Clearwater Paper Corp (CLW) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Clearwater Paper First Quarter 2020 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Sloan Bohlen, Investor Relations. Please go ahead.

Thank you, Sarah. Good afternoon, and thank you for joining Clearwater Paper's First Quarter 2020 Earnings Conference Call. Joining me on the call today are Arsen Kitch, President and Chief Executive Officer; and Mike Murphy, Chief Financial Officer.

Financial results for the first quarter 2020 were released shortly after today's market close. You will find a presentation of supplemental information, including a slide providing the company's current outlook, which is posted on the Investor Relations page at our website at clearwaterpaper.com.

Additionally, we will be providing certain non-GAAP information in this afternoon's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release or in the supplemental information provided on our website. Please note Slide 2 of our supplemental information. 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.

Good afternoon, and thank you for joining us today. We hope you're all well. While both Mike and I know many of the analysts and investors joining us today, we would like to begin with quick introductions. I'll begin by introducing myself. I've been with the company since 2013. Most recently, as many of you know, I was the Senior Vice President and General Manager of our Consumer Products division. Earlier in my career at Clearwater Paper, I held several finance leadership positions as well.

Instead of speaking to the rest of my background, which is included on Slide 3 of our supplemental deck, I'd like to extend a special thank you to Linda Massman for her many contributions to Clearwater Paper over the years and for her support during this transition. I would also like to thank my leadership team and our Executive Chairman, Alexander Toeldte, for all their support and expertise during this time.

With that, it's my pleasure to introduce Mike Murphy. I would just like to say that we're very lucky to have Mike here. I know we will benefit greatly from his industry experience and operational expertise. But more importantly, Mike's strategic insights will be invaluable to us as we develop and execute our plan to drive shareholder value.

Thank you, Arsen. I'm excited to be a member of the Clearwater Paper team and about the opportunity to create shareholder value by partnering with you, our Board and the 3,300 employees that are the heart of our company. The industry exposure that Arsen mentioned in his comments includes by finance, treasury, strategy and M&A roles at Kapstone Paper and Packaging and Boise, Inc. Previously, I worked at JP Morgan's investment bank, covering the paper packaging and building products industries, among other areas. I look forward to interacting with you, our investors and analysts, many of whom I know from my previous experiences as well as developing new relationships.

Thank you, Mike. Before we share our comments about the first quarter, we'll provide a brief update about the company's operation and market outlook during the COVID-19 pandemic.

Let's begin on Slide 4. We are working hard to protect our 2 most important assets, our employees and our reputation with our customers, which we believe, together with our stable balance sheet, will position our company well for future value creation for our shareholders. First and foremost, we're taking care of our employees by implementing rigorous safety and health measures, including temperature checks, social distancing guidelines, sanitation practices, remote work for those whose jobs allow them to do so and travel and visitor restrictions. Our employees are covered by health insurance benefits and have paid sick leave. We further enhanced our benefits to support our employees during this time to include additional paid leave and assistance for COVID-19-related medical costs.

While we have some exposure to COVID-19 in our facilities, the safety and health measures put in place have minimized business impact. We remain vigilant and continue to proactively mitigate risks. We have been designated as an essential industry, and we're proud that our employees continue to make a difference in producing products that are necessary for our country. Similarly, consistent with our reputation for quality, performance and dependability, we have worked closely with customers and suppliers to meet heightened demand.

As the former leader of our tissue business, I take a lot of pride in the creativity and dedication of our teams to find proactive solutions to increase throughput and service, the unprecedented increase in demand for our products during this challenging time. These actions are not only helping to protect our employees and customers but also our company. Along with a supportive and stable capital structure, we believe that we're well positioned to get through these challenging times. I want to extend a very heartfelt thank you to our employees, suppliers, customers and state and local government officials who have been good partners over a very chaotic couple of months.

If you turn to Slide 5, we'll talk to what we're seeing at each of our businesses as it relates to COVID-19. First, for our Consumer Products division, I'd like to provide some context on how COVID-19 has impacted us and the broader industry from a demand and supply perspective. Pandemic has driven a sharp shift from normal demand trends, and our expectation is that this will continue in the near term. For Clearwater Paper specifically, we shipped over 15 million cases of tissue products in the first quarter, which is roughly 19% higher than volume trends over the last 4 quarters.

The demand increased late in the quarter. And while we were able to increase our production rates, we also sold down a lot of our inventory. Together with our customers, we have diligently worked to rationalize SKUs and improve throughput such that we believe that absent events outside of our control, we can continue to produce at a rate that is similar to our Q1 shipment volumes. While none of us like the underlying reason for our current demand, our employees are working hard to meet the needs of our customers and their consumers who depend on our products in their daily lives.

In the broader U.S. tissue market, retail sales were up over 90% in March versus the same period last year as our customers' supply chains were depleted, leading to out-of-stock conditions that many of you have experienced at your local stores. While this was partly driven by consumers loading up their pantries, there's a significant change in consumption patterns that is taking place. In an environment not impacted by COVID-19, approximately 1/3 of total U.S. tissue is consumed in away-from-home settings such as offices, schools, hotels, restaurants and airports. A large part of our population staying home, not only from work but also from other activities has clearly shifted that mix to at-home consumption. We expect the return to normal to be gradual and stretched over the next several quarters. This underpins our view that demand for at-home products will remain elevated in the near term.

From a supply perspective, we believe that there's a limited ability to shift away-from-home production to retail products. This will continue to put pressure on suppliers like us to maintain higher throughput and asset utilization levels until the situation normalizes. At-home sales typically make up over 90% of our company's total tissue volume. Ultimately, the duration of the elevated demand remains unknown, and we're working with our customers with the goal of keeping their shelves stocked during this time.

The key takeaway here is that we believe Clearwater Paper is very well positioned to execute on the current tissue demand. We believe our expertise in manufacturing, supply chain planning and transportation has enabled us to be an agile partner to our customers and continue to deliver at elevated levels. Based on feedback from customers, our performance over the first quarter has further improved our strong reputation during this unprecedented challenge.

Let's turn to our Paperboard division. We experienced strong demand in the first quarter, with shipments up 4% versus the fourth quarter. The business benefited from our exposure to traditionally noncyclical segments, such as food and pharmaceutical packaging and other consumer goods. This led to an increase in demand for our products in March as consumers stocked up. We estimate that roughly 2/3 of the industry demand is driven by market segments that are recession-resilient. With that being said, the impact of government-mandated closures and current economic conditions are making it difficult to predict what might occur in the end market segments for paperboard in the coming quarters.

In the broader market, we estimate that approximately 1/3 of paperboard demand is driven by end market segments that are impacted by economic conditions. These include food service products used by restaurants and other discretionary consumer goods. Historically, recessions have led to short-term declines in demand for paperboard products in these segments. It remains to be seen how current economic conditions impact demand, particularly with a consumer shift to at-home consumption of packaged food and other consumer goods typically found in center store.

With that being said, we do expect that overall paperboard demand will be more economically sensitive than tissue. We believe that our end market segment diversification, service model and product quality will help to dampen volatility during this period of uncertainty.

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

Thanks, Arsen. Let's turn to Slide 7. Clearwater Paper had a strong first quarter across the board with net sales of $478 million, which was largely driven by an extraordinarily strong quarter in our tissue business. Sequentially, our overall net sales were up 10%. As a result, we ended the first quarter with the operating income of $19 million. Our net income per share for the first quarter was $0.62, and on an adjusted basis, our net income per share was $0.57. Our adjusted EBITDA was $55 million, well above our outlook range of $41 million to $47 million. Our performance exceeded expectations due to strong performance in our Consumer Products division, driven by increased demand and continued cost improvements.

Our Paperboard division had a solid quarter as well. Its segment results were impacted by the previously reported RISI index price decreases and a public utility disruption at our Cypress Bend facility caused by a weather event. Both factors were discussed in our fourth quarter earnings call. Lastly, with lower capital expenditures, we generated net free cash flow in the quarter. Today, we continue to have ample capital and liquidity as we continue to focus on generating strong cash flows and prudently managing our capital expenditures.

On Slide 9, the adjusted EBITDA performance of our tissue business in the quarter is highlighted. As Arsen previously mentioned, volume grew from 13.3 million cases in the fourth quarter of 2019 to 15.2 million cases in the first quarter of 2020 or over a 14% increase. Roughly 2/3 of this growth was driven by selling through existing inventory, while increased production accounted for the remainder. The higher production volume led to improved cost absorption, which, together with declines in some of our input costs, contributed to $4 million cost improvement.

On Slide 10, the adjusted EBITDA performance of our Paperboard business is detailed. As we mentioned in our fourth quarter earnings call, previously reported RISI price reductions impacted our performance by more than $2 million. That said, we continued to experience strong orders as our sales improved over 4% on a sequential and year-over-year basis. We also experienced higher costs due to wage inflation and some production disruption and a public utility outage at our Cypress Bend facility caused by a weather event that impacted production for a week.

As we turn to our outlook, there is significant uncertainty driven by COVID-19, government actions to flatten the curve, broader economic conditions and how all these factors ultimately impact our customers and their consumers. This uncertainty is also impacting pulp market pricing and availability of residual wood in the Pacific Northwest that we purchased a supplier, Lewiston Mill. Regardless of this uncertainty, our focus will continue to be on the items that we have greater control over, which is keeping our employees healthy, operating our facilities, servicing our customers and continuing to generate cash to deleverage our balance sheet.

Looking ahead to our second quarter outlook on Slide 12. We currently expect adjusted EBITDA in the range of $45 million to $55 million. We expect volumes to moderate from the first quarter with continued elevated demand in tissue. While selling through some of our finished goods inventory in March contributed to our tissue sales growth, we believe that current production rates in the second quarter can support the sales volume levels achieved in the first quarter. We believe that the cost benefits in tissue realized in the first quarter should be sustained in the second quarter. RISI's reported price decreases in SBS have created downward pressure on the margins in our Paperboard business. But we expect that our end market segment diversification will dampen the impact of possible demand reductions. We also experienced a public utility failure in Arkansas at the beginning of the second quarter.

Looking ahead at the second half of the year, we are optimistic about continued strength in our tissue business but are less certain about the impact of economic conditions on the paperboard end market segments and key cost drivers. During the fourth quarter earnings call, we provided an outlook range for certain revenue and cost components for the full year. There are a number of scenarios that we considered since that outlook. And while there is uncertainty on how each component plays out, we currently believe that the net impact still represents the likely outcome, given today's information. We are expecting to provide an updated outlook when we have a greater degree of confidence in the economy and its impact on our business.

We continue to expect full year CapEx to be in the $45 million to $50 million range, well below our expected depreciation and amortization of $109 million to $112 million and interest expense in the range of $49 million to $51 million. We are less certain about our previously communicated range of using $20 million to $25 million of cash to build working capital due to recent inventory reductions. Finally, we do not anticipate being a net cash taxpayer this year. And we believe our effective annual tax rate, excluding our tax attributes, should be approximately 25%.

To wrap up our outlook comments, we are on track to meet our Shelby expansion paper production target by the middle of this year and expect to contribute $20 million to $25 million to adjusted EBITDA impact in 2020. This is included in our outlook. As a reminder, our Shelby expansion delivered roughly $10 million of adjusted EBITDA impact in 2019 and is expected to contribute an additional $20 million to $25 million in both 2020 and 2021 and the remainder in 2022. In total, we are on track to contribute $55 million to $65 million of adjusted EBITDA for the project. Approximately half of that impact is expected to come from new sales volume, while the other half is expected to come from network optimization and other cost reductions.

Before I turn the call back to Arsen to conclude, I'll review the key facts about our liquidity position and debt maturities. You can find the details on Slide 13. We have an asset-based revolving credit facility or an ABL, a covenant-light term loan and 2 outstanding bonds. Our current debt maturity schedule is $3 million annually until our 2023 bond maturity, and we could have additional mandatory repayments if we generate excess free cash flow. We also have an obligation under our ABL and term loan to refinance or repay the 2023 bond at least a quarter in advance of the bond maturity, which is standard for a capital structure like ours.

At the end of the first quarter, our liquidity was approximately $234 million. We believe we have adequate liquidity today, which should be enhanced by expected positive free cash flow generated for the balance of the year.

Let me turn the call back over to Arsen to conclude our call today with a level set of Clearwater Paper's value as we see it and a few concluding remarks.

Thanks, Mike. Let's turn to Slide 14. First, we believe Clearwater Paper is very well positioned across 2 attractive and complementary businesses. Our Consumer Products division is a leader within the growing private branded tissue market. From our vantage point, we believe the key strengths of this business are the following. First, tissue is an economically resilient and need-based product. Historically, demand has not been negatively impacted by economic uncertainty.

Second, there are long-term trends away from branded products to private brands. This is amplified during recessions. Private brand tissue share in the U.S. has risen to over 30% in 2019, up from 18% in 2011. While these trends are impressive, we're still a long way from where many European countries are where private brands represent over 60% of total tissue share.

Lastly, we have a national footprint with an ability to supply a wide range of product categories and quality tiers, which is an attractive sales proposition to our customers. Our expertise in manufacturing, supply chain and transportation is a key differentiator, especially during challenging times like today.

Turning to our Paperboard division. We believe that the key strengths of this business are the following. First, we operate well-invested assets, with a geographic footprint enabling us to efficiently service customers on both coasts. We have a diverse customer base with end market segments that have largely stable demand. Second, not being vertically integrated enables us to focus on independent customers with unparalleled service and quality commitment. Lastly, we believe that the business is well positioned to take advantage of trends towards more sustainable packaging and food service products.

Our Paperboard business has demonstrated an ability to generate good margins and solid cash flows. Overall, our large capital investments are behind us, and we're prioritizing cash flows to reduce debt. We intend to do so by delivering benefits from our Shelby investment, continued operational improvements, aggressively managing working capital and prudently allocating capital. We believe that this strategy is the best way to create value for equity and debt holders in the near term.

I also want to add that we prioritize the sustainability of both the products we make and the way we make them, which is a key part of our investment proposition. We recently published our latest sustainability report that includes our focus areas which we believe benefit the environment, local communities and our business for the long term. You can find the report on our website.

Before we take your questions, I want to reiterate my excitement for taking on the leadership of Clearwater Paper at this time and how proud I am with how our employees have responded to the COVID-19-related issues that are impacting our personal and professional lives.

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

Our first question comes from the line of Adam Josephson with KeyBanc Capital Markets.

Best of luck to both of you in your new roles. Start off on the Paperboard segment for either of you. Your volumes were up 4.5% sequentially, as you mentioned, and March was obviously the biggest driver of that. Can you talk about what your shipments were up in March and what they were in April, and what you're expecting for the balance of the second quarter relative to whatever they were in April?

So what I'll tell you is that our shipments were strong in March, and our backlogs were strong in March as well versus prior years. If you look at the overall industry, backlogs in March were also up by 14% versus February and we had high operating rates. Our backlogs have continued to remain healthy into April and we have healthy shipments. The question that's -- the biggest question before us is how does the current economic environment impact the broader paperboard market for balance of the year. I think as we stated in our prepared remarks, we believe 1/3 of the overall demand is in products that are -- we consider discretionary, which is, call it, food service and luxury goods and other types of packaging. What we don't know is how this current recession will impact that 1/3 of the demand. What we do know is we have strength in the underlying folding carton business that is used for food packaging and pharmaceutical applications.

And Adam, if I can add to it, we actually had good year-over-year sales momentum in both January and February. So our growth in March, while above trend, wasn't the full explanation for the year-over-year and sequential growth that we saw.

Can you -- Arsen, I guess you don't want to talk about April, what you were up or not up in April. Just trying to -- I know you said your backlog remains healthy. Can you just give us some perspective as to what your shipments were versus the up in 1Q?

I think we'll hold off on commenting on Q2.

Okay. And then just one more on Paperboard. Thank you for your estimate of the industry's mix in terms of retail versus food service and discretionary. Is your mix comparable or do you have a much different mix than what you estimate the industry's mix to be?

So we have -- we believe we have less exposure to food service and liquid packaging than the rest of the industry. But we have more exposure to what I would call a discretionary folding, folding and packaging. So while our mix is different, we do think that about 1/3 of our demand is also what I would call -- would be impacted by potential recessionary conditions.

Sure. On tissue, who knows how long the situation, the state of affairs will last, but let's operate under the assumption that at-home demand will remain elevated as you're expecting it. Well, I have no reason to think otherwise. How do you think that will affect the capacity addition slated to come online? Obviously, the private label tissue market has struggled for years with an excess supply situation. I'm just wondering how this sudden surge in demand could affect that supply-demand balance over the next few months and perhaps longer than that.

A couple of comments on that, Adam. So what we saw in March and into April was what I would call -- was driven by pantry loading. We saw a 90% increase in March, we saw a 40% increase in April. The industry saw 90% and 40% increases. And we -- and a lot of that was driven by the pantry loading. There's a longer term question as 1/3 of total tissue consumption is -- takes place outside the home. And a big chunk of that consumption is shifting to at-home. And if you just assume that 50% can throw out a number, 50% of at-home, away-from-home consumption shifts at-home, you would drive a 20% to 25% increase in at-home tissue demand.

The forecast out there for this year estimates somewhere between 250,000 and 300,000 tons of incremental capacity. As you know, in this industry, capacity -- you can't turn capacity on and off and you can't finish capacity all that quickly. So we have to assume that, that capacity is coming online. But in terms of the overall supply and demand balance for at-home tissue, I think it's going to be driven by how long this trend towards at-home consumption continues.

Just last for me on that, the away-from-home, what happens to all that away-from-home capacity then? I know you addressed that briefly in your prepared remarks. But can you just share your thoughts with us in terms of to how much of that away-from-home capacity could be converted to producing for at-home? And for those that -- for the capacity that you can't, what comes of it?

It's a hard one to analyze. So we think some portion can be converted to at-home production but we don't think it's the majority. So I think the minority of that production could be converted. But it's hard to tell what the away-from-home players decide to do, whether they decide to convert to spend any capital on that or not. So it's hard to comment on that right now.

Our next question comes from the line of Paul Quinn with RBC Capital Markets.

Just a question, just following up on Adam on the away-from-home side. It's the idea of a limited ability to switch. You guys described yourself as 90% at-home. The 10% that you produce for the away-from-home market, did you produce that or did you switch some of that into consumer brands?

So at a high level, 90-plus percent of our sales are at-home. 10% is a combination of parent roll sales as well as away-from-home sales. So away-from-home is actually less than 10% of our sales. We have very specific away-from-home assets. And right now, we're running all the retail products that we can. But I think that's -- it's a small part of our overall capacity.

Okay. And then what was the tissue inventory drawdown in the quarter?

So we're not going to comment specifically on exactly where our inventories ended up. But I would tell you there was a very significant drawdown of our inventories. And we assume and we have to assume that a similar drawdown happened across the supply chain with our customers as well, with the unprecedented demand increase in March and April. But it was a substantial inventory drop to where I think we're essentially running at our cycle stock inventory levels.

Okay. And then just on this notion of the increased demand in Q1 and your expectation that it stays high in the near term, do you expect a pullback at some point down the road? Or have you seen actually increased consumption by the consumer?

I think it's going to be driven by how long some of these stay-at-home orders last and how quickly the consumer shifts back to their old consumption patterns and how quickly people get back to work, get back to traveling, get back to eating out. We think it's going to take at least a few quarters for things to normalize. So we do expect increased demand in the coming quarters. But to what extent, I think it's difficult to predict right now.

Okay. And then just lastly, just it looks like pulp was a tailwind in the quarter. What's your expectation going forward? And maybe a little bit of an update on the digester at Lewiston.

Yes. So during the fourth quarter earnings call, we stated that we expect pulp to be a $15 million to $20 million tailwind for us. Pulp -- as you know, pulp prices bottomed at the end of Q4 into Q1 of this year, and RISI is projecting increases later this year, we still think we have $15 million to $20 million of upside in pulp year-over-year.

And Paul, the latter comment on Lewiston, just want to remind you that the project overall has generated $10 million of EBITDA benefits. We're still working to optimize the asset and we'll look to give you an update on the upcoming quarters.

Okay. So the -- so what I'm trying to get more at is more of your exposure to the pulp market. So that still remains at somewhere around 300,000 tons?

That's correct. And as you think about us, the majority of that's hardwood exposure as opposed to softwood.

Our next question comes from the line of Steve Chercover with D.A. Davidson.

So obviously, it was a very good quarter for tissue. I guess that's from the no surprise department. And I can attest that things are still sold out in late April, early May. Any visibility on how far forward your order fails are? I mean, I know you said that you expect volumes to be fairly similar.

So in tissue, what we look at is our demand at various points in the month, customers order within their lead times. So what I would tell you is demand remains strong in April and I think our orders remain strong into May. So I do think that the strength there continues not at the same levels, obviously, as in March. And I think the IRI data would support that but we're continuing to see strong demand. As we look forward, I still think our customers' supply chains are pretty light on inventory. So I think until we get product on the shelves and fill up our customers' supply chain, I think our order book will remain pretty strong.

And you kind of touched on this but I think it's an important point. Away-from-home is only a very small part, less than 10% and obviously, you're selling to some third-party converters. Is there a target integration level for converted product? I mean, would you prefer to not sell any parent rolls, for instance?

I think probably the best way to answer that is we look at each of our regions, each of our mills and each of our assets and figure out what's the best way to optimize profitability. So when we do sell parent rolls, that is the best way to optimize profitability for those tons. So we'll continue to make those types of decisions. I mean, obviously, we are in the finished goods business and that's our preference. But we will sell parent rolls if those incremental finished good cases don't make sense financially.

Got it. Switching gears to Paperboard, is there any kind of insurance recovery anticipated for the utility failure in Arkansas? And the product disruption that you referenced in the waterfall chart, is that also a function of the power-related issue?

So Steve, on the first one, I'm not anticipating any sort of recovery necessarily there. This was a power line that went down and we couldn't get power into the mill. And again, that happened again in the second quarter. And so I know that answers the first part of the question. The second part, could you just clarify for me the question?

Well, in the same waterfall chart, there was product disruptions and I'm wondering if that's part of the utility failure?

Yes, that's most of it. We had a little bit of disruption in the quarter in Lewiston, but the majority of it was from the power outage that we experienced at Cypress Bend.

Okay. And then operationally, like how would you characterize the ramp of the new machine at Shelby? I mean, does the voracious demand for tissue prompt you to ramp it faster than you might have mapped it out last fall?

What I would tell you is we are doing everything possible to ramp those assets as quickly as we can. As we said, we're on track to ramp the machine halfway through this year. And our goal is to get everything ramped and sold out by the end of '21, heading into '22. So the site's running 24/7, as you may imagine, and it has been and we are making products for customers and trying to get as many cases off those lines as possible.

Okay. And finally, just a follow-on to Paul Quinn's question on the benefits of the Lewiston digester. So I think Mike said, you've got $10 million of the benefit so far. What was the original target? Was it 20% of $180 million investment? Can you help me frame that?

It was roughly $30 million was the initial target. 1/3 of that was cost, 1/3 was yield and 1/3 was incremental production. We think we're getting 1/3 of that. What we have not seen, what we're not seeing is the -- that yield and that resulting volume benefit. So we're continuing to optimize our assets. The team is working hard to get the benefit, but we'll provide you with an update when we have one.

Yes. I mean, is it a catalyst? Maybe I should just wait, but I know you've got the new catalyst in so that's not the only secret sauce evidently.

I think as I've said, we're -- we are -- the team is looking at every part of that production and the process. As you may imagine, it's an end-to-end process, and they have to look at various stages in the process to see what we can do to get to that yield number.

We do have a follow-up question from Adam Josephson with KeyBanc Capital Markets.

Arsen and Mike, one on your guidance, the $45 million to $55 million for 2Q, obviously, I think you addressed the fact that it's a rather wide range, just given the highly unusual circumstances we find ourselves in. But is there anything in particular that would get you to the high end or bottom end that you would point to, one? And then two, Mike or Arsen, is the full extent of the Shelby savings in that number such that sequentially 2Q to 3Q, there won't be incremental savings from the Shelby expansion?

So Adam, I'll reverse the order of your questions. There is some incremental benefit each quarter from the Shelby expansion. So it's not a -- as you're modeling it, it's not a big bang in that we received it all in either Q1 or Q2. Second, backing up to the $45 million to $55 million, part of it is going to be volume strength. So if we continue to have abnormally high tissue demand, that's going to drive a lot of the benefits that we see in the quarter and then what demand we see on the SBS side of things. I think we commented that we had a very strong first quarter. I think we're not dissimilar from the industry overall in a major way. We're starting to see some pullback there. And so those are the bigger question marks, at least in my mind. Arsen, I don't know if you have anything to add?

Yes, agreed.

Perfect. And just on the cash flow, I think you mentioned earlier that working cap may not be a use of cash anymore, just given the substantial decline in your tissue inventories. Can you just elaborate on that comment? Are you thinking now that working cap could be flat or perhaps even a source of cash this year? Or anything on the receivables or payables side that you would point to?

Thanks for giving me the opportunity to clarify. I think in the fourth quarter, we guided to $20 million to $25 million of increased working capital. What we're saying now is we're not sure that, that's a great assumption, in part due to the drawdown on inventory. Where we land at the end of the year will largely be a function of the demand levels that we're seeing at the end of the year and if we've been able to replenish some of the inventory drawdown that we've seen on our balance sheet and in our assets.

Perfect, Mike. And just one last one, just back to the guidance and your visibility into tissue. I know you've answered this question, Arsen, but how much -- what is your visibility/backlog at this point? Just again to try to further clarify that point. How much of your 2Q tissue volumes have you effectively locked in or do you have visibility into at this point?

So in the tissue business, we don't think of demand in terms of backlogs. Our customers order within their lead times and they order on a very regular pattern. So what we see visibility to is over that lead time what the orders look like. And right now, the orders remain strong, but we have visibility out to those -- out to that lead time for customer ordering. So I'm not sure if that answers your question, but it's how we look at the tissue business here.

So would you measure that in a matter of weeks, 2 weeks, 3 weeks, is it longer than that, shorter than that?

It depends on the customer but yes, I think you're in the ballpark.

We do have a follow-up question from the line of Paul Quinn with RBC Capital Markets.

It's an easy one here. I've noticed when I've been shopping at various locations in British Columbia here that price of toilet paper has moved up. Now talking to some of the other producers out there, they seem reluctant to increase prices. Is there any -- can you share any thoughts about whether you'd look for a price increase, given the increased demand?

So a couple of ways to look at that. So number one, right now, we're focused on servicing our customers, and pricing in this space is driven by supply-demand and our value proposition in the market. I think that's a nice way of saying we're not going to talk publicly about future pricing actions.

This concludes today's question-and-answer session. I would now like to turn the call back to Arsen Kitch, President and Chief Executive Officer, for closing remarks.

Great. Thank you, and thank you to everybody for joining us today and for your continued interest in Clearwater Paper. Have a great day.

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