Nov 2, 2021
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Clearwater Paper Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Sloan Bohlen, Investor Relations.
Please go ahead.
Sloan Bohlen
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 2 of our supplemental information covering forward-looking statements.
Rather than rereading this slide, we are going to incorporate it by reference into our prepared remarks. With that, let me turn the call over to Arsen.
Arsen Kitch
Good afternoon and thank you for joining us today. Please turn to Slide 3.
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 EBITDA of $50 million.
A few highlights to mention, our paperboard business continued 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 in tissue orders and shipments. We completed the last of our major maintenance outages for the year at our Cypress Bend, Arkansas mill.
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 reduced 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 are 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 4 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, a 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 U.S.
market that totaled $250 per ton in folding carton and cup stock. This includes a $50 per ton increase in October for both grades.
We are continuing to see strong demand from our folding carton customers and a recovery in the foodservice segments. We are 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 5 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 6 million to 7 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 2 million tons and has grown more quickly than the branded market. In terms of the retailer environment, clubs and 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.
Due to this, we believe that private branded manufacturers will operate at 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, retailer 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 returned 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 shipped 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 is 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 full prices are at elevated levels.
With that, I will turn it over to Mike to discuss our third quarter results.
Mike Murphy
Thank you, Arsen. Please turn to Slide 6.
The consolidated company summary income statement shows third quarter 2021, the third quarter 2020, and the first 9 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 7. Slide 8 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 9 where we provide a year-over-year comparison of third quarter in tissue.
Price and mix were a limited part of the story for tissue. Our sales of 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 or down 25% versus the prior year. Please note that we largely exited the away from home tissue segment 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 at Neenah helped offset some of the higher costs that we faced. You can review a comparison of our third quarter 2021 performance relative to second quarter to 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 continued to target a net debt to adjusted EBITDA ratio of 2.5x, 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 of $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 mill closure, which we previously stated as being more than $10 million annualized. If we take actuals for the first 9 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 SBS price increases, which are expected to result in year-over-year benefits of $53 million to $55 million.
In our paperboard 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 will provide an update when we refine our estimates. Our current view is that our tissue volume decline year-over-year will be slightly 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 expected to be $80 million to $85 million relative to our previous estimate of $60 million to $70 million. Increasing energy, chemicals and with 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 will avoid those losses and lower our overall cost structure by producing our retail volume and 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 to $47 million, which is lower than our prior guidance and historical average of around $60 million, excluding extraordinary projects. And our effective tax rate is to be 26% to 27%.
Let me turn the call back over to Arsen.
Arsen Kitch
Thanks Mike. It has certainly been an interesting year 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 businesses benefiting from these dynamics while tissue remains challenged.
I am proud of how our people have managed these challenges and opportunities. We are 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 longer run. We are 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 towards more sustainable packaging and foodservice 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 wide range of product categories and quality tiers, which is an attractive sales proposition to our customers.
Our expertise in manufacturing, supply chain and transportation is a key differentiator. Second, there are long-term trends away from branded products to private brands.
Private branded tissue share in the U.S. rose to over 30% recently, up from 18% in 2011.
While these trends are impressive, we are 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 are 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 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’d 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.
Operator
Thank you. [Operator Instructions] We have your first question from Adam Josephson with KeyBanc.
Your line is open.
Adam Josephson
Arsen and Mike, good afternoon.
Arsen Kitch
Good afternoon, Adam.
Adam Josephson
Good to talk to you. Mike, I think you mentioned you are 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 tons a 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?
Mike Murphy
Sure, Adam. I will give you my best shot and then if you have clarifying questions, please add to it.
So, in terms of the business itself, you are right, approximately 800,000 tons a year. We talked 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 those price increases or decreases that we sell on the spot market, but it’s just not 100%. So, we will 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 will 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 the $200 million. We’d recommend that you back that off by some amount of accounting for the fact that not all of the grade – not all the grade will go along with those price increases.
And then what we talked about for this year, we believe that we are 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
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 tied to the RISI index, the rest is spot market mostly, and that’s what RISI reports on what’s already taken place in the market.
So, it’s not as simple as taking $250 times 800,000 tons. There’s other grades and there’s other pricing mechanisms involved, but the math that Mike walked you through, I think is largely accurate.
Adam Josephson
No, I appreciate that. I am just asking you, because obviously 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 will 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 benefit.
So, just thank you for clarifying that, because it’s helpful. On the tissue side, yes, I am sorry, go ahead.
Mike Murphy
Just to clarify on Neenah, we have gotten [audio disturbance] here in the back half of this year. And I think for your model, you will want to probe a little bit on inflation as well to make sure that we do that.
Adam Josephson
Yes, 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 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
It’s a good question. So, what we saw in Q3 versus Q2 is our volume was up 20% if you look at IRI demand.
So, this is consumer purchases in dollars, it was up about 11%. So, the consumer came back and was buying tissue again, I think you saw Delta driven, a Delta variant driven spike in August and that subsided in September.
And now we are 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 is 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 with having a good opening day order book into November, we are feeling pretty good about having a good Q4 that’s comparable to Q3.
Although there has been a tremendous amount of volatility even week-over-week or month-over-month, but that’s our best view right now.
Adam Josephson
I appreciate that, Arsen. One more and then I will get back into queue.
Mike, back to the inflation issue you mentioned, so you mentioned pulp prices are still elevated for you. Obviously, they have 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 are seeing with freight, chemicals, energy, etcetera, is it reasonable to assume that the inflation impact next year will be notably different than that which you are expecting this year or can you give us any way to perhaps help frame it?
Mike Murphy
Sure, Adam. Thanks for the question.
When we look at our fourth quarter inflation expectations compared to fourth quarter of last year, we are 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 have since dropped that.
Pulp is no longer the majority of the driver here. And so we are seeing some strong inflationary headwinds as we end this year and it’s – the crystal ball is awfully difficult to look at and try to figure out inflation for next year, but we still can be running at a very elevated level like we are seeing here in the fourth quarter.
Adam Josephson
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
Good evening, Arsen. Good evening, Mike.
Arsen Kitch
Good evening.
Mark Wilde
Mike, just I wonder if it’s possible for you to just help us put a little finer point on sort of the roll through these SBS heights 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 are 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?
Mike Murphy
So, Mark thanks for the question. We do think quarter-by-quarter that price increase is going to be about $7 million to $9 million better off in the fourth quarter versus the third quarter.
Mark Wilde
Yes.
Mike Murphy
And so that’s what we are currently expecting today and obviously a sizable increase year-over-year, a number just north of $25 million year-over-year.
Mark Wilde
Yes. Okay.
So I guess I wonder you talked about $35 to $45 a ton that using 200,000 tons as a quarterly base?
Mike Murphy
Yes, for the incremental improvement quarter, yes, eventually.
Arsen Kitch
And Mark, I think your broader question about what’s happening in the SBS market, I think we are still seeing even with these price increases, demand is outstripping our ability to supply. So we are continuing to try to service our existing customers that we are allocating volume.
We are delaying capital projects into next year to maximize production. I think the market remains very strong as we head into the fourth quarter.
We will talk more about next year in a few months, but the market remains very robust and very strong.
Mark Wilde
Okay. Arsen, just one more on SBS, is there any scenario that you could see over the next 2 or 3 years let’s say where you could see yourselves making any further investments in the packaging business?
Arsen Kitch
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 is making small to medium-sized investments to improve our operations and efficiency, SBS investments and capacity that are material, are pretty significant.
There is certainly opportunity for us to get additional capacity through manufacturing creep through some smaller projects, but any material increments comment that’s pretty significant capital investments.
Mark Wilde
Okay, that’s understood. And then I wonder, finally from my side, Arsen, 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
It’s a difficult question to answer. So, if you look at last several years, while the capacity additions appeared to reflect – to be balanced with broader demand across all the 10 million tons, they are disproportionately aimed at this market and they are outpacing that demand growth.
So, it – to me it becomes an economic question for the industry and is what happens with higher cost assets you saw us taking out higher cost capacity that was no longer economically viable. So, it is difficult to predict what others are going to do, we have done.
We have done what makes sense for us in terms of reducing our high cost capacity that was no longer economically viable.
Mark Wilde
Okay. I will turn it over.
Operator
We have your next question from Paul Quinn with RBC Capital Markets. Your line is open.
Paul Quinn
Yes. Thanks, guys.
Good afternoon.
Arsen Kitch
Good afternoon.
Paul Quinn
Maybe I will start on the consumer products side. Just you guys ever since I started covering you, you have been weighted to the grocery stores side, just wondering over the last 5 years, how much movement you have done to some of these areas that have to groceries detriment?
Arsen Kitch
We have done quite a bit of movement. We were north of three quarters grocery.
We are still more than half grocery. But we have made substantial inroads into mass and to club.
Over the years, there is more to go. We are still overweight in grocery.
And if you look at – 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 are still more weighted towards grocery, but that’s certainly something we are working on to make sure that we are aligned with where the growth is taking place.
Paul Quinn
Okay. And then just sticking with that theme of growth, I mean you have just shutdown, and but you have also had this successful and very well timed start up at Shelby two.
When is it a time to look at you Shelby three or another machine for you guys, at some point down the road, given the long lead time on ordering equipment?
Arsen Kitch
I think first things first, I think we are sticking with our theme of things on 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 that would apply 64 million cases, 65 million cases of capacity.
We removed approximately 10 million with an 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 will be somewhere in that 46 million cases, 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.
Mike Murphy
Paul, I would also add it. It’s a pretty highly fragmented manufacturer market out there as well.
I think we would have to really challenge ourselves, is it better to build versus to bind to consolidate. And I think there is probably a lot of good reasons to think about that trade off.
And something that as we approach our leverage ratio, we will have to challenge ourselves with.
Paul Quinn
Okay. And thanks for the color on the maintenance schedule at the back of the deck.
Just wondering how you are thinking about ‘23. And if you could remind us of what that curiosity is for maintenance that at both sites have been in Lewiston?
Arsen Kitch
We are going to have a major maintenance outage in 2023, with which we commented on in the prepared remarks. Paul, we don’t have an estimate for you today.
When we were at a more refined estimate, we will certainly share that with you and the investment community.
Paul Quinn
Okay. And then just lastly, just on pulp, I mean I understand you have got some cost inflation in energy and chemicals that just what about everybody else is seeing as well.
But pulp costs look like they should come down in a material way. Am I correct in assumption that you are still sort of consuming about 300,000 tons of outside pulp a year?
And so that could be a material tailwind in ‘22?
Arsen Kitch
You are right, we consume about 300,000 tons. Most of that is hardwood or eucalyptus.
If you look at what’s happened since the end of last year and to middle of this year, if you look at the Receipt Index on eucalyptus, it’s a $460 a ton, or about 50%. Of the last couple of months, I think we have seen about $50 easing.
So, $460 up and $50 down, I think there is still – there are still 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 we are anticipating as a continued easing into next year, which should benefit us.
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
Thanks for the help. Best of luck.
Operator
We have your next question from Adam Josephson with KeyBanc. Your line is open.
Adam Josephson
Arsen, thanks a lot for taking my follow-ups. Mike, any update on PIUMPF, I know that the new administration was looking into potentially some changes that could affect clients, any update there?
And then and how does your PIUMPF exposure factor into your thinking about hitting that 2.5x leverage ratio by ‘23? And how much financial flexibility you will have at that point, given your exposure to this pension fund?
Mike Murphy
Great. Adam thanks for the question.
So, as some of you know, PIUMPF is our Multiemployer Pension Plan that we are party to. There is good disclosure in our 10-K.
Earlier this year, the American Recovery Plan Act was passed, which was intended to provide some financial relief to some of the more troubled Multiemployer Pension Plans that are out there. Adam, I think since that plan is passed, they are still working through the rules in terms of who can apply and how you can apply for these funds.
Our expectation is that PIUMPF will apply for the funds. I do think that PIUMPF is probably lower on the priority list for the PBGC in terms of receiving applications.
So, this is something that we are closely monitoring. And as soon as we get the disclosure that PIUMPF 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 PIUMPF, it’s not factored into our 2.5x leverage target.
That target is more a function of our net debt to let’s call it a three of the cycle or average EBITDA. So, that’s what we are focused on when we communicate the 2.5x leverage ratio target.
Adam Josephson
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 normalized level?
Mike Murphy
It is below our normalized level. We would say there is, we are a smaller company.
So, things will be episodic. This year is putting in a little bit lighter than we thought.
Arsen had mentioned in his comments. Earlier this year, we have made the determination to move one of our outages into the first quarter.
This is a head box project that we have, that will actually produce a little bit of incremental volume. Also, I think what we are finding here, Adam this year is, just as tougher to get stuff done in the COVID environment.
And I think we saw this last year as well.
Adam Josephson
Yes, I appreciate that. Just a couple of to you Mike, on free cash, anything notable in the fourth quarter versus the first three quarters?
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?
Mike Murphy
There are a couple of pushes and pulls. The two things that we have talked about, one, our bond interest payments are made in the first quarter and the third quarter.
It’s roughly a little bit north of $14 million in each of those quarters and no similar payment in the fourth quarter or second quarter. And then secondly, we do have a repayment of the Cares Act incentives that was on payroll taxes and the payroll tax holiday, that’s a little bit north of $5 million.
Net the two together, it’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
Mike, thank you.
Mike Murphy
Sorry. Go ahead.
Adam Josephson
Yes. I was king of – so just when we look, I mean last year, I think your free cash flow 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 it’s the – there is 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?
Mike Murphy
I am not sure there is an easy rule of thumb Adam and half road. I will touch later to walk you through various scenarios, but take EBITDA you have.
I think you are 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 are 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 do you see higher inflation, net working capital becomes a little bit of a drag.
And I think that’s what we are seeing here in 2021.
Adam Josephson
Yes. No, I appreciate that Mike.
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 convert it to another box board grade. And then fast forward a few months, the market is as hot as it’s ever been, obviously, you mentioned prices are going to be up $250 in the span of four months or five months.
Just can you help frame what changed in your mind, what changed so dramatically for the industry over the past year, so I am 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 industries fortune seem to change so dramatically in a pretty short period of time?
Arsen Kitch
I think I will start with supply, the supply changes aside for a moment. If you look at the end markets that we play in, we are much more heavily weighted towards folding cartons, retail cup and plates in the rest of the market.
So, when COVID first happened, it had a disproportionate impact on foodservice in print grades. That is not where the majority of our business is.
So, our markets, 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 also have seen some supply disruptions over last – over the last 12 months that were weather related and other disruptions.
And I think we have done a really good job of managing through those disruptions and minimizing the amount of downtime that we have had across our mills. I think we have – so it’s a, I think we have good end markets that have been very favorable through this.
And b, I think we have done a really nice job of operating through for some of these COVID and weather challenges that the mills have had across the industry.
Adam Josephson
Yes. And I appreciate that.
And actually just one last one for Mike, just on your guidance. I know, it’s obviously easy to provide full year guidance at this point.
Should we read the fact that you are giving – you get that full year guidance as a sign that you might get back to providing full year guidance, or is that just something you are doing this quarter given that it’s already 4Q and you don’t expect to get in the habit of doing that?
Mike Murphy
No, Adam, at this time, it just was a function of adding the first three quarters to the fourth quarter.
Adam Josephson
Thanks so much, Mike.
Operator
We have your next question from Mark Wilde. Your line is open.
Mark Wilde
Adam did such a good job. He nailed the two remaining questions I have got.
I am all set. Thank you.
Arsen Kitch
Thanks Mark.
Mike Murphy
Thanks Mark.
Operator
I am showing no further questions at this time. Presenters, please continue.
Arsen Kitch
Thank you for participating in the Clearwater Paper third quarter earnings call. With that operator, we conclude the call.
Operator
Thank you, sir. Ladies and gentlemen, that concludes today’s conference call.
Thank you for your participation. You may now disconnect.