Clearwater Paper Corp (CLW) 2010 Q2 法說會逐字稿

Good day everyone, and welcome to the Clearwater Paper second quarter 2010 earnings conference call. Today's call is being recorded. At this time I would like to turn the conference over to Ms. Linda Massman. Please go ahead.

Thank you. Good morning, and welcome to Clearwater Paper's second-quarter 2010 conference call. Our press release this morning includes the detail regarding our second quarter, and you'll find a presentation and supplemental information posted on the investor relations area of our website at ClearwaterPaper.com.

Additionally, we provide certain non-GAAP information in this morning's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the supplemental material provided on our website and in the schedules attached to earnings release.

Before we get started, I would like to remind you that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. These forward-looking statements are based on current expectations, estimates, assumptions and projections that are subject to change. Actual results may differ materially from the forward-looking statements.

Factors that could cause actual results to differ materially include those expressed or implied by risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2009.

Any forward looking statements are made only as of this date, and we undertake no obligation to update any forward-looking statement.

On today's call with me is Gordon Jones, Chairman, President and CEO.

I will begin today's call with financial highlights for the quarter and will be followed by Gordon, who will provide commentary on the different business segments and comment on the 2010 outlook for the business, before we take questions.

We reported net earnings of $20.6 million or $1.75 of earnings per diluted share for the second quarter of 2010, compared to net earnings of $75.4 million or $6.43 of earnings-per-share in the second quarter of last year.

Excluding alternative fuel mixture tax credits, renewable energy tax credits, and debt retirement costs in the second quarter of 2009, last year's net earnings were $21.5 million or $1.83 per diluted share.

EBITDA for Q2 2010 increased 13.2% to $49.2 million, versus $43.4 million for Q2 2009, excluding the alternative fuel mixture tax credits for black liquor.

Our EBITDA margins were 14.3% and 13.7%, respectively, for second quarter 2010 and second-quarter 2009.

Our consumer products segment had second-quarter 2010 net sales of $145.4 million for the quarter, which is an increase of 4.3% over Q2 2009 net sales of $139.4 million.

Segment operating income was $20.8 million for the quarter, as compared to $32.2 million for the second quarter of 2009. The reduction in operating income was primarily attributable to higher pulp costs.

Our pulp and paperboard segment reported net sales of $217.9 million for the quarter, an increase of 14.9% over Q2 2009 net sales of $189.7 million.

This segment had operating income of $27.5 million for the second quarter of 2010, versus $83.3 million last year, which included alternative fuel mixture tax credits of $76.4 million.

Excluding alternative fuel mixture tax credits, operating income would have been $6.9 million in the second quarter of 2009.

Our income tax provision was $12.6 million or a 38% effective tax rate for the second quarter of 2010, slightly higher than our annual estimated effective tax rate of 35%.

Regarding the cellulosic biofuel production credit you may have heard about, all we can really tell you at this point is that there are number of factors that need to be evaluated to determine which credit is best for the company. And we are still reviewing the details of these two credits with our tax advisors.

Regarding our balance sheet and liquidity, we had $333 million of cash and short-term investments at June 30, 2010, representing an increase of $142.2 million from December 31, 2009. This was driven by strong operational performance and the receipt of $99.5 million in taxes receivable related primarily to the alternative fuel mixture tax credit. As a result, we had a $184.6 million net cash position, which includes cash and short-term investments less outstanding debt, providing us liquidity and capacity to fuel our growth objectives.

Our financial ratios remain very strong. Total debt to total capitalization, excluding accumulated other comprehensive loss, was 22.4%, while EBITDA to net interest expense for the second quarter 2010 was 11.9 times.

I will now turn the call over to Gordon.

Thanks Linda.

We continue to have solid performance in both of our segments.

Our consumer products segment continued to show revenue growth driven by a 7.2% increase in volume shipped, which was partially offset by a 2.7% reduction in net selling price. We maintained very high production levels and shipped 3749 more tons than we did in the second quarter of 2009.

As a reminder, these volume and pricing figures are available on our website as supplemental materials in the events and presentations section of the investor relations page.

Pricing has continued to remain relatively stable, with a little more promotional spending as compared to last year. We experienced excellent production in papermaking and converting, but experienced much higher input costs for pulp, which was the driver of lower earnings for the quarter in this segment.

Our pulp and paperboard segment had net sales 14.9% higher than the same quarter last year. The increase was attributable to a paperboard volume increase of 4.9% and a pricing increase of 3.5%. Adding to these gains were high dollar pulp sales, driven by a 78.2% increase in market pulp pricing, which was reduced by a decrease of shipments compared to the second quarter of 2009.

As it relates to our growth strategy, to better meet demand in our consumer products segment, we broke ground in early July on the site at Shelby, North Carolina, for our new converting facility. We estimate that the converting facility will be operational in the second half of next year and currently anticipate that the adjacent paper machine facility will begin initial production in the fourth quarter of 2012.

In support of selecting our Shelby, North Carolina, site location, we were able to secure approximately $50 million in tax incentives. There was approximately $6 million of this that we benefit from up front for the location, with the balance coming from potential tax reductions during operation.

This does not change our overall cost estimate for the operation provided earlier.

I would now like to provide some comments on our outlook for the rest of 2010.

In our consumer products business, the promotional environment continues to be competitive, and volumes are expected to remain steady.

In the pulp and paperboard segment, we expect continued solid performance. We expect to gain some (technical difficulty) and pulp prices to moderate in the second half of 2010, with the rest of input costs expected to remain relatively stable.

Year-to-date 2010 we have had capital expenditures of $15.5 million and still expect to spend $40 million to $45 million in total for the year. This $40 million to $45 million number includes $11 million related to the construction of the two converting lines in North Carolina. We still expect to have scheduled mainten- -- major maintenance costs of $20 million to $25 million in total in 2010, $16.9 million of which was already incurred in the first half of 2010.

In closing, we have had good financial results for the first half of the year and feel good about the state of our business.

On a final note, will be attending the Oppenheimer fifth annual industrials conference in New York in late September and hope to see you there.

Thank you for your attention and your interest in our company.

Operator, we will now take questions.

(Operator Instructions). Steve Chercover, D.A. Davidson.

First question -- it appears that tissue prices, at least from Clearwater's realizations, peaked in the fourth quarter of 2008. Since that time has the gradual decline been a function of mix? Or increased promotional activity? Or can you give us some color, please?

Steve, basically I think, yes and yes. It's a bit of a function of mix as demand changes a little bit over time, when you start making comparisons from one period to the next, but there has been some increased promotional activity. We've talked about that a little bit on some other calls. And I think that is probably the major cause for that little slippage.

Overall when we look at it, if you look back at our supplementals there, which I'm sure you've seen, that are attached to this, not much movement on a price per ton basis here in the last couple of quarters. And of course, more movement from the second quarter of 2009. But I think generally, based on promotions is probably a good way to look at that.

And it's amazing to me that as pulp prices were spiking, some of the larger -- the branded names, who are also non-integrated, didn't raise price. And I guess with pulp now rolling over, it's unlikely that they will do so now. So when do you think -- I mean, this is almost a sea change in their behavior. Do you know why they are not trying to maximize revenues anymore?

Really don't know, Steve, the answer to that question. That of course would be a good one for them. But from our aspect, we have always said that we are good followers. We are always trying to do the best thing in the interest of our customers and all of our shareholders. So we are going to follow the market, follow the pricing trends as they happen. But the brands will do what the brands do. So I just don't have a good answer for you.

Yes, okay. And then we don't get the lumber breakout anymore as a segment. Can you tell us how lumber did in the quarter, what was the -- was it profitable?

Sure.

Can you actually tell us what it was?

Yes, absolutely. And we don't want that to be confusing for you.

On that same supplemental chart, which I think we list as like page 5, where it's got the sales price per unit, you've probably noticed a spike in pricing there on lumber, and then down a little bit on the number of board feet that we ran. That -- we had a bit of a spike in the second quarter on pricing with dimension -- dimensional lumber.

But we don't want to confuse that with an improving lumber situation, because we really don't have an improving housing market. It may be a little better than it was over several months ago, but it's not much better.

Our numbers really reflect a switch to cedar. And when we run cedar, we run less of it. So our lumber board feet goes down a little bit as that happened. And our price, of course, spikes. So that's -- the difference in price there is not related to some huge sea change in the lumber business. The lumber business is still struggling and is going to be struggling until the housing market returns.

Sure. But was it profitable? How much money did it make or lose?

Yes, it's just not something that we're putting out anymore as a separate segment. But it's still part of -- ever since first quarter -- our pulp and paperboard division. So we are incorporating it inside of there these days.

Gee, I wish you would reconsider on that one, actually. But okay. And then finally and unfortunately you had a bit of a -- well, you had a fatality in the current quarter. Did you lose a lot of time? And has the investigation determined what happened there?

No, we are very -- still very sorry about the tragedy that happened there. And we are still investigating it, Steve. It's a difficult one for all of us, and no one feels good about that situation. So we have been very careful to try to investigate the cause of that and are still in the middle of doing that.

And so was -- obviously condolences to the individual and the extended Clearwater family, but did you lose a lot of production?

No. We -- some, but not anything that we would consider material.

Okay, thanks. I'll get back in the queue.

Ian Zaffino, Oppenheimer.

I just wanted to follow up on the last question about the pricing from your competitors. If they weren't really raising prices when pulp was going up, is there a risk they are going to take pricing down or become even more promotional as pulp comes down?

Ian, it's a good question. I just don't know. I guess I would do, as I mentioned to Steve, I would have you focus on that with them.

Our focus is about trying to meet our customer needs. Of course, our customers are using branded products as well as our support through private label. So we are really trying to respond to them. And our promotional activity comes from our customers who say that they need a little bit more here or a little bit more there or whatever that situation is. So we take our cues from our customers on that.

Okay. And then the next question would be, is -- and maybe this is a little bit too early and maybe you could refresh our memories as to the process of how it works -- the converting line that you've broken ground on, when do you begin to gauge demand? Have you? And if you have, has anything really changed since your decision to do so? If you could just kind of give us some color on that, that would be helpful.

Yes. Nothing's really changed relative to our feel for the market. I think I've said in many public forums before that this is a growing market, that tissue is a growing market. It grows at a -- depending on what range you want to pick, but about 2% a year. It's an 8 million ton market. You need 160,000 tons just to keep up with the amount of demand that comes from population growth. So we still feel very good about the segment and don't really have any different assumptions relative to the demand for us on either converting or the paper machine we announced last time.

Great. Thank you very much. Very good quarter.

Kevin Cohen, Imperial Capital.

Very nice quarter, guys.

I'm wondering if you could talk a little bit about sort of the competitive dynamics out there and private-label tissue gaining share at the expense of the branded producers. One of the large producers talked about that. What are you guys kind of seeing out there on that front?

Well, we obviously were a bit prejudiced, but we feel very good about private label and our support of our customer base with private label. Private label has been doing well, and we think on behalf of our customers that it's been a good strategy that they've employed. So we're trying to support their particular strategy.

We feel good about the kind and types of quality that we are able to offer them, so that we believe those competitive qualities make a difference in private label and make a difference on behalf of those customers. So I think as long as we can continue -- and we have every expectation to -- to make high-quality product on behalf of them, private label should do very well.

Is there anything that you can point to that might explain why the rate of market share gains seems to have accelerated for the private-label guys?

Well, there's lots of speculation, I'm sure, that folks have talked about. What about the economy? What about all of those kinds of things? But for us, it has really been -- and as you know, we are highly concentrated in grocery stores. It's been about what the customers need relative to quality. And we try to focus on those particular needs and those particular SKUs required in those stores, and the mix of product. Those -- that's the thing that has made the difference for us.

So we think -- and speaking obviously strictly for ourselves, we think that that growth comes from our ability to satisfy customer needs as they want to use that private label in their store environment.

And do you think the gains in private label in terms of market share, do you think that might be causing some of the increased promotional activity that you alluded to in the prepared comments?

Well, it could. It could. It's sort of a chicken and egg kind of thing, but it certainly could.

The retailers themselves, as you listen to them talk about their focus on private label -- and of course the private label for them isn't just about paper. Their private label is in a lot of goods that are in those stores. So paper is certainly an important part of it. But I think that those folks, if they tell us they're very interested in offering good customer value and they believe private label does that, we want to support them in that belief.

And then can you talk a little bit about the pulp cost side of the equation? Is there a way to sort of quantify in rough terms maybe the year-to-year change in pulp costs as we look at the consumer segment specifically?

Well, just a quick comment about the pulp market -- as the pulp market -- we've said in our script I believe that it's beginning to moderate. The pulp costs to us are important to integrate what's really happened relative to CPD results, for instance, and PPD results. That's important to both. And we transferred market between those two divisions. So we watch pulp close.

Something though that -- to remind the audience about is that we are net buyers of pulp. So we buy about 85,000 tons a year of pulp. So what happens as those pulp costs go up, we do get impacted by that net buying position of pulp.

We are able mitigate it a bit because we have a pulp dryer that allows us to take advantage of the market. And if you go back on that schedule on page 5, you can see what we've been able to do with external sales on pulp tons and pulp pricing, which certainly is similar to what's happened in the rest of the market. But we mitigate the rising pulp market a bit with our pulp dryer.

But overall, we are still a net buyer of pulp, so we get impacted negatively when the pulp market zooms, as it did in the last several months.

Sure, yes. I was trying to sort of back into maybe what type of price improvement the company would need in tissue to sort of broadly speaking to recover that lost margin that was sort of the view there.

And then just lastly on paperboard, any thoughts on that? You did really well in the quarter.

Actually paperboard has been a very good performing segment for us for the entire year. They have done very well. They have run very well. Both of our operations, both in Cypress Bend and in Lewiston are running well. Pulp mill is running well. That's been very helpful to us.

The general market for paperboard has been very good. There's a lot of demand out there from customers, and we are working hard to try to satisfy that demand. That's really where the issue has been. The demand this year is significantly different than the demand last year, and fortunately our paperboard division has been performing up to that need.

Great, thanks. Good luck, guys.

David Woodyatt, Keeley Asset Management.

Just to follow up on what you just discussed, could you run through when there have been price decreases in paperboard and whether anything is scheduled for the third quarter?

Yes, the -- on paperboard there were some increases in 2008. I believe they were four increases in 2008 and no increases in 2009. And then in 2010 there was some increase done early. Some suppliers were able to accomplish it, some weren't, and of course it was very mix sensitive on whether or not that price could go up.

So by looking at our numbers you see that we improved our price a little bit in the first quarter over our fourth quarter. And then we improved it a little bit more in the second quarter over the first quarter.

So industry wide there's been kind of one general increase, if you will, over that particular time, although we took it in a couple of different stages and based upon mix and then where it made sense for us to do that.

There is, however, another movement in the industry relative to a price increase, and that is currently in the midst of implementation. And that would be what I would call sort of the second major industry effort. Although we did the first major industry effort kind of in two pieces here, overall industry was doing it basically in two pieces so far this year. So kind of one across the first and second quarter, and another, which is beginning in the third quarter.

Generally for your competitors in that area, are they generally integrated into pulp?

(multiple speakers) yes (multiple speakers)

Pretty much the same as you are? Or are they not (multiple speakers)

They are. Yes, they really are, most of the competitors. When we look across the segment and see the major competitors of MeadWestvaco and IP and Georgia-Pacific and RockTenn and other companies like that, they all do have their own pulping operations. So they are integrated with pulp the same way we are on our paperboard system.

Okay. One last question. If we could think about a normal year (inaudible) if we ever have such a thing again, and assuming no maintenance downtime, could you discuss a little bit whether or not there's any meaningful seasonality in your overall business?

Boy, that's probably the $64,000 question. That is a tough one.

There is some seasonality, not so much in tissue. Tissue is tissue. There's a little seasonality when it comes to napkins or something like that relative to a picnic season or those kinds of things. But in facial tissue and -- maybe a little bit in facial tissue, but on household towels and toilet tissue, not much seasonality there. So really again the demand on tissue comes from population, not a whole lot of seasonality.

On paperboard there is some more seasonality associated with that. Our demand curves look different in the spring and summer and early fall than they do across the winter months. We will typically accelerate. Backlogs are a little bit higher beginning in early spring and then last through sort of late fall, and then they will be a little bit lower across the holiday period and into the beginning of the year and then start back up again.

So there's a little seasonality associated with the paperboard business, but not much in CPD, our consumer products business.

Lumber tends to be a little higher in the summer, I assume?

Right, lumber would be a little bit higher. If we had a good housing market, that would certainly help pick up in the spring and summer and then taper off again in the winter.

Okay. And any variation for market pulp?

Market pulp is -- it's very hard to predict that, because market pulp is a global entity. What happens of course there is you get everybody's climate, whether you're shipping it to Europe or South America or South Africa or wherever. So I wouldn't call it really seasonal.

It's very -- market pulp in my opinion is very just demand related based upon individual product line. And that whole market pulp segment really responds to what's the state of the uncoated free sheet business, what's the state of the tissue business, what's the state of container board business, what's paperboard -- all the things that would use market pulp, those businesses really determine the demand curve there and not really seasonality.

Okay. Thank you.

Roger Spitz, Merrill Lynch.

On the $11.5 million sequential drop in consumer products costs and other from Q1 '10 -- can you give us any sense of that $11.5 million, how much of that was due to the rising pulp price?

Yes. A significant amount of it. I mean, the -- when you -- you're talking about the overall profitability that I mentioned in the segment? It's very much related to pulp. In fact, it's virtually all pulp, Roger.

Okay, great. And then looking further down on page 3, the costs and other under pulp and paperboard in the same comparison, Q2 to Q1, the $28 million positive comparison -- I suspect maybe $17 million perhaps was due to the major maintenance or lack thereof. Is that true? And what would be the rest of the positive there?

Roger, it is related to the maintenance, which was $16.9 million in the first quarter. And the balance of that would just be good operating performance.

Okay, great. Thank you very much.

[Dan Won], [Jersey Capital].

Great quarter.

My question, first question, is around you capital structure. And your balance sheet, even when factoring in the CapEx for the TAD facility, seems to be under-levered. And I'm wondering if you've thought incrementally, now that the majority of the initial planning for the TAD facility is probably behind you, what you will be doing with your incremental free cash flow, and if you're entertaining either a dividend or any sort of buyback at this time.

With regard to our capital structure, clearly it appears as though we have a little bit of excess cash on our balance sheet. But even after that paper machine converting announcement, I would just say that we continue to consider how we are going to deploy that cash. And we are evaluating all options.

What we've said in the past is we deploy a pretty strategic set of alternatives that we go through and look at before deploying cash, and those would range from organic growth expansion to dividends to acquisition to share buyback, and all of those are part of that evaluation process.

And it's an ongoing exercise for us, and obviously we also need to consider that cash deployment in light of the underfunded pension and our uncertain tax position. But all of that is under evaluation, yes.

Okay. Thank you for that. And could you give any clarity on what you are seeing in the wood fiber costs, where that's trending and what it was in the second quarter versus the first?

Well, it's been a little bit better for us. We do anticipate that there might be some changes going forward which might increase it a little bit, but don't know that for sure. Certainly our overall wood costs have been basically flat, if you will, basically stable. And that is not all that bad, of course, considering that we've had a pulp market that has accelerated pretty rapidly, albeit now going to moderate a little bit would be the expectation. But generally, from a wood standpoint, we are not overly concerned about it.

Okay. My last question is, when you look ahead two or three years from now when your TAD facility is fully up and running, is it your expectation that you'll be getting incremental shelf space with your retail customers? Or are they demanding the TAD product in lieu of some of the product that you are selling them now?

It's again a good question. It just -- it really of course depends on how our customers feel about what they want to do with their shelf space and SKUs at that particular time.

Our overriding concept here is that we think that's an important part of our mix offering to those customers to be able to offer that high quality product to be able to run into that ultra tissue segment. So -- and of course the plant in North Carolina is geographically positioned to do just that.

But with all of that having been said, we are still in a growing tissue environment. We feel very good about the overall tissue environment. It isn't just the ultra paper. It's also growing demand for conventional paper driven by population growth. So you may have some customers that want to focus on the ultra, some that want to focus on conventional. We don't know if they would displace one with the other. Obviously -- maybe my best guess is that they will want both, and because there is demand and need for both.

I guess a quick follow-up -- are there any accounts or geographies that you are not in now you think you will be able to service once you have this new product offering?

Well, we are really taking a look at it all. I mean, we are heavily oriented right now into the grocery store segment across the country, and that's really -- we've been limited by our capabilities and having to buy in paper. I'd mentioned on the briefly previous quarterly call that we purchase paper from the outside on order to be able to support our needs.

So one of the things that will help us when that new machine comes up in North Carolina is we will have more paper and more converting capacity. So at that time, it's going to be a function of what do the grocery stores need and what do the other categories in paper need. And we'll -- we will be there.

There's a -- we think a real need in the East Coast and -- for more of what we have to offer, and we are counting on that extra paper coming out of North Carolina and extra converting to satisfy that need on the east. So whether or not we jump into different categories is going to be dependant very much upon the market situation and where we are at that time. But right now we feel very good about where demand is.

[Michael Westerman], Spring Creek Capital.

Congratulations on a great quarter.

One quick question. As you expand eastward with the addition of this new North Carolina facility, are there going to be any material distribution savings in your consumer segment, any inter-milling that you are going to be saving on?

Yes. There's a lot of opportunity for that. In fact, that's one of the reasons why we feel good about putting that in North Carolina.

Right now we have a national footprint. And as you know, we have papermaking capacity in Lewiston, Idaho, and also Las Vegas. That is where our papermaking is. And then of course we buy in some parent rolls of paper to support us too.

And we have converting facilities in Chicago. But until the North Carolina plant comes up, that is as far east as we actually have manufacturing capability. And we only have papermaking capability in Idaho and Las Vegas.

So when we get that kind of papermaking capacity in the East, we will certainly have those parent rolls of paper are much closer to our customer base than they are today. And that should help us a lot on freight savings. We are looking for logistics to help us out a lot.

Do you have any idea on an annualized number?

I don't -- we do, but I -- we really haven't disclosed what that particular is. It's all in our minds in the justification for why that plant is where it is.

Okay. When you get these converting lines up and running, you mentioned earlier that you source strategically on the parent rolls. Do you have any long-term agreements where you are going to be able to supply this through 2012, up until the TMs are running?

I don't know that we've disclosed that, other than just say that we do have plans on how do we integrate that new paper machine in, and that -- and we are comfortable about it.

One of the things that of course weighs on how much you need there is how well do our existing paper machines run, and then -- and compare it to the market demand. So it's pretty hard to know exactly what we're going to need during that time, but our projections all say that we are going to be able to source what we need in order to have a smooth transition into that paper machine.

Okay. And one final question. Reading through your Q's and your K's, I didn't see anything about this, so maybe you can comment. But are there any long-term hedging agreements for the 85,000 tons of pulp that you currently source in the open market?

No, there's really not. We are doing that in the open market. We are doing it under arrangements with a number of suppliers. We think we are doing it very effectively in agreements that we have with them. But there are -- there's not really any good -- in our opinion, no good way of really formally hedging that in the market. There used to be some activity on that regard in the London Exchange a few years ago, but that never really panned out.

So I -- no, we really don't do an official, formal kind of hedging. We just stay very close to our suppliers and make sure they know what we need.

Great. Thank you very much, and congratulations again.

Russ Silvestri, Skiritai Capital.

I have three questions actually. You talked about $6 million that you're going to recognize up front with the North Carolina facility, and I was curious where that's going to show up and how it's going to show up and when it's going to show up, I guess.

That is associated with like, for example, the cost of land and whatnot. So it doesn't really -- quote/unquote -- show up. Our estimate of $260 million to $280 million cost for this facility had already factored that in. So that's still a good number to use when looking at that investment.

Okay. And then of the $27 million associated -- in terms of the operating income of both the pulp and the paperboard, I was curious, how much of that was associated with pulp?

From the pure external pulp sales? The size of that?

Yes, yes.

Well, let me -- let's find our number here. That's not one that's jumping right off the page on us relative to pulp, and it's not that easy, frankly, for us to get it because of the integrated nature of our pulp business. So we will noodle around on that a little bit. Why don't you ask your next question while we try to come up with that one?

And then I'm relatively new to the company. I was just trying to understand -- so the 85,000 tons that you acquire outside, of your total consumption of pulp on an annual basis, what does that represent?

Well, if we start with the two -- the major operations, of course, with -- and not counting Las Vegas -- Las Vegas is going to make about 35,000, 36,000 tons a year, but -- and they are going to be running without a pulp mill. The two large paperboard and pulping operations are Cypress Bend and in Lewiston. And we are pushing almost about 1 million tons there across both of those kinds of operations.

So when we break that down, let's say we've got about -- a little more than half of it heads into the paperboard operation in Lewiston. The balance of it goes to Cypress Bend. And then we bring in outside pulp.

Where it gets a little bit confusing is that we actually purchase outside pulp, both for our paperboard division to help give us the smoothest on a softwood sheet in Idaho, and we also purchase pulp for our tissue operations to run not only Las Vegas but to support us at Lewiston.

So how we get to that 85,000 net number is really, after we produce all the pulp that we need and after we buy it in for both divisions, we end up with that net sort of 85,000 position. And then that of course includes the subtraction out of what we've sold.

So we're a bigger buyer, if you will, than 85,000 tons. We are closer to at least double that on the buy side. But it's a net position across the company after we subtract away what we are selling on the outside in external pulp. Is that confusing enough for you?

No. I think I understand. I guess the 1 million tons is what you produce and consume internally. So if you kind of are a net buyer of 85,000, that would in essence represent the 80 -- 8.5% of your pulp, so to speak, is purchased outside. Is that the way to look at it?

Yes, I think you could say purchased outside is more like 10% of our total usage, and 90% of our needs on the inside. That might be just a simpler -- or more simplified way.

Okay. Thank you very much.

(Operator Instructions). Jonathon Goldrath, Fortress.

Great quarter, and especially in regards to the cash.

Can you guys -- just following up on a previous question -- can you guys go into the underfunded pension issue and how that affects your cash flow needs going forward?

Yes, that's difficult to predict. I would say I think our expectation is that this will take some funding. And you saw us contribute about $6.1 million so far through second quarter. And we actually contributed a bit more in third quarter, for a total of $15.1 million this year. So it's really going to be dependent on what happens to the market and how the liability grows, which is incredibly difficult to know at this time.

Okay. Can you guys discuss if you have a threshold of a new expansion deal or any CapEx projects versus returning to shareholders cash in any other ways?

Yes, I think my previous comment about how we look at deployment of cash and capital would still stand [to prove] that we really look at it more in the light of what's the best way to strategically deploy cash to return the best long-term value to the shareholders. We look at that across the strategic options that we have available to us.

And do you guys have a time frame for when you make those decisions as the cash, $330 million, is just sitting there as you guys pay 10.625% coupon on $150 million of debt?

Yes, it's something that we routinely look at. So it's an ongoing exercise for us -- is the best way to describe that.

Okay. Thanks, guys.

Eric Hollowaty, Stephens Inc.

I'm working four conference calls simultaneously this morning, so if any of these are repeats, please just direct me to the transcript or the recording. But a couple to start off. Did you guys address the cellulosic biofuel credit issue?

Yes, we did touch on it just ever so briefly, just mentioning that there's obviously a lot of moving parts associated with that credit and that we are currently working with our tax advisers to determine what the best answer is for Clearwater Paper.

Okay, great. And on the paperboard business, a couple of questions. Again, if you already addressed these, I'm happy to be waved off.

In terms of backlogs, several of your peers in the industry have reported very strong order backlogs on SBS, in the range of 5 to 9 weeks. Is that something you guys are seeing as well?

And then also on pricing, you mentioned in Q&A you thought there was some price realization could happen in Q2. And do you think that going forward into Q3 and maybe beyond there's also some more price realization that can happen?

Sure. Let me address that. First of all on the backlogs, I would say it's fair that we are consistent with the industry relative to the backlog level. We are not typically releasing what those backlog levels are, but we have very strong backlogs. So we are consistent with the industry there.

On pricing -- and it's just -- I did mention a little bit about it before, but just I think it might be helpful to restate it.

The pricing for our paperboard business, we moved a little bit in the first quarter from the fourth quarter, and then moved a little bit more in the second quarter. So we really took the first industry paperboard increase kind of in two pieces, if you will. And some other folks did whatever they did. But we kind of did it in pieces, depending upon mix.

And there is a current second paperboard increase that is being executed now across the industry, and of course we are participating with that. So that's really where we are.

Think of us as participating in two industry changes in price, although our first industry change in price we really took in two segments, a little bit in first quarter and a little bit in the second quarter.

Would it be reasonable to expect that for future increases you kind of see it roll through the P&L in a similar format, meaning it's spread over maybe 2 to 3 quarters?

Well, it could happen, because we have different relationships with different customers in the different categories. So yes, it could happen. It's not necessarily been our history to see it all just to slam right at one particular moment in time. So it does kind of happen depending upon the mix of business we have at that point in time.

Sure. One other one, while I have you -- on the major maintenance and repair, originally in the fourth quarter I think it was when you gave guidance on that for the year, I think it was a bit higher than what you disclosed in your most recent 10-Q for the first quarter, where I believe you said you were expecting $5 million to $6 million -- in total, I assumed that was -- for the back half of 2010. Is that still a reasonable run rate to expect in 2H?

Yes, our current forecast is that we'll spend between $20 million to $25 million during 2010, of which we spend $16.9 million in Q1. The balance will likely be spread equally over Q3 and Q4.

Okay. Thanks much.

[Chris Orski], [Balanore].

Actually all my questions were answered in the last 10 minutes. I think just one issue I was sort of just curious about. On a relative basis, you guys are obviously a pretty new company, and you look at your -- obviously your revenue, and even on a market cap basis you aren't that small. So I was just wondering if there's anything proactive you are thinking about in terms of marketing the company and really getting the Clearwater story out to the rest of the Street.

Well, we are very interested in that. And one of the things that I'd mentioned in my script is that we are going to attend the Oppenheimer annual industrials conference in New York in late September. So we are working hard on a number of investor relations fronts here to get the story out, because I think you're absolute right, I think that we would serve our shareholders and all of our stakeholders better the better we are communicating our message. So we are going to do a number of things and have started to do a number of things, in our opinion, that are proactively getting our message out.

Okay, great. That's all I had.

And this does conclude today's Q&A session. I would now like to turn the conference back over to our speakers for any additional or closing remarks.

We thank everyone for listening today. We very much appreciate the questions. Obviously we feel good about our financial results for the quarter, and we look forward to talking to you again next quarter. Thank you very much for your participation.

Once again, this does conclude today's conference. We do thank you for joining us.