Clearwater Paper Corp (CLW) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Clearwater Paper Second Quarter 2012 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host for today, Mr. Gordon Jones, Chairman and CEO of Clearwater Paper Corp. Sir, you may begin.

Thank you. And once again, good afternoon, and welcome to Clearwater Paper's Second Quarter 2012 Conference Call. Our interim CFO, John Hunter, will walk you through our quarterly financial results.

Thanks, Gordon. Our press release this afternoon includes details regarding our second quarter results and you will 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 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 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, 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.

For the second quarter of 2012, we reported net earnings of $21.5 million, or $0.91 per diluted share, compared to net earnings of $13.9 million, or $0.59 per diluted share for the second quarter of 2011. Second quarter 2012 earnings before interest, taxes, depreciation and amortization, or EBITDA, was $64.2 million, compared to $52.4 million in the second quarter of 2011. Second quarter 2012 adjusted EBITDA, which excludes approximately $1 million in legal expenses associated with the First Quality Metso Paper litigation, and a $1 million loss associated with the sale of our legacy Cellu Tissue foam manufacturing assets, was $66.2 million.

Net sales in the consumer products segment increased 5.2% versus second quarter 2011 to $283.1 million primarily attributable to higher net selling prices and increased volume. Consumer products operating income for the second quarter of 2012 nearly quadrupled to $25.7 million, as compared with the second quarter of 2011, primarily due to higher net sales and lower external pulp costs. Operating income for the second quarter of 2012 also included the $1 million loss on the sale of the foam manufacturing assets and $6.7 million of net cost savings from synergies associated with the Cellu Tissue acquisition.

Net sales in the pulp and paperboard segment decreased 15.5% versus second quarter 2011 to $190.5 million. The decrease in net sales was primarily due to the sale of our Lewiston, Idaho sawmill last November. There was also a reduction in the sale of external pulp due to the increased internal usage, as well as lower paperboard volumes, down from the second quarter of 2011. Operating income for the quarter declined 7.1% to $32 million, compared to $34.5 million for the second quarter of 2011, primarily due to the decline in pulp and paperboard net sales, partially offset by reductions in pulp, energy, and transportation costs. Pulp and paperboard operating margins increased to 16.8%, compared to 15.3% in second quarter 2011, due to the benefits from the sale of our wood products operation.

Net interest expense of $9.1 million declined $1.8 million from the second quarter of 2011 primarily due to the capitalization of $2.8 million of interest associated with our TAD project, which includes the construction of our Shelby, North Carolina facility and updates to our Las Vegas, Nevada facility. We expect capitalized interest associated with our TAD project to be approximately $9 million for the second half of 2012 and approximately $19 million over the entire construction phase of the project.

Regarding taxes, we recorded a 39.2% tax rate for the second quarter of 2012. Excluding discrete items during the quarter, our effective tax rate was approximately 35.3%. We expect our annual effective rate, excluding discrete items, to be approximately 35% for 2012.

We had capital expenditures of $53 million during the second quarter of 2012, which included $43 million related to the TAD project, bringing total project to date expenditures to $191.9 million. Capital expenditures in the second half of 2012 are expected to be $95 million to $100 million, which includes an estimated $65 million to $70 million associated with this project. We currently estimate that the entire TAD project will cost approximately $275 million, excluding capitalized interest with all but approximately $15 million to be incurred by the end of 2012.

As of the most recent measurement date of December 31, 2011, our company sponsored pension plans were underfunded by $89.1 million. Although we did not make any contribution during the second quarter of 2012, we contributed $2.1 million to these plans in July, bringing our annual contributions to date to a total of $17.6 million. We expect to contribute approximately $3 million more to our company sponsored pension plan during the remainder of 2012.

With regard to liquidity, we had $37.2 million of unrestricted cash and short term investments on June 30, 2012, representing a decrease of $12.3 million from March 31, 2012. This decrease was primarily due to the capital expenditures associated with our TAD project, partially offset by strong operational cash flows in the second quarter of $50.9 million.

Our long term debt outstanding at June 30, 2012, was $523.8 million, which was consistent with the amount at March 31, 2012. Our financial ratios remain strong. Our total debt to capitalization, excluding accumulated other comprehensive loss, was 46% on June 30, 2012, compared to 46.8% on March 31, 2012. Adjusted EBITDA to net interest expense for the second quarter of 2012 was 7.2 times. During the second quarter, we repurchased 238,482 shares at a total cost of $7.5 million pursuant to our previously announced $30 million share buyback program. Since announcing the program in July 2011, we have repurchased 571,782 shares at a total cost of $18.8 million for an average cost of $32.91 per share.

I will now turn the call over to Gordon.

Thanks, John. Following our solid first quarter results, we posted even stronger second quarter results. Our second quarter EBITDA of $64.2 million and adjusted EBITDA of $66.2 million is a record quarter. Further, the cost synergies associated with our acquisition of Cellu Tissue are coming in ahead of schedule and our TAD project remains on track. I will now walk you through some of the operating segment details.

Consumer products net sales of $283.1 million were up 5.2% versus the second quarter of 2011, due to a 3.3% increase in volume, to 132,978 tons and a 2% increase in net selling prices to $2,129 per ton. The increase in volumes above our previous estimate of 128,000 to 130,000 per quarter resulted from improved production and excellent sales.

Higher net selling prices were driven by higher retail pricing with a price increase implemented in the fourth quarter of 2011 and the first quarter of 2012. 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.

Consumer products operating income for the second quarter of 2012 was up significantly to $25.7 million, as compared with the second quarter of 2011, primarily due to higher net sales and lower operating costs with decreased external pulp cost being the biggest driver. The TAD project contributed $1.6 million to second quarter 2012 operating income and we realized approximately $6.7 million in net cost savings from synergies associated with the Cellu Tissue acquisition in the second quarter.

Pulp and paperboard net sales of $190.5 million were down 15.5% compared to the second quarter of 2011, primarily due to the sale of our Lewiston sawmill, a reduction in sale of external pulp due to increased internal usage, and lower paperboard volumes. Paperboard sales of $188.4 million declined 4.8%. This was primarily due to a 4.3% decline in paperboard volumes to 193,285 tons, compared to record volumes in the second quarter of 2011. Paperboard net selling prices were down only slightly versus the second quarter of last year due to market pricing and mix.

Pulp net sales of $2.1 million declined from $8 million in the second quarter of 2011 primarily due to using more pulp internally, and to a lesser extent, a 30% decline in selling price per ton as the pulp markets have come down off of record highs in 2011.

Pulp and paperboard operating income for the quarter declined 7.1% to $32 million, compared to $34.5 million for the second quarter of 2011, primarily due to the decline in net sales.

Before I talk about our outlook, I want to express how pleased we are with the outcome in regards to the lawsuit brought by First Quality against Metso Paper related to the delivery of our new TAD paper machine in Shelby. In short, the court denied the Request for Injunctive Relief sought by First Quality and dismissed their Amended Complaint with prejudice.

While we had continued construction at Shelby, the court's decision clears up any uncertainty about the project resulting from the litigation. The project remains on budget, on schedule, with production expected to begin by the end of the year.

Now, I'd like to spend a few minutes on our outlook for the balance of 2012. We are still expecting annual net cost savings from synergies from synergies from our Cellu Tissue acquisition to ramp up during 2012 to an annual run rate of $35 million to $40 million by the end of the year. Specifically, net cost savings from synergies for the remainder of 2012 are expected to be approximately $7.4 million in the third quarter, $8.6 million in the fourth quarter, for a total of $28 million estimated for the entire year. This is up from our previous estimate of $20 million. We expect the consumer product segment to sell approximately 128,000 to 130,000 tons per quarter on average for the remainder of 2012. Further, we believe our pricing will continue to remain strong during the remainder of 2012.

The TAD project in both Shelby and Las Vegas is proceeding as planned. The first two Shelby converting lines, which were operational in 2011, are expected to contribute $2 million of operating income per quarter beginning in the third quarter. In addition to the first two converting lines, we are installing two additional converting lines that we expect to start up in the fourth quarter of this year. Offsetting some of this benefit will be an estimated $2 million to $3 million of additional costs associated with the startup and construction of the paper machine and the new converting lines, which will be incurred in the second half of the year. We expect an additional converting line will be added in 2013 and anticipate this will meet our stated goal of matching, converting, and papermaking capacity.

We anticipate the startup of the paper machine at Shelby in December of 2012 and estimate that it will produce approximately 70,000 tons per year when fully operational with approximately 75% of that amount in 2013. Also, as part of this project, we expect the work currently being done to improve our TAD capabilities in Las Vegas to be complete in the third quarter of 2012. This project will allow us to supply the full range of TAD products, including paper towels and bath tissue to customers across the United States by minimizing transportation costs and establish us as the only private label tissue products company to offer a full line of consumer paper products to our customers.

As for our pulp and paperboard segment, we continue to expect 2012 paperboard volumes to be similar in 2011 and selling prices to be stable. We also continue to expect pulp sales to be minimal as we anticipate utilizing almost all of our pulp internally. Our scheduled major maintenance expense in pulp and paperboard segment is now estimated to be approximately $4.3 million during the fourth quarter of 2012.

Regarding total company sales, we believe the cost structure will not change significantly during the remainder of 2012. And finally, we continue to expect corporate expenses to be approximately $12 million per quarter.

In summary, we had an excellent quarter driven by strong results and remain confident that we will continue to be on track to meet or exceed expectations on all of our key initiatives. With the Metso lawsuit now behind us, we look forward to the completion of our new TAD paper machine later this year. I would also like to take this opportunity to mention that [John Hertz], whom we recently hired to serve as our Senior Vice President of Finance and CFO, will be assuming his CFO responsibilities on August 6. Mr. Hertz brings 23 years of experience to Clearwater Paper, including accounting, auditing, finance, and investor relations, and we are delighted to have him join our company. His most recent role was as CFO of semiconductor manufacturing equipment supplier, Novella Systems.

Thank you for listening to our prepared remarks. Operator, we'll now take some questions.

Certainly. (Operator Instructions) Our first question comes from Graham Meagher from TD Securities. Your line is open.

Good afternoon. It's Graham Meagher with TD Securities.

Graham.

Gordon, just a couple of questions on paperboard to start. Have you seen any softening in demand through sort of mid-2012 here, or have you been insulated with your exposure to food?

Well, I guess you could say there's a little bit of softening, but I mean, we still have a very good market. We feel very good about the business. You can probably notice from our results that we're performing quite well. But I think the way to think about the paperboard business is how the--how's the economy going, and with the economy still stumbling a little bit, that probably gives the impression of some softness in paperboard. But overall, we still feel very good about it where our pricing remains stable and it's still an excellent business for us.

And just on the pricing there, quarter over quarter it was up a little bit. Is that more just a mix issue?

Yes, it is. It--you're looking on our supplementals back there where it says--.

--Yes--.

--We went from 968 to 975. That's exactly what it is. We--that whole number I had kind of talked last time on the call that was a mix issue of why it only went down $2 when there had been some pressure in the first quarter, really at the end of the fourth quarter, but in the very first part of the first quarter it only went down $2 because of some mix changes. Those mix changes have continued, so we continue to run a higher level of extrusion versus our non-extrusion products and that's helping with our paperboard price. But our prices remain stable.

Got you. And then, just shifting gears to tissue, which some of that softening in the economy. Have you seen any significant shift within your tissue grades? Now, you participate in pretty much all the different grades.

Right. We--you're absolutely right. We're in all the grades. And no, we really haven't. I mean, the one--the very fun thing about being in the tissue market is that the demand is--continues to go up. So we haven't seen any reduction in demand and we haven't seen any major shifts between the different categories.

Got you. And then, on the synergies, obviously moving those upwards in 2012, but leaving the total the same. Is that more a timing issue? Things have been coming in a little bit quicker, or there are some new savings that were identified?

No. It's just very much timing. You're right on the money, Graham. It's all about timing. We're just getting them faster than we had originally indicated to the market that we would do. And one of the things that we promised everyone is that we would give these updates on synergies and when they change, they change. So if you remember, when we started with 15 million to 20 million, when we went to 35 million to 40 million, we let the market know that and we thought it's appropriate for the market to know we're going to do better than 20 million this year. So that's where the 28 million comes from.

Great. And just a last quick one on the foam business sale. Any material impact on earnings with that?

No, none. It was just determined to be non-core for us, and we decided that it was time to go ahead and remove it from the mix.

Got you. Okay, thanks very much. That was it.

Thanks, Graham.

Thank you. Our next question comes from Steve Chercover from D.A. Davidson. Your line is open.

Good morning, or good afternoon, and thank you.

Steve.

First of all, you bought back almost 240,000 shares, but the share count was still up nearly 400,000. So were those options that were granted to management, and does that happen every quarter or is that just an annual event?

Yes, Steve. Good comment. In the first quarter, if you go back and look, is when that increase really happened. We do--we have an annual LTIP program that's documented in our proxy statement. You can see that out there. So in the first quarter of each year, you will see going forward, assuming there is a grant, that will happen in the first quarter. So that is really offsetting the repurchase activities. And that was--we called that out--when we put that $30 million share buyback in place, we called out that we wanted to do that--we wanted to show we believe in the stock, and two, to offset that management equity that we were giving up.

So assuming you carry out the remainder of the program, we should see a modest decline, a very small decline, the second half of the year?

Yes, correct. We will--that program is still out there and we'll continue to buy depending on the price on the stock.

Okay. And I just wasn't writing fast enough. Could you clarify your maintenance schedule and expenses for the remainder of the year? And was there anything in Q2?

Yes. In Q2, there was not, and there will not be any in Q3. But in Q4, at Cypress Bend, we'll have $4.3 million and that's up from the $3.3 million that we said at the beginning of the year. We just looked at it. There's some other things we can do while we're down, so we're going to spend a little bit more on some projects to get that done in the fourth quarter.

Okay. And then, at risk of touching the third rail, has there been any dialogue with SAC since they wrote their letter?

We continue to talk to all of our shareholders, Steve. That's--we got their letter. We're continuing to analyze it, taking a hard look at all their suggestions. And we do talk with them and we talk to all of our shareholders.

Great. Okay. Thanks, Gordon.

Okay. Thank you.

Thank you. Our next question comes from Ian Zaffino from Oppenheimer. Your line is open.

Great, thank you.

Hi, Ian.

On the price increase--how are you doing there?

Good.

On the price increases, how much longer is it going to take for that to slow? And then, is there an opportunity to raise prices even more? Thanks.

On the price increases for--well, the tissue price increase--if that's the one you're talking about--that was really a fourth quarter, first quarter event. That was the one that was going to be and was actually fully implemented, Ian. That was a 2.5% increase across that total period, about 1.25--maybe a little bit higher than 1.25 in the fourth quarter of last year, and then the remainder of that 2.5 was in the first quarter. That's the only tissue price increase that is out there right now, if that's the one you're referring to. But those are all implemented and those were finished up in the first quarter.

And what about the potential to take prices up even more? What are you seeing in the marketplace--or leases? They're not (inaudible) to reduce some of your promotional activity?

Yes. I think the market continues to be nice and solid. We talked in our script about we expect the prices to remain stable for this year. I mean, we see no reason to have pressure on tissue prices at all. And as you know, the market is very much dominated by the brands and as the brands choose to take up their prices, those are the ones that are typically leading price increases. But I think where we are right now, having not heard anything from the brands or the rest of the market, we want to keep our customers very competitive and we will take price up, obviously, wherever we can. But it's--we just don't see any change in price, at least for the short term.

Okay. And the other question then is, with the pulp curve kind of pointing downward, what do you think is going to happen with price? Is it going to--I mean, you can keep it fixed and take the margin or (inaudible).

Well, for us--and it's always been difficult to model us, as I know you know very well. But for us, we have about this three-month lag relative to what happens in the pulp market. And just a quick thought about that is the pulp prices were still up high throughout the second quarter here, and pulp prices really only started going the other direction in the third quarter this year. So any benefit of this most recent drop in pulp prices that you're hearing about today in July are going to hit us more as a fourth quarter event and not in the third quarter.

Having said all of that, it's hard to know exactly where pulp prices are. Risi is talking about pulp prices going down and certainly that's happened as northern softwood, a number of suppliers have announced that two stages down, $20 followed by $30, to take NBSK to $850. So that appears to be happening now. They're also forecasting it might bubble up a little bit in the fall and then go back down. I would leave you with this thought, that for the tissue business, which is a pretty hardwood oriented kind of business, there's almost 5 million tons of hardwood coming on in the world between now and early 2014. So I'll let you make your own assumption about what's going to happen to the pulp market, particularly the hardwood with that kind of [bad] added capacity coming on in pulp.

Perfect. Thank you very much.

Okay, thank you.

Thank you. Our next question comes from James Armstrong from Vertical Research. Your line is open.

Good afternoon.

Good afternoon, James.

First, on the consumer products tissue realizations on your supplemental material, pricing--you're showing pricing quarter over quarter down about $30. Was that just a mix shift? And if so, how--what was the shift due to?

Yes, it's a good question. And it's higher parent roll sales and parent roll sales, of course, on a per ton basis, which is all that's reported in, is what's pulled that down. The retail side of our business is just fine. I mean, it's gone very well. In fact, it's up a little bit on a finished case basis. But that number is very reflective of just higher parent roll sales and that comes from higher production and that's all good news for us.

And then, on that production number, you had a pretty strong volume number on the tissue on the consumer side in the second quarter. Is there any reason that's not sustainable into the third and fourth quarter?

Well, we're kind of reflecting back across some comments we've made in previous earnings calls, James, where we've said that we would typically be in the 128,000 to 130,000 range of selling and we provided those comments to folks so that they would know that if we were more than that, then either we had a very good production month, highly productive on our machines, or we were buying in some tissue rolls to take advantage of some logistical situations. For us, this particular number this quarter is about our operations are running very well and those results are excellent as a result of it. But that's what it's from and that's why we just kind of fall back to 128,000 to 130,000, but certainly we hope to continue to run very well and we'll do whatever--best we possibly can there. But we just didn't want to come off of that initial 128,000 to 130,000 number.

Okay. And lastly, how much nat gas do you buy a quarter? And do you have any hedges in place?

I'm going to pass that one to John. But while he's pulling that number out, we don't actually call it hedges. We do a little forward buying is the way we look at it, because we don't want people to think we're some kind of financial company trying to hedge something per se. So--but we do a little bit of forward buying. John, you want to talk about that?

Yes, James. We do hedge and we do that on a spot basis that we look at to see where we're at. So for the remainder of 2012, we've got about 29% of our nat gas purchase hedged at the moment. We look at that regularly, so that can change. But we do report that each quarter. So we look at the need, we look at where we think it's going, and we make our decision.

And how much do you buy a quarter?

We haven't put out the volumes for our natural gas. So--.

--Okay. Thank you very much.

Okay, thanks, James.

Thank you. Our next question comes from Eric Hollowaty from Stephens. Your line is open.

Hey, guys.

Hi, Eric.

Nice job on the quarter. Thanks for taking my questions. There's been a lot of attention in the investment community lately on the struggles of Super Value. And as I last understood, they were one of your top three customers on the consumer tissue side. And so, I'm wondering if you can just opine on the potential implications of their struggles, particularly as it concerns potential loss of market share to competitors or to the mass channel, where they seem to have an increased focus on grocery these days. Thanks.

Sure, Eric. Thanks. The--don't have a lot to say about it, honestly, because certainly it's for them to talk about what's going on with their particular company. But let me just say that they're a very highly valued customer of ours. The way to think about Super Value I think for yourself and others that are modeling us is the demand associated at the Super Value side doesn't go away no matter what happens with Super Value, what they do or don't do or whatever choices they make. I'd also mention to you that many of their marquee banners, like Jewel Osco and Shaw's and Acme and Albertson's in southern California, and those kinds of places are just terrific properties and we're delighted to be working with them in partnership to get them the tissue paper that they need. So there--so lots of very good relationships between the two of us. But if something were to happen to them, and I don't know what it would be or what the--maybe restructuring or any kind of options that they might consider, we feel very confident that the tonnage that we have going to them would be displaced and that--very highly likely that it would continue to be ours at the next location. But it's hard to opine on what's in their future strategy. I'd just leave you with they're a very good customer of ours and they're highly valued, and we appreciate that long term relationship with them.

That's great. Thanks for that color, Gordon. And just as a corollary to that, in terms of the market share grab that a lot of the mass retailers are aiming for, if you walk into any Wal-Mart or Target, you can see that. How are you guys thinking strategically about that part of the market, and whether it's from a diversification standpoint or a more offensive business development standpoint in terms of developing opportunities within that channel?

Well, it's another good question. And we are interested in those channels. I mean, we're interested in all the channels that purchase tissue. Prior to, of course, the Cellu Tissue acquisition, we were very grocery store centered, and--but that was based upon limitations of paper supply. And now with having a--coming up on 1.5 years or more of Cellu Tissue having joined into the Clearwater family, we're now paper long. So we have the ability to participate in those other kinds of forums to sell our tissue paper and we're doing that. So we very much want to participate in all those. We're not saying no to any category or any option where it makes sense for the company. So your comments about business development are probably the ones that are most in line with where we are. We need to continue to develop our business. And we are, as I mentioned in the script, really the only company out there that's going to offer this full range of products all the way from an ultra soft and ultra strong product all the way to recycled and, of course, the many grades of conventional paper as well. We've got it all. We think we're the only one that can do that.

Great. Thanks, Gordon, and good luck.

Okay. Thanks, Eric.

Thank you. Our next question comes from Stuart Benway from S&P Capital IQ. Your line is open.

Yes, thank you.

Hi, Stuart.

I just wanted to--hi--talk about the paperboard again. Your volume was down I guess over 4% in the quarter, and another major producer reported some weakness in that sector today. And if that business is mostly in food, why would the economy be having that kind of an impact on volume?

Well, it's also a good question. But it depends on who you are and what segment you're selling into. We do sell into food and--but we also sell in a bunch of other segments as well. And I would say the thing to watch when you look at our supplement back there - that's that page three supplement that I know you're referring to - is the all time record quarter that we've ever had in paperboard was the Q2 in 2011. That's the 201,000 number. The 193,000 that we just sold in Q2 of this year is the second all-time best that we've ever done in paperboard. So we don't look at it as though our volume is off in paperboard. We look at it more as though our volume is up.

One of the things that we had said in previous calls is that kind of like we gave some forward feel to the 128,000 to130,000 tons in our tissue business, we think of paperboard as more like a 185,000 ton kind of business. And in the first quarter when we reported 182,000, there was an outage in that particular quarter and they did quite well even with that outage, and the 193,000, of course, even better. So if you're modeling us, Stuart, think of us as about 185,000 tons and every time we're there or above we've done very well.

Okay. And on the new TAD machine, you said it's going to be 70,000 tons and 75% capacity next year. But how fast do you expect that to ramp up?

We don't have--aren't frankly giving the slope of the curve associated with that. We're just trying to give people a feel for what it looks like for the total year, because there are so many variables that go into that. I mean, do you come--just a quick example--do you come up at a slow speed and ramp up, or do--or how fast do you take the speed of the paper machine back up? How quickly do you get to the quality framers that you want to get to? And those will take us a while. But there is also the fact that, although we're going to get paper on the reel in the--yet this year, and meaning we're starting up that paper machine this year, but it's going to take us a while to make sure that we get the inventories built to the levels and organized. We've done a lot of pre-organizing with customers, but we want to make sure that we get into their distribution warehouses what they need to have in there. So that means that some of the billings associated with this TAD paper machine don't happen instantaneously with the beginning of the first quarter.

So it's kind of a combination of building up inventory, getting that all distributed where we want it, but the--kind of the overriding factor is how quick can we get paid to run a reel, how fast can we come up and still meet all the quality requirements that we so desperately want.

And so, as you go from construction to production, I guess really in the first part of next year, then these expenses will be expensed, right? They'll be--it will be a negative?

Yes. Yes, those startup costs we tried to call out for the rest of this year some of those costs, that $2 million to $3 million in the second half of the year. Those are those costs of training, getting people up to speed, and getting everything set up. We'll continue to have those in 2013 as we ramp that machine up.

Okay. And your corporate expense was up significantly in the quarter, I think about $6 million. And I think that $1 million of that was for legal expenses and then the million for the loss of the foam assets. What accounted for the remainder?

Okay, I'm actually--I guess I need--on your numbers, I'm looking at the expense chart. I'm showing $13 million in Q2--oh, from Q2 '11, I'm sorry.

Yes.

I was going--.

--7.5--.

--Yes, I apologize. In the first quarter we talked about this year we are planning on running at that $12 million level. What we're--where that's going is really with the integration of Cellu Tissue in 2011--we were just getting started on that in 2011--we have integrated a lot of the corporate function. We also talked--and the biggest one of those being IT. That was spread throughout the company. So that gives you--we've consolidated that into the corporate expenses. We're also still spending quite a bit of money on the integration and spending a lot of money to get those synergies. The net numbers that we're reporting are net of the cost, but you see the benefit of those in the business unit and you see the cost of those are running mostly through corporate for a lot of those synergies. So that's been--we said this year would remain at $12 million as we continue to finish that integration, get those synergies and work towards those. So that $12 million rate is what we expected and it is consistent with prior quarters.

Yes. Stuart, this is Gordon. I might just mention that one of the things that we've been working very hard on here is driving out all of the non-value-added costs. So I would give you the comment to rest assured that we're trying to drive those numbers down as fast as we can. One of the programs, for instance, which we have implemented across the company, we--is really a Lean program. We call it continuous improvement, but it's about taking out waste and about getting our costs down. And we're looking at that SG&A area as part of that whole thing and not just the operating side.

One last one. So CapEx is going to be $275 million for the plant for the TAD machine this year, so the total is--what--going to be $325 million for the year?

Yes. I think the way we look at that, Stuart, is--I think I'm going to pass it to John, because we gave some of those specific numbers. But we had Shelby the second quarter was $43 million, the rest of the year at Shelby, about $65 million to $70 million. And that means that total CapEx--that would be our normal CapEx, not counting the Shelby--or--and the Las Vegas TAD project, is $53 million in the second quarter - we'd given that - and the rest of the year about $95 million to $100 million, $105 million kind of range. So that's how we finished for the year. And--but the $275 million that you mentioned, there's about $15 million of that $275 million which is going to carryover that we'll actually spend during 2013 just by the nature of what we have coming in and when we owe it.

So Stuart, if you're talk--looking for just 2012, that's the $195 million to $200 million number for just 2012.

Total. Total or--?

--Total for the year.

Okay.

Yes.

And how about any guideline for--I mean, I'm sure it's going to be down in 2013, but like half or--?

--We haven't put it out there yet. What we've said is we look at that every year as part of our budget process. Clearly, it will go down. We have ran for the non-TAD project capital, we've been about $50 million the last couple years. We're bigger, so there'll be more projects in the future. But $50 million is the baseline we've had the last couple years. But we'll look at all the available projects and look at our free cash flow for next year and make that decision, and we'll give you that number at the end of the year.

Thank you.

Thank you. We have a follow-up from Eric Hollowaty from Stephens. Your line is open.

Yes. Gordon and John, just really quickly. Gordon, as you were reviewing the performance of the consumer products segment, you referenced a $1.6 million contribution. I think it may have been an operating income contribution. Could we just revisit that? I wasn't able to get that when you first ran through it. Could you just repeat what you said there?

Yes, Eric, I'll jump in. This is John. Yes. We called out--the last few quarters we've called out the contribution from the TAD project, and that's the two lines at Shelby. And last quarter it was about $1.1 million. This quarter it's $1.6 million. So as that machine works its way up the cost curve--startup curve, it's generating more. And we've thrown out there that it will be to that run rate that we previously said of $2 million per quarter of operating income. And remember that also includes depreciation. So if you're looking at EBITDA, that's a larger number.

Right, got it. I'm sorry. Gordon? So the--.

--I was just going to say, Eric--sorry.

Yes.

The $1.6 million was operating income, too. That's what my statement was.

Understood. Okay, got you. You are--are you making TAD converted product on those lines, or is this still conventional product that hasn't yet shifted to TAD?

Yes. We--on--those converting lines will do both. They will convert conventional paper and they'll convert TAD paper. They are doing both right now, but any paper that's going into Shelby that's TAD happens to be coming from one of our other two facilities, whether it's the--up in Canada at Saint Catherine's, or it's from Las Vegas. So if you looked at Shelby--if you walked in Shelby now, you'd see converted conventional tissue and you'd see converted TAD. But none of that TAD, of course, is being made in Shelby. It's all coming in from our other two sites.

Understood. Okay, that's great. Thank you very much.

Okay, thank you.

Thank you. I show no further questions at this time, and would like to turn the conference back to Mr. Gordon Jones for closing remarks.

Okay, thank you very much. As I've said in my remarks, we had an excellent quarter driven by strong results and we remain very confident that we're going to be on track to meet or exceed expectations of all our key initiatives. We very much appreciate everyone's interest in the company and look forward to talking again next quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.