Clearwater Paper Corp (CLW) 2012 Q1 法說會逐字稿

Thank you for standing by and welcome to the Clearwater Paper first-quarter fiscal year 2012 earnings conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference may be recorded. And now it's my pleasure to turn the call over to Gordon Jones, Chairman and Chief Executive Officer. Sir, the floor is yours.

Thank you. Good afternoon, and welcome to Clearwater Paper's first-quarter 2012 conference call. I would like to take this opportunity to introduce John Hunter, our Interim Chief Financial Officer as of April 13. John has been with Clearwater Paper since August of 2009 and will also continue in his role as Vice President and Corporate Controller for the Company. The Company is currently engaged in the search for a permanent CFO. With John as Interim CFO, Linda Massman is now focusing full-time on her Chief Operating Officer responsibilities. John?

Thanks, Gordon. Our press release this afternoon includes the details regarding our first-quarter results and you will 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 afternoon's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release and 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 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, 2011 and our quarterly filings on Form 10-Q. Any forward-looking statements are made only as of this date and we undertake no obligation to update any forward-looking statements.

I will begin the details of today's call with financial highlights for the quarter and then turn the call back to Gordon who will provide commentary on the different business segments before we take questions.

We reported net earnings of $3.7 million or $0.16 per diluted share for the first quarter of 2012 compared to net earnings of $5.6 million or $0.24 per diluted share for the first quarter of 2011. Excluding $6.7 million in discreet tax items mostly associated with converting cellulosic Biofuel Producer Credits to Alternative Fuel Mixture Tax Credits, first-quarter 2012 net earnings were $10.4 million or $0.44 per diluted common share.

Excluding a net tax charge of $1.9 million or $0.08 per diluted share related to a combination of discrete tax items, first-quarter 2011 net earnings were $7.5 million or $0.32 per diluted common share. First-quarter 2012 earnings before interest, taxes, depreciation and amortization, or EBITDA, was $45.2 million compared to $41.7 million in the first quarter of 2011.

Net sales in the Consumer Products segment were $277.8 million for the first quarter of 2012 compared to first-quarter of 2011 net sales of $269.3 million. The increase in net sales was primarily attributable to higher net selling prices.

Consumer Products' operating income was $26.3 million for the first quarter of 2012, was nearly double first-quarter 2011 operating income of $13.8 million primarily due to higher net sales and lower pulp costs in the first quarter of 2012. Operating income in the first quarter of 2012 also included a $1.1 million benefit from our Shelby, North Carolina facility and an estimated $5.3 million in net cost savings from synergies associated with our acquisition of Cellu Tissue.

Net sales in the Pulp and Paperboard segment were $180 million for the first quarter of 2012 compared to first-quarter 2011 net sales of $196.6 million. The decrease in net sales was due to the sale of our sawmill in November 2011.

Excluding remaining lumber sales of $3 million in first quarter 2012 and a full quarter of lumber sales of $22.6 million in first quarter 2011, net sales were $177 million in first quarter 2012 and $174 million in the first quarter of 2011. This increase was primarily due to higher paperboard volumes partially offset by lower volumes of pulp sold externally and lower paperboard selling prices.

Operating income for the first quarter declined 25.5% to $11.7 million compared to $15.6 million for the first quarter of 2011 primarily due to $15.5 million in scheduled major maintenance costs incurred during the first quarter of 2012 compared to $11.4 million in the first quarter of 2011.

Net interest expense of $9.7 million in the first quarter of 2012 declined $1.6 million from the first quarter of 2011 due to $2.1 million in capitalized interest associated with our Shelby project, compared to $500,000 of capitalized interest in the first quarter of 2011.

We expect capitalized interest associated with Shelby to be approximately $3 million in the second quarter and $14 million total in 2012 bringing the total capitalized interest amount to $18.2 million for the project. We also settled our industrial revenue bonds in the third quarter of 2011.

Regarding taxes, we recorded a 76.6% tax rate for the first quarter of 2012. The conversion of a portion of our Cellulosic Biofuel Tax Credits back into Alternative Fuel Mixture Tax Credits significantly contributed to this high quarterly tax rate.

Due to the uncertainty regarding proposed legislation, which included a provision that would have eliminated our ability to choose Cellulosic Biofuel Tax Credits, we elected to convert gallons back to Alternative Fuel Mixture Credits to safeguard these benefits and provide us flexibility in the future. Excluding discrete tax items during the quarter our tax rate was 34.6%. We also expect the effective tax rate for 2012, excluding discrete tax items, to be approximately 34.6%.

We had capital expenditures of $50.2 million during the first quarter of 2012, which included $39.6 million related to the construction of our Shelby converting and papermaking facility. We continue to estimate that the TAD paper machine and tissue converting facility will cost approximately $260 million to $280 million. Capital expenditures for the remainder of 2012 are expected to be between $165 million and $170 million, which includes an estimated $125 million to $130 million associated with Shelby.

As reported in our 10-K, our Company-sponsored pension plans were underfunded by $89.1 million. During the first quarter of 2012 we contributed $15.5 million to these plans; we expect to contribute an additional $5 million to our Company-sponsored pension plans during the remainder of 2012.

With regard to liquidity, we had $49.5 million of unrestricted cash and short-term investments at March 21, 2012 representing a decrease of $13.9 million from December 31, 2011. This decrease was primarily due to capital expenditures associated with our Shelby facility and the contributions to our pension plan, partially offset by positive cash flow generation from operations.

Our long-term debt outstanding at March 31, 2012 was $523.8 million which was consistent with the amount at December 31, 2011. Our financial ratios remain strong, our total debt to total capitalization, excluding accumulated other comprehensive loss, was 46.8% at March 31, 2012 compared to 46.6% at December 31, 2011. EBITDA to net interest expense for the first quarter of 2012 was 4.6 times.

We reported last quarter on our 30 million share repurchase program through the end of the year. Although we were not in the market during the first quarter this year, we had been participating in the market in the second quarter and have purchased an additional [111,248] shares through April 20, 2012 for $3.4 million. We still have $15.2 million remaining under this program. I'll now turn the call over to Gordon.

Thanks, John. With our solid quarterly results 2012 is off to a good start. Not only did we report excellent first-quarter results, but our new paper machine and converting lines in Shelby, North Carolina remain on time and on budget. I will now walk you through some of the operating segment details.

Consumer Products' net sales of $277.8 million were up 3.2% versus the first quarter of 2011 mainly due to a 3.8% increase in net selling prices to $2,158 per ton. The rise was driven by our 2.5% retail price increase and conversion of more parent rolls into finished cases.

The tissue price increase was primarily in place in the fourth quarter of 2011 with a small remaining amount in the first quarter of 2012. Tissue prices were down 1.1% compared to the fourth quarter of 2011 due to a slightly higher percentage of parent roll sales.

Tissue volumes decreased slightly to 128,768 tons in the first quarter of 2012 compared to the first quarter of 2011 primarily due to converting more parent rolls into finished cases. Volumes, however, were up 5,722 tons from the fourth quarter of 2011 due to increased parent roll sales and a return to more normal selling volumes. Our Consumer Products retail business continues to be very solid.

As a reminder, these volume and pricing figures are available on our website at Supplemental Materials in the Events & Presentations section of the Investor Relations page.

Consumer Products' operating income for the first quarter of 2012 was $26.3 million, up from first-quarter 2011 operating income of $13.8 million primarily due to higher net sales and lower operating costs including pulp and energy. Shelby made a solid contribution to operating income and our cost savings from synergies are proceeding as planned.

Pulp and Paperboard net sales, adjusted for the sale of our sawmill, were up $3 million when comparing first quarter 2012 to first quarter 2011. Paperboard net sales increased 4.6% compared to the first quarter of 2011 due to a 6.2% increase in paperboard volume to 182,198 tons partially offset by a 1.5% decline in paperboard net selling price per ton to $968 per ton. Pulp net sales of $0.6 million declined from $5.3 million in the first quarter of 2011 due primarily to using more pulp internally.

Pulp and Paperboard operating income for the quarter declined $3.9 million from $15.6 million in the first quarter of 2011 to $11.7 million in the first quarter of 2012. This was primarily due to scheduled major maintenance costs during the first quarter of 2012 being $4.1 million more than the first-quarter of 2011 major maintenance costs.

Now I'd like to spend a few minutes on our outlook for 2012. As mentioned last quarter, we continue to expect the Consumer Products segment to sell approximately 128,000 tons to 130,000 tons per quarter on average during 2012. And we also expect selling prices to remain stable.

The initial two converting lines at Shelby are still expected to contribute approximately $8 million of operating income in 2012 which includes approximately $2 million of depreciation, offsetting some of this benefit will be an estimated $6 million of additional costs associated with the start-up of the paper machine and additional converting lines mainly to be incurred in the second half of the year.

We continue to expect the paper machine to start up in the fourth quarter 2012 and expect that it will produce approximately 70,000 tons per year in 2014 and we expect it will be -- when we expect it to be fully operational with approximately 75% of that amount estimated in 2013.

There's nothing new to report regarding the litigation involving Metso Paper, the manufacturer of the TAD paper machine for our Shelby facility, and a competitor's attempt to prevent the delivery of the machine. The trial is scheduled for the week of May 7. The law lawsuit does not delay the start-up of our Shelby facility and construction is proceeding as planned and on schedule.

We are still expecting annual net cost savings from synergies from the Cellu Tissue acquisition to ramp up during 2012 to a $35 million to $40 million annual run rate by the end of this year, net cost savings from synergies are expected to be approximately as follows for 2012 -- that would be $4 million in the second quarter; $5 million in the third quarter; and $8 million in the fourth quarter. The second-quarter 2012 figure is down from the $5.3 million we reported for the first quarter of 2012 due to some additional costs associated with achieving our synergy goals.

As for the Pulp and Paperboard segment, we continue to expect 2012 paperboard volumes to be similar to 2011 levels. Our paperboard business remains stable as does demand. We expect pulp sales to be minimal as we anticipate utilizing almost all of our pulp internally. We estimate our scheduled major maintenance expenses in the Pulp and Paperboard segment will be approximately $3.3 million during the fourth quarter of 2012.

Regarding total Company cost of sales, we have benefited from declining pulp prices over the last two quarters following pulp prices peaking last summer. However, pulp prices have been gradually rising since the beginning of this year. Accordingly, we expect our pulp costs to begin to rise moderately in the second quarter of 2012 due to the lag in pulp costs showing up in cost of sales. Analysts have predicted the recent rise in pulp prices to be short-lived.

Lastly, while corporate expenses have been rising over the last few quarters with the addition of Cellu Tissue and the growth of the Company, we expect them to generally level out at our current rate of approximately $12 million per quarter going forward.

In summary, we had a solid first quarter, we expect more of the same through the rest of the year, our Consumer Products business continues with the integration of Cellu Tissue and the buildout of our new site at Shelby, North Carolina, and we are on track to meet our objectives. Our paperboard business remains solid and we have successfully completed our scheduled major maintenance in Idaho. I want to continue to express my appreciation to our many stakeholders for their support.

Before we move to questions I want to mention that we will be presenting at the seventh annual Oppenheimer Industrials conference on Tuesday, May 15, in New York and the Stephens Spring investment conference on June 5 also in New York. Details are provided on our website. But if you are interested in meetings, please contact Sean Butson or Oppenheimer to arrange. Thank you for listening to our prepared remarks. And, operator, we'll now take some questions.

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

A couple quick questions. First of all, on the tissue price increase, I thought you were going to get 1.5% rolling into this quarter and, if I'm not mistaken, it was better than that. Would you attribute that to mix?

If we go back and look at what we were seeing in some of the other quarters, Steve, I believe we said 1.25% in the fourth quarter and 1.25% in the first quarter. We got a little better than 1.25% in the fourth quarter and we ultimately did get our 2.5%. Some of the difference in those numbers is to mix; I think that's a good conclusion to come to there. I think the point we want to make is that that price increase is in, that's done. And we got everything we said we'd get.

So that's the reason why the realizations were down in Q1 versus Q4, it was mix as opposed to competitive activity?

Yes, it's more of a mix because we also shipped -- our production is doing quite well in both paperboard as well as tissue and we had more parent roles to sell, so we sold some more parent roles and that's what we say by mix. It's more of a mix of higher degree of parent roles in that quarter than anything, that's the thing that takes it down a little bit. But the retail side of the business, that price increase is in and solid.

Okay. And then could you talk a little bit about the transfer pricing from pulp and paperboard to tissue? Was that part of the reason that I guess the results were down beyond what was a function of the maintenance in the quarter?

I'm not sure what you mean about -- well, the transfer price, the only really transfer price that we have is we have one fixed-price on internal transfer pulp and that we said at the beginning of the year and lasts for the entire year. That would have been a little bit higher this year than last year, for example, but that number gets locked into the Consumer Products division from the Pulp and Paperboard division.

So it's established at the beginning of the year for 12 months regardless of what happens to market pulp?

Exactly, exactly.

And if I'm not mistaken it's done at cost as opposed to price?

Yes, it is, it's done at cost. And that's why -- for example, I mean you hit on a good point there that that particular amount of pulp is a fair amount of pulp inside of our system. So as the pulp market goes up or down that doesn't impact that particular number on the transfer price to the Consumer Products division.

And this is perhaps kind of related. You had $15 million of maintenance in Q1 in the Pulp and Paperboard segment; I think you said you've got another $3 million or so in Q4. But where does maintenance show up in the tissue business? In cost of goods sold?

John, do you want to take that?

Yes. Major maintenance is performed at Pulp and Paperboard and that's generally what we talk to when we say major maintenance, that's when they're taking the plant down for an extended number of days. For example, first quarter was 16 machine days in the first quarter.

At Consumer Products we don't take any major maintenance so we don't take anything down for an extended period of time, so we don't classify anything as major maintenance. Those costs flow through as cost of goods sold and if you look at the EBITDA bridges in the supplementals you'll see that maintenance cost is both PPD and CPD total maintenance cost including the major maintenance.

And is the reason that it's always Pulp and Paperboard that takes the maintenance expense because it's those two facilities that have the actual virgin pulp mills?

Yes, exactly right. That's where the major costs associated with maintaining them. They have recovery boilers at both places, things like that, large -- huge, large pulp mills. All of our sites that are pure Consumer Products division do not have the pulp mills. I mean they're -- Lewiston of course is co-located to the Pulp and Paperboard division's pulp mill, but CPD wise there's not a pure pulp mill inside the CPD division.

Okay. And last question and I'll turn it over. The maintenance that was taken in Q1, was that Lewiston or down in Cypress Bend? Because I assume it's harder to do maintenance in the winter.

Yes, it was done at Lewiston. And the -- and what we talked about for the remainder of this year in my remarks about the extra spend, I think I said $3.3 million, that's an Arkansas spend later in the year. But Idaho is done for the year.

And that's obvious, you know how to major maintenance them down in Arkansas.

Well, we consider it major maintenance just because it's related to the pulp mill and it doesn't go -- it's not as big a maintenance ticket as what we do in Idaho, but it's consistent with the levels of major maintenance we have to spend, remembering, of course, that's the newest pulp mill in North America running SBS, so some of the costs associated with that ought to be a little bit less.

But, is there like a periodic every two-year or three-year shut where you do the boilers?

Right. We have rotations for major maintenances that are currently about one year in Idaho and 18 months in Arkansas. The boilers are part of that mix, but everything in a pulp mill has its own rotation which we put it on. That's why you might see an Idaho, for instance, last year in the first quarter we did [$11 million], this year we did [$15 million], it changes depending upon what comes up on that list as needs.

But it's always much more major in Lewiston. And remember that Lewiston is supporting significantly more volume out of there than Arkansas is, that's one of the reasons that the cost is higher.

Great, thanks for taking my questions.

Graham Meagher, TD Securities.

First, just I wanted to say appreciated the bridge in the quarter-over-quarter and year-over-year in the supplemental, it's helpful for clarifying quite a few points. Just first question on tissue pricing and just wanted to clarify, because last quarter you talked a little bit about increased promotional activity and I understand the change in price quarter over quarter is due to higher parent roles. But the retail price -- can you just confirm that that did stick this quarter and that promotional activity was as expected?

Yes, it's absolutely yes and yes on both points. It stuck, it has, as I mentioned on the previous question, we've got a little more than half of the 2.5 in the fourth quarter, we got the rest of it in the first quarter, it stuck, it's solid, that's of course on the retail side of the business, which we have said earlier is about 60% of the Consumer Products business is on retail, so that absolutely did stick.

And from a competitive environment, normal promotional activity. So there's nothing that causes us any concern about the pricing environment in tissue.

Okay, great. Second question on pulp costs and we've seen list pricing bottom out in Q1. And in the past you've noted a two- to three-month lag as it runs through the system. Would you expect then lower externally purchased pulp costs in Q2 or would it be relatively flat?

It's obviously going to depend on what grade, but overall we have the lags that we had before. We expect those rising pulp prices to start hitting us in the next quarter. But then, based upon analyst expectations, that's a very short lived increased, then it hits back the other way and heads back down.

So if you look across the year I would think about pulp this way. I would say that pulp started up and let's call it roughly in a February kind of time frame, it started up very modestly and that modest increase is probably, according to the analysts, going to be heading back down here in late spring and then remain down through the end of the year.

So, although we feel good about some of those lower pulp costs flowing through the first quarter, we're going to have a little bit of impact in the second quarter, then it will swing back the other way.

Okay, great. Thank you. And just the outlook for other costs, thinking transportation, chemicals, energy -- there was a little bit of inflation through the end of the year. Has that sort of stabilized at this point?

Well, it's hard to say. I mean obviously what happens to fuel is an important thing to us. We have a lot of fuel service, fuel surcharge costs that hit us from time to time and we do of course a lot of miles by truck and a heck of a lot by rail. So it's hard to predict exactly on the transportation cost where it's going.

But we are hit I think like every other paper company with the higher caustic costs, the higher starch costs, higher resin costs, poly costs, those kind of things. We get the benefit of natural gas, we get hit with changes associated with fuel surcharge. So it's really a prediction about what do you think is going to happen with the oil increase.

So what we tried to do this quarter, and I appreciate you mentioning that, is to be able to lay out for our investors and all interested parties the quarter-to-quarter comparisons year over year and also consecutive so you could see how those costs are changing and see what the impact is. And the one thing I'd mention, Graeme, is that when we look at those kinds of things, take a close look at what the footnotes say on those bridges because those are really important.

As you see on some of them, for instance, transportation costs might be favorable and you might wonder why is that favorable. That's because we're doing a heck of a good job on scheduling things and moving stuff around and reducing the number of shipping miles, but at the same time our fuel costs are going up associated with diesel and fuel surcharges. So that's kind of balanced out.

If those things go away we're going to continue to do a heck of a job on shipping and organizing and planning at our products. If those costs associated with diesel and fuel charges go down it's only to our benefit.

Got you. And then just last question on the box board markets. We saw folding carton prices come down in January, but your realizations only dropped I think it was $2 a ton. Is that more of a lag as things go through there or are you exposed to -- I know you've got the cup and plate as well, but are you less exposed on the folding carton side?

Yes, great question, Graham, because I'm glad to have the opportunity to mention that a little bit. There was some very late fourth-quarter pressure on our SBS board business which kind of carried over a little bit into the early part of the first quarter. And those were mostly on commodity grades, [Reese] had picked up that a little bit, the folding carton grade was under some pressure and I think they had on their price watch dropped that down $20 and then subsequently they said that cup had gone down $20.

Frankly, we didn't see that pressure on the cup price; we saw a little bit of it on the commodity grade of folding carton. But from a price standpoint, the difference for us is that we worked hard on mix and we ended up with a higher priced mix. So that that price that you see on the supplementals at $9.68 is only off $2, but get folding carton, which is 40% of our business was off significantly more than that.

However, having said all that that's history, that was early in the first quarter, demand is back, seasonality of our business -- we say there's not much and there's not much, but it's good demand characteristics heading for us right now and we feel great about it.

But if our mix did change sometime in the second quarter, which we don't anticipate but we'll see, that would take the price down a little bit even though the SBS market is not moving down, that little dip was already in and done as an early first-quarter move. Does that make sense?

That does absolutely. Thanks for very much, Gordon.

Okay, you bet.

James Armstrong, Vertical Research Partners.

The first question I have is are there any pass-through provisions either on the tissue side or the box board side related to either energy pricing or pulp pricing that we should be aware of or is it just all market-based?

Yes, it's very market-based. I mean -- and when we say market-based, we have contracts that might have a delay clause in them or something like that. But there's not -- and if we do have some they're very minimal, we call that sort of nonmaterial kinds of things for you, James.

And if it was it might be more on parent rolls relating to pulp -- pulp prices as they relate to parent roll prices or something like that. But in general for the majority of our business, no, we just move with the market and we negotiate the contracts and whatever the up/down mechanism is it is.

Okay. Then switching gears, the corporate line jumped a good bit. Could you help us understand what the -- a few issues on that? First, what were the eliminations in 2012, just as a reminder? And should we expect the run rate for corporate to remain about $12 million a quarter all else being equal?

Yes, James, great question. To answer the second one first, that $12 million is a good run rate going forward. We've definitely done some things in Corporate to help the Company, really all but a couple buckets, the biggest of which, if you look year over year, last year we had just finished the acquisition of Cellu Tissue, what that meant is we had a whole bunch of integration that we needed to do and continue to do today.

So a lot of that cost increase is figuring out how we wanted to run the Company, bringing in services into corporate, figuring out systems and we continue that today. So this year the costs are up a little bit quarter over quarter from fourth quarter because we're continuing to push projects -- integration type projects around IT, around shared services, things like that that are going to help the Company in the long run, but we're going to have to spend a little money to do it. So our run rate for this year at about 12 is perfect.

James, Gordon here. I just want to mention -- I mean we absolutely are committed to driving out non-value added costs. We're going to do that. So when we're spending money on that corporate line it's about trying to help us in the future. But that's a good run rate, as John mentioned, to think about through the rest of this year and then we're going to continue to try to push it down as we drive out any non-valued things that we see and can improve efficiencies.

Okay, that helps. And lastly, once Shelby is up and running what do you expect your maintenance CapEx and normalized depreciation to be?

For the last couple years our CapEx has been right about 50 for the non-Shelby. We do have maintenance costs that roll through our cost of goods sold for Shelby already. So maintenance costs this year's year over year are up. But we look at that every year, we look at the projects as part of our budgeting process and we identify what's the best use of our capital. So that number could go up, but it's going to depend on the projects we've got before us. So about 50 is a pretty good ball park to benchmark that off of.

Okay, that helps. And depreciation?

Depreciation should be pretty consistent. I don't have that number right in front of me, but it's going to go up year over year. Let me get that number back, I'll have to look that up. It will be in the Q because it will be pretty consistent quarter over quarter (inaudible) summarize.

Yes, we'll put it -- we'll work on trying to get that displayed in the Q for you, James.

Perfect. Thank you very much.

Okay, thanks for your interest.

Ian Zaffino, Oppenheimer & Co.

As far as the ramp of Shelby, I know you mentioned at 75% in the first year, is that going to be sort of zero or just pure catch funds in the first quarter? Or maybe just kind of walk us through the process on how that ramps up. And if you could roll that into maybe a discussion on how your discussions with some of the customers have been related to the new Shelby plant. Or can you really not really get into deep discussions until Shelby is actually producing? Thanks.

Well, we are in discussions with customers all the time related to Shelby. So let me answer that first and then I'll come back on the sequence or ramp up, Ian. The comments we have from customers continue to be that they're very, very excited and interested about getting that TAD paper off of that Shelby machine.

And we're going to have both TAD tissue and TAD towel off of that, and we work with customers, we're working right now on how that works for them and trying to integrate that into their business. But we don't sense any problem at all in making sure we have a home for the TAD paper that will come off of that machine. We feel very, very comfortable about it and we have a lot of anxious customers.

The second part of the ramp up of that, you start a paper machine up, of course it doesn't stay down and then come up at full speed. What happens is we said that we would get paper on the reel, that's a paper making term here, before the end of the year. But as we get into 2013 in that first quarter you typically start up a machine and maybe not at optimal speed. So you may not be running it at the full speed until you line it out a little bit. So you kind of bring it up in stages.

And I'll let my engineers -- I don't want to get them too much in trouble here, but that's the way we'll bring it. We won't bring it up to full speed right away, we'll bring it up, stage it in at different speeds and different control points as it comes up. And the sum of those control points, that's why we're trying to give the insight into what that paper machine looks like for 2013, the sum all of that is if you took the 70,000 tons times 75%, that's how many tons will go off that machine sometime during 2013.

So that will be -- more specifically, there will be some tons coming off that thing in the first quarter. But it just won't be at the rate of 70,000 tons a year.

Okay. And then in the discussions you're having with your customers, I guess one of the concerns is that there's a lot of TAD capacity coming on line. How are you going out there differentiating yourself, what's your value proposition if you could kind of remind us there?

Yes, always happy to do that. We are a company that after our acquisition of Cellu Tissue allows us to address every single category associated with the tissue business from the Shelby comes up the very high end ultra to take on the market leaders, the branded market leaders and all the way down into value and economy levels of paper. So we can do it all.

And what we're offering our customers is the opportunity to do those kinds of things across the whole range of qualities based upon what their desires are about selling their brand. As a reminder, we don't have our own brands, our brands are our customer brands. And if a customer brand wants to run just the high end we can do that, if they want to run the low end we can do that, if they want the whole range we can do that.

So we think that we have a lot to offer in that regard about the different options. And remember also that Cellu Tissue gave us some recycled capacity that we never had before under Clearwater and we can use that to also extend our product offering lines.

Thank you very much.

Kevin Cohen, Imperial Capital.

I'm wondering, could you talk a little bit about the demand trends that you're seeing broadly speaking for Private Label tissue versus branded? And what sort of competitive response, if any, are you seeing from the branded guys and how do you sort of see that continuing to play out over the balance of the year?

Still very good characteristics for Private Label. I mean we're probably enjoying some advantages of people wanting to have high-quality and pay a little less for it because they're buying it off of the grocery store shelves or out of some of the other categories of customers. So we still see Private Label growing.

With respect to brand response, I mean they all -- they might -- each one might respond differently, one might be offering a lower grade of product for themselves but still putting their old name on it. Another might be taking capacity out, another might be doing something else. I mean they're all kind of doing different things.

But I can tell you from our point of view on Private Label we still feel very good about the growth aspects of Private Label. And we feel especially good about it when Shelby comes up because then we'll be able to offer the very, very high-end range of ultra as well, and that's a very large differentiator for us in the market.

And then I guess separate from the market dynamics between Private Label and branded, within Private Label do you feel the Company is gaining market share or do you think the market shares are relatively stable or what sort of color can you furnish on that front?

Yes, we think -- our retail sales are up. When we say retail we're talking about case sales. I mean our case sales are up so I mean we feel like we are growing and our data suggests to us that we're growing our Private Label share. The Private Label market is also growing, it grows at a little bit different speeds depending on whether you are talking napkins or towels or tissue or high-end tissue, low-end tissue, you all got a little bit different paces associated with that.

But Private Label is not only here to stay, Private Label continues to grow. And the fun thing about that is that this market continues to grow based upon population. So there is demand for everybody, there's demand for the brands, there's demand for us and there's increased demand for us because of Private Label. So we get the basic demand plus the Private Label demand.

And then I guess on a separate topic, I know it's sort of theoretical, but when you look at tissue pricing today and inflation adjusted to terms where do you think it sort of stands? I know it will very product by product, but broadly speaking where do you think tissue prices are today versus about two or three years ago?

And is there more sort of patch up that the industry ought to be able to achieve and do you think that's possible at this point given the move in pulp prices down and natural gas, to your earlier comments, about having sort of a benefit from that cost input being down?

Yes, I think -- and it's just purely just an opinion remark. I don't want to go back for -- I don't have the history in front of me for two or three years ago, but tissue prices will probably move based upon not just demand but also what happens to pulp prices.

Remember that two of the three large branded players buy all of their pulp. So pulp prices go up, that puts pressure on, if pulp prices go down that's something else again. But it's hard to predict what's really going to happen relative to the tissue market.

But again, if you think of tissue as a solid demand up kind of business in the pulp and paper industry, and pick whatever number you want for population, if it's 2% on an 8-plus-million-ton market you've got to get 160,000 tons, 170,000 tons a year just to keep up, that demand is going to be there, there's going to be needs for paper machines to supply it, we're part of that and there's enough demand for brands and enough demand for Private Label to go for both.

That's very helpful. Thanks a lot, Gordon, and good luck with everything. And the extra disclosure in the supplement very helpful in terms of the sequential and year-over-year bridge.

Great, Kevin, thanks a lot.

Eric Hollowaty, Stephens Inc.

I too appreciate the extra disclosure. So, kudos, for including that. Gordon, I wanted to go back just briefly to, I think it was Graham's question on the SBS market. I know in your outlook you basically suggested a more or less stable market. We're reading about some industry trends that include some near-term pressure of late on cup stock as well as export volumes that might be under pressure. And I'm wondering if you're seeing any of that or perhaps the trade sources are drawing on a generalization from maybe other parts of the country?

As good as those trade sources are, I think their information is a little late. I think it's kind of behind the current curve. Our competitors, they'll do of course whatever they want to do. From our standpoint, we think that the cup stock increase or the cup stock decrease that just got recently announced by one of the trade publications is pressure that is just now evidently being seen by somebody, but it happened more in the first part of the first quarter than it did now.

We don't feel that pressure on the cup stock. We felt it on folding carton, we felt it was kind of the end of the fourth quarter, first part of the first quarter. But our backlogs look good, our business is up. We heard on a call from a -- a public call from a competitor today that they felt solid about the market. I mean we feel in a similar situation about it. Our order book looks good.

Okay, great. And I know you reported that Shelby contributed I think it was $1 million in the quarter in operating income. Just would love some qualitative color, if you could, on how the two converting lines that you have running are up -- that you have up, excuse me, are running. And are they running at full capacity or can you give us a sense for just kind of how that's going so far?

Yes, and they're not at full capacity yet, but they're working hard at it. I would tell you I also know they're probably listening on this call so they're hearing from me one more time they're not at full capacity yet but they're doing very, very well, and we feel very good about what's going on in Shelby.

We have a tissue line there, a towel line there, we know that there are some additional optimization opportunities and efficiency opportunities associated with that. But it's gone quite well. A quick reminder, I mean when that facility is done we'll have almost 1 million square feet under roof and we have already an active warehouse there helping us with synergies and taking costs out, we have two lines there, we're adding more lines to that particular facility.

So all in all we think we're just all aces at this point about how this start-up has gone and we're counting on it to continue.

Okay, great. And one more quick one if I could. In your outlook you mentioned that you thought that the net selling price for tissue for the remainder of the year is expected to remain stable. Just to clarify, did you mean your fully loaded net selling price or were you referring to like-for-like business, if that makes sense?

No, I'm talking about -- I think if I understand your question, am I talking about just retail or am I talking about the whole consumer products division?

Correct.

Yes, I'm talking about the whole consumer products division. But what can happen of course inside of that -- I mean it would be a nice stable normal promotional on the 60% retail, but parent rolls will quite likely move a bit relative to pulp prices. So parent rolls pricing might go down a little bit as pulp prices go down or up a little bit as pulp prices go up. So that's the variability in the price. And to me that's all in the bandwidth of stable.

Got you. Okay, great, that's all I have. Thanks very much.

Stuart Benway, S&P Capital.

Just a little bit more on the pricing, how long does it typically take you to respond to cost increases? I mean if you have a product that's kind of retail I think those prices -- retailers like to keep their price kind of stable and they don't like to see a lot of movement there. So is there a significant lag between cost increases that you see and price increases? Because I mean pulp prices peaked last June I believe and you didn't really give much price increase until later in the year.

Yes, there's a series of kind of built up delays that happened with that, Stuart. And again, it's a good question, but the first is the premise of Private Label is you can't take the prices up on the grocery store shelf above the brands, I mean that's why Private Label sells is it's a high-quality matching product at a bit of a lesser price. So there's no customers that are going to let you out run the brands on pricing.

So what has to happen is the brands have to announce, once the brands announce then the grocery store or whoever it might be, our customers say let's see if the brands are serious and the brands have to demonstrate that they're serious in taking the price up and Private Label moves after that. That whole process can be as much as three to even six months depending upon customers and grades and agreements and all that.

So that's why you see that lag. That's why frustration comes on our parts too when we see pulp prices going down in the Midsummer and we see a good first quarter the following year. You say, well, it's about time. We say that to ourselves to. It takes a while for those things to happen. And so, yes, there is lag time associated with that.

Okay. And then you said I guess you're going to produce about 128,000 to 130,000 tons of tissue per quarter implying pretty much stable throughout the year --

Right.

-- and so, I mean that's not showing any growth. Is that because you're pretty much at capacity at this point or --?

Yes, that is what we can produce, that's the 128,000 to 130,000 is what we produce on our machines and we sell it all. And if we are above those kinds of numbers, like I believe we reported in the third quarter 134,000, that would have been a quarter that we bought paper in where it made sense for us to buy paper at a price that we could turn around and resell that paper or buy at a low enough price to convert it into finished cases to make sense.

So it's always just a -- it's an economic decision for us. We're in this thing to make money. If we can buy something at a low price and sell it for a high price we will. If we can buy it at a low price, convert it to cases we will. But we want the market to know that what we produce is really about the equivalent of 128,000 to 130,000 tons, that's what you can expect from us when we're not buying.

Okay, that makes sense. And is the -- I mean you say that you produce for every category of tissue, but aren't margins typically higher for the higher value -- you know, higher perceived value products?

They are. The top end products, there's no mystery that those have some better margins than the low-end products. But of course it all depends on how much does it cost you to make it, because some of the low-end products you might be able to make significantly cheaper depending on your mix of furnished than a higher-end product, so it varies.

But if you go to a store shelf you'll find that the high-end products of course are going to cost more than the low-end products. How much you make on each of those -- what the margins are we really haven't revealed because the furnish changes underneath can make that look a little bit different. But we typically expect for high price products to get high margins.

And I'm assuming that the TAD products are going to be aiming primarily at the higher end? Because that is a higher quality product, correct?

Yes, yes, TAD is going to be our way to allow our customers to put on their shelves products which compete against the market leaders.

Okay, and one last one. I think if my math is right you had somewhere in the area of about $3 million of expense related to the integration of Cellu Tissue in the current quarter. And you said that corporate is going to be about 12 per quarter but wouldn't that $3 million be going down some as the year goes on?

Yes, Stewart, this is John. We never really broke out the detail of that $12 million of corporate. Cellu Tissue integration costs are a component of that. And as far as what they'll do this year, we've looked at this year, we've picked the project and we are comfortable with the $12 million all year this year's because some of those projects, because of the size of them, will take us all year to put in place. Next year as we change we'll update that number. But that's a good number for the whole year.

Okay, thank you.

Ted Shiung, Archview Investments.

I have two quick questions, first on corporate. I guess I'm looking at last quarter's call and you guys -- actually more mention of $10 million in the quarter give or take and I just wanted to see what changed to go to the $12 million level. Was it the -- any incremental expenditures related to Shelby?

And then my other question would be on -- if there's any seasonality in sales of parent rolls. I think you guys mentioned that that selling price went down a little because of mix. Is there anything we should look to in terms of seasonality as a movement of more or less parent rolls? Thanks.

I'll speak to the corporate cost to start with. When we look every year we look at the projects. And as different things roll over -- a lot of this again going back to the Cellu Tissue integration -- we picked some additional projects to do this year due to urgency. So that number has gone up to that $12 million, and that's why it's a little bit higher than prior quarters.

There is a lot of noise in there. There are other things in corporate going in and out between quarters whether it's reserves, it's stock comp, there's other things. But every year we look at those and decide which projects we can afford to improve the bottom line. There's costs to do it, but long term we think it's worthwhile. So that higher rate of $12 million is a number we're going to run at this year.

Can I expect if you're spending a little bit more that maybe there's more to come on synergies as it relates to Shelby or (multiple speakers)?

There could be. As soon as there is we would certainly let the market know.

And absolutely, those synergies we reported are net. So I want to be very clear that those are net numbers. So that's a great thing; if we are spending more money we're still clearing them with the synergies. But as opportunities present we'll do the ones that make sense.

Ted, on the second half of your question, the seasonality there of parent rolls, very little, but there's some that happens in the holiday period because some of the customers of ours that buy those parent rolls might take a holiday cottage or something like that and not need as much in the fourth quarter, those kinds of things. But generally not so much.

I mean, again, think of the business that we're in. I mean, it might be machine glaze, might do some of those kinds of things, maybe a little bit of tissue. But the demand for tissue for all the obvious reasons doesn't really go down at any particular time of the year.

Thanks.

Kevin Cohen, Imperial Capital.

I'm just sort of wondering in terms of capital allocation what are the latest thoughts in terms of the stock repurchase program? Just given the move in the stock recently if that perhaps creates some opportunities and how you prioritize that in the capital allocation thought process these days?

Well, it's still an option and we tried to provide transparency to that on the call. We said that we had purchased nothing really -- we weren't in the market in the first quarter but we wanted folks to know that we've been in the market in the second quarter and purchased an additional 111,248 shares, that's through the -- April 20 and we did about $3.4 million to buy those 111,248 shares.

We still have $15.2 million remaining under the program. So we have our program going, we made all the appropriate filings and 10b5-1's and all those kinds of things. So that's still out there, it's still an option. But our focus right now is really drive value through EBITDA increases across both of our business segments. I mean that's really how we're trying to drive the stock price.

Okay, that's very helpful color. Thanks, Gordon.

Okay. You bet, Kevin.

Thank you, sir. And that looks like it concludes our time for questions and answers. I'd now like to turn the program back over to Chairman and CEO, Gordon Jones. Sir?

Okay, thank you very much. We really appreciate everyone's attention this morning. As I mentioned earlier, we feel like we had a very solid quarter and we expect more of the same through the rest of the year. And thank you for participating.

Thank you, sir. Again, ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.