Clearwater Paper Corp (CLW) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Clearwater Paper third quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to hand the conference over to Ms. Linda Massman, Chief Financial Officer. Ma'am, you may begin.

Thank you. Good morning and welcome to Clearwater Paper's third quarter 2011 conference call. On today's call with me is Gordon Jones, Chairman, President and CEO.

Our press release this morning includes the detail regarding our third quarter and you'll find a presentation of 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.

I would like to remind you that this presentation will 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 and 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, 2010. Any forward-looking statements are made only as of this date and we undertake no obligation to update any forward-looking statement.

This morning, I will first go through our financial performance and then provide a brief integration update on Cellu Tissue before turning the call over to Gordon.

Please remember that when comparing the third quarter of 2011 to the third quarter of 2010, a significant portion of the variances are driven primarily by the inclusion of Cellu Tissue in this year's results as we closed the acquisition on December 27th, 2010.

In addition, like last quarter, to assist you in analyzing the business on a comparable basis, we will discuss pro forma pricing and volumes as if we had owned Cellu Tissue during the third quarter of 2010. 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.

We had record net sales for the third quarter of 2011 of $501.1 million as compared to $352.9 million in the third quarter of 2010. EBITDA for the third quarter of 2011 was $46.2 million versus $40.3 million for the third quarter of 2010. This resulted in an EBITDA margin for the third quarter of 2011 of 9.2% versus 11.4% in the third quarter of last year.

Our third quarter 2011 EBITDA results included a $1.3 million negative impact associated with our Shelby facility and in third quarter 2010 included $3.1 million of Cellu Tissue acquisition-related expenses.

Net earnings for the third quarter of 2011 were $8.6 million or $0.37 per diluted share compared to net earnings of $15 million or $0.64 per diluted share for the third quarter of 2010.

Our Consumer Products segment had net sales of $285.2 million in the third quarter of 2011 versus net sales of $143.9 million in the third quarter of 2010 with the increase primarily due to the inclusion of Cellu Tissue's operations in our 2011 results. Segment operating income was $7.1 million for the quarter compared to $17.9 million for the third quarter of 2010. The lower operating income was primarily the result of increased operating costs associated with transportation, wages and benefits, packaging materials, and chemicals.

As a reminder, our operating costs historically lag current costs by three to four months due to the average costing method.

Our Pulp and Paperboard segment reported net sales of $215.9 million for the quarter, an increase of 3.3% versus third quarter 2010 net sales of $209 million. This segment had operating income of $26.3 million versus $21.1 million in the third quarter of last year. The increase in operating income was largely attributable to modestly better paperboard volumes and pricing versus last year.

Net interest expense of $12.1 million in the third quarter of 2011 was up from $3.8 million in the third quarter of 2010, primarily due to interest on the $375 million of senior notes issued in connection with the Cellu Tissue acquisition.

We capitalized $0.8 million of interest in the third quarter of 2011 associated with our Shelby expansion. We have capitalized $2.3 million of interest year-to-date through September 30, 2011, and expect to capitalize a total of $1.5 million in the fourth quarter of 2011 for total expected capitalized interest of $3.8 million during 2011.

The actual income tax rate for the three months ended September 30, 2011, was 40.7% compared to a rate of 39.3% for the same period of 2010. The estimated annual effective tax rate for 2011 without discrete items is estimated to be 34.2%. In addition, we do not expect to convert any additional black liquor credits to cellulosic credits through the balance of 2011.

As part of the previously announced stock repurchase program, the Company repurchased 291,600 shares of its outstanding common stock at an average price of $34.30 per share during the third quarter of 2011. The Company also executed a 2-for-1 stock split on August 26.

Regarding our balance sheet for the quarter, we had $23 million in capital expenditures which includes $8.6 million unrelated to Shelby and $14.4 million associated with our Shelby expansion, compared to $7.6 million of total capital expenditures in the same period last year.

This year through September 30, 2011, we have had capital expenditures associated with Shelby of $54.6 million and we expect to spend an additional $43.7 million in the fourth quarter of 2011, totaling $98.3 million of capital related to Shelby during 2011 versus our previous estimate of $133 million. The majority of the remaining Shelby capital is expected to be spent in 2012.

On September 28, 2011, we refinanced our revolver to extend the terms of the facility to 2016. The extension secured additional liquidity for the next five years, increased our capital spending flexibility and lowered our fees on undrawn amounts and rates applicable to borrowings under the revolver. Further, we paid off the remaining $15.2 million principal amount of industrial revenue bonds in the third quarter that were assumed as part of the Cellu Tissue transaction.

As of our last measurement date of December 31st, 2010, our pension plans were $55.4 million underfunded. During the nine months ended September 30, 2011, we contributed $9.8 million to these plans. In October, we contributed an additional $2.7 million to these pension plans which satisfied our requirement -- required contributions for 2011.

With regard to our liquidity, we had $106.1 million of unrestricted cash and short-term investments at September 30, 2011 representing a decrease of $20.4 million from June 30, 2011. The primary driver of the reduction was capital expenditures of $23 million and the redemption of the remaining $15.2 million principal amount of the industrial revenue bonds previously mentioned.

Our ratios remain strong. Total debt to total capitalization excluding the accumulated other comprehensive loss was 47.1%. EBITDA to net interest expense for third quarter 2011 was 3.8 times. We continue to make good progress on integrating Cellu Tissue.

During the third quarter of 2011, the costs associated with integration were approximately equal to the cost savings from synergies that we are beginning to receive. In addition, we anticipate achieving between $15 million and $20 million of cost savings from synergies in 2012.

Also, consistent with our earnings call last quarter, we still expect the annual run rate cost savings from synergies to be in the range of $35 million to $40 million by the end of 2012.

Finally, as you may have noticed in the press release yesterday, we have reached an agreement to sell our Lewiston, Idaho sawmill inventory and related assets to Idaho Forest Group for approximately $30 million and also signed a long-term residual supply agreement. The transaction allows us to monetize a non-core asset and forego future capital expenditures associated with the sawmill. More importantly it protects our residual supply from that sawmill and allows us to focus on our core consumer products and Pulp and Paperboard businesses.

We expect this sale and the corresponding residual supply agreement to benefit our operating income by approximately $5 million to $8 million annually.

Gordon will now discuss the performance of our operating segments and provide an update on Shelby.

Thanks, Linda. Before I discuss the operating segments, I would like to congratulate Linda on her promotion to President and Chief Operating Officer of Clearwater Paper, effective November 1. Linda's strong background in finance, consumer retail, and business strategy makes her an excellent choice for this expanded responsibility. In her new role she will oversee the Company's Pulp and Paperboard and Consumer Products operations including the integration of Cellu Tissue and the operational startup of our new tissue machine.

We have already begun the search for a new CFO and will let you know as soon as we find a replacement. She will remain CFO until that time.

With respect to our financial results, the third quarter of 2011 was our first quarter operating the two converting lines in Shelby after the grand opening on June 21. We estimate that these first two converting lines will contribute approximately $1.7 million to our operating income for 2011, which includes approximately $1.6 million of estimated depreciation.

On a go-forward basis, on average, we expect these two lines to contribute approximately $8 million of operating income annually which includes approximately $2 million of depreciation.

We remain on track with our estimate to spend $260 million to $280 million on this Shelby expansion and expect to complete the project by year in 2012. In addition, we still expect the internal rate of return for this project to be approximately twice our cost of capital.

Revenue in the Consumer Products segment showed a significant increase due to the addition of Cellu Tissue. When including Cellu Tissue volumes in the third calendar quarter of 2010 for comparative purposes, total tissue tons sold in the third quarter of 2011 were 134,145 compared to 135,102 pro forma tons sold in the third quarter of 2010. The decrease in volume was from early due to the yield loss associated with the reduction of external comparable sales so that we can leverage this paper internally to make finished cases.

Pricing on this same pro forma basis including Cellu Tissue was up 3.7% to $2,126 per ton in the third quarter of 2011 from $2,051 per ton in the third quarter of 2010 due mainly to an improved mix of finished cases versus [paper rolls].

Or Pulp and Paperboard segment net sales were 3.3% higher than the same quarter last year. Higher net sales for the quarter were driven by a 2.4% increase in paperwork pricing on relatively flat paperwork volume of 184,870 tons. The increase in net sales was partially offset by a 1.4% decline in pricing for external pulp sales to $684 per ton, but included a 28.3% increase in extra pulp sales volumes to 20,901 tons largely due to strong pulp production and seasonal paperboard demand.

Our major maintenance expense in the third quarter of this year was $3.1 million compared to $4 million in last year's third quarter. We had expected to spend $7 million in Idaho related to major maintenance expense in the third quarter of 2011, and are pleased that we were able to complete our maintenance below our planned level of expenditure.

I would like to provide an update on pricing initiatives that we discussed during our last call. The two areas, as you might recall, relate to retail tissue and bleached paperboard. We still expect to raise the price of our retail tissue products by an average of 2.5% with half of the increase going into effect in the fourth quarter, which is a process that is well underway.

And the other half of the increase is expected to go into effect in the first quarter of 2012. Retail tissue has historically represented approximately 60% of our total Consumer Products volume.

Regarding paperboard, we were able to raise prices on folding carton by $20 per ton during the third quarter of 2011 on our non-contract accounts. However this increase was offset by mix.

In summary, we had a challenging third quarter but expect a much better fourth quarter. On our second quarter call, we announced a stock split, a stock repurchase, an increase to our estimated net annual cost savings from synergies, and FSC certification for our Consumer Products premium and ultra grades.

This quarter, you have heard us announce the sale of a sawmill while protecting our residual supply from that source. Our Shelby project continues on track and on budget. Our integration efforts are going well and our customers remain very positive about them.

As you can see from our supplementals provided on this call, our tissue and our bleached paperboard business remains solid. We expect the cost synergies we previously announced will have a meaningful impact during 2012 and we expect to provide quarterly updates throughout 2012 on how they're getting implemented.

As mentioned earlier, the first tissue price increase since 2008 is being implemented and will continue to be incremented between now and the end of the first quarter of 2012. In the second half of 2011, we began experiencing a pulp cost decline with the initial July cost reduction beginning to benefit our Consumer Products business in the fourth quarter. We remained excited and optimistic about our future and thankful for our customer support during our many initiatives.

Thank you for tuning in to our prepared remarks and, Operator, we will now take questions.

(Operator Instructions). Ian Zaffino from Oppenheimer & Co.

You mentioned the increase in transportation wages, packaging and chemicals and that is basically the average costing method. If you were to use a different inventory method, more of a real-time method, what would the difference be?

I don't know that I could give you the difference because we don't calculate it that way, but obviously we have seen some improvements in pulp pricing. And it should benefit the fourth quarter as Gordon mentioned.

Some of our transportation costs are still relatively high. And we are not really seeing as much benefit in that area, but definitely on the pulp side we would.

So would you be able to quantify how much the average costing method is costing you? Cost you in the third quarter?

I wish I could, but we don't go back and restate inventory and do our P&L and those different methods. We purely do the average cost method.

And then you said that you will see most of that relief in the fourth quarter, correct?

Correct.

Right.

And what was the amount of shares you repurchased, again? And what are your thoughts on reverses going forward?

Yes, so we repurchased 291,600 shares at $34.30 and that's still -- we still have some remaining amount on our share repurchase program. And I would say our viewpoint on it is just the same as it was last quarter. We'll just buy shares as we see appropriate opportunity in the market.

Thank you very much.

Steve Chercover from DA Davidson.

Good morning. If I recall, I think you said you were going to have $7 million worth of maintenance in Q3 and that would be allocated to Pulp and Paperboard. Is that correct?

That's right. And we actually ended up spending up $3.1 million and that was good. We actually forewent some of that cost we thought we would have to spend.

And there was nothing allocated to Consumer Products?

No.

That is all Idaho, Steve.

Okay. And will there be any maintenance expense in Q4?

No. That's not expected.

Okay. That's great. And then I hope you don't take this the wrong way, but have you guys thought of a policy on how to manage expectations if there is going to be a material shortfall between expectations and actual results?

That is a tough one to say because we don't give guidance historically. But it is something that we always take into consideration, I guess.

It's a difficult one and we certainly recognize the issue here. The one thing I would say and I was trying to emphasize it in my remarks is about the way the business flows through. So I think that one of our action steps is to make sure that everyone has a better understanding of how the costs flow through the system on an average cost basis, how long it takes. I mean, it does take a significant time to get through.

I will just give you a quick answer on one which I suspect is part of other folks' question.

On the pulp market, you know this is virtually a three-month kind of flowthrough. So if you take a look at where the market was on pulp in the second quarter, it was continuing to go up in the second quarter. It only started down at the very beginning of the third quarter, so those kinds of downward moves get reflected for us in the fourth quarter.

So it's an increasing kind of cost situation. It is difficult when you put yourself in the moment and say, wait a minute, pulp price is falling down. But for our average cost system, the way we do it there's advantages in rising and falling kinds of markets, but in this particular market with average costs and with it going down, and with the pulp price still rising in the second quarter, those kinds of costs on rising pulp get reflected in our P&L in the third quarter. And that is what you saw.

Yes, I had actually thought we might see a little bit of a tailwind, but clearly that will be a fourth-quarter event, which is great. Just getting back to the issue of guidance or expectations management, I mean, clearly, you are paying a price in the market today because people thought results would be virtually double what they came in.

But getting back to the pulp situation, are you very active in the spot market or what you -- what you are procuring now is done on a contractual basis as well?

It's a good question. It is done both ways. We have contracts and we participate in the spot market. I mean, what we want to do is to make sure as a larger pulp buyer now after the Cellu Tissue acquisition is to protect our position in very tight markets. So although right now we might feel more excited about being in the spot market than we are. And we are in the spot market a bit, but we would like to be more in the spot market right now. But we are protecting our supply when the market goes the other way too.

So we do both. We very -- we purchase very aggressively. We have ranges in our agreements on our contracts relative to pulp. We can take some advantage of that. So we are doing whatever we can to pull our costs down, but the answer is really both. Both contract and spot markets and we are playing hard in both of them.

Final question, then I'll get back in the queue. I recognize it's in a somewhat different industry. We have got some companies that are expanding and they have effectively presold 70% to 75% of their new volume.

Do you have any kind of metrics of how your Shelby volume might be spoken for with your clients?

Well, we spent a lot of time talking with the clients and our customers are very excited about getting it. We anticipate just zero problems being able to sell the new tad quality off of the Shelby machines. Our customers are very anxious for it.

Obviously we have got to get it up, get it going, show them that quality, demonstrate that it's the tad quality that matches their expectations. We are very comfortable with that. And then given that, we have every belief in the world that it is not going to be a problem for us at all with that because the demand requirement is so strong against the high-quality branded ultra players.

Is that a long process to qualify it?

It might take a little while; kind of depends who it is and I guess how quickly we come up. But we will spend some time with each one and we may even have them right there by the machine watching what happens. But we will do it as quickly as we can, get them comfortable with it, and get it switched over to them as fast as we can.

Very good. Thanks, Gordon, and congratulations, Linda.

Thank you.

Thanks, Steve.

Kevin Cohen from Imperial Capital.

Good morning. I dialed in just a couple minutes late, but did you furnish any color in terms of the consumer tissue price hike and how that is proceeding and the reception in the marketplace just given declines in pulp and general economic weakness?

Yes, in fact, but I would be happy to quickly cover that one. The consumer price increases that we talked about on the last quarter call, we are in exactly the same spot we were before. Prices are going up. We said that we would average 2.5% across all of our volume.

We gave a little more color this morning into that. We said that our retail side of the business which this increases on is 60% of our Consumer Products volume, our total Consumer Products volumes so that is a metric there to help people's models a bit. But on that 60% we will get 2.5%. We are going to get 1.25% of it in the fourth quarter and we will get 1.25% of it early in the first quarter of 2012.

And by the nature of that timing, you can tell that that first 1.25% is well underway. But it is a fourth-quarter event.

Sure and what are your guys's collective thoughts on pulp? We saw DomTar come out yesterday with a $30 per ton decrease in NBSK. When you look forward over the next six months do you think there is a lot more correction to go in commodity pulp or how should we think about that?

Well, hard to know, but I attended a [RiC] meeting in San Diego where I heard lots of negative remarks about the pulp market, meaning lots of pressure down. I mean, as you know, the July increase or the July decrease, sorry, the July prices went down $20 a ton. They went down another $30 in August, another $20 in September and another $30 in October. As you just mentioned DomTar announced another $30 in November.

I mean, it appears that we have a trend and that it's certainly going down. I don't know if you are on the call earlier when I mentioned that those take a while to get through our system, but they are certainly there and they are on the horizon for our P&L.

Great, that's helpful. And any thoughts in terms of the paperboard side just again given the economic climate in terms of supply and demand and price on bleached paperboard? How do you look at that?

Yes, let me mention a little something on bleached paperboard here because we -- bleached paperboard market continues to remain solid. I mean, we feel good about that market. We felt very comfortable about that business. As you know we are one of the largest five players that constitute 85% of the bleached paperboard market.

And we continue to match up supply and demand. If you look at last year's 2010 board sales, and just kind of add them all up and divide by 4 and then you see what we have done in the first three quarters of this year, you say that we are in that 184,000 to 185,000 tons of paperboard range. So we are running flat out on paperboard.

I might mention that early in the third quarter, we had a little softness in our Food Service business and decided to run a little machine dried pulp, but that was also taking advantage of high pulp prices when the pulp market was higher of course than it is right now. So that is one of the reasons that that pulp number, that external pulp number is 20,000 tons is because it includes a little machine dried pulp or rolled pulp where we took advantage of a little softness in Food Service and decided to run a little pulp.

But that is all behind us now and we are not running any machine dried pulp today. Market continues to be solid. We feel good about where we are and that is also, by the way, when you look at those supplementals, Kevin, one of the reasons that the price is down just a little bit on paperboard it is not because paperboard pricing is down. It's because that extra pulp sales happened and some of that machine dried pulp was run on a board machine.

And then lastly, Gordon, the Lewiston sale, what was the LTM EBITDA contribution from that mill just for modeling purposes?

Yes, we didn't give that. But what we did say and you probably didn't hear on the call because you joined late was that we expect on a go-forward basis that operating income will benefit by approximately $5 million to $8 million annually.

Any working capital benefits associated with that as well?

That would be part of that $30 million purchase price.

Got it. That's very helpful, thanks a lot.

Graham Meagher from TD Securities.

(multiple speakers)

Just first question on cost and I hate to belabor the point on the Consumer Products side. So thinking about the fiber cost, I know that there is a peak, but can you -- or sorry I know that there is a lag. Can you say directionally in Q3 versus Q2 were your pulp costs up or were they closer to flat?

They were pretty flat quarter over quarter. I mean it was really some of the other operating costs that were more of an influence quarter over quarter.

I might mention -- and I agree with Linda completely on that -- but I might mention from a market standpoint when you look at the second quarter, you know the second quarter prices, those were up from first quarter levels in pulp. So just kind of keep that in mind. Pulp market was still moving up through the end of the second quarter.

So is it fair to say that Q2 or Q3 that maybe Q3 was the peak? [Your exact citation] for the peak fiber costs for Clearwater?

Yes, exactly. I mean, I guess that is the point that I would like folks to hear is that the third quarter cost for us in pulp reflect second-quarter price movements up. And as the price moved down in the third quarter, you know, those kinds of things gets realized in the fourth quarter.

Great. And then just thinking about the other cost on a quarter-over-quarter basis, you know you had the --. You talked about the Cellu Tissue integration costs being offset by synergies this quarter. Last quarter, we have an increase in cost due to Shelby coming online and there was no revenue from that last quarter. Obviously there is this quarter.

Was there a change in the Shelby costs in Q3 versus Q2?

I'm not sure that you could think that there was a substantial amount. I think the difference in how we reported second to third is really the benefit of the revenue offsetting some of that cost.

Good. And then on the other cost, maybe it's transportation or chemicals, can you just talk about any big deltas between Q3 versus Q2?

Yes. So Q2 to Q3, we have seen some increase in transportation costs, some increase in packaging costs, I believe, and chemicals were the biggest drivers. And then mix played a bit of an issue between second and third quarter as well.

On the transportation side is that more of a cost per mile or is that a different freight line, that kind of thing?

It's pretty much a fuel cost. Maybe some miles, but mostly fuel.

All right. Then on Shelby, is it fair to say that Q3 was a normal shipment or a normal production quarter for the two lines that are operating at this point?

No, I would say it is still ramping up.

Yes, we are still ramping up there. We have two lines there running right now and one is a tissue line and one of them is a towel line. One of them got up a little bit quicker than the other line, so we are still, frankly, bringing both of them up to the speed that we really want them to perform at. But it is happening and it is going well. We feel good about what our people are doing down there, but there's still room between where we are today and where we want to be on those two lines.

Great. And then on the tissue price -- tissue prices, so you have gone through great detail on the retail side and what's the timing on how that is flowing through. So when we are thinking about Q3 versus Q2, that the average price that you report is up 1.8% is that all just the difference between the selling prices cases versus roles there? Or was there anything else on the away from home or the parent roles, or the machine glaze side?

Well, there has been a little movement on those sides as well. I don't want to discount the movement that our folks have done on the nonretail side, but a lot of it has to do with just the change in moving to retail. And the point I wanted to make is when you look at that per ton number and you see it go up, we didn't want folks to think, well, that is the retail tissue price increase.

That is not the retail tissue price increase. That one is yet to come in the fourth quarter. That movement between second and third quarter is more of the kinds of things that you mentioned and also the increase in number of retail cases that have been sold.

And would there be any more price increases on the nonretail side flowing through in Q4 or Q1?

Well, if the market moves, we will move too, but we are not anticipating that right now. We are continuing to try to execute against increases wherever we can, but I wouldn't anticipate that. I mean, the next big move in Consumer Products is going to be this retail case move that happens again on 60% of our divisional volumes. And that will happen again half in the fourth quarter and the other half in the first part of the first quarter of next year.

And then think about tissue demand as well, have you seen a shift over the last couple of months or couple of quarters towards private-label from branded and if you see that shift, do you feel that that is a marketshare gain there?

Yes, we continue to feel terrific about the markets that we're in. I mean if you look again at that supplementals, which I know you are, and you've seen that kind of increase in tonnage that goes out, the natural -- I think the natural thing to say is that it is going up. So we feel good about it. I don't know that it's certainly not necessarily a monster increase in private-label, but our private-label share continues to grow. And we continue to run as flat-out as we can on the cases in order to get them into our customer base.

So our basic business on both retail tissue and our parent roll sales away from home, our paperware business, all of our basic businesses are solid. We have solid businesses.

Where we have to focus -- and we are continuing to focus and I have tried to give some insight into some of the market changes and costs that will help us is on our cost side. And we are doing that. We have a strong lean initiative, for instance, particularly in our paperboard side of the business and we are continuing to push that.

So we are going to push hard on cost, we are going to take advantages of changes of cost in the market and then these increases that come to us from the synergies and also from the tissue price increase are going to help us a lot.

Great. Thanks, that is all I had.

Roger Spitz from Bank of America Merrill Lynch.

Good morning. What have tissue hard roll prices done in Q3 2011 sequentially and do the tissue hard roll prices move -- does that move as pulp? Is that the same as three-month [past due] lag that you are talking about for the rest of your consumer business?

Yes, we don't actually break out our hard roll pricing, but it is true that that would move more in line with pulp than you would see on retail cases.

And have you given or can you provide sort of in that hard roll mass balance on an annual basis in tons?

We haven't. Yes, I mean we will certainly take a look at that on whether or not we can do that. This quarter, we decided to break it out so folks knew what the retail side was, particularly because there was a price increase on the retail side. But the other 40%, of course, includes that away from home and hard roll and all that.

We'll take a look and see if we can give any future look into that for folks. We just figured that retail would be the key for folks in this quarter.

Sure. Lastly, the higher transportation, was that mainly fuel or was that any of that due to extra shipping due to the either Cellu Tissue acquisition or the Shelby start up, or what have you?

I would say it was primarily fuel, but there was probably some additional miles with some of the Cellu Tissue situation.

All right, great. Thank you very much.

[Ted Chong from Artsview Investments].

Hello. Maybe looking at it another way, you reported $9.1 million of Cellu Tissue integration cost and Shelby cost in the second quarter. Do you have a comparable number for the third quarter?

Yes, what we said in the prepared remarks is that our synergies are pretty much equal to our cost right now in the third quarter. So it is pretty neutral. Our costs are probably running just a little higher than synergies, but it is pretty de minimis.

And then with regard to Shelby, it had about a $1.3 million drag on EBITDA. And that is just because of the startup curve of the Shelby facility.

And you guys said $15 million to $20 million of save -- I guess run rate savings in 2012?

Yes. In fact just so there's no confusion, by the end of 2012, we will be at a run rate of $35 million to $40 million, but we are going to achieve the $15 million to $20 million into the P&L in 2012. So we are going to start getting synergies that you can see on our P&L in 2012. By the end of the year the runway will be $35 million to $40 million. But there will be $15 million to $20 million of the achieved synergies in 2012.

Accumulative through 2012.

Right, right. Now that might be a little bit less in the first part of the year, a little bit more in the end, or whatever. But we also said we would provide quarterly tracking relative to that. We'll show the market how those numbers are coming throughout 2012 and we'll show you a run rate of $35 million to $40 million by the end of the year.

And what is the run rate now? (multiple speakers). What's the acuity of now?

Yes, we just said it is pretty neutral. I mean because again our synergies are about equal to our cost.

And these are costs associated with obtaining the synergies, not to be confused with actually operating -- (multiple speakers).

Right, I understand that, but you know you did provide much more transparency last quarter. And it is difficult to be able to extrapolate on a sequential basis. If you are trying to help us model a little bit better, then it would really help if you are able to provide a comparable number for that $9.1 million.

Yes the 9.1, the comparable number is 1.3 and that is what we stated in our script in our prepared remarks. The 1.3 is the Shelby comparison that would compare to if you just split that 9.1 in half. The 4.5 associated with Shelby last quarter and the other 4.5 last quarter was related to the synergies spend which we are now saying is about equal to our synergy. So it's a net neutral impact. Okay?

Okay. And then, on the sequential costs, I think when you said pulp was flat quarter over quarter, so it's really transportation, packaging and chemical. You guys provided a slide in terms of what the sort of EBITDA sensitivities were and I guess transportation dollar per gallon was $9 million. Can you help us in terms of just -- it seems when I look at these sensitivities on a quarterly basis, I'm finding a hard time getting to the EBITDA magnitude that was -- that happened in the third quarter versus the second quarter.

Yes, so those were the biggest cost drivers. Obviously there were other costs and then of course I mentioned earlier that the mix played a bit of an issue in third quarter for Consumer Products as well.

Can you expand on the mix? And maybe just walk me through how that would impact it so much?

Yes, let me take that one. Let me talk about paperboard mix maybe for just a minute. I mentioned that we ran a little machine dry pulp. That is typically at a number different than paperboard. So what happens is that is one of the things that helps pull down that pulp price. If you look at our supplemental for and you see that we were -- the pulp sales price went down a little bit.

That is because there is machine dry pulp. But typically machine dry pulp is priced a little bit less than [bale] pulp. So that is one of the things that impacts us.

But the mix for us in paperboard is, for instance, as in this particular quarter, we ran a higher percentage of non-extruded product than extruded product than we had maybe in a previous quarter or two. So that non-extruded product and that is just the extra step that you put on the sheet of different poly or whatever we might be extruding on to our paperboard sheet, that changes our mix. That changes our pricing a lot and it has an effect also on profitability.

So even though the paperboard side of the business did very, very well, we did have a mixed difference when it comes to non-extruded and extruded. And we also ran a little bit of that machine dry pulp to take advantage of the pulp market. So those are the kind of impacters that flow through the system. (multiple speakers).

Appreciate that color. I guess more so was there mix issues on the tissue side just because I think people aren't concerned over -- I was very happy with the paperboard side, I just I think the cost on the tissue side was what surprised people.

Yes, maybe a little bit on the tissue. The function there is that you get into seasonality associated with some of this, and you have facial that happens in the winter and doesn't happen in the summer. And you have extra demand on toweling as opposed to tissue or bathroom tissue.

So the mix can be quite different. Particularly when you look on a per ton basis if you have a very high volume of mix relative to towels, you have got a lot of tonnage that is going out. So that is going to adjust your number a bit too.

So it's a flexible market and since we are just reporting one big number for a per ton on the tissue price, the blend of that particular number can move it a little bit as well. I think the important thing to concentrate on really is the trend. What has been happening, relative to our pricing and consumer products. It is continuing to go up and again I would say something I mentioned earlier, that movement there is more about more retail cases going out than pure tonnage sales going out, positive trend and it does not include the tissue price increases coming in the fourth quarter.

So, on that 50% of the 2.5%, we should look for that all of the third quarter net selling price number?

Right. That should be above the third quarter net selling price.

Okay and maybe I can follow-up off-line about some of the sequential calls. Appreciate it.

(Operator Instructions). Richard Kus from Jefferies.

Just one quick one. With regards to the purchase of residuals from the sawmill that you sold, are you going to be incurring any additional costs as a result of that or is that included in the number that you already gave us?

Yes, that is included in the $5 million to $8 million of operating income.

Okay, great. Thank you.

This concludes our question and answer session for today. Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.