with up to 30% post-consumer recycled fiber that is FDA-compliant for food contact. Together with our NuVo SBS brand of cup 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.

Michael Murphy -- Senior Vice President, Chief Financial Officer

Thank you, Arsen. 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 eight. 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 nine, 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, start-up 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 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 are benefiting from the volume increases related to the production ramp which helped to meet elevated demand. Overall fixed cost leverage from increased production, lower input costs 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 on the box shows a quarterly view versus last year. It is estimated that $1 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 phenomenon at the end of the first and beginning of second quarters, that has given away 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, were down 4% versus the second quarter and up 19% versus prior year. Our production levels had benefited from the Shelby ramp and SKU 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 paperboard business. Lower pricing reflected in Macy'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 brand our operations well in the quarter and continue to deliver stable results. You can review a comparison of our third quarter 2020 performance relative to the second quarter of 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 Arsen 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. And as we mentioned previously, our paperboard business remained stable in 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 us 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 million 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 million and $48 million, which is a slight decrease to the past expectations due to debt repayments. Depreciation is expected to be between $109 million and $112 million. Capital expenditures are trending toward $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 million 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 the head box on one of our Lewiston paper machines, which will require some additional downtime. Based on third-party pulp forecast, we are anticipating around a $50 per ton increase in pulp. As a reminder, we purchased approximately 300,000 tons of pulp each year. Capex is expected to trend closer to our historical averages of approximately $50 million.

Slide 13 outlines our capital structure. We utilized approximately $40 million of 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 5.5 additional years of tenure at a rate we deemed to be attractive at 4.75%. We also achieved the mass [Phonetic] amendment through 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, reducing our net debt and increasing our financial flexibility.

Let me turn the call back to Arsen to conclude our call today with the Clearwater Paper value proposition as we see it and a few concluding remarks.

Arsen Kitch -- President, Chief Executive Officer and Director

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 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 and 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 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 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 operate well-invested assets with a geographic footprint enabling us to efficiently service customers on both posts. We have a diverse customer base that serve 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 toward 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're prioritizing cash flows to reduce debt, 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 deleverage 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 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.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Adam Josephson from KeyBanc Capital Markets.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Arsen and Mike, good afternoon.

Michael Murphy -- Senior Vice President, Chief Financial Officer

Hey. Good afternoon, Adam.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

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 expect to 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?

Michael Murphy -- Senior Vice President, Chief Financial Officer

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 its 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.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

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?

Arsen Kitch -- President, Chief Executive Officer and Director

I want to -- I take that, this is Arsen.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Sure.

Arsen Kitch -- President, Chief Executive Officer and Director

If -- what we've seen as a -- it's a normalization in demand from consumers. And I think there's some consumer destocking taking place. Retailers order pretty heavily in Q2 and Q3. If you look at our year-to-date shipments, they were up around 17% versus 2019 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're managing through their inventories in certain product categories and they have reduced their orders in the month of October to adjust their inventories. So I think this is an adjustment month that we just gone through.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

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?

Arsen Kitch -- President, Chief Executive Officer and Director

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.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

I appreciate that Arsen. Just two more. One, on pulp, I know you said you're expecting it to be up 50 bucks a ton on average next year. Is that just based on a RISI forecast or is there anything you're actually seeing in terms of notable pulp price inflation?

Michael Murphy -- Senior Vice President, Chief Financial Officer

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 of the marketplace of a $50 per ton, higher pulp price levels next year versus this year.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Is it based on anything you're actually seeing at the moment or is it much more about while these third-party forecast that you're saying it's going to happen next year. So we'll just assume that for now?

Michael Murphy -- Senior Vice President, Chief Financial Officer

Great clarifying question. We're not seeing anything at the moment. Just more helping you and the other analysts and investors out there calibrate what you should be thinking about for 2021.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

I appreciate Mike. And just last one from me on Paperboard. So I appreciate your candor in characterizing the industry is having what you call the uneven end-market segments. If I just think about what's been happening in the industry since last year, the 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?

Arsen Kitch -- President, Chief Executive Officer and Director

Adam, let me take that. So we won't comment on what our competitors are doing, they have their businesses to run. They're making nice and good decisions for themselves. What we're seeing as a stable order book and we're seeing our customers have especially in the folding carton 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, into our customers and we continue to see a very stable order book.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks, Arsen.

Operator

Your next question comes from Steven Chercover from D. A. Davidson. Please go ahead.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Good afternoon, everyone.

Sloan Bohlen -- Investor Relations

Hi Steve.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

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, at what stage will the new Shelby capacity be sold out? And then how do you would contemplate it, addressing that, in that eventualities?

Arsen Kitch -- President, Chief Executive Officer and Director

Good question, Steve. As we said previously, we ramped the paper machine in the second quarter of this year, by converting we'll continue to ramp through 2021 and we are assuming all run rate production and benefits in 2022. So we're continuing on that trajectory. As you can 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, as Shelby is part of our broader network and part of our strategy to service our customers. We are 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.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

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 the third-parties?

Arsen Kitch -- President, Chief Executive Officer and Director

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 parent roll sales as an outlet for additional inventories. We'll be looking to make the right financial decisions around our mix of case sales and parent roll sales.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Okay, thank you. And switching to Paperboard, hopefully not duplicating Adam's questions, but given the proximity of the Texas facility to where you are in Arkansas, I mean, in the grand scheme of things, its recently closed. Are you seeing any inquiries from folks who might be concerned that their sources is going away. Are you seeing any outreach?

Michael Murphy -- Senior Vice President, Chief Financial Officer

Yeah. Steve, it's a fair question. It's Mike. I think what we're seeing is -- again what Arsen had commented on before, a pretty stable flow of orders and a pretty stable order book. As you recall, as we 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.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Yeah. And then last question. I mean, I think your performance in containerboard -- sorry, in paperboard has been superb over the years. And I think it will probably remain that way. So are you satisfied with your results both operationally and financially from your small independent fleet?

Arsen Kitch -- President, Chief Executive Officer and Director

I think especially in this quarter, Steve, our team had a great quarter in paperboard, operationally, which you can 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.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Yeah. Kudos indeed. Okay, congratulations. Thank you.

Arsen Kitch -- President, Chief Executive Officer and Director

Thank you.

Operator

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

Paul Quinn -- RBC Capital Markets -- Analyst

Yeah. Thanks very much. Good afternoon, guys.

Arsen Kitch -- President, Chief Executive Officer and Director

Good afternoon.

Paul Quinn -- RBC Capital Markets -- Analyst

It sounds like Adam and Steve and I are in the same boat, we are kind of confused in the drop in tissue and I suspect it's around you've adjusted the customer -- your customer mix to improve in 2021, is that why it's coming down?

Arsen Kitch -- President, Chief Executive Officer and Director

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 order heavily in Q2 and Q3 and to meet their peak demand they also brought 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 are working through that inventory. So while demand remains elevated, we are being impacted by that inventory adjustment this quarter.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. And then if I could just try to understand Shelby too, and the converting capacity there, you've got converting capacity. How much -- like what percentage of the converting capacity is converting it versus parent roll sales?

Arsen Kitch -- President, Chief Executive Officer and Director

Yeah. So the facility was designed with the paper-machine and adequate converting capacity to convert the paper coming out of that machine. So we've ramped the machine, we're still ramping our converting assets. So some of that paper is moving to other side for converting. And as we ramp our converting assets, more and more of that paper will stay, will stay within Shelby. We needed that paper over the last couple of quarters to service our customers. I mean, as I mentioned previously, we will 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.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. Maybe just to further clarify then. How much has been converted at Shelby? How much has been converted within the Clearwater network and what's the percentage of roll sales?

Michael Murphy -- Senior Vice President, Chief Financial Officer

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 with that, within our own sites. On the margin, we sold a few tons over last couple of quarters, but most of that paper was converted internally.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. One last one, just [Indecipherable] 96% retail in Q3 and you're ramping over 2021 on converting. Does that mean you're going from 96% to 100%?

Michael Murphy -- Senior Vice President, Chief Financial Officer

I think what we mentioned previously, it's 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 and to Shelby to be closer to customers and help with our network optimization initiatives.

Paul Quinn -- RBC Capital Markets -- Analyst

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 that is -- one of them is probably just -- probably somewhere around 3 times now and you've got to go at 2.5 times. So is that still number one? And if that's number one, what's number two, three and four?

Arsen Kitch -- President, Chief Executive Officer and Director

So Paul, thanks for the question. And 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 and a year in which we have an appropriate amount of outages. So right now, we're closer to 2.8 times, but I'd argue on a year where we had a couple of things going in our favor. And so it's going to be a while yet before we reach that 2.5 times more of a normalized EBITDA.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay, that's fair. And then after that pay-down, what are the priorities of cash?

Arsen Kitch -- President, Chief Executive Officer and Director

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.

Paul Quinn -- RBC Capital Markets -- Analyst

All right. That's all I have. Thanks.

Operator

Okay. Your next question comes from Mark Wilde from BMO Capital Markets.

Mark Wilde -- BMO Capital Markets -- Analyst

Good afternoon, Arsen. Good afternoon, Mike.

Arsen Kitch -- President, Chief Executive Officer and Director

Good afternoon.

Michael Murphy -- Senior Vice President, Chief Financial Officer

Good afternoon, Mark.

Mark Wilde -- BMO Capital Markets -- Analyst

Yeah. Arsen, 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?

Arsen Kitch -- President, Chief Executive Officer and Director

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, it's about -- 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 assets this year, 150,000 I mean net asset this year, and another 160,000 next year.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. Again, 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?

Arsen Kitch -- President, Chief Executive Officer and Director

So a lot of the away-from-home products are not applicable in the at-home retail market. So think about the big giant rolls, paper towels, folded napkins and so on. So 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 of the retail markets. It's difficult to say what percentage that is, but we believe that the majority of away-from-home capacity, it would be rather difficult and costly to convert it to at-home capacity.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay, all right. That's fair.

Michael Murphy -- Senior Vice President, Chief Financial Officer

In key markets -- it's Mike. Just on the important question that you asked before. I think the best third-party data source that we have to point you to is refi. So just looking at the first quarter to the second quarter, there were really notable imported volumes of both the parent rolls and converted tissue product. And kind of eyeballing the graphs here, I think in the quarter, we were 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 tons, 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.

Mark Wilde -- BMO Capital Markets -- Analyst

Yeah, I think that's a good practice. If we just toggle over to the bleached board market. I'm just curious about how you think about the knock-on effects from these pricing initiatives that are under way in both [Indecipherable] board right now?

Arsen Kitch -- President, Chief Executive Officer and Director

So Mark, I don't think that there is a very strong correlation among the three different markets. It's obviously not a negative for SBS. For converters on the margin, you can choose among the three grades. So we don't comment on forward pricing at all, but I do think that there are three reasonably different markets that the folding carton producers purchase from.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. All right. And it seems like the CUK [Phonetic] 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?

Arsen Kitch -- President, Chief Executive Officer and Director

We won't comment on what the competitors are doing with. What we will tell you is, we're continuing to service our customers, we'll continue to see some pretty robust demand from our customers in a stable order book. So hard for us to tell what knock-on effect at the various moves we're making, but what we do know as our customers are seeing good solid end-market demand and it's enabling us to maintain a solid order book as we had end of October.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. And then just two final ones. Mike, what was the third quarter benefit from lower pulp costs?

Michael Murphy -- Senior Vice President, Chief Financial Officer

We didn't break that out, Mark. It was one of those, looking at year-over-year -- I put down as less important than the fixed cost leverage that we now saw the slide nine, we kind of rank order those.

Mark Wilde -- BMO Capital Markets -- Analyst

Yeah. Okay. All right. And then the last one from me. Did I hear you say that the impact for more normal maintenance next year is about $25 million to $30 million increase year-to-year. Did I get that correct?

Michael Murphy -- Senior Vice President, Chief Financial Officer

That's correct. We had on slide 22 as a document for your reference and we also put out 2022 estimates as well.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. All right. Sounds good. I will turn it over. Thank you.

Michael Murphy -- Senior Vice President, Chief Financial Officer

Thank you.

Arsen Kitch -- President, Chief Executive Officer and Director

Thanks.

Operator

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

Roger Smith -- Bank of America Merrill Lynch -- Analyst

Thank you. Good afternoon.

Arsen Kitch -- President, Chief Executive Officer and Director

Good afternoon.

Roger Smith -- Bank of America Merrill Lynch -- Analyst

What are you expecting in Q4 for working capital, presumably working capital release?

Michael Murphy -- Senior Vice President, Chief Financial Officer

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

Roger Smith -- Bank of America Merrill Lynch -- Analyst

Okay. But when you say less potential drag, that suggests you may be putting -- it will 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?

Arsen Kitch -- President, Chief Executive Officer and Director

Yeah. If that does happen, you are thinking about it correctly, but there is 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, our bond interest payments are in the first -- in the third quarter. And so generally you expect the accrual for the interest expense to go higher in the fourth quarter. There are some things that you can 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.

Roger Smith -- Bank of America Merrill Lynch -- Analyst

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

Michael Murphy -- Senior Vice President, Chief Financial Officer

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

Roger Smith -- Bank of America Merrill Lynch -- Analyst

And lastly, any impact from the West Coast forest fires on your operations obviously, Lewiston, Idaho?

Arsen Kitch -- President, Chief Executive Officer and Director

Nothing, as of now.

Roger Smith -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you very much.

Arsen Kitch -- President, Chief Executive Officer and Director

You bet.

Operator

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

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks Arsen and Mike. Thanks for taking my two last questions here. Arsen, not to beat a dead horse too much, but just on the implied 4Q to 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 guidance as 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?

Arsen Kitch -- President, Chief Executive Officer and Director

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 where we see it, it's the right range.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Okay. And just last question Arsen. I think you both took over your current jobs really at the start of the pandemic. So whatever you are expecting this year to be I'm sure it has not played out quite as you're thinking. But serious question is, how much, I mean, you've obviously been, 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 and then it's been just a perfect combination. So 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 has done differently before versus just the benefit from the external environment?

Arsen Kitch -- President, Chief Executive Officer and Director

Good question. So certainly the tailwinds from input costs and COVID related demand are helping this year, but the team has done an outstanding job of continue 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 -- one of the 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 really difficult environment to deliver outstanding results this year.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Okay. All the best of luck and stay safe.

Arsen Kitch -- President, Chief Executive Officer and Director

Thank you.

Operator

Your next question comes from Steven Chercover from D. A. Davidson.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Thanks to really to get back in the queue. But since we were going there in an event, I want to put it in the context of a containerboard market where some producers view the optimal integration level to be 100% and others want to be 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 rolls in a perfect world?

Arsen Kitch -- President, Chief Executive Officer and Director

We haven't spoken to that previously. What we said is we're in the business of retail case sales, that's our primary business. We will sell parent rolls as necessary to balance our network, but what we're aiming to do is to maximize retail case sales as long as they're making [Indecipherable]. So 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.

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Okay. Sounds good. Thanks again.

Arsen Kitch -- President, Chief Executive Officer and Director

Thank you.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Sloan Bohlen -- Investor Relations

Arsen Kitch -- President, Chief Executive Officer and Director

Michael Murphy -- Senior Vice President, Chief Financial Officer

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Steven Chercover -- D.A. Davidson & Co. -- Analyst

Paul Quinn -- RBC Capital Markets -- Analyst

Mark Wilde -- BMO Capital Markets -- Analyst

Roger Smith -- Bank of America Merrill Lynch -- Analyst

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