Clearwater Paper Corp (CLW) 2017 Q4 法說會逐字稿

Welcome to Clearwater Paper Corporation's Fourth Quarter and Full Year 2017 Earnings Conference Call.

As a reminder, this call is being recorded today, February 5, 2018.

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, James.

Good afternoon, and thank you for joining Clearwater Paper's Fourth Quarter and Fiscal Year 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 fourth quarter and full year 2017 were released shortly after today's market close.

Posted on the Investor Relations page of our website at clearwaterpaper.com, you'll find both the earnings press release and the presentation of supplemental information, including outlook slides providing the company's current expectations and estimates, sales, operating margin, adjusted EBITDA range and earnings per fully diluted share for the first quarter of 2018.

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 or in the supplemental material provided on our website.

I would like to remind you that during this conference call, we will be making 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 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 our quarterly filings on Form 10-Q.

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

John will begin today's call with a review of the financial results for the fourth quarter and fiscal year 2017.

Then, Linda, will discuss the completion of our 3-year strategic plan, the business environment, status of our expansion project in Shelby, North Carolina, our efforts to reduce corporate SG&A expenses, the recently announced reorganization in Lewiston's Consumer Products division, and our outlook for the first quarter of 2018, and then, open up the call for the question-and-answer session.

Now, I'll turn the call over to John.

Thank you, Robin.

We ended 2017 with solid Q4 financial results that came in at the high end of our outlook.

Reflecting on the full year 2017, Clearwater Paper's biggest accomplishment was completing our 3-year strategic plan to reduce operating costs.

In particular, the final warehouse automation installations were completed and the Lewiston pulp mill was upgraded with a new continuous pulp digester that began production in October, and will improve pulp yield and quality and lower operating costs.

Since inception of the strategic plan, we have realized related annual cost savings of $95 million versus the 2014 cost structure and left the year on a run rate to achieve the $115 million to $145 million in annual cost savings we outlined at that time.

Those savings are helping to offset the negative impact of a rise in input cost and price compression experienced in paperboard and tissue's since 2014.

Because of the competitive environment, particularly on the tissue side, we have not been able to meaningfully pass the input cost increases on to our customers.

Linda will talk about the additional measures that we are taking to effectively compete in this environment in the near term and create shareholder value over the long term.

Now turning to our fiscal year and fourth quarter 2017 results.

First, 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 press release and supplemental slides posted on our website.

For the full year, the EBITDA adjustments netted to $12 million of pretax expense and included $11 million in cost associated with the closure of Oklahoma City facility, $2 million in reorganization related expense, and $1 million in cost associated with the closure of the Long Island, New York facility.

All offset by a $3 million mark-to-market benefit associated with directories cash settled common stock units.

Net income adjustments for 2017 netted to $59 million of after-tax benefits and includes the previously mentioned EBITDA adjustments as well as a $70 million benefit resulting from the remeasurement of net deferred tax liabilities under the 2017 Tax Cuts and Jobs Act.

For the fourth quarter of 2017, the EBITDA adjustments netted to $5 million of pretax expense and are comprised of costs associated with the closure of the Oklahoma City facility, reorg expenses associated with the SG&A cost control measures, closure of Long Island, New York facility, and a benefit from a mark-to-market director's equity-based compensation.

Q4 net income adjustments netted to $66 million of after-tax benefit, and include the previously mentioned EBITDA adjustments as well as the $70 million tax benefit.

Starting with the full year 2017 results, net sales totaled $1.7 billion, which was roughly flat with 2016.

Paperboard shipment volumes were up 4% and Pulp and Paperboard net sales increased 5.6%, primarily due to a full year of operations for Manchester Industries.

That was offset by a 4.7% decrease in Consumer Products net sales primarily due to a 32.2% decline in non-retail tons shipped, which resulted from a shutdown of 2 high-cost paper machines at the Neenah, Wisconsin mill at the end of 2016.

Adjusted EBITDA came in at $190 million, down 12% versus 2016, and at the low end of our most recent outlook.

In 2017, we delivered an incremental $41 million of cost reduction versus 2016, of which $28 million was associated with capital projects and $13 million was associated with operational efficiencies.

That benefit, along with a richer product mix of ultra-quality tissue and higher paperboard shipment volumes was more than offset by higher input cost across the board and higher transportation costs due to increased line-haul rates, diesel prices and weather-related events.

So despite the richer product mix and all of the cost savings accomplished in 2017, adjusted EBITDA margin declined to 11% compared to 12.4% in 2016.

Pulp and Paperboard delivered $133 million or 16.9% adjusted EBITDA margin, and Consumer Products delivered $106 million or 11.3%.

2017 fully diluted adjusted EPS came in at $2.32 per share compared to $3.44 per share in 2016.

Fully diluted GAAP EPS was $5.88 versus $2.90 in 2016, reflecting the benefit from the remeasurement of the net deferred tax liabilities in 2017.

From a cash flow standpoint, we generated $178 million in operating cash flow versus $173 million in 2016, despite lower EBITDA in 2017.

This was largely driven by working capital improvements, which led to an 8-day improvement in the cash conversion cycle.

Now turning to the fourth quarter.

Net sales were $437 million, up 2.4% from the third quarter, and above the midpoint of the consolidated outlook range of up 1% to 3%.

This was due to a richer mix of ultra-quality tissue sales and higher paperboard volumes that was partially offset by lower retail tissue and parent roll volumes.

Compared to Q4, 2016, net sales were up 2.6% primarily due to a 4.6% improvement in paperboard average selling price, and a 5.4% increase in paperboard shipment volumes, both largely attributable to the Manchester Industries acquisition.

Fourth quarter adjusted gross margin of 14.2% was up 9.7% in Q3, primarily due to the Q3 completion of the planned maintenance outage in Lewiston and lower maintenance at the Consumer Products Mills in the fourth quarter.

Compared to Q4, 2016, adjusted gross margin was relatively flat.

Adjusted SG&A expense was $30 million in the fourth quarter compared to $29 million in Q3, and flat with Q4, 2016.

Corporate spending was $14 million of the total SG&A spend in the fourth quarter, compared to $13 million in Q3, and flat with Q4, 2016.

Adjusted operating income of $32 million or a 7.3% margin came in at the high-end of our fourth quarter outlook of 6% to 7.5%, and was up from 2.9% in Q3.

Adjusted operating margin was impacted by the same factors impacting gross margin, adjusted operating margin improved by 20 basis points compared to the 7.1% that we saw in Q4 2016.

As a result of all that, adjusted EBITDA came in at $58 million or 13.2% of net sales, which was at the high-end of our outlook of $50 million to $60 million.

Compared to Q4, 2016, adjusted EBITDA was up $3 million.

Net interest expense of $8 million was flat with Q3.

Turning to taxes.

On an adjusted basis, our Q4 effective tax rate was 39.9%, which is above the high end of our outlook.

It was primarily due to the tax impact of performance stock grants that did not vest.

That compares to a 17.9% tax benefit in the third quarter.

The Q4 GAAP tax rate was a 333% benefit resulting from remeasuring net deferred tax liabilities under the 2017 Tax Cuts and Jobs Act.

Due to accelerated tax depreciation related to our capital projects, we did not pay cash taxes in 2017, and do not expect to pay cash income taxes in 2018.

As a result of the corporate tax rate change and other provisions in the Tax Cuts and Jobs Act, we expect the 2018 GAAP tax rate to be approximately 26%.

Fourth quarter 2017 adjusted net earnings came in at $14 million or $0.87 per diluted share.

That compares to adjusted net earnings of $5 million or $0.32 per diluted share in the third quarter, and $14 million or $0.82 per diluted share in the fourth quarter of 2016.

Q4 GAAP EPS was $4.88 per share, driven by the previously described tax impact.

Noncash expenses impacting EBITDA in the fourth quarter of 2017 included $26 million of depreciation and amortization, $1 million in equity-based compensation and $300,000 of net -- non-cash pension and retiree medical expense.

Employee headcount at the end of the fourth quarter was approximately 3,270, which reflects a decrease of 100 employees compared to the end of 2016, due to headcount reductions primarily related to warehouse automation, the shutdown of the 2 paper machines at the Neenah Mill, and the closure of the Oklahoma City converting facility.

Now I'll discuss the segment results.

Consumer Products net sales were $235 million for the fourth quarter of 2017, up 70 basis points versus the third quarter due to a richer product mix of ultra-quality tissue and a lower promotional spend, which was partially offset by lower parent roll's shipment volumes.

Consumer Products adjusted operating income for the fourth quarter of 2017 was $11 million or 4.9% of net sales versus $10 million or 4.4% in the third quarter.

Operating margin percentage improved modestly as lower maintenance cost and lower SG&A from cost savings initiatives were partially offset by increased transportation costs and higher medical claims.

Consumer Products Q4 adjusted EBITDA margin of $26 million or 11% of net sales was flat with the third quarter.

Turning to the Pulp and Paperboard.

Pulp and Paperboard net sales of $202 million for the fourth quarter of 2017 increased 4.4% versus the third quarter, and shipment volumes increased 4.8% or nearly 10,000 tons.

Average sales price was down $3 a ton compared to Q3 due to mix.

Pulp and Paperboard's Q4 adjusted operating income was $35 million or 17.2% of net sales compared to $50 million or 7.8% of net sales in the third quarter, primarily due to the planned major maintenance outage impact in Q3.

Pulp and Paperboard's Q4 adjusted EBITDA margin of 22% outperformed the 19% divisional objective inherent in our cross-cycle financial model.

Now turning to the balance sheet.

Capital expenditures were $58 million in the fourth quarter and $194 million for the full year.

In 2017, $157 million of CapEx, including capitalized interest, was spent on strategic projects and $41 million on maintenance CapEx.

Capital expenditures for 2018 are expected to total $290 million, of that, $230 million is earmarked for the new tissue converting and warehousing facility in Shelby and the remaining digester additions, and $60 million for maintenance.

We had $155 million of borrowings outstanding under the revolver at the end of the quarter.

Long-term debt outstanding at the end of Q4 remained unchanged at $575 million.

Our leverage ratio was 3.9x last 12 months adjusted EBITDA.

We expect leverage to remain near these levels through mid-2018 and begin to decline thereafter.

We did not repurchase any stock in the fourth quarter and approximately $30 million remains under the current authorization.

With regard to our liquidity, we ended the fourth quarter with $60 million of unrestricted cash, and we had $137 million available under the revolver.

During the fourth quarter, we generated $25 million of cash from operating activities or 5.8% of net sales.

As of the most recent measurement date of December 31, 2017, our company-sponsored pension plans were underfunded by approximately $7 million, a $12 million improvement from 2016 primarily due to investment portfolio performance for the year.

With that, I will now turn the call over to Linda, who will discuss the steps taken to address changing market conditions in both tissue and paperboard and the market environment for both businesses, and the company's outlook for the first quarter of 2018.

Thank you, John.

Hello, everyone, and thanks for joining us today.

Let me start with our key accomplishments in 2017.

We made great progress streamlining our cost structure, which we expect will create shareholder value for the long term.

Toward that end, as John mentioned, since inception, we have realized $95 million of cost savings versus our 2014 cost structure, and we left 2017 on a run rate to achieve the targeted annual savings of $115 million to $145 million.

Of the $95 million in savings, $37 million came from capital investments, and $57 million was a result of our noncapital-related operational improvements, such as Lean Six Sigma and total productive manufacturing, the drive out waste and improve our operating efficiency.

We continue to remain focused on components of the cost structure that we can address in an effort to build a solid foundation for our long-term success as an efficient, low-cost producer of tissue and paperboard.

The benefit of these investments and actions should set the stage for improved returns under more stable and improved market conditions.

Throughout 2017, we continued our focus on addressing shifting market conditions in both tissue and paperboard.

For example, we are restructuring the tissue converting operations in Lewiston due to the reduction we have experienced in conventional tissue demand.

Second, we are addressing our corporate SG&A cost structure and external spend.

We are currently executing on a plan that is expected to yield at least $20 million in annual SG&A cost savings that will occur over the next 5 quarters.

We expect to see a $5 million reduction in adjusted SG&A this year versus 2017, and the to be at the full cost savings run rate as we leave Q1 of 2019.

While these are difficult steps, they are necessary to maintain our longer-term competitiveness in the dynamic market that we are operating within.

Now I'd like to address our priorities for 2018.

First, we need to deliver the major projects, which are already underway, and that is ensuring we get fully ramped on production and quality from the continuous digester, and implementing the SG&A cost savings program.

Second, is to complete the new tissue production, converting and warehousing facilities in Shelby, North Carolina, within budget and on time for production to start in the first quarter of 2019.

To that end, construction of the converting and paper manufacturing buildings has commenced, and the foundation for the paper machine is in progress.

We delayed approximately $39 million in Shelby-related capital spend in 2017, but that is not expected to delay our plan to start production in the first quarter of 2019.

Third, due to tissue market conditions that remain challenging, we are looking at additional levers to reduce costs and improve our operations.

This includes a detailed look at our operating model to further reduce complexity, transportation costs and improved service.

And last, but most important, we will continue our relentless focus to increase operating cash flow, which will be used to fund the new Shelby expansion in 2018, and thereafter, to reduce debt levels and return cash to shareholders.

Discretionary free cash flow for 2017 was approximately $136 million, which at our current market value, equates to a discretionary free cash flow yield of 14.7%.

Turning to our view of the market environment for each of our businesses, and starting with the North American tissue market.

Our Consumer Products business continues to present both challenges and opportunities.

The changing retail landscape and shift in consumer preferences for distribution channels for our products continues to evolve.

In the last year, we saw our largest tissue customer move to a multisource supplier model.

This is one of the reasons that we are taking the steps I previously mentioned to remain competitive in this emerging environment.

Within that environment, however, consumers acceptance and preference for private-branded products continues to grow.

And in 2017, we expanded the retail segments in which we serve by winning new customers in the limited assortment, club and online segments.

For 2017, the U.S. tissue market in dollar terms was flat year-over-year, primarily due to price deflation at some major retailers in response to consolidation and increased competition.

In 2017, IRI estimates that private brand dollar sales were up 4.4% versus 2016, while the national brands were down 1.8%.

And as a result, private brand tissue market share is 25% of the total retail tissue market, which was up 1% from a year ago.

The positive trend in private brands is reflected in the 5-year CAGR of 3.3% for private brands versus negative 6% -- 0.6%, for national brands.

Underlying these numbers is a 12% 5-year CAGR for ultra-quality private brand products compared to 0.4% for national brands.

In the premium quality conventional category, private brands enjoyed a 4.4% CAGR over the last 5-year period compared to a negative 1.5% for the brands.

Based on IRI data, Clearwater Paper's 2017 share of the total tissue market was flat at 8% compared to 2016, and our share of the private label portion of that market declined about 1 percentage point to 32%, largely due to ultra-quality capacity constraints.

We are challenged with balancing our fixed ultra-quality capacity with growth in our existing customer base and the addition of new customers, until our new ultra capacity in Shelby comes online.

Looking to 2018, RISI estimates the U.S. tissue market will grow approximately 1% in line with long-term trends, and we believe that private label should continue to gain share.

The most current RISI forecast for net new tissue capacity from 2016 through 2019 is 892,000 tons, which is down 5,000 tons from RISI's forecast at Q3, due to a closure in the fourth quarter.

Over the next 2 years, RISI scheduled capacity additions forecast 344,000 tons of -- coming online in 2018, and 295,000 tons in 2019.

Assuming all that capacity comes online as scheduled, and using RISI estimates for demand in North America, the demand to North American capacity ratio in 2009 (sic) [2019] is forecasted to be approximately 98%.

Over the last 12 months ending November, 2017, net imports totaled 484,000 tons.

If net imports stay consistent through 2019, the North American demand to total capacity ratio will be 93%.

The other key headwind is the increased competitiveness in the retail industry and the inability to pass on higher input costs.

Clearwater Paper remains the North American private brand share leader in the tissue market with an impressive customer base.

According to [pori], private brands are expected to grow 2% to 3% per year, on average, over the next decade, primarily driven by demand for ultra-quality tier products, which is forecasted by Fisher International to be the fastest-growing segment of the North American tissue market at 4% to 5%.

We will need to get you to balance our premium capacity, which has seen flat to declining demand.

We remain confident in our decision to expand our ultra-quality tissue manufacturing and converting capacity to meet the growing needs of the marketplace and our customers.

Turning to North American paperboard, RISI's outlook for 2018 is for a balanced market, with operating rate averaging 94% for the year.

RISI forecast demand for SBS to grow 1.2% in 2018, following growth of 0.8% in 2017.

2018 got off to a good start with industry backlogs up approximately 20% higher than levels a year ago.

While prices published by RISI have remained stable since April, 2017, they are forecasting certain grades of SBS to improve approximately 2% to 3% in 2018.

While RISI is forecasting a 1% decline in export volumes for the year, this is considerably better when compared to the 10% decline in 2016.

In addition, imports are forecasted to be lower by approximately 2% in 2018.

As we look at 2018 for Clearwater Paper, there are a number of variables whose final outcome will greatly impact our 2018 financial results.

Those include our ability to replace premium, conventional retail tissue volume, that we will begin to lose from our largest customer in the second quarter, and at what price.

As we sit here today, we have secured 1/4 of the lost volume.

On based on what we see, as of 2018 bid cycle, believe that we have the opportunity to replace at least 50% of that volume by the end of 2018.

To the extent case volume is not replaced, we will shift the volume to parent rolls.

Input cost, particularly pulp on the tissue side, and with fiber on the paperboard side; our ability to pass through input cost inflation; the effective new entrants to the North American tissue market; channel shift within retail tissue; and foreign exchange rates and their impact on paperboard exports and imports.

We will update you on how we see these variables playing out for 2018 as we move through the year.

As John mentioned, we currently have $30 million remaining under our existing stock repurchase authorization.

However, in 2018, we expect our capital will be devoted to completion of the new tissue project in Shelby, North Carolina, with any excess cash being used to pay down debt, followed by returning cash to shareholders.

Now to our Q1 outlook compared to the fourth quarter of 2017.

We expect consolidated net sales to be down 2% to 3% sequentially, primarily due to the normalized promotions and the pricing impact from already renegotiated contracts in our consumer business and lower paperboard shipments, compared to higher-than-normal seasonal shipments in Q4; consolidated adjusted operating margin to be in the range of 4.5% to 6%, based on higher maintenance due to a scheduled water wash at our Cypress Bend Arkansas Mill and increased raw material costs; and an adjusted tax rate of 26%, and we expect this to result in adjusted EBITDA in the range of $42 million to $52 million, and adjusted net earnings per fully diluted share in the range of $0.49 to $0.79.

In conclusion, we will continue executing our strategic initiatives, completing construction on the paper machine; converting lines and warehouse expansion in Shelby; and executing on our plan to reduce SG&A expense by $20 million over the next 2 years.

While market conditions in our consumer business continue to be challenging, we believe we are investing in all the right areas to position ourselves for growth and operating cash flow, margin expansion and returns on invested capital.

And we expect shareholder value creation to accelerate when market conditions improve.

In closing, I'd like to thank our employees who are the heart of Clearwater Paper for their unwavering commitment to our success, especially in light of the tremendous change underway, both within our company and the markets that we serve.

Thank you for listening to our prepared remarks.

And we'll now take your questions.

(Operator Instructions) Our first question comes from Chip Dillon with Vertical Research.

Yes.

The first question is on the -- if you could just remind us how much of, I guess, either the percent of the tissue sales dollars or of the tons, however you want to tell us, were lost to that customer that we start seeing the impact of in the second quarter?

And I guess, that's the second quarter of '18.

And I know on the last call, I believe, you said that you would replace 1/4 of it.

So it sounds like you haven't made any further progress and just sort of how you -- or why you think you will get another 50 -- another 25% replaced by the end of this year?

Okay.

So in regard to your first question, I don't think we really talk specifically about the volume.

It obviously is meaningful that we lost from our largest customer.

I guess our confidence about going from 25% to 50% is just looking, I guess, opportunity by opportunity as we see how it's going to play out throughout the year and when bids are going to come up and what we think our chances are and what the opportunity is.

Okay.

And then on the cost side.

I note -- know you guys do make some pulp and almost everyone else in the business that's in private label does not.

And I'm just wondering how that compares with the pricing dynamic you're seeing given that I would imagine virtually all your competitors are just continuing to see prices move up, cost move up at the faster rate than I would imagine you all are since you are roughly 50% integrated, at least as a company.

Yes, that's correct.

We are -- we're going to be fully integrated from a softwood pulp standpoint as the continuous digester ramps.

And we typically see a price delta of our own internal cost, and by and large, we use it in internally versus selling it on the open market.

It's typically 2/3 of kind of what you'd see at a spot price or a stated price out there.

Okay.

And then I noticed in the -- I think you put all out a press release not too long ago about getting some covenants changed with your banking group.

And I didn't know -- I couldn't see if there's any cost to that.

And if that's the case, is that just a reflection of more competition in the banking industry.

And then if you could just talk through -- you gave us the -- you said you had $137 million left on your revolver.

And it just looks like with our CapEx being what it is, that you're kind of skating close to the edge of there.

And what kind of options do you have if -- as you spend the $290 million on CapEx this year, how can you work your way through that?

Yes.

So in regard to the first question, so we -- we're doing a covenant with 4x EBITDA, trailing 12 months, and we do not expect to go over 4, but we are at 3.9 right now.

We did have a conversation with the bankers to see if there was a way just to get some flexibility, even though we don't intend to go over 4, and at what cost would that be and found it to be very, very attractive from a cost standpoint.

And they're willing to work with us, and so we kind of took the financial flexibility even though, as I said, we don't plan on going over 4x.

Right.

And then again, if you have to draw -- is it your plan to draw down the whole revolver as you do your -- finish Shelby up?

We won't get our -- our plan is not to draw down the whole thing.

It will be more than we're sitting at right now.

We do have an accordion feature at our discretion for an incremental $300 million.

So plan wouldn't be we don't need -- plan would be we don't need to avail ourselves of that, but we do have that.

And is that cost roughly the same as what your current interest rate is?

Or can you give us an idea of how much more that accordion would cost?

It would be similar terms, yes.

Okay, and then lastly, you mentioned that you had deferred some of the CapEx, which, first of all, sounds like that was a good thing because I guess whatever you spend in '18 and beyond is subject to a faster depreciation.

So that kind of begs 2 questions.

One is how much more CapEx will be left next year?

So I assume, it's $60 million maintenance plus whatever's left on Shelby.

And then secondly, what is kind of a good guess as to when you might start paying cash taxes now?

How far off many years is that pushed out?

Yes.

So I think I said we expect to spend at $290 million in CapEx next year.

(inaudible)?

In '18, yes.

I'm talking '19.

Okay.

For '19, there's going to be about, call it, between $20 million and $40 million of CapEx related to Shelby that'll go into '19.

It's not anything that would hold up production.

And so we'll just see how we move through the year in terms of how much of that is in '18 versus '19.

But at the most, it would be $40 million.

And the second part of your question?

When do you think just kind of a guess of a range of years when you might be a cash taxpayer.

It seems like with -- like I said, you pushed some of this CapEx into '18.

I believe you get an immediate write-off of that, and that would just further, I would imagine, build your credits and, therefore, I would imagine you don't become our cash taxpayer I'm just guessing for several years to come.

As I said, we're not going to be a tax cash payer in '18.

From a timing standpoint, to the extent we've got 100%, I don't know, write-off from a tax perspective, that actually might have the effect of accelerating when we do start paying cash taxes in '19 or '20 versus I guess the old tax regime.

The other thing we are seeing is we are already in a loss position in 2017 from a tax perspective.

And with some of this accelerated depreciation and some of the provisions in the new tax law, we're able to add to that, and so we are going to be able to recapture some losses going back a couple of years.

It will be to our benefit from a cash perspective here in kind of the mid- to later part of 2018.

Our next question comes from Adam Josephson with KeyBanc.

Just a couple.

One on the guidance.

Correct me if I'm wrong, you normally give a full year of outlook for EBITDA.

It looks like you refrain from doing so this time.

Am I correct in thinking that?

And if so, can you just give us a little more detail as to why?

We have some years and we haven't some years.

Last year we did.

2 years ago, we did not.

Year before that, I believe, we did.

Linda, in her prepared remarks kind of highlighted some of the variables that we're looking at as we sit here today.

And in terms of, I guess, confidence and line of sight as to how those variables are going to play out, right now it still feels like it's too early in the game right now for us to feel comfortable and the range we'd end up -- to be comfortable to end up being huge.

So the approach we're taking is we're going to talk about each of those variables each quarter and let you know what we're seeing and handle it that way.

And is the uncertainty mostly related to pricing or volume or raws, or is it all the above in roughly equal amounts?

It's all of the above.

It's also the evolving retail marketplace in terms of what's -- the dynamics are within the segments or across segments and how quickly and at what price we replace the lost volume from our major customer.

Okay.

But in terms of the big -- you normally give us what maintenance is going to be year-over-year, John.

I think you previously indicated that major maintenance would be around $30 million lower in '18 versus '17.

Does that remain the case?

Correct, yes.

And then you have SG&A that'll be lower by 5, right?

Correct.

Are there any other buckets that you can give us?

Or is that the extent of it?

Interest?

[presumably]

In terms of the EBITDA, yes.

Yes.

Not really.

That would have been in our script.

Nothing's jumping off my head.

Okay.

So just those 2. Okay.

On your SBS, a question or 2, you're obviously a mostly non-integrated producer.

As we all know, there's been recent significant consolidation and integration in the industry.

So just as a mostly non-integrated producer, what do you think of your position, both short term and long term?

Obviously, you lost a large customer because of an acquisition last year.

Again, where do you see yourself within this industry that's clearly consolidating and integrating while you're not really integrated?

Yes.

Thanks, Adam, that's a great question, and we obviously are watching those industry trends pretty carefully.

I guess the easiest way to say it is we're a very well-matched supplier for independent converting customers like we have been historically.

That's where we tend to have a lot of our volume.

That's where we tend to focus.

And then, of course, we do supply to some of the integrated players more on a niche basis.

Long term, though, like you say as the market shifts, we're going to assess and protect our ability to place SBS volume at good market prices.

And we'll watch that and make good business decisions around that as we move forward.

I would say I think our value proposition by not being integrated maybe gets a little stronger in the near term, but obviously we've got to watch that -- we ended up at a time where all of our customers are also our competitors.

It's not necessarily ideal.

One more on SBS, John.

Do you see the demand -- domestic demand remaining flattish as it was last year?

No.

I think we might see demand up a little bit.

RISI had it up.

Had it up, going up a little bit.

We entered the year with strong backlogs.

RISI has it going up about 1%.

So we're seeing some pretty good demand characteristics.

Okay.

And just one on tissue.

I've asked of this before and I know you touched on it, but you're making a large investments in tissue at the same time as you're indicating that you're having real difficulty offsetting cost inflation.

In fact, you're saying you're expecting your prices to go down next year -- or in '18, excuse me, while your costs are going up.

So it's a real squeeze there, right, and obviously your margins got squeezed in '17.

So what gives you confidence that you'll get a good return on this $340 million investment in that business considering these pretty significant industry headwinds at least for the next year or 2, it would appear?

Yes.

So Adam, I'll take that one.

Let me preface that with saying that we were competing in the tissue industry for the long term and look at our business and strategic decisions that way.

So we'll start with that.

So the Shelby investment, as you know, is in ultra-capacity.

So we're putting in the ultra-tissue making capabilities, which is in line with the growing part of the market and what our customers are asking for.

So in my prepared remarks, I talked about the ultra-quality tissue market growing 12% over the last 5 years.

And then Fisher International, which is a consulting firm to the industry, predicts that ultra-quality tissue is going to be the fastest-growing segment of the North American tissue market.

Couple that with we are completely sold out on ultra-tissue.

And as I've mentioned in my prepared remarks, right now we're really trying to balance our fixed capacity with the growing needs of the market and our customers.

So as we look at it, as one of the leading suppliers to the North American market, this is something we have to do or we're going to not to be able to maintain all of our retail relationships.

And we don't expect market conditions to be this disruptive in the long term, so we'll continue to look at taking cost and efficiency and increasing our operating cash flows, in the meantime, while we're going through these market conditions that I think it's necessary to maintain our retail relationships.

Last question, Linda, just what do you think will change with respect to industry conditions at any point soon?

I mean, it sounds like there's more capacity coming on in '18 and '19.

I think you said the market in dollar terms was flat in '17.

So what are you expecting to change exactly?

Are you expecting capacity to come out?

Or are you expecting demand to pick up again?

What gives you confidence that industry conditions will improve, if not in the next year, then in the next 2 or 3 years?

Yes.

So I'd say that's a difficult question to answer, first and foremost, but I'll take a crack at it.

First of all, I would say that when you see this type of cost inflation that we've experienced during 2017, typical conditions would be that we should be able to pass along at least some, if not all, of those cost increases.

But that, coupled with what we saw on the retail side with all the disruption taking place, it's just been too severe to be able to do that with our retail customers.

So I think the retail environment will eventually sort itself out.

There were quite a few disruptions in 2017, changing technologies, changing partnerships.

And so I think that will settle itself out and we'll kind of have a better roadmap for the future.

And I also think that retailers' focus on private brands will become increasingly strategic as it plays a bigger part of their overall economics.

I think those are the main things that will happen.

now.

I mean, you saw us take some retail capacity or some capacity out of the market with the Neenah machines, and I think others will do the same as they look at their business and look at the market as it relates to that premium-quality tissue.

Our next question comes from Paul Quinn with RBC Capital Markets.

Just maybe starting on the overall strategic plan.

It sounds like you've made some pretty decent guidance or pretty decent flow-through in terms of cost savings on the original $115 million to $145 million.

And it sounds like you're in a different cost paradigm now.

And just if I look at your Slide 10 and the competitive environment here and add up what's left to get there, it looks like somewhere in the $35 million to $50 million in cost savings from those projects.

What are you doing in addition to that to get yourself back into sort of the competitive position you were probably 2 to 3 years ago?

Yes, I would say, Paul, that when you look at what we -- versus 2014, when we ended 2014, when we embarked on this, we got the cost inflation that you've talked about, but the other kind of big net you also have was paper were pricing in 2014 versus what we saw in 2017, so those 2 components that we're overcoming.

So in addition to that, we're really looking at our operational network, particularly within the tissue business and I guess, where we're sourcing were from particular customers and maybe put a little bit more rigidity around that so really just to try to minimize miles on the road as well as doing some -- taking a look, like we did in Lewiston, just within the mills, whether there's operational efficiencies to be had.

Did I leave anything at all?

No.

Paul, yes, it's going to be an ongoing effort, looking for cost savings and efficiencies.

Thankfully, we have thousands of processes across our mill every day and many of those have improved.

And thank goodness we have such a incredible group of employees working for Clearwater Paper that are incredibly good with driving change and looking at ways in which we can operate our business better.

And I just believe we have lots of opportunities, especially around the operating model as it relates to tissue.

And we'll just stay very, very focused on driving operating cash flow.

Okay, and then just sticking with tissue and just on Chip's question about the 25% of the major customer loss that you've replaced last quarter, but nothing incremental this quarter on the call here.

Maybe you could just help us out in understanding the bid process and your -- because it sounds like based off the number of bids and your success rate, you expect to have 50% done by the end of the year.

But is Q4 a period when there's no business out for bid?

So I would just clarify that a little bit, Paul.

I think what we said last call was we had line of sight to 25%, and what we said this time is we actually have it in-hand.

So that's all in-hand, and then the incremental 25% by the end of the year.

I don't know if you want to talk about the bids or...

So we tend to know which retailers are putting their business up for bid in any given year, so we have pretty decent line of sight to that.

And we know what percentage of their volume we tend to have, and typically, what's going up for bid and what geographic locations they are.

So we've looked at all that.

And given our cost structure, given our quality and capabilities, I think we have a pretty good opportunity ahead of us to get to that 50% mark.

What's going to vary is at what price can we place this, and it's going to be at a price that makes sense or we'll sell parent rolls.

And that's our other alternative.

Okay.

And just on the paperboard side.

A number of your competitors announced a price increase last week for $50.

Can you confirm that you're onboard with that price increase?

So I'm just going to say, we have not announced a price increase, but we always consider those decisions based on our specific demand situation and what's in the best interest of our strategic customers and our company.

But we did say backlogs are coming into 2018 in a very healthy way.

We have good, healthy customer demand, and it's a pretty encouraging start to the year.

So we'll be making our assessment about how to proceed throughout the year.

(Operator Instructions) Our next question comes from Kurt Yinger with D.A. Davidson.

First question, big moving pieces, obviously, maintenance and some of the strategic benefits in 2018.

Is there any way you could help quantify maybe some of the bigger offsets as you look at 2018?

Well, I think it's going to be what your assumption around what's going to happen with pulp, I think what's going to happen with oil and how that feeds into transportation.

So I think the biggest variables are what Linda described in her prepared remarks and that's kind of what we're watching.

And then as we look past Shelby in 2018, how closely do you think that your CapEx in 2019 can sort of approximate the cost for just maintenance CapEx that you guys have sort of outlined at the end of the presentation?

Yes.

So I've talked about -- as we sit here right now, we think $20 million to $40 million of Shelby won't hold up starting production, but $20 million to $40 million of that will go into '19.

And so I would say -- I would assume maintenance CapEx of $50 million to $60 million plus $20 million to $40 million.

And depending on where we fall within those ranges, that would set up what '19 would look like.

And then, obviously, a lot's been talked about, about the headwinds in the current retail environment.

I mean, are there any specific channels where you see sort of the best opportunities?

I mean, kind of the emerging one right now is the -- how do we describe that?

Omni, limited assortment.

Limited assortment.

So when you think about like the Aldis and Lidls of the world, that's interesting because they're all, in large part, private label.

So -- and then, obviously, the online thing is something to pay attention to, too.

Okay.

And then last question, does there come a point where it's just impossible to place some of the lower-value product at a competitive price as customers move up the value chain with some of the more ultra-quality-tier volume that's coming online?

I think there's always going to be a place for premium conventional-quality tissue.

The nice thing is we have the option to either sell it as a case product or as parent rolls, depending on what the pricing structure looks like.

And we'll have to make those decisions kind of one situation at a time as we progress through the next couple of years.

I mean, do the pricing -- as you try to win those contracts, does it just get more competitive, though, as the new value comes online obviously more people are competing for what I would assume is a pretty similar set of contracts?

I think it depends.

Again, I think the key driver here is just how much retail disruption has taken place in 2017.

Right now, the retailers have their own battle, and our focus is on being a very good supplier for them.

It's eventually going to sort itself out, and we expect this will be sorted through in time.

And so I don't think this is the new normal, so to speak.

I think we're going to see a more stable retail environment in years to come.

Our next question comes from Dan Jacome with Sidoti.

A couple of questions.

It sounds like on the press release you had some comments on future tax reform items or buckets that you are still looking at.

Any sense of what that might be just for our understanding?

Or do you think the guidance you gave today is pretty much it?

I was just trying to -- that was my first question.

Yes, I think the guidance we gave is pretty much it.

Obviously, it just came out and there's different interpretations or rule-making that's going to happen as we move through the year.

So that's kind of -- that's what we were addressing with that comment.

Okay, just checking.

And then on the transportation cost headwind, I think that was mentioned.

I know I've heard -- it seems like almost everyone in forest products is talking about that.

Can you give us a little flavor of what exactly you're seeing at your facilities?

And then again, how much line of sight do you have there?

Like how long would that persist if it's going to?

Your question was on transportation?

Yes, I think you mentioned something about the freight costs, right?

Yes, I mean, there were some weather-related disruptions, obviously, from the storms that caused not permanent kind of impacts, but where you're having to pay bounties or whatever to -- in order to get -- to move stuff.

So that's working itself out of the system.

And diesel's up year-over-year, so that's a continuing headwind.

Okay.

So most of it seems to be in the rearview mirror, and it might be tapering somewhat?

I wouldn't say that.

I'd say a portion of it is as it relates to getting through the weather-related stuff.

But I think between elevated diesel costs and then line haul rates under pressure, just because there's not as many drivers as would be ideal.

Okay.

That helps.

I had a question on mix shift.

If you have to go to more parent rolls because you're not able to pick up the lost volume from the lost contracts, would there be some sort of material difference on your more parent roll scenario for your margins -- for the segment margins for consumer tissue?

I'm just trying to see what the case would be if we got to that scenario.

Typically, your case product is going to have a better margin than your parent rolls.

That's not always the case, particularly, when you get into the more conventional value space.

But trading up parent rolls versus ultra would have a noticeable impact, but that's kind of not what we're talking about here because it is in a conventional space.

So let me see if I got that correct, if you -- the parent rolls typically would -- that would drag your margin down, if you had to go there?

As a general statement, right.

But if you get down onto the conventional and lower-quality stuff, sometimes you're better off just selling it as a parent roll.

Okay.

And then in your line of sight, if you had to go to parent rolls, where would you -- in what area would you fall?

Would you fall -- would you be in the conventional side?

Yes, yes, yes.

Because the business that we lost at the major customers were all conventional.

So the margin headwind wouldn't be as bad as I might first think?

Correct.

Okay.

And then what am I -- for paperboard, the pricing seems to be on the upswing.

I know you just said you didn't announce a price increase per se, but other than the what sounds like reduced imports, is there anything else I'm missing that's helping paperboard pricing or -- just looking for like a very high-level thought you might have there, the imports?

I think when you look at the backlogs and everything, the demand is there, yes.

And I guess, the other thing, if you look -- if you go back a year plus, more in the way of U.S. companies exporting than what we're seeing a year plus ago.

Ladies and gentlemen, that does conclude our question-and-answer session.

At this time, I will turn the call over to Ms. Massman for any closing or additional remarks.

Great.

Thank you.

We look forward to another year of solid progress toward attaining our target cross-cycle margin model.

Despite the challenging environment, which has changed more rapidly than expected, we have stayed ahead of the curve and continue to aggressively invest in projects to reduce cost, which we believe will position us for the growth when market conditions improve.

We thank our customers who make us better every day and for the support of our shareholders.

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

Ladies and gentlemen, that does conclude Clearwater Paper Fourth Quarter and Full Year 2017 Earnings Conference Call.

We do appreciate your participation.

You may all disconnect.