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Clearwater Paper Corp (NYSE:CLW)
Q1 2021 Earnings Call
May 5, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Clearwater Paper, 1Q 20 earnings conference call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Sloan Bohlen, Investor Relations.

Sloan Bohlen -- Investor Relations

Thank you, Christine. Good everyone. Good afternoon, everyone. And thank you for joining Clearwater papers first quarter 2021 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 first quarter of 2021 were released shortly after today's market closed along with the filing of our 10 Q. You will find a presentation of supplemental information including the slide provided in the company's current outlook posted on the investor relations page for our website at Clearwater paper.com.

Additionally, we will be providing certain non gap information in this afternoon's discussion. The reconciliation of the non gap information to comparable gap information is included in the press release or in the supplemental information provided on our website. Please note slide two of our supplemental information covering forward looking statements. Rather than rereading the slide, we are going to incorporate it by reference into our prepared remarks.

So 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, the financial performance for the first quarter was strong, despite some challenges, in fact, in both of our businesses. On a consolidated basis, the company reported net sales for the first quarter of $426 million and adjusted EBITDA of $54 million. If you highlights to mention our paperboard business continue to experience strong demand, particularly in our folding carton segment. Based on that strong demand, we announced and began to implement price increases across our SBS product portfolio.

Our operations were affected by the February cold weather events in the south natural gas curtailments impacted production and increased energy prices. Collectively, this negatively impacted our adjusted Eva da by approximately $6.5 million are tissue business are lower orders and shipments reflecting overall market trends. IRI market data showed a nearly 20% decline in overall tissue dollar sales in the first quarter of 2021. As compared to the fourth quarter of 2020.

Consumers were destocking their pantries and retailers were working through elevated inventory levels. With a decrease in demand, our production outpaced sales, resulting in above target inventory levels. We're taking downtime on our assets to reduce and manage inventories, particularly with today's elevated pull prices. With regards to our balance sheet, we use the free cash flows generated during the first quarter to reduce our net debt by $21 million.

We're experiencing significant cost inflation at a temporary decrease in tissue demand. Mike and I will discuss both in detail later in our prepared remarks, including actions we're taking to address these market driven market driven headwinds across our businesses. As noted over the previous quarters, we remain focused on our top priorities during COVID the health and safety of our people and safely operating our assets to serve as customers. Our people's focus has been key to our success, and we will continue to be so in partnership with local health agencies we have offered on site COVID vaccinations across several of our facilities, and we're continuing to offer a $200 incentive to each employee to become vaccinated.

Let's discuss some additional details about both of our businesses. Please turn to slide four so that I can share a few comments on our paperboard business. As you recall, we estimate that approximately two thirds of paperboard demand is derived from products that are more recession resilient, and 1/3 is driven by more economically sensitive or discretionary products. We continue to observe strengthened demand from our folding carton customers and are starting to see a recovering food service segments. demand for food packaging products and retail paper plates has remained healthy throughout the pandemic. We're also pleased with the market reception of our sustainability focus brands of New World Cup and reimagine folding carbon.

Both are playing a role in our favorable market position. Our strong order book which predates Industry supply disruptions continues to be robust. We are diligently working to implement the previously announced price increases. fastmarkets Risi, a third party industry publication has recognized a $50 per ton increase in folding carton and a $20 per ton increase in food service grades and it's March and April publications.

During our fourth quarter earnings call, we noticed that the cold weather event in the style impacted operations at our side percent Arkansas. This resulted in the $6.5 million direct impact to our adjusted EBITDA. I want to again thank our team for their actions to minimize the impact on our mill and for quickly resuming operations to service our customers. While there was while the weather event primarily impacted the first quarter, other potentially longer lasting impacts on input costs are included separately in our revised inflation expectations. As you're aware, we scheduled our largest plant maintenance outage for 2021.

During the second quarter at our Lewiston, Idaho, we recently completed that work and are back up and running. We would like to thank our Lewiston team for safely completing this important outage on time and on budget. The overall economic impact on this outage store adjusted Eva dust in the second quarter is projected to be between 21 and $24 million as originally expected. Please turn to slide five with some additional comments on the tissue business.

Our industry view remains largely the same, but I wanted to discuss the inventory overhang from 2020 and the expected temporary impact on volume in 2021. The market for tissue in the US is traditionally two thirds at home and 1/3 away from home with around 10 million tons per year total demand. As consumers spent more time at home in 2020, there was a shift toward at home consumption. Throughout the pandemic, we witnessed consumer pantry loading and retailers responding by placing higher orders with existing suppliers and seeking out tertiary suppliers, both both domestic and international to meet demand.

It is difficult to estimate the level of inventory overhang with consumers and customers as there is no third party data available for this metric. Based on receipt, tissue ship and data for 2020 and some assumptions on consumption trends. We estimate that the industry is currently faced with more than a month of excess inventory between consumers and retailers. While it is difficult to predict the timing for the resolution of the inventory overhang, it is likely that both consumers and retailers are working through much of the excess inventory during the first and second quarters of this year.

We have entered a new phase of the pandemic with consumers starting to return to more normal lifestyles. This may involve increased the weight from home consumption of tissue, and destocking and consumer pantries. Based on IRI market data, consumer purchases of tissues slowed considerably in the first quarter, but have now started to recover to pre pandemic levels. retailers have responded to these trends by managing down their higher inventory levels, reducing their orders to suppliers like us. This is likely a temporary adjustment after a very robust 12 months of pandemic driven demand. While the inventory adjustment is temporary, it may result in at home industry tissue shipments dropping to below 2019 levels in 2021.

With that said, we expect long term consumption growth to continue between one to 2% per year. with private brands continuing to gain share. Our tissue volume trends in the first quarter and heading into the second quarter appear to reflect these industry dynamics. We sold 11 point 7 million cases in the first quarter, which was down around 23% and 16% compared to the first and fourth quarters of 2020 and down 5% relative to the first quarter of 2019 sales at 12 point 3 million cases. We're continuing to closely monitor channel and customer trends to ensure that we're aligned with areas in the market with the highest growth prospects.

Let's turn to our production and inventory levels. While we did take some acid downtime in the first quarter, our production exceeded sales and inventory levels increased. We're taking more substantial substantial downtime in the second quarter to reduce inventory levels to get closer to our targets. While this will have a negative impact on our fixed costs absorption will help us avoid producing excess inventory at today's elevated market poll prices as well as income Supply Chain costs. As Mike and I discuss our outlook for the second quarter, we will go into some additional detail on actions that we're taking, as we face the normalization, tissue demand and significant cost inflation.

With that, I'll turn it over to Mike to discuss our first quarter results.

Michael Murphy -- Senior Vice President, Chief Financial Officer

Thank you Arsen, please turn to slide six. A consolidated company summary income statement shows first quarter as well as the first quarter of 2020. In the first quarter, our net income was $12 million. diluted net income per share was 71 cents per share, and adjusted income of 69 cents per share. The corresponding segment results are on slide seven are pulp and paper board business was impacted by the weather event. While consumer products are lower demand partly offset by the benefits from the Shelby expansion.

Before we speak in more detail about our divisional performance, I wanted to remind you of some of the changes that we started making last quarter and how we portray our financial purchase. Previously, we had shown the impact of production volume changes and associated fixed costs leveraging impact in our cost category. We have modified that approach and are including production volume changes in our volume category. We believe that this change will enable investors to better understand sales changes as we expect to produce similar quantities of product that we sell, which will all be in the volume category. In tissue production exceeded sales in the first quarter of 2021.

And the reverse was true in the first quarter of 2020, which complicates comparisons to prior periods. The cost category will better reflect the changes in raw material input pricing and inflation. We also made a change related to our paperboard business in the presentation of our volume and sales price to remove the impact of our contract shooting business. This contract sheeting business as a service and distorts our sales price of our base paperboard products. Additionally, as a reminder, we have moved our bale pulp sales to external customers back to the producing segment. from Consumer Products Division to the pulp and paper work division.

We've also started transferring build post from our pulp and paper board division things will better reflect the economics associate accounting changes that taking effect with our first quarter 2021 report we found that retest numbers as part of our 8k associate with our fourth quarter earnings announcement, where we read past the prior three years as well as the past eight quarters. Slide eight is a year over year adjusted even comparison for pulp and paper board business. We are implementing the previously announced the price increases in our SPS business and are starting to see some of the benefits relative to a year ago and have a positive shift in our net.

Our sales and production volumes were slightly off due to the impact of the weather event in the south in February. Our costs were elevated in part due to the weather events slightly offset by lower year over year input costs. You can review a comparison of our first quarter of 2021 performance relative to fourth quarter 2020 performance on slide 14 in the appendix. Please turn to slide nine, where we provide a year over year comparison of the first quarter of 2021 relative to the first quarter of 2024.

We continue to see the benefits of a positive mix shift due to our shelbie expansion and related commercial news. Our sales have converted chronics in the first quarter or 11 point 7 million cases representing a unit decline of 23% versus prior year. Our production of converted product in the quarter was 13 point 5 million cases or down 3% versus the prior year. This mismatch in sales and production has led to increases in our inventory. We've had several year over year cost as we've benefited from ramp and our shelving mill and realized benefits from the rationalization and from some lower input and freight costs. You can review a comparison of our first quarter of 2021 performance relative to the fourth quarter of 2020 on slide 15 in the appendix.

We have also added finished good production and other financial data on a quarterly basis to slide 6510 outlines our capital structure. we generated approximately 20,000,020 $1 million in free cash flow to reduce our net debt and our liquidity was 282 point 7 million at the end of the first quarter. We continue to make strides in reducing our net debt and increasing our financial flexibility. Over the past couple of years, we've worked on our financial flexibility so that we could be well positioned during times of uncertainty in our business.

We prioritize capital allocation, repaying debt and bolstering our liquidity and turning down our debt maturities to Since access to our abl facilities based loosely on accounts receivable, inventory levels and advanced rates, and our term loans covenant life, maintenance financial covenants do not present a material constraint on our financial flexibility. The net result is that we believe that we have a stable financial structure with ample liquidity and a few years before we have any required principal payments.

Slide 11 provides a perspective on our second quarter outlook and some other key drivers for the full year 2021. Our expectations assume that we continue to operate our assets without significant COVID related disruptions. As previously discussed, demand visibility and tissue as well as inflation expectations have and will continue to be challenging and unpredictable for a while. As we mentioned previously, our pulp and paper for business has been diligently working to implement the previously announced price increases. We expect that the benefit of this will continue to be reflected in the next couple of quarters. The planned major maintenance outage at Lewiston in April, which is included in our paperboard business is complete, and it's expected to impact earnings by 21 to $24 million. Consistent with our initial expectations.

Tissue demand is expected to weaken further from the first quarter shipments of 11 point 7 million cases, as our shipments in April are at 3.1 million cases compared to a monthly average in the first quarter of 2021 a 3.9 million cases to address our elevated inventory levels, and expected lower demand from our customers in the short term. We are materially reducing production flow anticipated shipments in the second quarter. To put this into context. The amount of quote unquote lack of ordered downtime in the second quarter of 2021 is expected to exceed 1/3 of our peak demonstrated production of 15 point 9 million cases in the second quarter of 2020.

The lack of fixed cost absorption and related expenses are expected to be meaningful period cost in the second quarter due to the magnitude of the downtime. We started observing raw material price inflation in the first quarter and expected to expecting that to accelerate into the second quarter. We estimate that the impact would be approximately 9 million to $30 million in the second quarter relative to the first quarter. Due to tissue sales and production declines. Second quarter out of its costs and higher inflation. Our second quarter adjusted EBIT dot could be close to breakeven. While we're not providing specific annual guidance for 2021 there are several drivers assumptions and variables that we'd like to update from our commentary during our fourth quarter call.

We're expecting continued positive impact from the previously announced SBS price increases. And our paperport business plan major maintenance outage is expected reduce earnings for 2021 compared to 2020 by 25 to $30 million. Similar to our previous guidance to the impact of the weather events in the south, we've decided to move the Cypress an outage from the fourth quarter into the third quarter. We've updated this guidance on slide 20, where we broke out the timing by quarter which reflects our current plan and made a negative impact from the weather events in the first quarter of 2021 a 6.5 million. Previously we spoke to our anticipated tissue buying declines of high single to low double digit percentages year over year.

Considering demand today, we're revising this assumption to mid double digit decline year over year for 2021 as the consumer and retailer pullback has been more significant than anticipated. While demand forecasting continues to be challenging as the market works through the inventory overhang. We believe these issues to be temporary nature. By we're encouraged by our sales pipeline given the pull back and demand across channels than demand ramp from these wins will be delayed.

As customers are working through existing inventory in their supply chains with wider consumer demand. We're expecting even higher input costs including pulp, packaging, energy and freight versus our previous expectations of 40 to 50 million or revised estimate based on our current assessment of the market to 65 to 75 million of inflation in 2021 versus 2020. Polk continues to be the main driver. We're taking various proactive measures to reduce costs, improve sales and manage inventories, which are some will address in his closing remarks. For the full year 2021. We're also anticipating the following expect interest expense.

As between 68 and 3536 and $38 million. We continue to expect depreciation amortization to be between 106 and $110 million. We have revised our capital expenditure expectations downward from 60 to 65 million to 55 to 16 million. And our effective tax rate is expected to be 25 to 26%. And we expect to utilize some of our current tax attributes, which amounts to 16 million to reduce cash taxes. We did receive approximately 8 million of that 16 million in the first quarter and an additional 3 million in April.

Let me turn the call back over to Arsen, to conclude our call today.

Arsen Kitch -- President, Chief Executive Officer and Director

Thanks, Mike. I would like to discuss the actions that we're taking across the company to combat higher inflation and lower tissue demand. In our paperboard business, we're focused on implementing the previously announced paperboard price increases and maximizing production to meet demand. In our tissue business, we're working with customers to offset higher costs through previously announced price increases and upcoming product changes.

We have a robust pipeline of new tissue volume and are actively pursuing additional sales opportunities across both businesses, we're working through ways to reduce costs both in the short and long term. from looking at our network cost structure to optimizing polemics to lower variable costs. we're managing our cash flows by taking significant downtime across our tissue operation, and a careful slow down and planned capital expenditures in 2021. At the beginning of the second quarter, we also launched a transformation effort focused on improving our core operations in the medium to long term.

The transformation team is made up of dedicated internal resources supported by top tier consulting firm aimed at achieving the full potential of Clearwater paper over the next several years. The team is now focused on identifying and evaluating opportunities for improvement across the company. I look forward to discussing this effort with you in the upcoming quarters. We have been will continue to take appropriate actions to position our business for the future, while balancing the needs to respond to current market conditions. Let me remind you of why I think these businesses are well positioned in the long run. For paperboard division.

We believe that the key strengths of this business are the following. First, we operate well invested assets with a geographic footprint enabling us to efficiently serve as customers on both coasts. We have a diverse customer base, which serves and markets that have largely stable demand. Second, knocking vertically integrated enables us to focus on independent customers with unparalleled service and quality commitment. Third, we believe through product and brand development, the business is well positioned to take advantage of trends toward more sustainable packaging and food service products. Lastly, our paper for business has demonstrated an ability to generate good margins and solid cash flows. 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 customer patience is a key differentiator trends away from branded products to private brands. Private brands issue share in the US rose to over 30% from 18% in 2011. While these trends are impressive, we're still a long way from where many European countries are for private brands represent over half of total tissue share. Lastly, tissue with an economically resilient and youth based product.

Historically, demand has not been negatively impacted by economic uncertainty. After we get beyond the temporary distortions in our tissues supply chain at the retailer and consumer level, we're optimistic that this business will generate meaningful cash flows and returns over the long run. While we're faced with some headwinds in 2021. We're building our business to be successful both in the near and long term, and believe that we will come out of point 21 a better operation than where we started.

Our balance sheet is well positioned to support us with strong liquidity, limited financial maintenance covenants, and debt maturities which are a few years away. We're working with our board to develop a medium to long term capital allocation plan and look forward to sharing those thoughts including internal investments, external investments, and the return of capital to shareholders as we approach our 2.5x target leverage ratio.

So with that, we will end our prepared remarks and take your questions.

Questions and Answers:

Operator

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

Mark Wilde -- Bank of Montreal -- Analyst

Thanks, good evening are some mic opening? thing? I wonder if you could, first of all, just help us on the roll through of that SBS pricing, increase how you would think about the cadence.

Arsen Kitch -- President, Chief Executive Officer and Director

So, Mark, I think we've talked about it previously being college about two quarters to get the price increase fully through.

And, you know, extending your question a little bit further, we have about a quarter to a third of our business that's directly tied to that we see our sorry, the VC fastmarkets index price.

Mark Wilde -- Bank of Montreal -- Analyst

Okay, so the rest of it is kind of a is not contractually tied, but should move directionally with the, you know, with with the announced price increases, or of what the trade vectors are showing, is that correct?

Arsen Kitch -- President, Chief Executive Officer and Director

That's correct.

Mark Wilde -- Bank of Montreal -- Analyst

And then Michael, is it possible, you know, when you when you showed us that second quarter, bridge, can you just help us work through the cost of the impact of lower sales, and then the big production cuts?

Michael Murphy -- Senior Vice President, Chief Financial Officer

So when you say, the second quarter for just the second quarter outlook commentary?

Mark Wilde -- Bank of Montreal -- Analyst

Yes, yes.

Michael Murphy -- Senior Vice President, Chief Financial Officer

Sure.

Mark Wilde -- Bank of Montreal -- Analyst

You basically, you've quantified most of the other pieces there. I'm just like a little bit of help. The the fourth one, which is lower sales and the production cuts?

Michael Murphy -- Senior Vice President, Chief Financial Officer

Sure. So you know, I think, Mark, just to do the math, for the benefit of the people on the phone, start with just over 54 million of EBIT Dom a second quarter and add back six and a half million is the weather event that we would not see repeating. So just north of 60 million, take the outage costs, call it 22 and a half million, the midpoints of range, take the inflation 11 million, the midpoint of the range after that. And you're left with a number in the high 20s millions. And so if you say, Hey, we're approaching breakeven, what does that all mean?

A positive there is some of the benefits from the paper for price increase. And then progressive that is the cause both sales declines, and maybe more materially the volume or production declines that we're going to experience within the quarter. Another way to kind of think about it is rewind the clock last year, we're producing 15 point 9 million in the second quarter of last year, this year, we're going to take over a third of that production capacity down. It's a lot of fixed costs that we're going to need to absorb here in the corner.

Mark Wilde -- Bank of Montreal -- Analyst

Alright, that's really, really helpful, Michael, in your talk about what you're doing, in terms of, you know, whether it's tissue price, you can cheek out whatever, to sort of mitigate the impact of these rising costs. Right, it seems like the among the branded players there, you know, there's a pretty wide dispersion of strategies, some people have announced nights and some people have done nothing.

Michael Murphy -- Senior Vice President, Chief Financial Officer

Now, let me let me let me take that one mark. So across both of our businesses, price is determined by supply and demand. And so if you look at the paperboard market dynamics, they're they're quite favorable. And I think you're seeing that reflected in the price increases that we've announced and are implementing, you know, frankly, that's less so in in tissue with with slowdown in consumer demand and some of that inventory, overhang that that we're seeing.

We're working through this customer by customer don't have specific additional comments on what that would mean for us on the tissue side. But we're working through this with our customers that's on the pricing end. On the product changes on D sheeting, I would say the majority of our customers follow what we call an N v strategy, which is national brand equivalent. So they aim to have their private private, private branded products closely closely resemble branded products. And so we're working through product changes.

With our customers to follow that the follow that MBE strategy here in the upcoming in the upcoming quarter. So that's certainly something that we have done and we will continue to do that from a pricing perspective, I think in, you know, in the long haul, it's that supply and demand equation that's going to drive price and gold for businesses.

Mark Wilde -- Bank of Montreal -- Analyst

Okay. All right, the last one for me. We just had an announcement a week or so ago that one of the other SBS producers is acquiring a large independent carbon producer with about seven facilities. Can you tell us whether you currently have SBS volume into that particular carton producer?

Arsen Kitch -- President, Chief Executive Officer and Director

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

Mark Wilde -- Bank of Montreal -- Analyst

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

Operator

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

Adam Josephson -- KeyBanc -- Analyst

Thanks Arsen, and I hope you're well versed in one more on the the tissue production cut into queue. Have you mentioned that you think there's over a month, months worth of inventory? Are you anticipating that the downtime you'll take the sufficient to fully clear that overhang by the end of the second quarter? Or is that still not clear to you.

Arsen Kitch -- President, Chief Executive Officer and Director

Think what's somewhat unclear is exactly how much debt overhang is out there between consumers and retailers. But But let me provide a little bit of data that we're seeing. So we saw a consumers pullback, call it right around 20%. In q1, we're starting to see some some positive signs in April with consumer demand picking up and returning back to pre COVID, pre COVID levels. I think that suggests that the consumer is the stocking and may have largely be stopped in q1 retailers, retailers pull back their orders in q1 we think they had well above target inventory levels at the end of q1.

They're still working through those. And I think that's reflected in our April order book, which was which was 3.1 million cases well below where we've been historically. So I think it's unclear exactly how long it takes to play through this to play through this overhang. We we contemplate that by the second half by the beginning of the second half, we'll we'll start to realize some some sort of normal in the space. But it really depends on exactly what those consumer and retailer shopping and ordering patterns patterns look like the downtime we're taking.

It's there's two purposes number one, it's to match up with demand and the second quarter which which is which is a week, but also to start reducing some of that some of our own inventory overhang in our system. And frankly, with with record pole prices, this is the right time to take to take these curtailments across our system and not not make inventory that we don't need that high pole prices and paying paying to store it. So I think it's the right decision. It does create the fixed cost absorption issues within the quarter but it's the right is the right business decision.

Adam Josephson -- KeyBanc -- Analyst

Okay, understood thanks. And speaking of Hi, Paul prices. My second question I asked you three months ago what you made of what was going on because it seems to me like demand wasn't very good. And yet Paul prices were hitting all time highs in China. And here we are three months later you're having to take tissue downtime printing and writing demand remains weak globally. The shipment data hasn't been good. And yet Paul prices keep going higher. Do you have any better sense of what is driving this record search and pull prices in China and then by extension elsewhere? And where do you see this going?

Arsen Kitch -- President, Chief Executive Officer and Director

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

Adam Josephson -- KeyBanc -- Analyst

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

Arsen Kitch -- President, Chief Executive Officer and Director

I think there's a few variables to think about, I think that the first one that we that we experienced last year is the power of volume and fixed costs absorption to our through our system. So that's, that's a lesson we'll learn on our part, and certainly part of our longer term thinking and planning. So there's the volume piece, there's the pricing piece that we've seen over the last several years. And then there's the the volatility and in primarily pulp, but also in transportation and a few other input costs.

So it's over the last couple of last years, we've seen, we've seen this, we've seen this volatility, and it's been driven by those by those variables. And, and this year, what we are experiencing is, is, you know, post COVID, we had a really robust 12 months. This is the this is the adjustment period. And it just also happens to be at the same time as we're experiencing peak peak oil prices. So those are the things that have been moving as business over over the years.

I'm not going to, to attempt to predict at this point what what the normal would look like, but we are focused, we're focused, in the long run on improving this business structurally. We will get the beneful benefits of the Shelby, the Shelby expansion channels and our cost truck. those are those are the things the market market headwinds and tailwind, has to happen.

Adam Josephson -- KeyBanc -- Analyst

Thanks. And just one last one on your guidance, and a philosophy and then you know, all year last year, you are exceeding your guidance pretty significantly. And conditions were quite fluid, but you kept providing quarterly guidance, albeit dramatically exceeding it. And now you're no longer providing quarterly guidance just because conditions remain fluid but in the opposite direction as last year. So what is your philosophy regarding quarterly guidance? Is that something you plan to resume doing next quarter? Or what are you thinking along those lines?

Michael Murphy -- Senior Vice President, Chief Financial Officer

Adam its Mike I will pick that question. I think we we mentioned in our prepared remarks that we could approach breakeven even for the second quarter. And so we think that we've provided that and in response to an earlier question, we think we helped provide some of the data points to get to there. So that's what we're doing here in the second quarter. And in terms of our philosophy, I think given the dramatic changes that the business has gone through quarter to quarter, I think we'd have to give at least the investment community, our expectations that we think might happen.

The biggest variable that we had all last year was demand. And I'm not sure who did a wonderful job of predicting demand in the tissue category. This year, we have both that demand issue and we have the inflation issue and we're trying to do our best to give you and the investors out there, what we think is gonna play out here for the quarter.

Adam Josephson -- KeyBanc -- Analyst

Thanks, Mike.

Operator

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

Paul Quinn -- RBC Capital Markets -- Analyst

They pretty much good afternoon nursing. And Mike, I thought, if I could just try to understand sort of what's happening in the tissue. I mean, you describe it as two thirds consumer and you've got heavy leverage to that component. So the downtime that you're going to be taken in q2 or the lack of orders. You know, that 22% year over year drop in q1 is that related to people getting back to work and more away from home consumption or is that just a destocking in the consumer channel alone and and you still got this second level drop as people get back to work and consume more tissue at home at the office.

Michael Murphy -- Senior Vice President, Chief Financial Officer

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

Paul Quinn -- RBC Capital Markets -- Analyst

Okay, and then, you know, obviously, this is like, almost 180 degree market turn over the course of the year, last year, you know, with with customers, you know, all of a sudden allocation, on the KC side, you were able to significantly reduce skews, now you got a period where you're not getting the order files, or at least customers coming back to you and pushing really hard to increase skews, which was a significant cost and you see a lot here.

Michael Murphy -- Senior Vice President, Chief Financial Officer

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

Paul Quinn -- RBC Capital Markets -- Analyst

Right, and then to sign the capital allocation side, I take it your your first party's still debt reduction. And maybe you could just remind me what what that leverage target is when when that might move to some different areas.

Arsen Kitch -- President, Chief Executive Officer and Director

Sure, Paul, we're still targeting two and a half times leverage ratio of over call it a more normal, and I've even done whether the COVID related or outage related. So that's the target that we're still working toward. And I think we can repeat what we said on the last call, we don't expect to achieve that this year

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. So I had,best of luck guys.

Arsen Kitch -- President, Chief Executive Officer and Director

Thanks Paul.

Operator

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

Mark Wilde -- Bank of Montreal -- Analyst

Thank thanks, Michael. I just wondered if we could get some update around that measure in the stimulus bill that would potentially impact multi employer pension?

Michael Murphy -- Senior Vice President, Chief Financial Officer

Sure, thanks for the question. I think, Marcus, we, we look at it. And for the benefit of those on the phone. This is the American recovery plan Act, which includes provisions to provide the financial relief for these financially troubled multi employer plans. I think we're moving from this legislation, which is very welcome to How does it get implemented, and it's uncertain whether or to the extent to which the legislation will reduce the amount of liability that Clearwater has to pile.

So like, like everyone else for assessing the impact of legislation, we're waiting for the pbgc rules that will establish the guidelines and procedures for pension plans to apply for funding. The pbgc hasn't so early July to come up with these rules. Mark. After that. I think we'll have clear visibility in terms of what this could potentially mean. But we still need some color has we would expect time to apply for that sometime after the rules are outlined for them. And then some clarity falling I am applying for those potential funds.

Mark Wilde -- Bank of Montreal -- Analyst

Okay, all right, that's fine. Just two other real quick ones. Are you out with a second increase on folding party rates of belief board?

Michael Murphy -- Senior Vice President, Chief Financial Officer

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

Mark Wilde -- Bank of Montreal -- Analyst

Okay, and then I noticed in the deck this afternoon that the not retail sales price, but tissue was down about 9% year on year and down about 20 to 25%. From the first quarter 19 levels. I know it's not a big chunk of your business, but what's going on there.

Arsen Kitch -- President, Chief Executive Officer and Director

So we we combined both parent role sales as well as away from home converted product sales There are so if, if any one of the were misleading fingers where you get a mixed shift, where more parent roles were sold in the current period than in the previous comparison periods.

Mark Wilde -- Bank of Montreal -- Analyst

Okay, all right. So really, perhaps not an apples to apples there.

Arsen Kitch -- President, Chief Executive Officer and Director

Correct.

Mark Wilde -- Bank of Montreal -- Analyst

Okay. All right. Sounds good. We'll turn it over. Thanks a lot.

Arsen Kitch -- President, Chief Executive Officer and Director

Thank you.

Operator

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

Adam Josephson -- KeyBanc -- Analyst

Thanks, Arthur. The mike reset, it might just to follow up on that the leverage question and the normalize the EBIT, da. So next year should have fairly average outage expenses, I think you're getting to 19 to 23 million. And then, presumably next year would be a more normalized tissue. either die year, it doesn't seem like last year wasn't in this year won't be either. So a How would you have us think about when, when you're at normalize the the DOM consequently, when you've achieved your target leverage ratio to your satisfaction, and consequently, we'll do something with your capital via dividends repurchases. What have you.

Michael Murphy -- Senior Vice President, Chief Financial Officer

Adam, I think that's a good question. I think as we essentially set up expectations for next year, we can try to figure out if that's a good year as a point of comparison for that, quote, unquote, normalized in the DOM from which we can come up with that leverage target. I like the way that you framed it. Thank you for that.

Adam Josephson -- KeyBanc -- Analyst

No problem and just the catbacks reduction. I know it's minor. But what is what is that?

Michael Murphy -- Senior Vice President, Chief Financial Officer

We're we're going through a list of projects for the year. And you know, given given some of the some of the had been headwinds, you know, we're taking a bit of a deeper scrub on which projects we're going to implement and not implement. This era, it's a small reduction sending, we're still, we're still able to execute all of our critical, critical projects that we need to execute.

Adam Josephson -- KeyBanc -- Analyst

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

Michael Murphy -- Senior Vice President, Chief Financial Officer

You know, if you look at, if you look at receipt, receipt, data on capacity additions, you know, 19 2021 each of those years, if you added up there's there's between 160 and 170,000 times roughly of capacity that's been added. There's there's under 60,000. That's slated to be out of this year. And it's all it's all tagged capacity. there's a there's a few other announcements out there for 2223 and even even for 24.

And much of that is old surpassed capacity, as well, so hard for me to say exactly what that supply and demand balance looks like at the end of this year. But hopefully that provides some color in terms of capacity addition, I think what we said previously, you know, the demand grows that roughly one maybe 2% 2% per year and on a 10 million tonne market, that's 100 to 200,000 tons of capacity. So if you look at the last last few years, it's been about 160 170,000. That's been added per year.

Operator

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

Paul Quinn -- RBC Capital Markets -- Analyst

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

Arsen Kitch -- President, Chief Executive Officer and Director

Great question. So we are, we're looking at it obviously, which we're looking at our demand, we're looking at our inventory. We're looking at where where our customers are and where the orders are. And then we're also looking at the cost structure of the assets. So So yes, a lot goes into those decisions. It's not it's not simply a rotating outage across across our system.

These are these are targeted. These are targeted downtime to correct processes and based on based on inventory based on demand and based on based on cost structure. So as an example, during the Louis the major outage of downtime in Lewiston, given that the site was going through a major maintenance outage, it made sense for us to to take some downtime at our Lewiston tissue operation that went along with a major outage in our paperboard business. So we're managing through this pretty carefully.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay, so let's pull up in that what is the most efficient way to do that is Is that like a week of downtime? Or is that like, is that two weeks? or What is that, like the time that you know, you still got to active work for us and you were able to, you know, bring bring back machines that were pretty quick operating capacity after the show.

Arsen Kitch -- President, Chief Executive Officer and Director

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

Paul Quinn -- RBC Capital Markets -- Analyst

Okay, that's really helpful. Thanks, guys.

Operator

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

Arsen Kitch -- President, Chief Executive Officer and Director

Thank you everyone for joining us today.

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

Mark Wilde -- Bank of Montreal -- Analyst

Adam Josephson -- KeyBanc -- Analyst

Paul Quinn -- RBC Capital Markets -- Analyst

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