Clearwater Paper Corp (CLW) 2018 Q1 法說會逐字稿

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

As a reminder, this call is being recorded today, April 19, 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, Cheri.

Good afternoon, and thank you for joining Clearwater Paper's First Quarter 2018 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 first quarter were released shortly after today's market close.

You will find the presentation of supplemental information, including an updated outlook slide, providing the company's current expectation and estimate as to certain costs, product pricing, mix, shipment production and other factors for the second quarter of 2018 posted on the Investor Relations page of our website at clearwaterpaper.com.

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 this presentation contains 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, 2017.

Any forward-looking statements are made only as of today's date, and the company assumes no obligation to update any forward-looking statement based on new developments or changes in the company's expectations.

John Hertz will begin today's call with a review of the financial results for the first quarter.

And Linda Massman will provide an overview of the business environment and our outlook for the second quarter of 2018, 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.

Q1 of 2018 was a challenging quarter.

While tissue shipment volumes were strong, the challenging industry conditions have resulted in pricing pressure and higher input cost related to transportation in pulp and wood fiber.

As a result, with the exception of revenues, we came in below the low end of our Q4 outlook ranges.

Before I get into our first quarter 2018 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 our press release and supplemental materials posted on our website.

For the first quarter of 2018, both adjusted EBITDA items netted to $4 million of pretax expense and includes $5 million in reorganization-related charges associated with the previously announced SG&A cost-saving measures, partially offset by a benefit of $1 million from the mark-to-market adjustments to our outstanding directors' common stock units.

For adjusted net income, the items netted to $3 million after tax, which includes $4 million in the previously mentioned reorganization-related charges, offset by $1 million in benefits from the mark-to-market adjustment and the impact of a state tax rate reduction.

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

Our first quarter net sales came in at $437 million, slightly up versus the fourth quarter.

That was well above the outlook range of down 2% to 3%.

Strong top line growth resulted from a nearly 5% increase in tissue case shipment volumes, which was partially offset by expected lower paperboard shipments coming off of an unseasonably strong fourth quarter.

Tissue pricing was a headwind due to pricing pressures primarily in non-ultra products and higher promotional spend in the first quarter.

Net sales were flat versus Q1 2017.

First quarter adjusted gross profit of $45 million or a 10.2% margin decreased from 14.2% in the fourth quarter.

That was mainly due to the tissue pricing pressure of higher external pulp and wood prices and higher planned maintenance at the Arkansas and Shelby mills.

Other contributors were planned Shelby expansion start-up costs and higher transportation costs resulting from a very tight carrier market.

Adjusted SG&A expense was $29 million or 6.6% of first quarter net sales, which was down 25 basis points versus Q4 of '17.

Adjusted corporate expense was $14 million of the SG&A spend in the first quarter and down $700,000 or 4.8% versus Q4 of '17.

Adjusted operating income was $16 million or 3.6% of net sales, came in below our outlook range of $21 million to $26 million.

Adjusted EBITDA was $40 million or 9.1% of net sales and also came in below our outlook for adjusted EBITDA of $42 million to $52 million.

That compares to $58 million or 13.2% in Q4.

Net interest expense of $8 million was flat versus Q4.

Turning to taxes.

On an adjusted basis, our Q1 effective tax rate was 21.3%, which was lower than the midpoint of our outlook of 26%.

That was due to recognition of income tax benefits from a federal tax law extension on a previously expired tax credit.

Our full year 2018 tax rate outlook remains unchanged at 26%, plus or minus 2%.

First quarter 2018 GAAP net earnings were $3 million or $0.16 per diluted share and, on an adjusted basis, $5 million or $0.31 per diluted share, which is below the outlook range of $0.49 to $0.79.

That compares to adjusted net earnings of $14 million or $0.87 per diluted share in the fourth quarter.

Noncash expenses in the first quarter of 2018 included $25 million of depreciation and amortization and $2 million of net noncash pension in retiree medical expense.

Employee headcount at the end of the first quarter was approximately 3,200, which is down by approximately 1% from year-end 2017.

Now I'll discuss the segment results.

Consumer Products net sales were $239 million for the first quarter of 2018, up $4 million or 1.8% compared to the fourth quarter.

The solid top line results were due to 7.8% higher retail shipment tons, a 4.7% increase in converted case shipments and a richer product mix of ultra quality products.

That was more than offset by lower retail tissue pricing, reflective of the competitive retail environment and higher promotional activities, which is the result of the current market conditions.

We are sold out on ultra quality tissue and now have limited ability to enrich the sales mix with additional ultra tissue until the Shelby expansion is complete.

Consumer Products adjusted operating income in the first quarter of 2018 was $3 million or 1.3% of net sales versus $12 million or 4.9% in the fourth quarter.

Decrease was due to the previously mentioned lower retail prices, higher external pulp prices, higher planned maintenance and expansion start-up costs at the Shelby mill, along with higher transportation costs.

As a result, CPD adjusted EBITDA of $17 million decreased by $8 million from the $26 million in Q4.

The adjusted EBITDA margin declined to 7.3% from 11% in Q4.

Now turning to the Pulp and Paperboard division.

Net sales of $198 million for the first quarter of 2017 were down 2% coming off of a strong fourth quarter.

Shipment volumes were 2% lower with a stable product mix.

Pulp and Paperboard adjusted operating income for the first quarter of 2018 was $26 million or 13.3% of net sales as compared to $34 million or 17.1% of net sales in the fourth quarter.

The decrease in operating margin primarily resulted from higher wood prices at both Idaho and Arkansas due to demand for wood related to the strong pulp and corrugated industries and higher planned maintenance at Arkansas.

Paperboard's Q1 2018 adjusted EBITDA margin was 18.1% compared to 21.9% in the fourth quarter.

Now turning to the balance sheet.

Capital expenditures were $48 million in the first quarter of 2018, of which $45 million was spent on strategic and other ROI-positive projects, the bulk of which is attributed to the Shelby expansion.

Our expected total CapEx for the year remains unchanged at approximately $290 million, most of which is earmarked for the Shelby expansion with $60 million for maintenance CapEx.

We had $169 million of borrowings outstanding under the revolver at quarter-end.

Long-term debt outstanding at March 31 remain unchanged at $575 million.

Our leverage ratio was 4.1x last 12 months' adjusted EBITDA.

We did not repurchase any shares in the first quarter under our $100 million share repurchase authorization, which leaves approximately $30 million remaining under the authorization.

With regard to our liquidity.

We ended the first quarter with $12 million of unrestricted cash, and we had $124 million available under the revolver.

During the first quarter, we generated $30 million of cash from operating activities or 6.8% of net sales.

That concludes my remarks.

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

Thank you, John.

Hello, everyone, and thanks for joining us today.

As John stated, Q1 was a challenging quarter, and we delivered mixed results in the quarter.

However, we are confident in our long-term position in the marketplace due to strong demand for our products and our focus on generating strong cash flow.

Now we'll talk about specifics.

The first quarter was a mix of better-than-expected tissue shipment volumes due in part to solid demand and increased retailer promotional activity, which was more than offset by the very challenging industry-wide economic conditions in retail tissue, including tissue pricing pressure in the non-ultra categories and higher input costs, all of which resulted in lower-than-expected EBITDA.

As John stated, we are sold out of ultra quality tissue.

And until the new ultra capacity at Shelby comes online, our ability to continue to enrich our product mix to offset pricing pressure in non-ultra segments will be limited.

So while tissue is under pressure, remember that our Paperboard division, which is roughly half of our business, is currently operating in stable-to-good market conditions.

Paperboard demand remains stable, and our backlogs were up from the fourth quarter and in line with industry trends.

Our backlogs are tracking to similar levels as this time last year.

In addition, we continue to realize the benefits we expected from the acquisition of Manchester.

However, input cost pressures are also affecting Paperboard as prices for wood fiber have increased due to high demand.

Despite the margin pressure and market challenges in the quarter, I was pleased with our ability to generate $30 million in cash flow from operations or 6.8% of revenues.

As we have continued -- as we have faced continued competitive pressures and increased raw material costs, we previously announced actions to further reduce costs, which include, first, our operating model work to reduce supply chain costs and headcount reductions at our Lewiston, Idaho converting operation.

We will continue to optimize our operating assets to match demand.

We will -- have also recently announced a price increase for certain products and grades of tissue due to significant cost increases facing the tissue business.

As previously mentioned, we completed the pulp digester in Lewiston last quarter, under budget and on time.

But the ramp-up to the expected production and yield benefits has been slower than anticipated but is still tracking to an average startup.

We are focused on stabilizing production consistency and yield improvement, and we expect it will take until the third or fourth quarter to reach full run rate.

Regarding our new tissue machine, converting and warehouse project in Shelby, North Carolina.

The project is progressing on schedule and within budget.

The paper machine is currently being shipped to the mill, and the converting and construction of the warehouse buildings are well underway.

And as a reminder, this project will address our capacity constraints to serve our customers' projected growth in the ultra tissue segment.

It also gives us additional flexibility to eliminate supply chain inefficiencies in our current network.

I'm also encouraged by our overall progress made in our effort to reduce SG&A expenses.

Now I'll provide our view on the market environment for each of our businesses and our expectations for the second quarter.

Starting with Consumer Products, the IRI panel data for Q1 indicates the total U.S. retail tissue market, measured in dollar sales, was up approximately 2.9% compared to Q4 '17.

Private brands grew 1.3% in the first quarter, and brands grew 3.6% during the same period.

However, the longer-term trends towards consumer adoption of private brands continued to improve.

And compared to a year ago, private brands grew 6.1% versus the brands' decline of 1.2%.

Private label market share was approximately 28% of total tissue, with the brands at 72%.

I'd like to note that starting in Q1, we had started to use IRI panel data instead of IRI point-of-sale scan data to provide a more comprehensive overview of the U.S. tissue market and Clearwater Paper's business.

The previously quoted IRI scan data excluded certain key retailers and markets, which represent approximately 12% of Clearwater Paper's business that was not being captured.

The most current RISI forecast for net new North American tissue capacity from 2016 through 2019 is 826,000 tons, which was down 66,000 tons from RISI's forecast at the end of Q4 due to a closure now scheduled for the second quarter of 2019.

Over the next 2 years, RISI's schedule of capacity additions predicts 224,000 tons coming online in 2018 and 299,000 tons in 2019.

Assuming all of that capacity comes online as scheduled, and using RISI estimates for demand in North America, the demand-to-capacity ratio in 2019 is forecasted to be approximately 98%.

Over the last 12 months ending January, net imports totaled 493,000 tons.

If net imports stay consistent through 2019, the North American demand-to-total capacity ratio is estimated to be 94%.

Turning to our Pulp and Paperboard business.

The market environment for North American paperboard is encouraging.

RISI's outlook for 2018 is for a balanced market, and their current forecast for operating rates is now expected to average 98.5% in 2018.

This is up from an already favorable 94.4% of RISI's December 2017 outlook.

On a year-to-date basis, American Forest & Paper Association is reporting a 98% operating rate compared to 95.3% for the same period last year.

Since the beginning of the year, order backlogs reported by AF&PA are up 11%.

According to RISI's latest outlook for 2018, U.S. export volumes are now expected to grow by 7% versus a decline of 1% as reported in their December 2017 forecast.

RISI reports Chinese ivory board mills are shifting their focus more towards their home market due to growing demand and production constraints on recycled Chinese box work.

Additionally, European mills have increased their focus on filling the folding box board gap in Asia.

In turn, this will benefit the domestic SBS market by reducing imports into the U.S.

RISI's outlook for imports of competing substrates is now down 1% compared to down 2% in their December 2017 outlook.

SBS price increases, up $30 per ton for folding carton and $40 per ton for cup stock, were published by RISI's Price Watch in late March.

With this market environment in mind, let's turn to my final topic today, our second quarter outlook compared to Q1.

We expect consolidated net sales to be down 1% to 2%, sequentially, primarily due to lower shipment volumes related to a lost volume of a large tissue customer that we have previously mentioned.

We have made good progress to replace that lost volume and, as of today, have lined up 60% of the revenue associated with that lost volume to begin shipping in Q3 and Q4.

By year-end, we could have line of sight to recover an additional 15% to 25% of that lost volume.

With that volume recovery and our work with the operating model changes, we expect to recover most of the related lost profit by the end of 2018.

We're projecting our consolidated adjusted operating margin for Q2 to be in the range of 2.5% to 4% based on these factors: one, higher wood fiber cost; two, a continued tight carrier market for transportation; and three, SG&A cost savings from the recent reorganization.

We're forecasting a tax rate of 26%, plus or minus 2 percentage points.

Our Q2 projections are forecasted to result in an adjusted EBITDA ranging from $35 million to $45 million and adjusted net earnings per fully diluted share in the range of $0.13 to $0.46.

The key variables we see determining where we land in that range are paperboard market conditions, branded tissue promotional activities and changes in customer and consumer demand in tissue.

For the full year, we expect to see continued industry-wide economic challenges in tissue, including non-ultra tissue pricing pressure, higher transportation in pulp and wood fiber cost, with the partial offset from improved paperboard pricing.

While we're not providing a full year 2018 outlook due to economic uncertainty across a number of key drivers of our financial performance, we would like to update you on our current thinking on the 4 key variables that we believe will determine the final 2018 outcome.

First, we now expect that tissue pricing, primarily non-ultra grades, will adversely impact 2018 by $25 million to $40 million versus 2017.

Second, we now expect recently published paperboard pricing will favorably impact 2018 by $10 million to $20 million versus 2017.

Third, we now expect transportation cost to be $10 million to $20 million higher versus 2017.

Fourth, we now expect pulp and wood fiber cost to be higher than 2017 by $5 million to $10 million.

While we are facing some challenging economic headwinds, we are aggressively focused on continuing to drive cost out and improve the efficiency of the Consumer Products operating model, which includes recovering margin on the lost volume of our largest customer by substantial reductions in labor, transportation and other operating costs; developing a regional service model to reduce transportation and other service costs; evaluating our asset footprint to optimize the network and deliver target margins; and rationalizing product SKUs and redesigning products to reduce manufacturing cost and complexity.

We are confident that our leading market positions in both private label at-home tissue and SBS packaging, combined with our continued focus on driving out cost and improving efficiencies, will result in achieving our priority, which is to generate strong cash flows and improve our ROIC.

In closing, our 2018 priorities, which include ensuring our Shelby expansion plans are executed well, we reach our predictive production run rates with continuous digester in Lewiston later this year and continuing to streamline our operations, will make us a stronger, more capable company for our employees, customers and shareholders.

Thank you for listening to our prepared remarks.

We'd now like to take your questions.

(Operator Instructions) Our first question comes from Adam Josephson from KeyBanc.

Linda, just one other -- just one quick thing on those 4 key variables.

You left out the maintenance, obviously.

Maintenance is going to be down by about $25 million or $30 million this year, is that right?

$30 million, Adam.

Yes.

$30 million.

And are there any other big buckets -- I know that you had talked about it [now], were there any other big buckets besides those 5 that we ought to be cognizant of?

No, I think we thought about which ones we wanted to talk about, so let's -- we'll leave it at that.

Okay.

Linda, I've asked you this on several recent calls, just about tissue.

Industry conditions remain extremely challenging for you and your competitors.

You talked about you expect your pricing to be down this year, you have significant cost inflation.

Your margins have been heading in the wrong direction for a while now and yet, obviously, you're investing $340 million in this business.

What -- why do you remain confident that you'll get a good payback on this investment given these seemingly exceedingly challenging conditions not only now, but you talked about the capacity that's coming on over the next 3 years that's rather substantial?

So it's not clear to me why industry conditions would improve at all over the next 2 to 3 years, perhaps you're thinking differently.

Yes.

So Adam, thanks for that question.

It might be a little bit of a long-winded answer here, so bear with me.

Let's just take a step back and widen the lens just a bit.

I think everybody would agree that the broader paper industry has a long history of being cyclical.

The tissue sector of this industry is no different.

So we're currently facing economic headwinds in tissue.

But as I said in my prepared remarks, the Paperboard business, which is roughly half of our business, is operating in stable-to-good market conditions.

So that's great.

We want to just remind everybody of that.

We're also confident that our leading market positions in both private label at-home tissue and SBS packaging, combined with all the actions we're taking to focus on driving out cost and improving efficiencies, are going to help us achieve the priority that we're very focused on which is generating strong cash flow and improving our ROIC.

Now when we look at operating in a cyclical industry, it's just that, cycles.

It comes and goes with regard to different economic cycles.

We believe it's important that we make good strategic decisions throughout the cycles and consistently create value that our customers and, ultimately, our shareholders, will benefit from.

Now if I go back and answer specifically on Shelby and why we believe that makes sense, we absolutely believe our Shelby project makes strategic sense.

And just as a reminder, I know you know this, but in case others on the phone don't know it, we've been a leader in the private label tissue business for well over a decade.

And it's because we partner with the best, the very best retailers, to bring high-quality products that consumers value.

So we talked a little bit about the ultra tissue category on previous calls, it is the fastest-growing segment of the tissue -- at-home tissue market.

And we talked on today's call, we're sold out of capacity in ultra quality, and we invested in Shelby to be able to secure capacity to meet our customers' growing needs and to remain a leading position with retailers.

So that was the strategic premise of the Shelby investment.

Talking a little bit about trends.

And so of course, viewpoints can differ on trends.

But how we see this is the trends continue to point to growth in private label, both from a retailer perspective, it being a priority for them, and from a consumer perspective.

And we believe with this Shelby capacity that we are, and we will be, well positioned to benefit from those trends as they begin to emerge.

And then also, maybe just backing up, when we make large capital investments like you have to do in this industry, that's just how it works with regard to adding capacity or even some of the digester projects, they're just -- they're big capital investments, we make them from a very strategic perspective.

And we think about how much long-term value they're going to create and making sure that they have sustained value creation.

They're not short-term decisions.

So the other aspect that we thought about with regard to Shelby is we believe the winning retailers will develop strong private label brand portfolios, and we think they're going to do that to differentiate themselves and capitalize on the trust that they have been building up all these years with the consumer.

And we think that's a far better strategy than an undifferentiated strategy of just being a reseller of national brands.

And we want to partner with those retailers that are focused on driving that very differentiated, high-quality private label offering.

And we think the market's poised for growth.

So it's a long-winded answer to your question to give you a little bit more insight.

Sure.

John, just a couple on balance sheet and cash flow items.

So your leverage was 4.1x at quarter-end.

Based on your 2Q guidance, it looks like it'll be -- I don't know what your cash burn will be in 2Q, but your leverage would presumably go up a bit sequentially, maybe up to 4.2x or so.

I know you recently loosened your covenants.

So you're at -- I think your maximum leverage is 4.5x this year and 4.25x next year.

Based on what you outlined here today, what do you expect your leverage ratio to head to later this year?

Do you think it'll be above 4.2x or stay around that 4.2x level?

And given next year you're going to have $30 million of higher maintenance expense and the covenants are stepping down by 1/4 of a turn, so how concerned -- and you're going to be burning cash this year given Shelby, so how concerned are you about your ability to stay below your covenants next year, let alone later this year?

Sure.

And I guess after our results this quarter and our outlook for next quarter, it's a little tighter than I -- if you would ask me that question a few months ago.

But I would say, we're going to be in the 4.2 to 4.3x range, probably peaking out in the third quarter.

I think even in a downside EBITDA kind of scenario, we do have enough tools in our tool chest, so to speak, between managing timing of CapEx and some other working capital knobs that we feel comfortable that we won't find ourselves in a breach kind of situation.

Other part of your question, as you look out into 2019, now one thing you'll see is that CapEx will begin to drop off in the fourth quarter this year as it relates to Shelby and then finish in the first quarter.

So that far out shadows what we're spending -- we'd spend on, on the maintenance outages.

So we feel that we'll very quickly, in the first quarter, begin to start paying down on the line of credit, and that will become less and less of an issue as we move through '19.

If you do have -- you're going to have a $30 million EBITDA headwind next year, right, all else equal from higher maintenance, right?

So your -- it's going to be -- even if you generate cash next year, you'll have that challenge to deal with, right?

Correct.

And just from a -- your CapEx expectations for next year, what again, John?

Sorry, I missed that.

Adam, we haven't necessarily given that for next year.

What I would say is, in a normal year, we spend about $75 million, and we'll have about a $20 million to $30 million lap-over from Shelby, so what's that now is $95 million to $100 million.

With some flexibility.

Okay, got it.

And just last one on the consultant you hired.

What, if anything, has that -- what have you learned from that consultant?

Or what are you doing differently as a result?

Well, it was an SG&A-focused exercise.

We're done with the consultant as it relates to that.

We've developed our plan that we're going to be executing over the next year, but we made changes around organizational structure that they worked with us.

We made changes around headcount and changes around how we do our work so we can reduce headcount.

And so it was kind of all of those things that they helped us with.

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

Just maybe to start with Consumer Products, it seems like every call, or between calls, we get another couple of tissue capacity additions announced.

I like that the way the trends are going are more ultra product, but it seems like all the capacity additions are falling in that category as well.

You cited in the quarter the pricing pressure on the non-ultra categories, maybe you could give us an indication of what percentage of your tissue is non-ultra, and then -- pre-Shelby 2 and then post Shelby 2?

Yes, so we've got 400,000 tons of capacity, and 100,000 tons are currently ultra, so we'll add another 70,000 tons with Shelby.

Okay.

And then just -- you cited higher promotional spending in the quarter.

Just trying to understand what that promotional spending is related to private label, I thought that wasn't an expense that you'd necessarily see.

Yes, I mean it can go both ways in terms of sometimes it's the retailer that funds it, and sometimes it's us.

So that's kind of a negotiation.

Okay.

So it's not only you're seeing lower pricing among the non-premium grades, but now it looks like there's a trend to more promotional spending by you with your partners?

Paul, that's some of it, but most of what that promotional spend resulted in was increased volumes for us.

So we ended up having to move product around to support those promotions in the quarter, which is right, I mean we want to have that strong demand, especially leading into this capacity that we're putting in, and so we just had to take care of that increased demand.

Okay.

And then we've seen rising pulp prices for about 1.5 years.

And typically, we would see some pushback by the tissue industry in terms of a price increase or desheeting.

Why isn't that going on right now?

Is that because of the changing customer mix right now?

Yes, so we are seeing some desheeting across the market, and we'll look at that as well.

And then we announced, as I said, Paul, a price increase that we'll implement across certain segments and certain customers.

Anybody joined you on the price increase?

I don't know.

Okay.

And then just maybe switching over to paperboard.

Saw that there's no price increase in the quarter-over-quarter, although list prices were up $30 in March, maybe you can just help us with understanding the lag there and what your expectation is on the remaining $20 of the price hike.

Yes, I guess the lag could be anywhere from about 30 days, depending on the nature of our relationship with the customer from once it gets recognized by RISI Price Watch, to contractual ones where they could be reset every 6 months or every year.

Okay.

So given the mix of your contracts, what should we expect in terms of that lag?

Is that a one-quarter lag?

Is that a 2-quarter lag?

What -- can you help us out with that?

I think full implementation across everything, I'd say, 2. That might be a little conservative, but I'd say 2.

Okay.

And then just in respect to -- just lastly, in respect to the digester at Lewiston and the ramp-up, which seems to be a little bit slower than you expected, what are the main issues in terms of dialing that up?

It's a new piece of machine, I would have thought it would have been -- and it's not anything state-of-the-art.

I mean, it's probably a state-of-the-art digester but it's not a new piece of equipment and lots of people started this up.

What are the issues associated with it?

Yes, so just as a reminder, we did start the digester up under budget, on time, so that was great.

We actually had expected an accelerated start-up curve.

We're now on a more normal start-up curve I would say.

And obviously, we're disappointed that we weren't able to bend that curve a little bit to our advantage, but we are confident we'll get the savings that we're expecting from the project.

Right now, our big focus is on process stability.

And while it seems like a simple piece of technology, I would just say there's a lot of different variables that go into making this work, and the start-up, getting ramped up and on curve, and we're working through them carefully and methodically to make sure that we get those benefits delivered by the end of the year.

Our next question comes from Steve Chercover with Davidson.

Some of my questions have actually already been answered.

But did the pulp/wood guidance include the benefits of the digester?

Yes, it does.

Okay.

So if I look at the 4 items that you articulated and take the midpoint, and then add back the $30 million less maintenance, it looks like we're -- kind of net-net, we should be down EBITDA around $15 million year-over-year.

Is that an easy way to think about it?

I think if you took the midpoint of all that stuff and did your math, you're probably about right.

So that gets us to around $165 million for the full year, which means you don't really expect to see things get much better in the second half.

Is that fair to say?

So you added $30 million for maintenance?

Yes, I mean, so minus 40 and then the paper benefit and transportation impact are about a wash, you got...

You're taking the high end of the tissue pricing.

So it was minus 40, so what's the lower end?

Well, the range was $25 million to $40 million.

$25 million to $40 million, okay.

So -- all right.

So we got a fighting chance of being in the same zip code as last year but it's tough.

So I mean if I -- let's just say it is 170 or 175, whatever you want it, 175, 4.5, 787.

So I guess, what we got to do here is figure out the trailing 12 months and just not focus on just the year for the covenant.

Yes, I mean, Linda talked in her comments about a lot of effort on the operating model, and we should start seeing some of the fruits of that labor in Q3 and Q4.

But that's -- I mean, that's a variable as to how much we get from that, the digester, whether we get an earlier and more of a benefit than we thought.

So I mean, those are the kind of different things that would vary, I guess, where we do end up in this, this year.

But that also then set us up for -- to be in a stronger position from a cost perspective as we go into 2019.

So -- and I'm not trying to sound negative, but considering that things haven't really bounced your way, you haven't had a lot of good breaks in the last little while, if things -- if you don't get a good break, how onerous is it to -- if you breach the covenants, what does that entail?

Well, I mean, we've got a very strong relationship with the banks that are in the syndicate.

And my expectation would be that getting a waiver would not be, I guess, using your words, onerous.

All right.

And have you -- calling pulp prices in the last year has been a losing proposition, but is there any consideration that, I guess, your counterparts, even the big guys who aren't integrated, might stop eating these price increases and start passing them on to the consumer or that's just -- fat chance on that?

I don't think we're going to try to speculate on that.

But I will tell you, we're happy we invested in the digester and are a little bit less reliant on external pulp markets.

So as soon as we can get that curve up and running and on target, we'll be very happy around here.

Now I think you said that your headcount's down year-over-year, is that correct?

Headcount's down year-over-year, is that correct?

Yes, we said it was down versus end of Q4 '17.

Okay.

So I think I saw in the local paper, either Spokane or Lewiston paper, that there were somewhere in the vicinity of 100 [who were] scheduled to be eliminated, is that right?

Or was it more than that?

No, that's correct.

That's in Lewiston.

And that has yet -- that has not happened yet.

And Steve, that's really the operating model work that we're currently working on.

And of course, we take those kind of situations very seriously about our employee base.

And this is more a function of what our customer demand is, where we have production and really trying to line out our network to most cost-effectively serve the customers.

And in this particular case, that has a negative impact on our Lewiston employees.

And we had previously mentioned that, and that's yet to happen.

Okay.

And last question, I mean, obviously, you're doing your best to mitigate the impact of freight, but I mean -- you also said that Shelby was going to diminish your logistical challenges.

But how does doubling down in one jurisdiction in terms of capacity lower your logistics?

Yes, so as we look at the operating model work, assuming the new Shelby capacity, we're really going to be looking at how we can try to keep paper in a very regional way and really try to minimize those long hauls halfway across the country or even sometimes all the way across the country to a very bare minimum, especially given the current outlook on transportation.

So we can do that because we have this mix of product production across the country.

From the west, we have both ultra and conventional.

And now in the east, when we start up the second Shelby machine, we will also have the capability to run ultra and conventional in the east.

So this will really allow us to try to optimize on a more regional basis where we're producing product and shipping it to.

So is -- this will be my last question.

Is the current Shelby through-air-dried machine doing premium as opposed to ultra?

No.

Ultra.

We make ultra on that machine.

Our next question comes from Chip Dillon with Vertical Research.

First question is the 10-K seems to suggest that your capacity to make your own pulp is like 50,000 tons a year higher.

And I'm betting a lot of that, in fact, looking -- because you do it by mill, is Lewiston.

Does it seem like that's unrealistic?

Because it seemed like, to us, that you would be able to substantially reduce your pulp purchases this year and that would maybe swing your pulp and fiber costs actually to a positive.

Even though we know there are cost increases there for wood fiber, it would seem like you'd be buying a whole lot less pulp.

But could you just update us on sort of how much in your forecast you assume you have to buy this year versus last year in terms of market pulp?

Yes, so we're going to be creating extra incremental for 50,000 tons of pulp in Lewiston with the continuous digester, which we expect it to be realizing as we sit here today.

As Linda talked about the start-up curve, it's, I guess, kind of more normal than accelerated, so we are not realizing that.

So I would think rather than realizing the full 50,000, we'll probably realize half of that.

Okay.

So then next year, if everything goes to plan, you'll get the other 25,000?

Correct.

Yes.

And if we assume that lowers your cost, I'm just going to throw a number out there, by 200,000 tons -- sorry, $200 a ton, that -- I guess, that would be about a $5 million benefit.

But you've mentioned earlier about the -- about not having a covenant issue next year.

And we know you have, what, $25 million, $30 million higher maintenance.

We can see that $5 million of that's offset by perhaps better pulp purchases, maybe that delta is even bigger.

But what else do you think will happen besides the digester benefits next year to help you -- obviously, you have the full year of the bleached board pricing, assuming that sticks.

Well, yes.

So I was -- when I was talking to Steve, I mean we're doing a lot of work around our operating model that we expect to see those benefits start to materialize in the P&L at the end of this year, and so we would see that flow through into next year.

We announced a price increase, and we'll see whether that has a benefit next year.

Okay.

And then last question, you mentioned, I think, $10 million to $20 million of benefits this year from the bleached board pricing, does that assume the full $50 million takes effect at this month?

And how -- I know you're not particularly integrated, you do some sheeting, I guess, but when you think -- how much of that price do you have in that forecast?

And when does it become effective?

Yes.

So it's not effective day 1, it will become effective as we work through the year.

I think we said earlier that we would expect to see the full impact take about 2 quarters, and it is reflected in the data point we gave about SBS pricing.

Okay.

And then last point, just an update on the price -- sorry, the CapEx as you look at next year, and maybe I think you said it would start to slow down after the third quarter.

I didn't see much of a net debt change this past quarter, so I imagine, I think you said $290 million for this year, is that going to be super heavy in the second and third, and then it starts to come down?

Or how should we see that progression?

And then what does next year look like at this point?

Yes, I would see it probably peaking in the third quarter and start to come down in the fourth as it relates to Shelby.

As it relates to next year, and we haven't given CapEx guidance for 2019, but I'll tell you what is out there is, typically, we spend about, in a normal year, when we're not a doing a strategic project, $75 million.

And then there's going to be $20 million to $30 million of Shelby spend that laps into Q1.

So you add all that up, and it gets you to like a $95 million to $105 million number.

Got you, okay.

And last question, in bleached board, you have, obviously, a couple of facilities where you make this.

One is sort of stand-alone.

Any thought as to how strategic that facility is?

Is that something that, given the tight skating on the thin ice, I guess you'd say in terms of the covenants, would that -- if a reasonable offer came across the table for part of your bleached board business, is that something you think you would be amenable to, to at least start evaluating and maybe more so than you would have in the past?

Yes, I doubt we would just sell one of the SBS mills because then we'd be just a really small player left in that market.

So we don't really want to kind of orphan the mill like that.

So just selling Arkansas is probably not something that would be on the top of our list.

Okay, got you.

And then last question is as we think about your tissue business, you talked about the ultra premium, there have been some similar machines that have started up to what Shelby is and Vegas is.

Are those machines really -- and I'm not asking you to name names, but just because we see -- I'll ask it this way, if we see a machine that has roughly the same branding as to -- in terms of what you're putting up, are you seeing that capacity in the marketplace, in the high-end areas that you focus on?

And even with that, is the market tight?

Or is it just that maybe others aren't able to make quite the quality that you all are and, therefore, you're not seeing as much competition as one might think just looking at the pace of capacity?

So I'll leave it at this.

So with regard to the other technology, there's a lot of variation in how you can structure the machine and how you run it and the kind of quality you're going to get off the machine.

I think we do a pretty good job of that.

We are seeing much more pressure in the non-ultra part of the market.

The ultra capacity is very tight, very difficult to make high-quality ultra tissue.

Our next question comes from Roger Spitz with Bank of America.

This is Bill on for Roger.

When do you guys see liquidity troughing?

And do you expect to tap the revolver's accordion feature at all?

We'd probably see liquidity troughing in the third quarter between cash on the balance sheet and operating cash flow.

We don't feel like we'll need to tap to accordion.

We do have kind of a readily available capacity to term out some of the revolver.

And if we do that, that would create capacity on the revolver, and we probably would do that before the accordion.

Our final question comes from Dan Jacome with Sidoti.

Just one question, what's your market share of U.S. private label tissue?

Sorry if I missed it earlier, I know you usually break that in the prepared remarks.

We're about 1/3 just looking at private label by itself.

33?

Yes.

Okay, so it's up from the last quarter.

That's a little surprising given your capacity constraints on the ultra side.

What's driving that steady quarter-to-quarter?

I just said it's about 1/3.

Thank you.

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.

Good.

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

We appreciate it.

Ladies and gentlemen, that does conclude the Clearwater Paper Corporation First Quarter 2018 Earnings Conference Call.

We do appreciate your participation.

You may all disconnect, and have a wonderful day.