Clearwater Paper Corporation (CLW) Q3 2021 Earnings Call Transcript

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Clearwater Paper Corporation (CLW 1.73%)
Q3 2021 Earnings Call
Nov 2, 2021, 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's Third Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to Sloan Bohlen, Investor Relations. Please go ahead.

Sloan Bohlen -- Investor Relations

Thank you. Good afternoon, and thank you for joining Clearwater Paper's third 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 third quarter of 2021 were released shortly after today's market close, along with the filing of our 10-Q. You will find a presentation of supplemental information, including a slide providing the company's current outlook posted on the Investor Relations page of our website at clearwaterpaper.com. Additionally, we will be providing certain non-GAAP information in this afternoon's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release and 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, our financial performance exceeded our expectations for the third quarter. On a consolidated basis, the company reported net sales of $450 million, adjusted net income of $9 million, and adjusted EBIT of $50 million. A few highlights to mention, our paperboard business continue to see strong demand. Based on that demand, we implemented previously announced price increases across our SBS portfolio. As per our expectations, we saw improving trends and tissue orders and shipments. We completed the last of our major maintenance outages for the year at our Cypress Bend, Arkansas terminal. We also completed the closure of the high cost Neenah tissue mill and our exit from the away-from-home tissue segment. We saw accelerating inflation across both of our businesses, particularly in energy, chemicals, wood fiber and transportation, as pulp reached its peak and started to ease. And finally, we maintained ample liquidity of $270 million at quarter end and reduce net debt by another $7 million. As noted during 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. We're monitoring the latest trends and are adjusting protocols and policies to keep our people safe. Let's discuss some additional details about both of our businesses. Please turn to slide four for a few comments on our paperboard business. The industry continues to experience strong backlogs even with a higher SBS pricing that has been reported by Fastmarkets RISI, the third-party industry publication. We have benefited from these industry dynamics and previously announced price increases. Since the beginning of this year, Fastmarkets RISI has reported price increases for the US market that totaled $250 per ton in folding carton and cardstock.

This includes a $50 per ton increase in October for both grades. We'll continue to see strong demand from our folding carton customers and a recovery in the foodservice segments. We're also pleased with the reception of our sustainability focused brands of NuVo cup and ReMagine folding carton. Both are helping our customers differentiate themselves in the market. It typically takes us a couple of quarters for price changes to be fully reflected in our financials. It is also worth noting that our portfolio includes additional grades and price mechanisms that are not reflected in RISI's reporting. We will discuss the estimated impact of our previously announced pricing to our 2021 financials later in our comments. Finally, we completed a planned maintenance outage at our Cypress Bend, Arkansas mill during the third quarter. The financial impact from this outage to our adjusted EBITDA was $5 million. My thanks to the team for completing the outage on time and on budget. Please turn to slide five with some additional comments on our tissue business. We continue to operate in a difficult market environment. As previously discussed, COVID led to significant volatility in tissue demand and retailer behavior in 2020 and 2021. With that said, let me provide you with our point of view on the overall market. In North America, we view tissue demand as being approximately 10 million tons with annual demand growth of 1% to 2%, slightly exceeding population growth. Pre-COVID, the market was about two-thirds at home and one-third away from home. Using that math, the at home market is six million to seven million tons, of which approximately two-thirds is branded and one-third is private branded. We operate in the private branded market, which is approximately two million tons and has grown more quickly than the branded market.

In terms of the retailer, environment, clubs and the mass merchandisers have gained share at the expense of traditional grocers over the years. As a reminder, we have greater exposure to grocery than the overall market. In terms of supply, tissue capacity additions have primarily targeted the private branded space with capacity growth exceeding demand growth. To the best, we believe that private branded manufacturers will operate a depressed capacity utilization levels in the next several years. Let me share some context pertaining to demand trends that we witnessed in the first nine months of the year. Consumers started to return to a more normal lifestyle in the first half of the year, as vaccines were becoming available and restrictions lessened. This led to a reduction of at home tissue purchases and destocking of consumer pantries. Based on IRI market data, consumer purchases measured in dollars bottomed out in March. Due to these consumer trends, retailers were faced with higher inventories in the first quarter and into the second quarter. In response, they reduced orders to manage their inventories. Based on RISI data, retailers shipments of finished goods bottomed out in April. This is largely consistent with our order patterns. We observed demand recovery at the retailer level throughout the third quarter. There was a demand uptick in August, related to the emergence of the Delta variant that led to higher orders than we anticipated. September order patterns return to more normal levels, but we observed another uptick in orders in late October. This volatility is a reminder of the unpredictable nature of our market during COVID. Let me provide some additional detail on our tissue volume trends. We ship 12.3 million cases in the third quarter, a 21% increase from the 10.2 million cases shipped in the second quarter. This was a bit higher than our guidance of 10% to 15% growth, partly driven by the August demand uptick. We expect demand to be flat in the fourth quarter relative to the third quarter. But there's a high degree of uncertainty in consumer and retailer behavior as we head into the holidays. We will continue to selectively take asset downtime as needed to manage inventories and our cost structure, particularly while coal prices are at elevated levels.

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 six. The consolidated company summary income statement shows third quarter 2021 -- the third quarter of 2020 in the first nine months of each year. In the third quarter 2021, our net income was $2 million, diluted net income per share was $0.11, and adjusted net income per share was $0.55. The adjustments incorporate the impacts from the Neenah mill closure as well as other adjustments. The impact of the Neenah closure activities in the quarter was $5.4 million, which was related to severance and related expenses. Corresponding segment results are on slide seven. Slide eight is a year-over-year adjusted EBITDA comparison for our Pulp and Paperboard business in the third quarter. We benefited from our previously announced price increases and a mild mix improvement with similar sales volumes as last year. Our costs were impacted by $5 million of major maintenance outage expenses, and higher inflation and maintenance expenses. You can review a comparison of our third quarter 2021 performance relative to second quarter 2021 performance on slide 14 in the appendix. Please turn to slide nine, where we provide a year-over-year comparison of third quarter and tissue. Price/mix were a limited part of the story for tissue. Our sales have converted products in the third quarter were 12.3 million cases representing a unit decline of 15% versus prior year. Our production of converted product in the quarter was 11.4 million cases are down 25% versus the prior year. Please note that we largely exited the away from home tissue segments in the third quarter of this year, which historically represented 3% to 4% of our overall case volume. While inflation pressure was significant, the action that we took it at Neenah helped offset some of the higher costs that we face.

You can review a comparison of our third quarter 2021 performance relative to second quarter of 2021 on slide 15 in the appendix. We also have finished other operational and financial data on a quarterly basis on slide 16 for both businesses. Slide 10 outlines our capital structure, our liquidity was $270 million at the end of the third quarter. During the third quarter, we reduced net debt by $7 million. Maintenance financial covenants do not present a material constraint on our financial flexibility. And we do not have near-term debt maturities. We've continued to target the net debt to adjusted EBITDA ratio of 2.5 times, which we expect to achieve by 2023. Slide 11 provides a perspective on our fourth quarter and full year 2021 outlook the key drivers. 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 unpredictable. But that said, our expectation for the fourth quarter is adjusted EBITDA of $48 million to $56 million. Let me walk you through the build up to that range from our third quarter adjusted EBITDA $50 million. Previously announced SBS prices is expected to positively impact us during the quarter by $7 million to $9 million which is helping to offset inflation. Raw material and freight cost inflation is expected to negatively impact us by $7 million to $12 million. There are no planned major maintenance outages, which will benefit us, given the $5 million Q3 outage. Tissue shipments are expected to be flat, while we take additional asset downtime to manage inventories. We are expected to achieve the full run rate benefit of the Neenah closure, which we previous previously stated as being more than $10 million annualized. If we take actuals for the first nine months and add our expectations for the first quarter, we expect adjusted EBITDA of $167 million to $175 million for the full year 2021.

We wanted to comment on some of the key drivers for 2021 relative to 2020. We are expecting continued positive impact from previously announced SPS price increases, which are expected to result in year-over-year benefits of $53 million to $55 million. In our paper board business, planned major maintenance outages are expected to reduce our earnings for 2021 compared to 2020 by $27 million. Our guidance for 2022 planned major maintenance outages is on slide 20. We expect to have additional major maintenance outages in 2023. And we'll provide an update when we refine our estimates. Our current view is that our tissue volume decline year-over-year will be above 20%, which is not adjusted for the impact of our exit from the away-from-home business. In total, from 2020 to 2021, input cost inflation, including pulp, packaging, energy, and chemicals, as well as freight is expected to be $80 million to $85 million relative to our previous estimate of $60 million to $70 million. Increasing energy, chemicals and fiber prices, drove our inflation expectations higher. While pulp pricing has started to decrease, we do not expect for that to have a material impact on our financials until early next year. The Neenah mill recently generated negative adjusted EBITDA by closing the site, we will avoid these losses and lower our overall cost structure by producing our retail volume at other lower cost sites. These actions are helping us to fully realize the benefits of the Shelby North Carolina mill investment. In total, the benefit from the Neenah closure is expected to exceed $10 million annually. For the full year 2021, we are also anticipating the following. Interest expense between $36 million and $38 million; depreciation and amortization between $104 million and $107 million; capital expenditures of approximately $42 million and $47 million, which is lower than our prior expectations; and historical average of around $60 million, excluding extraordinary projects, and our effective tax rate is expected to be 26% to 27%.

Let me turn the call back over to Arsen.

Arsen Kitch -- President, Chief Executive Officer and Director

Thanks, Mike. It has certainly been an interesting with robust SBS market conditions, significant inflationary headwinds and volatility and tissue demand. As we mentioned previously, we believe that supply and demand drive near to medium term pricing and margins. Our paperboard business is benefiting from these dynamics, while tissue remains challenged. I'm proud of how our people have managed these challenges and opportunities. We're committed to a strong finish in 2021 in positioning Clearwater Paper for future success. For the last couple of quarters, I spoke about performance improvement efforts, focused on our core operations in the medium to long term. These efforts are well underway and are aimed at offsetting inflationary and competitive pressures that we face in our industry. It is important for us to invest in these efforts to maintain and grow our cash flows in the long run. We're encouraged by the work to-date as we start moving from planning to execution, and believe that we are well positioned to combat margin compression in the next several years. Let me remind you, why I think these businesses are well positioned in the long run. For 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 our customers. We have a diverse customer base, which serves end markets that have largely stable demand. Second, not being vertically integrated enables us to focus on independent customers with unparalleled service and quality commitment. Third, we believe through product and brand development, the business is well positioned to take advantage of trends toward more sustainable packaging and food service products. Lastly, our paperboard business has demonstrated an ability to generate good margins and solid cash flows. Our Consumer Products division is a leader within 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. Second, there are long-term trends away from branded products to private brand. Private brand tissue share in the US rose to over 30% recently, up from 18% in 2011. While these trends are impressive, we're still a long way from where many European countries are in which private brands represent over half of total tissue share. Lastly, tissue is an economically resilient and an essential need-based product. Historically, demand has not been negatively impacted by economic uncertainty. We are optimistic that this business will generate meaningful cash flows over the long run. We're committed to improving our business to be successful both in the near and long-term, and I firmly believe that we will come out of 2021, a better and stronger operation than where we started. In addition, in addition to appropriately sustaining our asset base, our capital allocation plan is focused on paying down debt and improving our cost structure and operating performance. As Mike mentioned earlier, with this plan, we will achieve our near-term target leverage ratio of 2.5x by 2023. Our long-term capital allocation prioritizes maintaining a strong and flexible balance sheet with a focus on shareholder value. We will share additional perspectives on our long-term capital allocation prioritization when we reach our near term leverage ratio target. In closing, I like to thank our people for all that they do to keep our operations running safely and efficiently and for servicing our customers. I also want to thank our shareholders for their continued support.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] We have your first question from Adam Josephson with KeyBanc Capital Markets. Your lines open.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Arsen and Mike, good afternoon.

Arsen Kitch -- President, Chief Executive Officer and Director

Good afternoon, Adam.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Good to talk to you. Mike, I think you mentioned, you're expecting $7 million to $9 million of SBS price benefits sequentially. Can you talk about just on a full-year basis? At this point investors are obviously starting to think about next year. And so just in annual terms, you produce 800,000 ton year of SBS. You mentioned $250 a ton of cumulative price increases in the third quarter and October, you mentioned an up to two quarter lag in implementation. Can you help me with how much of your SBS business is tied to that index that you referenced? That's up $250 a ton in the last few months. And based on that, and based on the lags that you mentioned, what investors should expect in terms of the potential EBITDA benefit next year, given all that information?

Michael Murphy -- Senior Vice President, Chief Financial Officer

Sure, Adam, I'll give you my best shot and then if you ask clarifying questions, please add to it. So in terms of the business itself, you're right, approximately 800,000 tons a year. We talk about a quarter to a third of the business has contracts tied to the Fastmarkets RISI publication. The majority of the business will follow along with the -- those price increases or decreases that we sell on the spot market, but it's just not 100%.So we'll have certain grades that aren't aligned with those price factors. And then certain other issues where you might get -- you won't get 100%. But you'll get pretty close to that. If you take your math of call it $250 per ton on the 100,000 tons, yes, you can get to 200 million, we'd recommend that you back that off by some amount of accounting for the fact that, not all of the grade is tighter not all the grade will go along with those price increases. And then what we talked about for this year, we believe that we're going to have $53 million to $55 million of the price increases happening here in 2021. The remainder is something that you would put into a model for 2022.

Arsen Kitch -- President, Chief Executive Officer and Director

Adam, and just to clarify something so RISI is a -- it's an index that reports what's taking place in the market. So as Mike mentioned, about a quarter of our volume, is this type of the pre category index, the rest is spot market, mostly. And that's what we see reports on what's already taken place in the market. So it's not a -- it's not as simple as taking $250 tons $800,000 tons. There's other grades and there's other pricing mechanisms involved. But the math that Mike walks you through, I think is largely accurate.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

No, I appreciate that. I'm just asking because obviously that it's a huge swing factor next year in terms of your EBITDA because the maintenance will be flattish. I think, Mike, you mentioned you'll get $10 million of annual benefits from the Neenah closure. Presuming the tissue market normalizes, obviously, that could be a benefit. And then you have this potentially very significant SBS price benefits. I just -- thank you for clarifying that, because it's helpful. On the tissue side,

Michael Murphy -- Senior Vice President, Chief Financial Officer

Just to clarify, Neenah we have back this year and the back half of this year. And I think for your model, you'll want to probe a little bit on inflation, as well, to make sure that I guess that...

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Yeah, yeah, no, I hear you, Mike. Back to tissue for one moment Arsen, can you just talk about the brief demand spike in August, and then in late October and how the late October spike is informing your view of flat shipment sequentially? In other words, you expect that strength to hold or what exactly are you expecting? And why is this -- your best guess why is this happening, these spikes every month or two?

Arsen Kitch -- President, Chief Executive Officer and Director

Yes, it's a good question. So what we saw in -- what we saw in Q3 versus Q2 is our volume was up 20%. If you look at IRI demand, so this is consumer purchases and dollars, it was up about 11%. So the consumer came back and was buying and was buying tissue again, I think you saw Delta driven, a Delta variant driven spike in August. And that subsided into September. And now we're seeing another spike of demand coming in late October, early November. It's a little speculative of what's taking place, but I suspect that consumers are hearing about all the supply chain challenges that are out there. And some of the shortages that are out there and I suspect there's another stock up that's taking place by the consumer as we head into the holidays. And so what happens when the consumer stocks up, retailers carry a few weeks of inventory. They start ordering much heavier to respond to that stock up. And then some manufacturers put retailers on allocation. And then the retailers order more and the cycle continues until it runs out of steam. And the consumer starts destocking and we saw what happened in Q2. So I think with October under our belt was having a good opening day order book into November. We're feeling pretty good about having a good Q4 that's comparable to Q3. Although, there's been tremendous amount of volatility even week-over-week or month-over-month, but that's our best -- that's our best view right now.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

I appreciate that, Arsen. Now, one more, and then I'll get back in the queue. Mike, back to the inflation issue you mentioned. So you mentioned, pulp prices are still elevated for you. Obviously, they've been coming down quite a bit in China, and then more recently in the States, just based on what's happening in that market and what you're seeing with freight, chemicals, energy, etc. Is it reasonable to assume that the inflation impact next year will be notably different than that which you're expecting this year? Or can you give us any way to perhaps help frame it?

Michael Murphy -- Senior Vice President, Chief Financial Officer

Sure, Adam. Thanks for the question. When we looked at our fourth quarter inflation expectations compared to the fourth quarter of last year, we're coming in pretty close to about $40 million year-over-year. So a substantial increase. Energy and chemicals have been the driver of late. We used to talk about the majority of our inflation being pulp driven. We've since dropped that off. Pulp is no longer the majority of the driver here. And so we're seeing some strong inflationary headwinds, as we end this year, and now the crystal ball is awfully difficult to look down and try to figure out inflation for next year. But we still can be running at a very elevated level like we're seeing here in the fourth quarter.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks a lot, Mike. Appreciate it.

Operator

We have your next question from Mark Wilde with BMO Capital Markets. Your line is open.

Mark Wilde -- BMO Capital Markets -- Analyst

Good evening, Arsen, good evening, Mike.

Arsen Kitch -- President, Chief Executive Officer and Director

Good evening.

Mark Wilde -- BMO Capital Markets -- Analyst

Mike, just I wonder if it's possible for you to just help us put a little finer point on the roll through these SBS hikes, in terms of what we might expect in the fourth quarter, and then also, if you could just address the issue of sort of how you're reading the market right now. I think one of the two larger players in the market was out late last week with yet another $50.

Arsen Kitch -- President, Chief Executive Officer and Director

So, Mark, thanks for the question. We do think quarter-over-quarter that the price increase is going to be about $7 million to $9 million better off in the fourth quarter versus the third quarter.

Mark Wilde -- BMO Capital Markets -- Analyst

Yes.

Arsen Kitch -- President, Chief Executive Officer and Director

And so that's what we're currently expecting today and, obviously, a sizable increase year-over-year, a number just north of $25 million year-over-year.

Mark Wilde -- BMO Capital Markets -- Analyst

Yeah. Okay. So I guess, I would stock about $35 to $45 a ton, is that using 200,000 tons as a quarterly base?

Michael Murphy -- Senior Vice President, Chief Financial Officer

Yes. For the incremental improvement quarter, yes, naturally.

Arsen Kitch -- President, Chief Executive Officer and Director

And, Mark, I think your broader question about what's happening in the SBS market, I think, we're still seeing, even with these price increases, demand is outstripping our ability to supply. So we'll continue to try to service start assisting customers and we're allocating volume, we're delaying capital projects into next year to maximize production. I think the market remains very strong as we head into the fourth quarter. We'll talk more about next year, in a few months, but the market remains, very robust and very strong.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. And just one more on SBS. Is there any scenario that you could see over the next two or three years, let's say, where you could see yourself making any further investments in the banking business?

Arsen Kitch -- President, Chief Executive Officer and Director

It's a good question. Investments in SBS capacity come in very large increments of dollars. So we haven't talked about our capital allocation in a lot of detail, what we have talked about as making small to medium sized investments to improve our operations and efficiency. SBS investments and capacity that are material are pretty significant. There's certainly opportunity for us to get additional capacity through manufacturing creep, through some smaller projects, but any material increments come at pretty significant capital investments.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. That's understood. And then, I wonder, finally, for my side also, your comments in the kind of the preamble about the prospects for oversupply in the private label consumer tissue market being something that we have to live with for a number of years. Any thoughts on how the industry does any more than just kind of grow its way out of that situation?

Arsen Kitch -- President, Chief Executive Officer and Director

It's a difficult question to answer. So if you look at -- you look at last several years, while the capacity additions appear to reflect -- to be balanced with broader demand across all the 10 million tons, they're disproportionately aimed at this market and they're outpacing that demand growth. So, to me, it becomes an economic question for the industry, and is what happens with higher cost assets, you saw us taken out higher cost capacity that was no longer economically viable. So it is difficult to predict what others are going to do. We've done what make sense for us in terms of reducing our high cost capacity that was no longer economically viable.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay, I'll turn it over.

Operator

You have your next question from Paul Quinn with RBC Capital Markets. Your line is open.

Paul Quinn -- RBC Capital Markets -- Analyst

Yes, thanks guys. Good afternoon.

Arsen Kitch -- President, Chief Executive Officer and Director

Afternoon

Paul Quinn -- RBC Capital Markets -- Analyst

Maybe I started on the consumer product side, just you guys -- ever since I started covering you, you've been waiting to the grocery store aside, just wondering over the last five years, how much movement you've done to some of these areas that have grown to groceries detriment?

Arsen Kitch -- President, Chief Executive Officer and Director

We've done quite a bit of movement. We were north of three quarters grocery, we're still more than half grocery. But we've made substantial inroads into mass and to club. Over the years, there's more to go. We're still overweight in grocery. And if you look at just recent data that's out there, if you look at private branded tissue purchases, if you just take the top three players in the market, and all three of them are in club or mass. They now represent somewhere around 65% of all private branded tissue purchases. So, we're still more weighted toward grocery, but that's certainly something we're working on to make sure that we're aligned with where the growth is taking place.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. And then just sticking with that theme of growth. I mean, you just shut down Neenah, but you've also had this successful and very well-timed start up at Shelby two. When is it -- time to look at Shelby three or another machine for you guys at some point down the road given the long lead-time on ordering equipment?

Arsen Kitch -- President, Chief Executive Officer and Director

I mean first things first, I think we're sticking with our theme of paying down our debt and generating cash flows. That's our priority. We have capacity available to sell. So, to your point, if you look at last year, we peaked at about 16 million cases a quarter of sales. If you do back of the envelope that would apply 64 million, 65 million cases of capacity. We removed approximately 10 million with a Neenah closure, but that still implies capacity in the mid-50s in terms of cases. We are probably going to be if you do the math in our prepared remarks, we'll be somewhere in that 46 million, 47 million cases in 2021. So, we still think there is another 10%-plus of capacity that we can sell through to get to utilization rates somewhere in the mid-90s.

Michael Murphy -- Senior Vice President, Chief Financial Officer

Paul, I'd also added it's a pretty highly fragmented manufacturer market out there as well. I think we'd have to really challenge ourselves is it better to build versus to bind and consolidate? And I think there's probably a lot of good reasons to think about that trade-off and something that has been approached our leverage ratio we'll have to challenge ourselves with.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. And thanks for the color on the maintenance schedule at the back of the deck, just wondering how you're thinking about 2023? And if you could recall -- remind us of what that curiosity is for maintenance that at both Cypress Bend and Lewiston?

Arsen Kitch -- President, Chief Executive Officer and Director

We are going to have a major maintenance outage in 2023, which we commented on in the prepared remarks. Paul, we don't have an estimate for you today. When we will have more refined estimate, we'll certainly share that with you and the investment community.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. And then -- lastly, just on pulp, I mean I understand you've got some cost inflation in energy and chemicals that just about everybody else has seen as well. But pulp costs look like they should come down in a material way. Am I correct in assumption that you're still sort of consuming about 300,000 tons of, I would say, pulp a year and -- so that could be material tailwind in 2022?

Arsen Kitch -- President, Chief Executive Officer and Director

Yeah. You are right. We are consuming about three 300,000 and most of that is hardwood or eucalyptus. If you look at what's happened since the end of last year, in the middle of this year, if you look at the recent index on eucalyptus and it's up $460 a ton, or about 50% the last couple of months. So I think we've seen about a $50 easing. So $460 up and $50 down, I think they're still there's still a ways to go for this to be a more reasonable pulp market for us, but in terms of the forecasts that are out there. And what we're anticipating as a continued easing into next year, which should benefit us. A important reminder, it takes us several months for pulp pricing to work its way through our P&L just in terms of how our inventory cycles work between pulp, paper and converted cases, it takes about 90 days for those price decreases to work their way through our P&L.

Paul Quinn -- RBC Capital Markets -- Analyst

Great. Thanks for the help. Best of luck.

Operator

We have your next question from Adam Josephson with KeyBanc. Your line is open.

Adam Josephson -- KeyBanc -- Analyst

Arsen and Mike, thanks a lot for taking my follow-up. Mike, any update on PIAA, I know that the new administration was looking into potentially some changes that could affect PIAA any update there? And then and how does your PIAA exposure factor into your thinking about hitting that $2.5 tons leverage ratio by 2023? And, and how much financial flexibility you'll have at that point, given your exposure to this pension fund?

Michael Murphy -- Senior Vice President, Chief Financial Officer

Great, Adam. Thanks for the question. So as some of PIAA is our multi-employer pension plan that we're looking to? There's good disclosure in our 10k. Earlier this year, the American Recovery Plan Act was passed, which was intended to provide some financial relief to some of the more troubled multi-employer pension plans that are out there. Adam, I think since that plan is passed. They're still working through the rules in terms of who can apply and how you can apply for these funds. Our expectation is that PIAA will apply for the funds. I do think that pilot is probably lower on the priority list for the PBGC in terms of receiving applications. So this is something that we're closely monitoring. And as soon as we get the disclosure that PIAA has applied for the funds, we will let our investors know. So I think that answers the first part of the questions that you have. In terms of the second part, like we don't believe that we owe the AFD associated with PIAA, it's not factored into our 2.5 times leverage target. That target is more a function of our net debt to let's call it a three the cycle or average EBITDA. So that that's what we're focused on when we communicate the 2.5 times leverage ratio target.

Adam Josephson -- KeyBanc -- Analyst

I appreciate that Mike. Just a few others, the capex reduction what was that related to? I think came down by about 10 million from last quarter, and it's obviously going to be below your, your normalized level.

Michael Murphy -- Senior Vice President, Chief Financial Officer

It is below our normalized level. We'd say there is we're a smaller company. So things will be episodic. This year's putting in a little bit lighter than we thought, Arsen had mentioned in his comments is earlier this year, we made the determination to move one of our outages into the first quarter. This is headbox project that we have that will actually produce a little bit of incremental volume. Also, I think what we're finding here, Adam this year, just is tougher to get stuff done in the COVID environment. And I think we saw this last year as well.

Adam Josephson -- KeyBanc -- Analyst

Yes. No, I appreciate that. A couple of others for you Mike, on free cash, anything notable in the fourth quarter versus the first three? In other words, is there a reason to expect a meaningful bulge in cash flow in the fourth quarter based on working capital or otherwise.

Michael Murphy -- Senior Vice President, Chief Financial Officer

There are a couple of pushes and pulls the two things that we've talked about, one, our bond interest payments are made in the first and the third quarter, roughly a little bit north of $14 million in each of those quarters, and no similar payment in the fourth or second quarter. And then secondly, we do have a repayment of the Cares Act incentive that was on payroll taxes and the payroll tax holiday that's a little bit north of $5 million. Net the two together, there's probably a little bit better than -- a little bit less than $10 million of cash flow impact quarter-to-quarter setting aside our projections, financial results and other net working capital items.

Adam Josephson -- KeyBanc -- Analyst

That's it Mike. Thank you. No, go ahead.

Michael Murphy -- Senior Vice President, Chief Financial Officer

Yes. Sorry. Go ahead.

Adam Josephson -- KeyBanc -- Analyst

Yes, I was just going to say just, when we look at the last year, I think our free cash was north of $200 million this year, it looks like it's going to be quite a bit below. Obviously, EBITDA is much lower this year. But can you help me with just what to the extent there's such a thing as a normalized conversion ratio. What you would expect to convert adjusted EBITDA to free cash flow to on a normalized basis given that $60 million of capex that you talked about?

Michael Murphy -- Senior Vice President, Chief Financial Officer

I'm not sure there's an easy rule of thumb and have rather we have touch later to walk you through various scenarios. But to take up through EBITDA you have, I think, you're right in highlighting capex of close to $60 million, our cash interest is going to be a little bit below that $36 million to $38 million that I mentioned. And then you need to put in a number for cash taxes. We're going to be a cash tax payer this year, but to a small amount next year to a larger amount. And then it's whatever assumption you want to put in for working capital where you see higher inflation of net working capital becomes a little bit of a drag. And I think that's what we're seeing here in 2021.

Adam Josephson -- KeyBanc -- Analyst

Yes. No, I appreciate that. And Arsen just one last one for you on SBS. So your business has been quite consistent, really dating back to last year, even when some of your larger peers were having a much more difficult time in that market, which led obviously, some of them to either shut capacity or converted to another box board grade. And then fast forward a few months, the market is as hot as it's ever been obviously mentioned, prices are going to be up $250 in the span of four or five months. Just can you help frame what changed in your mind, what changed so dramatically for the industry over the past year or so. I'm sure some of it was the supply reductions. But just when the demand -- when demand really started booming for the market, and consequently, why the industry's fortunes seem to change so dramatically in a pretty short period of time?

Arsen Kitch -- President, Chief Executive Officer and Director

I think I'll set the supply changes aside for a moment. If you look at the end markets that we play in, we are much more heavily weighted toward folding carton and retail cup and plate than the rest of the market. So when COVID first happened, it had a disproportionate impact on food service and print grades. That is not where the majority of our business is. So our end markets remain strong. The rest of the industries markets weren't quite as strong. Now since then, some of those markets have come back. And you've also seen some supply disruptions over last -- over the last 12 months that were weather related and other disruptions. And I think we've done a really good job of managing through those disruptions and minimizing the amount of downtime that we've had across our mill. So, I think we -- so it's A, I think we have good end market that have been very favorable through this. And B, I think we've done a really nice job of operating through some of these COVID and weather challenges that the millets have had across the industry.

Adam Josephson -- KeyBanc -- Analyst

And I appreciate that. It's actually just one last one for Mike, just on your guidance. Just I know it's -- obviously easy to provide full year guidance at this point. Should we read the fact that you're giving -- you did have that full year guidance as a sign that you might get back to providing full year guidance or is that just something you're doing this quarter, given that it's already 4Q and you don't expect to get in the habit of doing that?

Michael Murphy -- Senior Vice President, Chief Financial Officer

No, Adam, this time, it just was a function of adding the first three quarters to the fourth quarter. But thanks for the question.

Adam Josephson -- KeyBanc -- Analyst

Thanks so much, Mike.

Operator

You have your next question from Mark Wilde. Your line is open.

Mark Wilde -- BMO Capital Markets -- Analyst

Adam did such a good job. He nailed the two remaining questions I've got. I'm all set. Thank you.

Michael Murphy -- Senior Vice President, Chief Financial Officer

Thanks, Mark.

Arsen Kitch -- President, Chief Executive Officer and Director

Thanks, Mark.

Operator

I'm showing no further questions at this time. Presenters, please continue.

Arsen Kitch -- President, Chief Executive Officer and Director

Thank you for participating in Clearwater Paper third quarter earnings call. With that operator, we conclude the call.

Operator

[Operator Closing Remarks]

Duration: 46 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

Mark Wilde -- BMO Capital Markets -- Analyst

Paul Quinn -- RBC Capital Markets -- Analyst

Adam Josephson -- KeyBanc -- Analyst

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