Clearwater Paper Corp (CLW) 2017 Q2 法說會逐字稿

Welcome to the Clearwater Paper Corporation's Second Quarter 2017 Earnings Conference Call.

As a reminder, this call is being recorded today, August 2, 2017.

I would now like to turn the conference over to Ms. Robin Yim, Vice President, Investor Relations of Clearwater Paper.

Please go ahead.

Thank you, operator.

Good afternoon, and thank you for joining Clearwater Paper's Second Quarter 2017 Earnings Conference Call.

Joining me on the call today are Linda Massman, President and Chief Executive Officer; and John Hertz, Chief Financial Officer.

Financial results for the second quarter were released shortly after today's market close.

You will find a presentation of supplemental information, including an updated outlook slide, providing the company's current expectations and estimates for the range of adjusted EBITDA for the third quarter and the full year of 2017.

And certain costs, pricing, shipment, production and other factors expected to impact the third quarter of 2017 posted on the Investor Relations page of our website at clearwaterpaper.com.

I would like to remind you that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended, including, but not limited to, adjusted EBITDA for Q3 and full year 2017.

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 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, 2016, and Form 10-Q for the quarter ended March 31, 2017, as well as our earnings release and supplemental information.

Any forward-looking statements are made only as of this date as the company assumes no obligation to update any forward-looking statement.

Additionally, we will be providing certain non-GAAP information in this afternoon's discussion.

A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release and in the supplemental material provided on our website.

John Hertz will begin today's call with a review of the financial results for the second quarter, and Linda Massman will provide an overview of the business environment and our outlook for the balance of the year.

And then we'll open up the call for the question-and-answer session.

Now I'll turn the call over to John.

Thank you, Robin.

Q2 was a solid quarter financially and operationally for Clearwater Paper as we delivered adjusted EBITDA at the midpoint of our outlook range and continued to make progress on our strategic initiatives.

Before I get to the details of our second quarter results, I'd like to preface my comments by stating that throughout the rest of my remarks, I will be distinguishing between GAAP and non-GAAP or adjusted results.

The adjusted results exclude certain charges and benefits that we believe are not indicative of our core operating performance.

The reconciliation from GAAP to adjusted results is provided in the earnings release, supplemental slides posted on our website.

The second quarter of 2017, those items netted to an approximate $200,000 pretax benefit and are primarily comprised of the $1.5 million benefit related to the mark-to-market adjustments to our outstanding directors' common stock units, an approximate $1.3 million in charges, primarily associated with the closed facilities in Long Island, New York and Oklahoma City.

So with that, let's get to our results.

The second quarter net sales came in at $430 million and below our outlook of flat to up 1% primarily due to a 4,000-ton decrease in consumer product shipment volume and a 3,000-ton decline in paperboard shipments.

All of which was partially offset by an improved paperboard product mix and the 3% improvement in SBS pricing.

Versus Q2 2016, net sales were down 1.6% due primarily to a 31% decline in nonretail tissue shipments as a result of the December 2016 closure of 2 paper machines in our new Wisconsin mill.

As an offset in our paper -- Pulp and Paperboard division, paperboard shipments and average prices were up due to the Manchester acquisition.

Second quarter adjusted gross profit of $50 million or an 11.7% margin declined 129 basis points from the first quarter due in large part to $9 million of planned major maintenance expense at the Arkansas mill, higher chemical costs and higher external pulp prices.

All of which was partially offset by lower wages and benefits.

Adjusted SG&A expense was $31 million or 7.1% of second quarter net sales, which was flat with Q1.

Adjusted corporate expense was $14 million of SG&A spend in the second quarter, essentially flat with the first quarter.

Adjusted operating income was $20 million or a 4.5% margin.

Adjusted EBITDA was $45 million or 10.5% of net sales and at the midpoint of our outlook of $42 million to $48 million.

That compares to $49 million or 11.3% in the first quarter and $66 million or 15.2% in the second quarter of 2016, which did not include any major maintenance costs and had comparably lower input costs for natural gas, pulp, chemicals and packaging supplies.

Net interest expense in Q2 was $8 million, which was essentially flat with Q1.

Turning to taxes.

On an adjusted basis, our Q2 effective tax rate was 33% versus 38.3% in the first quarter, in line with our outlook of 34% plus or minus a couple of percentage points.

Second quarter 2017 GAAP and adjusted net earnings were both approximately $8 million or $0.48 per share, which is below the midpoint of our outlook of $0.44 to $0.63 per share due to accelerated depreciation on certain assets in the quarter.

That compares to an adjusted net earnings of $11 million or $0.64 per share in the first quarter and $24 million or $1.37 in the second quarter of 2016.

Noncash expenses in the quarter of 2017 included $26 million of depreciation and amortization and $400,000 of total equity-based compensation.

Employee headcount at the end of the second quarter was approximately 3,200, which is down 100 heads from Q1, primarily due to warehouse automation and the closure of the Oklahoma City converting facility.

Now, I'll discuss the segment results.

Consumer products net sales were $232 million for the second quarter of 2017, down 4.3% compared to the first quarter, primarily due to a 17.6% decline in nonretail tissue shipments as incremental parent rolls were converted to support our forecasted demand for the balance of the year.

Retail sales declined by 1% and converted cases by 3% due to weaker product mix within the ultra-grade tissue than forecasted and fewer promotions in the quarter due to tight supply of certain products.

Consumer products adjusted operating income in the second quarter of 2017 was $12 million or 5.1% of net sales, essentially flat with the first quarter.

CPD adjusted EBITDA of $28 million or 11.9%, was up from $27 million or 11.1% in Q1.

Now turning to the Pulp and Paperboard division.

Net sales of $198 million for the second quarter of 2017 were up 1.4% versus the first quarter due to richer product mix and improved prices, which were partially offset by a 1.5% decline in shipment volumes.

Average sales price per ton in Q2 was up 3% or $28 per ton compared to Q1.

Pulp and Paperboard adjusted operating income for the second quarter of 2017 was $22 million or 10.9% of net sales as compared to $27 million or 14% of net sales in the first quarter.

The margin impact versus Q1 was due in large part to the $9 million of major maintenance costs at our Arkansas mill.

Pulp and Paperboard's Q2 adjusted EBITDA was $30 million or 15.1% margin, down from $35 million or 18.1% in the first quarter.

Now, turning to the balance sheet.

Capital expenditures were $48 million in the second quarter of 2017, of which $39 million were spent on strategic and other ROI-positive projects.

Expected CapEx for the year is approximately $250 million, of which $100 million is for the new paper machine in Shelby, $90 million for strategic projects, and $60 million is for maintenance CapEx.

To date, we have spent a total of $89 million.

We had $108 million of borrowing outstanding on our revolver at quarter end.

Long-term debt outstanding on June 30, 2017, remained unchanged at $575 million.

Turning to the stock buyback program.

In the second quarter, we did not repurchase stock due to our focus on the strategic projects.

I believe there's approximately $30 million remaining under the current authorization.

With regard to our liquidity, we ended the first quarter with $9 million of unrestricted cash, and we had $192 million available under the revolver.

During the second quarter, we generated $58 million of cash from operating activities or a 13.5% of net sales, up from 10.4% in the first quarter.

That's primarily due to working capital management improvements by reducing days sales outstanding and extending days payable outstanding.

That concludes my remarks.

And I will now turn the call over to Linda Massman, who will discuss the company's outlook.

Thanks, John.

Today, I'll provide some additional commentary on our second quarter performance, then I'll take a look at the market environment and what we expect for our business segment.

Finally, I will tell you what we expect for the balance of the year.

Second quarter adjusted EBITDA performance came in at the midpoint of our outlook, and I was especially pleased to see we generated $58 million in cash flow from operations or 13.5% of revenues due to improvements in working capital management.

Both of our business segments performed well in the second quarter, but that performance was dampened a bit due to some challenges in achieving the volume and mix we had forecasted for the tissue business.

Looking first at our Consumer Products division.

Business remains solid from a demand standpoint as John mentioned.

Total sales dollars were down 4.3% sequentially, driven by lower pricing and volume.

We experienced a different sales mix within our tissue products than forecasted.

That resulted in lower sales and led to a tighter-than-forecasted inventory position, which meant we limited promotions in the quarter to build needed supply of certain products to support demand in the second half of the year.

For the Pulp and Paperboard business.

Shipment volumes declined 1.5%, but net sales were up 1.4% due to a richer product mix away from commodity-grade paperboard.

Demand remained solid in the second quarter, and our backlogs were up and in line with industry trends and tracking comfortably above levels at this time versus the last 2 years and is now tracking close to levels seen at this time in 2013, which was a robust year for SBS.

Regarding our 3-year strategic plan announced in 2015, we have seen a cumulative cost reduction of $70 million to the second quarter of 2017, which is on track to achieving total cost savings of $115 million to $145 million.

Our biggest and most visible strategic project, the continuous pulp digester, is in the final stages of completion with installation and testing of final equipment and instrumentation underway.

Start-up remains on track for early fourth quarter, and we're excited about the capabilities and efficiencies the digester will bring to our operation.

We're also now in the homestretch with warehouse automation and realizing the benefits of the completed installations in Shelby, Las Vegas and Lewiston.

The annual run rate contribution to EBITDA through the second quarter was $14 million.

The remaining installation at our Elwood, Illinois facility is moving along very well and is approximately 75% complete.

Regarding our new tissue machine and warehouse project in Shelby, North Carolina, I'm happy to report that the project remains on schedule and within budget.

Design engineering is currently the project team's focus, and we have now started to clear the site and grade the land in preparation for construction.

We have made great progress against our 3-year strategy to help us win in today's marketplace.

We remain focused on producing the finest quality products, while driving cost savings and efficiencies to utilize our network and capabilities to meet the changing needs of our customers.

Let's turn our attention now to my second topic, the market environment for both business segments.

Starting with Consumer Products.

The IRI data for Q2 indicated that the U.S. retail tissue market measured in dollar sales was down 3.5% compared to Q1 due to seasonality and lower branded promotional activity compared to Q1.

Based on current IRI scan data, private label gained a point of market share while the brands were down 1 point in the second quarter.

Private label market share was approximately 25% of total retail tissue according to IRI, and Clearwater Paper's share of private label was approximately 33%.

Our head tracking service indicated that traditional promotional print ads by the brands was seasonally lower quarter-over-quarter, which was a factor in the 3.5% decline in U.S. retail tissue market sales for the second quarter.

The most current RISI forecast for net new North American tissue capacity through 2019 is 986,000 tons.

If the total capacity comes online as scheduled and using RISI estimates for demand in North America, the demand to capacity ratio in 2019 would be 98%.

Please note this demand to capacity ratio does not factor in imports.

We are facing commodity cost inflation as we progress through the third quarter.

Originally, we've forecasted a decline in pulp cost, but instead, it is a headwind going into the third quarter.

Pulp inflation also has a bigger impact in our third quarter this year because we were building pulp inventory in preparation for our Lewiston outage at a time when pulp prices are elevated.

In addition, chemical costs are also up.

Turning to our Pulp and Paperboard business.

The demand environment for the North American paperboard is equally encouraging.

RISI's outlook for 2017 remains unchanged with operating rates averaging 94%.

Through June of '17, the American Forest & Paper Association reported a 95.3% operating rate compared to 94.3% for the same period last year.

Order backlogs reported by AF&PA were up 37.5% at the end of the second quarter compared to levels reported during the same period last year.

AF&PA data for SBS backlogs through the second quarter have been trending steadily upward since late 2016.

The industry backlog levels at the end of the second quarter were 5.9 weeks, up from 3.9 weeks at the end of 2016.

This is the highest backlog level since April of 2014.

RISI has revised their outlook for 2017 U.S. export volumes to grow by 5.1%, which is a reversal of their forecast for a decline in export volumes of 4.2% in the March 2017 forecast.

On a year-to-date basis, AF&PA has reported a 3.9% increase in exports compared to the same period last year.

RISI's outlook for imports of competing substrates remained flat for the year.

In February, we mentioned that one of our top-tier paperboard customers was being acquired by a competitor.

Since the announcement, our sales team has been focused and working hard to refill the sales pipeline.

We have made significant progress to date and believe that our paperboard sales team can completely close the gap by year-end.

With this market environment in mind, let's turn to my final topic today, our third quarter outlook compared to the second quarter and our outlook for the balance of the year.

Compared to the second quarter, we expect consolidated net sales to be up 1% to 3% sequentially, primarily due to seasonality and improved paperboard and tissue product mix.

We're projecting our consolidated adjusted operating margin for Q3 to be in the range of 3% to 4.5%, compared to 4.5% in Q2, primarily due to the major maintenance scheduled at our Lewiston, Idaho mill, which includes the start-up of our new continuous digester; higher pulp cost, which is magnified by both higher-than-forecasted prices for the third quarter; and the increased volume for just this quarter scheduled outage at Lewiston and higher seasonal energy costs due to higher electrical rates at our Las Vegas mill.

Our third quarter projections are for an adjusted EBITDA ranging from $40 million to $46 million, and adjusted net earnings for fully diluted share in the range of $0.34 to $0.50.

The key variables we see determining where we land in that range are paperboard and tissue market conditions and the major maintenance outage at our Lewiston, Idaho mill.

As we look at the full year, commodity pricing, especially for external pulp and chemicals, has been a headwind in the first half of the year and is forecasted to be a headwind well into the third quarter.

Declines in external pulp prices have yet to materialize.

In addition, the consumer tissue business remains difficult to predict, given the rapidly evolving retail landscape, which adds risk to the second half of our original forecast.

Therefore, we are revising our full-year EBITDA outlook to a range of $190 million to $210 million.

While we are facing a few challenges related to commodity cost inflation and retail market conditions remain difficult to predict, we are aggressively managing this business to build more strategic value for our customers in developing a network of assets to produce at the lowest cost.

This substantial transformation we are undertaking to create value for our customers and our shareholders is only possible because of the dedication and desire of our employees to win.

They are undertaking massive projects and change to make Clearwater Paper stronger and a value-added partner to our customers.

We appreciate your participation in today's call.

And we'd now like to open it up for your questions.

(Operator Instructions) The first question is from Chip Dillon of VRP.

First question is -- I just want to make sure I have this right.

I was just filling these numbers together.

Looks like the fourth quarter, if you hit the middle of your range of $200 million for the full year EBITDA, I guess, that would suggest the fourth quarter could -- would be like in the mid- to high 50s?

And I guess the -- if I look at that versus the third where you're $43 million, then along to that improvement, it looks like half of it would roughly come from the maintenance.

And I guess, most of the rest would come from the digester project, is that roughly fair?

Those are 2 probably the biggest contributions, correct.

Okay.

And could you just review for us on that, how much we should say the impact of the maintenance is by quarter throughout this year in millions of dollars?

So Q2 was $9 million.

Q3 is going to be, call it, $18 million to $20 million.

And then 4Q is 0?

Correct, as it relates to the major maintenance.

Was that for me?

Yes.

No, I just have to ask you this.

If -- so again, if you look at your year-to-date EBITDA and maybe I have made a few tweaks that might not comport to what you have, but I think I have it pretty much, right.

It looks like if you, again, you do $43 million in the current quarter, and that's on top of, looks like, $94 million year-to-date.

So that would be like $137 million.

So to get to that number, I guess, you're looking at maybe -- maybe it's closer to $60 million.

And it just seems to me that almost all of it, if maintenance is $19 million less in the fourth quarter, you can almost say where is there any benefit from the digester?

And maybe there's a seasonal element I'm missing or maybe the real impact on digester doesn't hit till next year.

I mean, how should I think about that?

Yes.

So the digester will ramp in the fourth quarter.

And we will see some benefit, but not the full run rate benefit.

And your seasonality question, typically paperboard is lower from a volume standpoint, Q4 and Q1.

But that hasn't been how it's played out the last 2 years.

But if you look over history, that's typical seasonality.

Got you.

And again you have identified $9 million in maintenance, and there was no maintenance in the first quarter, was there?

Correct.

Okay.

So you add it all up.

It looks like that you're approaching the high $20 million range for this year.

And if I recall, you should have no maintenance in '18.

Is that correct?

And then obviously, you'd have some in '19?

That's correct, no maintenance in '18.

The next question is from Paul Quinn of RBC Capital Markets.

On the Lewiston maintenance, I thought that was going to be in July.

Is it done yet?

Or has this been moved to August?

Or did I get that right?

Yes, it's always been September.

Okay.

So is it down?

How long is it?

Is it -- are we talking like 10 or 15 days?

Or...

Yes, it's 21 days.

21 days in September, and the tie-in for the digester is going to happen right at the end of it?

Correct.

Okay.

Just in terms of -- you mentioned the customer you've lost on the paperboard side.

I suspect this is MTS.

It sounds like you're confident on selling the volume.

I'm just wondering what your anticipated drop in mix or margin looks like right now?

Yes, so we've made very good progress since that was announced.

We feel pretty good to where we're at, both from replacing the volume and doing it at a mix that's not going to be dilutive to our overall paperboard EBITDA.

Okay.

So it should be -- it sounds a lot better.

I guess, that market has significantly picked up since Q1 when you were very nervous about it?

It has, yes.

Okay.

And then just looking at the tissue side, it looks like retail tissue price is down kind of 1.8% in the quarter.

Is that really mix?

Or do you see anything changing in that place going forward in that segment?

It's predominantly mix.

Yes.

Okay.

And then just, I guess, since the last quarter, we talked that there's been a couple, I guess, local North American entrants in a couple German super discounters.

And Linda maybe you can sort of walk me through how you think they're going to change the North American marketplace.

And I suspect that will be positive for private label in terms of use, but I also suspect that they will be very aggressive on pricing.

How do you expect Clearwater to do with their expansion?

Yes.

So let me just kind of back up and say that's one component of what's changing the retail landscape, but we also see online retailers acquiring bricks-and-mortar retailers.

We're seeing a shift in channel mix from bricks and mortar to digitals.

I mean, there's a lot of change right now happening in the retail environment.

And we fully expect that to continue to evolve on a pretty rapid pace as we've seen in the first half of this year.

We do think it is a good sign from a private label perspective, especially as retailers really begin to try to figure out how they can strategically position themselves and differentiate themselves in the marketplace.

And we see a lot of them thinking hard about how they're going to use their store brands to drive traffic and retention of their customers.

So we do think it bodes well for private label.

And given our focus on private label and success in the past, we think we're uniquely positioned to help our retailers get the consumer's attention.

Okay.

And then just lastly, I'm just wondering on Q1 and Q2, there seemed to be a transportation headwind there of $3.6 million.

What's that related to?

So you had to look at that in conjunction with the benefit that we received on wages and benefits, Paul.

So if you remember, we shutdown the Oklahoma City facility.

And by doing so, by not having that location there in Oklahoma, it increased transportation cost into that region.

But that's more than offset by the -- some of the fixed cost savings that we achieved by doing that primarily in wages and benefits.

The next question is from Adam Josephson of KeyBanc.

Linda, just one.

On your outlook commentary, you talked about the consumer tissue business remaining difficult to predict, which added risk to your forecast.

And it was one of the reasons why you reduced your full-year guidance.

What exactly do you mean by remaining difficult to predict?

Yes.

So if I go back to what I said in response to Paul's question with regard to the changing and evolving retail landscape, it's changing rapidly.

And we've seen that in the first half of the year with regard to different acquisitions and entrants in the market as you mentioned, Aldi and Lidl, that is changing how retailers think about going to market and thinking about how they use their space whether it be digitally or on the shelf, and how they mix out their product.

And we're in conversations with our retailers on how best to partner with them to really get the consumer's attention and to drive that loyalty to their store brands.

Now, with that comes some risk from our perspective.

As you're aware, and we've mentioned, we are relatively sold out on our ultra-quality product.

So -- and which is why we're also doing the Shelby 2 machine.

So as we predict what product is likely to be demanded in the second half of the year, if our demand varies significantly from our forecast, there is likely to cause some mild to slightly more than mild supply chain disruption for us just given the tightness of our ultra capacity until we bring that second Shelby machine up.

So that's what I mean by it's just difficult to predict exactly what mix to expect for the back half of the year as retailers reassess their situation and what they want to drive from a private label perspective.

Okay.

John, just on your commentary that sales were a bit below your forecast on account of lower tissue volume and mix.

And I think you said lower paperboard volume as well.

Can you address the first part of the lower tissue volume and mix and what exactly drove that?

Yes, I'd say there's probably a couple of things.

One is from a mix standpoint, we were, as Linda said, below kind of a weaker, if that's a better word, than our original forecast from an average sales price perspective that impacted the top line.

And then additionally, commentary about taking some parent rolls -- incremental parent rolls than we otherwise would have and converting those for purposes of what our forecast and expectation is for the second half of the year rather than being parent rolls sales.

We've converted that to converted cases.

And Adam, that's a great example of this uncertainty in how to navigate through this retail environment.

So in the second quarter, while the mix is still good, it was just different than what we originally expected.

So we had built product inventory to meet a certain forecast.

And when demand came in it was for a different mix of product, which required us to shuffle some things around from the supply chain perspective in those cases to places we otherwise wouldn't have expected.

It required some changeovers that otherwise wouldn't have had to take place in order to make the product to meet the demand.

So those are the things that are difficult to accurately pin down in this rapidly evolving retail environment.

So we're nimble, we're quick, we know how to do this.

But given our tight capacity on ultra product, it's just going to be kind of just a tight rope a little bit until we get that second Shelby machine up and running.

Got it, and now thanks for that clarification, Linda.

And John, just back to the sales commentary for 2Q about lower-than-expected paperboard volumes, if I heard you correctly.

I know you're saying how backlogs have significantly improved.

Your demand has improved.

You're more confident in that market.

But I think you said that paperboard volumes are actually lower than you were expecting.

Am I -- did I hear that correctly?

No, not lower than what we are expecting.

We're pretty much running full out and sold out quarter-over-quarter.

And so it's going to drive that.

It's maybe probably mostly mix.

Okay.

And just -- and also on that point, paperboard volumes were up 8,000 tons from a year ago.

How much of that was Manchester?

Probably 99% of it.

So is the reason you're not -- you didn't have organic volume growth is just you're full out?

Or -- I mean, should one expect you to have some organic growth in that business?

So there's always creep, I guess.

Keep in mind, in the second quarter, we had the Arkansas outage.

So with that mill being down for the 6 days, I think it was -- I mean, it's less production.

Okay.

And just back to the tissue business for a second.

Your margins were down, I think 150 bps from a year ago, and they were down closer to 200 in the first quarter.

I know your input costs were up, but one would think you would be able to pass on those higher costs right in the form of higher prices.

But I guess, it just points to the level of competitive activity that's occurring that you're -- you haven't been able to do so.

If that's the case, do you expect to recover these higher input costs at some point over the balance of the year or next year?

Or how should we think about your ability to recover higher input costs in that business given the level of competitive activity that's occurring?

Yes, so it is the competitive activity.

But it's also, keep in mind, with private label typically, we're not price leaders.

We follow the brands.

If the brands were to increase prices, we would follow.

I think we were normally a year or 2 ago when we led a price increase, but you're typically not going to see private label doing those.

Got it.

So as long as they don't do so, it's going to be hard for you to be flattish on margins to the extent you have any cost inflation, it sounds like?

Correct.

The next question is from Steve Chercover of D.A. Davidson.

So the first one, it's just with respect to the Long Island closure impact.

It's been 6 quarters now, and I'm just wondering how long is this going to persist?

It's actually larger than it was before.

Yes, this is pretty much it.

I think it ends in October, so you won't be seeing that much anymore.

The reason it's more than it was for the last couple of quarters is that we had an asset write-off related to a Long Island asset.

Okay.

And then can you remind me on the SBS pricing initiative?

How much is there left to implement, if at all?

Well, we -- it was $50 as announced.

I guess, if you look at our average sales price, it's up $28.

We will, of course, endeavor to get the full $50.

But I don't know if I want to say I'm skeptical, but no guarantees on that.

Well, I mean, I guess, if the backlogs are better and we've had a swing between what would look like a decline in exports to growth, that's good.

Go for it.

And another one on bleached board.

So your market share in folding cartons and food service is basically in line with your domestic market share, but it's way lower in liquid packaging.

So is that by design?

And are the margins in liquid packaging smaller to the other applications?

Yes, that is by design.

The attractive piece of that business for us is in Japan.

And the reason it's attractive for us in Japan is they are a customer base that absolutely appreciates high quality and high service, which is exactly where we play very, very well.

And so it's an incredibly great fit for our asset base and for our sales and service team.

And that's out of the Lewiston mill, right?

Correct.

Okay.

My final question.

Since you've mentioned the evolving retail landscape, maybe I'll ask the obligatory e-commerce question.

Because if you look on Amazon at the tissue category, everything is branded.

So could you offer Amazon a private label brand?

Or would that alienate your legacy customers?

Steve, I would say anything is possible, okay?

Because I do believe the retail environment is changing so dramatically that no solution is necessarily off the table for us.

But you're right, it is predominantly branded at this point.

I would venture to guess that will change in time if it follows course to what we've seen Amazon do in the past, start with brands and then they move more into private label.

But keeping in mind that we also have our bricks-and-mortar retailers that are very focused on building their e-commerce platform as well and trying to figure out how to leverage their physical space to their advantage with their e-commerce platform.

And so we're working pretty closely with those retailers to try to find some really good solutions for them as well to drive that business online.

So it might come through a Kroger or Safeway-Albertsons portal, I guess?

Yes.

The next question is from James Armstrong of Armstrong Investments.

The first question I have is given the changing environment in consumer products, should we expect shipment levels to stay around the Q2 levels through the back half of 2018?

Or should those rebound somewhat just as you get everything in order?

No, I think they'll rebound, particularly in the third quarter.

Q4 tends to be a slower shipment quarter for us on the tissue side, so -- and they might rebound strongly in the third and then level out a little bit.

Yes.

And could you talk a little bit about what drove the lower volumes?

Was it anything one in particular?

Or was it just a timing thing?

Yes, I think from a volume standpoint, I don't know if you heard my comment about diverting some parent rolls that in a normal quarter we probably would have shipped into converting to set ourselves up for our forecasted demand in Q3 and Q4.

So those were parent rolls sales that otherwise might happen in another quarter that didn't.

Okay, so it's just parent -- building inventory in parent rolls for the third quarter.

Makes sense.

Yes.

And the other thing that Linda alluded to in her comments was we did see lower promotional activity.

And I think that wasn't just us, but the brands as well.

And that brings me to my next question.

Are you seeing any increase in promotional activity?

Or any higher competitive pressure from the branded players as you go into third quarter?

Q2 is actually down from a promotional activity, and I don't know if that could be called seasonal or not.

But we fully expect that we'll continue to live in this kind of high promotional environment.

Fair enough.

Switching to paperboard.

Could you describe a little bit what you're seeing in newer markets on the imported paperboard side?

Are you seeing increased competition where you compete?

Or is it just somewhere else?

No, I mean, it hasn't really hurt us much.

It's mostly in the lower-grade stock, plate stock, more in the East Coast as it relates to European importers.

But we've seen it kind of, I guess...

Flatten out?

Flatten out a little bit.

Okay, that helps.

And then lastly just a modeling question.

What's driving the lower tax rate in 2017?

And should that continue into 2018?

We're taking advantage of some tax credits as it relates to some of the CapEx that we're doing, and we've got potentially some other kind of energy-saving type of credits that we're working on.

Should those continue into -- for modeling, should that probably continue into 2018 at a lower level than the 37%, 38% you were at before?

James, I'd probably -- when you're looking out in the future like that, I'd probably just stick with our kind of 35%, 36%.

I mean, the one thing that's been visible from the GAAP financials is our cash tax rate, which is dramatically lower and going to be dramatically lower again in 2018 as we get bonus depreciation on some of these big CapEx projects.

Thank you.

And at this time, I would like to turn the call back over to Linda Massman for closing remarks.

Thank you.

We completed a solid first half of 2017 and we're excited and focused on the opportunities we have ahead of us through the rest of the year.

Thank you for joining us today and for your continued interest in Clearwater Paper.

On a final note, we'll be at the following conferences over the next 3 months: Jefferies in New York on August 8, KeyBanc in Boston on September 12, RBC in Las Vegas on September 14 and Deutsche Bank in Scottsdale in early October.

And we hope to see you there.

Thank you, everyone.

Ladies and gentlemen, that does conclude the Clearwater Paper Second Quarter 2017 Earnings Conference Call.

We do appreciate your participation.

Thank you.