Clearwater Paper Corp (CLW) 2018 Q2 法說會逐字稿

Welcome to Clearwater Paper Corporation's second quarter earnings conference call.

As a reminder, this call is being recorded today, August 1, 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, Gigi.

Good afternoon, and thank you for joining Clearwater Paper's Second 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.

First, I'd like to apologize for the delay and any confusion caused by the release of our results today.

Our service provider released the information prematurely, then retracted it, which caused a delay in publishing the information on a timely basis after the close of the market.

NASDAQ hosts and manages our IR website, and we explicitly instructed them not to release our results until a set time after the market closed, which is consistent with prior quarters.

Now that has been fixed, so the financial results and a presentation of supplemental information, including an updated outlook slide providing the company's current expectations and estimate for the range of adjusted EBITDA for the third quarter and certain costs, pricing, shipment, production and other factors expected to impact the third quarter of 2018 has been posted on the Investor Relations page of our website at clearwaterpaper.com.

I would like to remind you that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended, including but not limited to our expectations for adjusted EBITDA for the third quarter.

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 and form 10-Q for the quarter ended March 31, 2018, as well as our earnings release and supplemental information.

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

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.

Linda Massman will begin today's call with a brief review of the second quarter, followed by the Q2 financial results from John Hertz.

Then Linda will conclude our prepared remarks with an overview of the business environment and our outlook for the third quarter.

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

Now I'll turn the call over to Linda.

Hello, everyone, and thanks for joining us today.

Before John presents the financial results, I'd like to start with an overview of the second quarter.

We delivered results at the high end of our expectations for all of our metrics.

The paperboard division's financial performance exceeded our expectations while the tissue business met our expectations.

In our efforts to maximize cash flow from operations, we've had great success in executing a number of working capital initiatives.

As a result, we are able to lower our leverage ratio to 3.95 times.

Our pulp and paperboard team delivered a very strong quarter with record production levels and record shipments, combined with strong demand and improved pricing.

Our consumer products business delivered results in line with what we expected, demand for private label ultra quality tissue remained strong, which matches up nicely with the planned startup of our incremental capacity at the beginning of next year.

In the premium segment of the tissue business, competitive conditions remain challenging and we continue to experience high freight and pulp costs, which don't appear to ease anytime soon.

We have put forth tremendous effort to offset these rising costs.

With our pulp optimization initiatives, mill cost structure work, SG&A cost reductions and operating model efforts.

Now John will walk you through our financial details.

Thank you, Linda.

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

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

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

For the second quarter of 2018, 3 items essentially netted each other out as approximately $2 million in charges, primarily related to the previously announced Lewiston reorganization and the SG&A cost reduction initiative were offset by $2 million benefit related to the mark to market adjustment to our outstanding director's common stock units.

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

Our second quarter net sales come in at $432 million, down 1% from Q1 and in line with our expectations.

Higher paperboard pricing and record paperboard shipments on the pulp and paperboard side were more than offset by weaker mix on the consumer product side related to the lost conventional tissue volume at a large customer that we have previously discussed.

As a result, parent roll shipment volumes were up while retail converted case shipments were down.

Second quarter adjusted gross profit of $46 million or a 10.6% margin improved by 36 basis points from the first quarter due to higher paperboard pricing and cost controls within the mills, which was partially offset by the weaker tissue mix.

Lower adjusted SG&A expense reflects the progress of our SG&A cost reduction efforts.

SG&A was $27 million or 6.3% of second quarter net sales.

That is a reduction of approximately $2 million from Q1.

Adjusted corporate expense was $13 million of the SG&A spend in the second quarter, down $500,000 from the first quarter.

Adjusted operating income was $19 million or a 4.3% margin, which was above our expectations and $3 million higher than Q1 '18.

Adjusted EBITDA was $43 million or 9.9% of net sales, which was at the high end of our expectations and $3 million better than Q1 '18.

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

Turning to taxes.

On an adjusted basis, our Q2 effective tax rate was 26.5% versus 21.3% in the first quarter and in line with our expectations.

Second quarter 2018 GAAP and adjusted net earnings were both approximately $7 million with the fully diluted earnings per share of $0.42 and $0.43 respectively.

Adjusted EPS came in at the high end of our expectations.

Q1 adjusted net earnings were $5 million or $0.31 per share.

Now I'll discuss the segment results.

Consumer Products net sales were $222 million for the second quarter of 2018, down 7.2% compared to the first quarter, primarily due to the weaker tissue mix.

The Consumer Products segment incurred a $3 million adjusted operating loss in the second quarter compared to adjusted operating income of $3 million in the first quarter as the impact of the weaker retail mix and absorption of fixed costs over fewer converted cases was partially offset by incremental use of internal pulp in the continuous digester, SG&A cost reduction efforts and network optimization.

CPD adjusted EBITDA of $12 million or 5.2% was down from $17 million or 7.3% in Q1.

Q2 should be the low point from an operating results standpoint for CPD as we expect to see the impact of replacement retail converted case volume, the previously announced tissue price increases and improvements to the CPD operating model show up in the second half of the year.

Now I'll turn to Pulp and Paperboard segment.

For the second quarter 2018 we generated net sales of $211 million and we shipped a record 217,000 tons.

Net sales were up 6.3% versus the first quarter due to strong demand, record production and improved prices.

Average sales price per ton of $972 in Q2 was up $12 per ton compared to Q1.

Pulp and Paperboard adjusted operating income for the second quarter of 2018 was $34 million or 16.3% of net sales as compared to $26 million or 13.3% of net sales in the first quarter.

The margin improvement was primarily due to higher pricing while cost reduction initiatives at the mills and SG&A cost savings offset most of the increased costs for wood fiber in the Pacific Northwest.

Pulp and Paperboard's Q2 adjusted EBITDA margin was $44 million or 20.7% margin, up from $36 million or 18.1% in the first quarter.

Now turning to the balance sheet.

Capital expenditures were $116 million, not including capitalized interest in the second quarter of 2018, of which $110 million related to strategic projects, the bulk of which is for the Shelby expansion.

Expected CapEx for the year is now a range of $275 million to $280 million as we have reduced our discretionary CapEx forecast as part of our initiatives to improve cash flow.

Total CapEx through Q2 is $164 million.

$160 million of borrowings were outstanding under our revolver at quarter end.

Long term debt outstanding remained unchanged at $575 million.

Our total net debt leverage ratio was 3.95 times last 12 months' adjusted EBITDA, which is an improvement from 4.1 times in Q1.

We expect to remain in compliance with our leverage covenant as a result for initiatives to manage working capital and maximize cash flow from operations.

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 $53 million of unrestricted cash, and we had $132 million available under the revolver.

During the second quarter, we generated $80 million of cash from operating activities or 18.5% of net sales, up from 7.1% in the first quarter.

Cash flow from operations was up significantly in Q2 as we continued to manage working capital and spending.

As we look forward to the back half of the year, we would expect quarterly cash flow from operations to return to the 7% to 11% of revenue range, depending on working capital fluctuations.

That concludes my remarks and I will now turn the call back over to Linda, who will discuss the company's strategic priorities, current industry conditions and our outlook for the third quarter.

Thanks, John.

Now I will talk about our strategic priorities.

First, regarding our new tissue machine, converting a warehouse project in Shelby, North Carolina, the project continues to progress on schedule with the paper machine startup expected in the first quarter of 2019.

Further network optimization includes the early startup of converting operations in a new warehouse at our Shelby facility in the third quarter.

This will allow us to take costs out of our supply chain as we continue optimizing our network of assets and our operating model.

The hiring and training of employees are also on track with the majority of hiring complete.

Second, we remain on track with our previously announced cost reduction initiatives as well as the optimization of our operating assets to match demand.

The price increases we announced last quarter for certain products and grades of tissue are being implemented and will help to mitigate rising input costs for external pulp and transportation.

Third, the pulp digester in Lewiston continues to ramp up and produced improved quality pulp as well as incremental tons.

Our Pulp and Paperboard division, which is about half of our business, continues to operate well and market conditions remain strong.

Record paperboard production and shipments in steady demand led to growth in backlogs in the second quarter which was in line with industry trends.

Let's turn our attention now to the market environment for both business segments, starting with consumer products.

The IRI panel data for Q2 indicates the total US retail tissue market measured in dollar sales was flat compared to Q2 '17.

Over this period, private brands were up 5.1% and national brands were down 2.2%.

In the second quarter, private brands reached a record high market share of 29.8% of the total US tissue market, which is up 1.5 points compared to the second quarter of last year and up 4 points since the start of Q2 2016.

Looking forward, North American demand is expected to grow with population at approximately 1% per year.

From 2014 through 2017, private label has enjoyed a compound annual growth rate of 3% compared to flat for national brands.

Over the same period, IRI scan data confirms private label ultra quality remains the fastest growing segment in tissue with a compound annual growth rate of 8.7% versus 1.5% for premium conventional and a decline of 7.5% for economy and value.

The longer-term trend toward consumer adoption of private label brands continues.

The growth has been in both bath tissue and household towels, which together comprised 86% of the total US tissue market.

Since 2014, private label bath tissue has grown 3 points to 26% and household towels have grown 5 points to 35% of their respective market segments versus the national brands.

The most current RISI forecast for net new North American tissue capacity from the third quarter through 2019 is 446,000 tons.

RISI's schedule of capacity additions predicts an additional 147,000 net tons coming online for the back half of 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 99%.

Over the 12 months ending April 2018, net imports totaled approximately 500,000 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 demand environment for North American paperboard was solid and industry backlogs were up 46% since the beginning of the year and up 18% over last quarter as reported by the AF&PA.

RISI's outlook for 2018 is for operating rates averaging 95.7%.

Through June 2018, the AF&PA reported a 98% operating rate compared to 92.1% for the same period last year.

Liquid packaging and food service grades of paperboard are expected to grow 1.8% in 2018 and 2019 due to a shift favoring paperboard packaging over plastics and polystyrene foam for environmental reasons.

And the announced shift from polystyrene to paper hot cups by various institutions could accelerate cup stock demand.

RISI's latest 5-year outlook for US export volumes is for healthy average annual growth of 4.3% through 2022.

RISI's 5-year outlook for imports into the US incorporates the expectation that a greater percentage of Chinese ivory board is going to stay within the domestic Asian market to support growing demand and that production constraints on recycled Chinese boxboard will reduce Chinese imports into the US.

RISI reported that folding cartons prices have increased $30 and cup stock prices have increased $50 per ton since the beginning of the year.

With this market environment in mind, let's turn to my final topic today, our third quarter outlook compared to Q2.

We expect consolidated net sales to be flat to up 1% sequentially.

We're projecting our consolidated adjusted operating margin for the third quarter to be in the range of 3% to 5% based on the following factors.

Higher wood fiber costs; a continued tight carrier market for transportation; and higher seasonal energy costs at our Las Vegas mill.

These items should be partially offset by SG&A cost savings initiatives, continued benefit from our pulp optimization initiatives, previously announced tissue price increase and improved logistics costs with the startup of converting operations and the new warehouse in Shelby.

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

For the third quarter, our outlook for adjusted EBITDA is to be in the range of $40 million to $46 million and adjusted net earnings per fully diluted share in the range of $0.39 to $0.56.

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

As we said last quarter, for the full year we expect to see continued industry wide economic challenge in tissue, including non-ultra tissue pricing pressure, higher transportation, pulp and wood fiber costs, with a partial offset from improved paperboard and tissue pricing due to a previously announced price increase.

We have updated and narrowed the range of the variables expected to impact 2018 adjusted EBITDA compared to 2017 as follows.

The adverse impact from tissue price mix is expected to be $25 million to $30 million.

The favorable impact of the previously announced paperboard price increase in 2018 is expected to range from $12 million to $15 million.

Higher transportation costs to be in the range of $14 million to $16 million.

Higher pulp and wood fiber costs to be in the range of $15 million to $17 million.

While we continue to face some challenging economic headwinds, we are aggressively focused on continuing to drive costs out and improve the efficiency of the consumer products operating model, which includes recapturing the lost profit related to mix in tissue, developing a regional service model to reduce transportation and other services costs, evaluating our asset footprint to optimize the network and deliver target margins, and rationalizing product SKUs and redesigning products to reduce manufacturing costs and complexity.

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

In closing, our 2018 priorities remain unchanged and 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 is from Adam Josephson from KeyBanc.

John, one on the moving parts in '18 versus '17 that Linda just laid out.

Correct me if I'm wrong, but there are a few pieces of change.

The tissue pricing has gotten a little better, more favorable.

Pulp has gotten worse.

Everything else, I believe, stayed roughly the same.

So I think when I add it all up, it's roughly the same as what you mentioned 3 months ago.

Is that right?

I think the math works out to be pretty similar, yes.

You mentioned -- you talked about managing working capital and making some strides there and obviously cutting some of your CapEx projects, just in an effort to manage your balance sheet.

Can you just talk about what you're doing on working capital?

I noticed your accounts payable went up quite dramatically sequentially in year-over-year.

So just wondering what's going on there, what your working capital expectations are for the year and whether they've changed from where they were 3 months ago.

Yes, so in terms of the increase in accounts payable, which was about $100 million versus last quarter, by far the biggest chunk of that is associated with the Shelby project and basic accruals or payables we have associated with that construction in progress.

We also had from a timing standpoint some increases in things like accrued interest, accrued payroll, just depends on what day of the calendar those things fall on when we have to make those payments.

And then we did have some increases in trade AP to a lesser extent.

I would say what we're -- initiative-wise what we're doing is a significant push on supply chain financing and we're seeing that in seeing that in some of our construction progress vendors as well as the broader trade accounts payable balance as well as some kind of renegotiation and pushing out of terms across the board.

When you look at working capital overall, it was a $35 million, $36 million tailwind for us this quarter.

When you look at the components of that, it was a reduction of accounts receivable, about $20 million.

At the timing of accruals that I talked about before for about $10 million, and then a reduction in trade AP of about $5 million.

And in terms of your expectation for the full-year benefit from working capital, John?

Yes, it's probably elevated since -- from 3 months ago, just given the initiatives and efforts we put in place here.

But when you look at the full year, I would say we should be coming in around the 12% of revenue plus or minus area.

Compared to it was last -- yes.

Correct.

That's cash flow from operations.

So I'll do the math offline.

And then on reducing some of the CapEx projects, what are you cutting back on and are those reductions sustainable?

Yes, I mean it kind of falls in the discretionary bucket.

I call it the -- so we've got maintenance CapEx that we have to do otherwise we'll have much bigger problems.

And so we're not cutting off our nose to spite our face on that kind of stuff.

But kind of a non-Shelby, non-absolutely have to do stuff, that's where we're tightening the screw.

Just 2 others.

One on your guidance, John.

So you're guiding to flattish EBITDA sequentially 2Q to 3Q.

Anything meaningful changing 3Q to 4Q that we ought to be mindful of?

Not really.

I mean I think you've got some upside in terms of transportation in pulp and volume that kind of gets offset by some incremental maintenance where we're doing a hog fuel maintenance in Lewiston.

From 3Q to 4Q you're talking.

No from -- 2Q to 3Q.

Right, you're guiding to flat -- what I was saying is you're guiding to flattish EBITDA sequentially 2Q to 3Q.

I'm saying from 3Q to 4Q are there any big moving parts that we ought to be mindful of?

Yes, we're going to see the benefit of a lot of the cost initiatives, the network optimizations that we're doing in the CPD area start to really bear fruit there as we get the 2 converting lines up in Shelby, as we kind of put some constraints about the business we take and where it gets sourced from in terms of the mills network reductions in transportation.

We talked about SKU rationalization and redesigning some of our products to reduce our manufacturing costs.

We've actually gone into our mill network related to some of our volume reductions and we've actually taken quite a bit of cost out of our mill network.

We've reduced over 100 mill positions.

We've shut down some converting lines that just don't have the volume to be running.

And we've done a lot of network resetting already as it relates to warehouse and lanes and how we schedule our paper machines to optimize to this new mix environment.

And just one on the tissue market.

Obviously I think you said your results in tissue were in-line with your expectations, but obviously you lost money on an EBIT basis and your competitors obviously have not been doing well in tissue either.

And haven't really had much in the way of a positive outlook on the market in the next quarter or few quarters for that matter, even though one of them just announced a large price increase in tissue.

Whether or not that sticks is to be determined.

But I know what internal initiatives you have to improve that business, but do you have any reason to expect the industry conditions to meaningfully change in the next few quarters, particularly given the additional capacity coming on?

And if you can just talk a little bit more about industry conditions in tissue and I'd appreciate that.

We talked a little bit about some of the broader trends as it relates to private label and the adoption of continued growth in private label at retailers.

So those are all positive trends from our perspective.

And particularly in the ultra quality segment, where we're seeing almost 9% growth.

And we talked a little bit last quarter about how we were able to offset some of these cost pressures and some of the industry trends we're seeing through a lot of mix efforts over the years.

And we also talked about how those mix efforts were going to be somewhat limited until we got our new Shelby capacity because quite frankly we're sold out of ultra capacity.

I mean we don't have any more to sell until our Shelby machine comes up and begins.

So I think that's probably the broadest positive trend we see in tissue and what we're experiencing.

Like I said on the call, we don't really see an easing in transportation or pulp costs, so we'll be fighting that more likely than not for the balance of the year.

So I think what we're driving towards -- and I guess I should also mention we did talk about -- we took a price initiative to cover our cost increases that we'd already experienced and we announced that to customers and then initiated that last quarter and we're beginning to see the benefits of that roll through.

And we'll just continue to evaluate where our customer demand characteristics are and look at the different inputs affecting margin and what ability we have to offset and manage them and make our decisions going forward.

But really happy that we have a lot of these cost initiatives well underway that are beginning to take hold and we'll continue to look for those types of opportunities.

Our next question is from Chip Dillon from Vertical Research.

First question has to do with the Shelby situation.

It is obvious from the increase in payables that -- and as you did say, your true CapEx is flowing through.

What is sort of the latest on when you think you will throw the switch on that machine and give us a view of sort of how you see the ramp up again as it looks like from now.

Yes, so we're going to turn the switch on the machine in Q1 of next year.

From a manufacturing standpoint, it'll ramp over from a capability standpoint over a 3 to 6 month period.

And then from a selling it out from a shipment standpoint, that'll work itself out through the year and into next year.

And when you say first quarter, I don't mean to overly tie you down, but is this something that's looking -- we're in early August now.

Could that be -- is that going to be like end of March or could it be February or even January?

Yes, it should be early in the first quarter is what our anticipation would be at this point.

And we'll start up on a typical curve, where you run what's a little more manageable and we'll ramp that up and get sufficient volume there in appropriate product quality and then we'll switch this into our ultra quality mix probably a little bit midpoint to later in the year.

Okay, that's helpful.

And then on the working capital, John, I hate to overly tie you down, but I think many of us on this line would look at everything in the current asset section and not count cash in the current liability section and not count debt.

And that number was 173 at the end of '17.

And I just wanted to know again how should we think about what that number does at year end, especially keeping in mind that I think you said on the last call that while the actual physical work on the machine will be done at year end, there could still be some that doesn't show up on the cash flow statement because it'll instead be imbedded in payables.

I just want to make sure we understand where that number's going because it was such a big windfall for you in the second quarter, so to speak.

Yes, I guess with the way I'd answer that is if you look at our cash flow statement.

So I'm doing this from a cash perspective, not one that fixed assets at the balance sheet.

We had spent about $86 million of cash through the first 6 months of the year.

From a cash standpoint for the year as it relates to Shelby, we think we'll spend, depending on supply chain financing arrangements and terms in that kind of call it $200 million to $230 million range.

So that -- I would say that we're going to spend another incremental $110 million to $140 million of cash as it relates to the Shelby project over the last 6 months of the year.

I'm not really going to necessarily going to guide to what we think we're going to do from a cash flow from operations perspective in Q3 and Q4, other than the kind of percentages of revenue I talked about before.

And that's very helpful.

So again, the way you're thinking about it running the business, your CapEx will be $275 million to $280 million, but there might be this sort of lag, I guess, of $50 million or so that you won't actually pay till next year.

And keeping that in mind, first of all your view on that.

And then keeping that in mind, what do you think CapEx will be next year both either as you think about it or as it'll hit the cash flow statement?

Maybe both ways.

I think CapEx as it hits the cash flow statement it's probably going to be around $100 million.

And it's hard to tell from a timing standpoint of when stuff actually hits the balance sheet, but at this point I'd probably say at around $100 million for both.

And so then basically after you finish Shelby, your CapEx is going to, I guess normalize at something in that range per year or maybe even a little lower for a while?

Yes, lower than that.

So our quote normal CapEx when we're not doing a big project like this has been around $75 million.

And that's $50 million of maintenance and $25 million of strategic.

We probably are going to be putting ourselves on a little bit more of a CapEx diet once we're done with Shelby, so it could be even less than $75 million.

And last question.

I heard you say something about relaxing terms, so maybe you were talking about something you did in the past.

But how are things kind of with the banks and in terms of -- I mean it seems like you're now in the home stretch.

Are you seeing any pressure to have to take any unusual measures to kind of keep them happy through the end of this process and into next year, whether it be an asset sale or any kind of an equity race?

No, not at all.

Our conversations with the banking syndicate have been very constructive.

We have active dialog with them about different ideas on stuff and they're very receptive to some of our thoughts.

And Chip, I would say that we did make the statement we expect to be in compliance with our debt covenants.

And I think we've very confident and we've taken the necessary actions to mitigate any concern along that area through the different operational cost initiatives that are currently underway.

And then of course we saw some early successes in our focus initiatives to improve working capital and cash flow.

So I think we feel confident we've addressed these.

Our next question is from Paul Quinn from RBC Markets.

Question on just paperboard prices.

It looks like yours went up $12 quarter-over-quarter over the $50 price increase.

What should we expect the balance to be in Q3 here?

In terms of how much incremental?

Yes, I mean you won't get the full $50, plus you've got liquid packaging that I don't think you'll see it till '19.

So I'm just thinking is it -- should it shake out somewhere in that $30 to $35 range?

So an additional $18 to $23 in Q3?

Yes, we think we're probably kind of flattish, just what's going on with mix as we look Q2 to Q3.

Then in terms of the customer on the tissue side, on the customer order that has been talked about at length.

I seem to recall that you're getting some of this volume back in Q3, so I would expect your tissue mix to improve, but it looks from your guidance that it's not.

Yes, so what's going on, keep in mind, Paul, that we had about a half a quarter's worth of (inaudible) in Q2.

And as that wound down, now it's starting back up again in Q3 and we've said that we've identified 60% of that lost volume, but that's not all coming on all at the same time.

So I think you're actually going to have from a converted case standpoint less in the way of volume in Q3 than in Q2 and you'll see more in the way of parent rolls.

And then just in terms of I think, Linda, you made a comment on the Lewiston digester is still ramping up.

Where are we on that start-up curve and are we going to get there at -- fully hit the ramp-up by the end of Q3 or is that a Q4 or by the end of Q4?

I think it's not going to be as early as Q3.

So the project started up at the beginning of the year, as you know, and we're on the start-up curve now.

We've seen increased pulp output and quality.

Where our opportunity remains now is on yield and output to achieve our run rate savings that we've projected for the project.

So we're about a third of the way there, if you do it on an annualized basis and we're working to deliver the balance as quickly as possible.

As soon as we can kind of tighten down that timeframe for you, we will.

But I think we need to kind of get through the startup curve a little bit more before we can finalize that.

And that pulp that's transferred between I guess the Pulp and Paperboard division and tissue, is that done at cost or is that done at market?

At cost.

So if I backed out expected profitability on that, would you be EBITDA positive in Q2 on tissue?

Don't have the math in front of me, but it would be less than it is.

Less than it is.

Okay, fair enough.

I think that's all I had.

Our next question is from Steve Chercover from Davidson.

It's remarkable how close Paul's questions were to mine.

So on the continuous digester, you're one-third of the way through that thermometer graph or we still have about $20 million to come, is that right?

Yes, that's about right.

And then for the -- I call them the thermometer graphs, but they're not presented in this quarterly slide deck.

How much is left on the warehouse automation and the other opportunities?

They are pretty much what we've achieved or what we've said that we're going to do or going to achieve.

So that's kind of why we took the slide out (inaudible).

The digester is the remaining piece and what we've committed to do is just put our progress on the front page of the supplemental so you can track it there from now on.

And I think you engaged some consultants to help you identify I guess perhaps a new bucket of cost saving initiatives.

When will you provide us an update with that?

So we kind of did, as we talked about the SG&A improvements quarter-over-quarter.

What we did say was we were going to get to $20 million of savings, but we won't get to that full run rate until 2019.

And so we kind of have waves that are occurring through 2018 and so it'll ramp itself up through the year.

And finally, and again it seems like a follow-up question, on SBS, why is your position so weak in liquid packaging?

Is that a less lucrative grade?

I mean are you there because it's by design or is there an opportunity?

I would say our market position is not weak.

We actually have really good quality board.

We are selling into the Japanese market primarily, I mean almost exclusively, our product, which is a very discerning consumer base.

So we feel very confident we have great product quality.

And it was really by design as to the mix we wanted to run on our equipment and where we thought the market conditions lent itself best for the capacity of our assets.

And so we actually had pulled back, it's been a few year now, out of the export market and really just kept the business that was looking for the highest quality liquid packaging board and that's where we've chosen to spend our time and attention for that part of the business.

Yes, that was my understanding is that you had a very high quality product.

So is -- I don't want to call it a problem, but is the situation that your board is actually too good, for lack of better words, for liquid packaging?

No, not at all.

We could sell it in other markets if we wanted to.

It's just how we've chosen to mix out the assets to ensure we have, I guess, maybe the best mix, given our asset structure to maximize our profitability.

Our next question is from Roger Spitz from Bank of America.

I just wanted to be clear.

I think you were absolutely clear, but just for the avoidance of doubt, is the actions you are taking now movement of CapEx, other things, release of working capital for cash, you don't see yourself getting anywhere near your maintenance covenants.

Is that what you're telling us, right?

Correct.

Perfect.

And going back to your Q1 call on the Q&A, when you did the high level year-over-year 2018 EBITDA buckets, is maintenance still a $30 million tailwind as you mentioned then?

Correct.

Perhaps I just didn't hear it -- it is.

Okay.

It is.

That wasn't one of the things that we articulated in the script, but that is maintenance -- it was with…

We have time for one follow-up question from Adam Josephson from KeyBanc.

Linda, just one on SBS.

I think you mentioned in a presentation back in March, perhaps at the end of March, that you thought perhaps the SBS market would come under modest or moderate pressure in the second half because of the [sappy] startup.

Correct me if I'm wrong there.

And if I'm remembering correctly, has your outlook changed since then?

Yes, we don't consider that to be an impact to our outlook for the balance of the year.

So yes, I would say it probably has.

What changed exactly?

We haven't seen the anticipated volume enter the SBS market like we thought it might.

Are you still there, Adam?

Hello?

Operator?

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.

First of all, sorry for the abruptness.

I don't know what happened there with trying to answer your question, Adam.

We'll kind of figure that out.

But thank you, everybody, for joining us today and for your continued interest in Clearwater Paper.

On a final note, we will be at the RBC conference in Las Vegas in September and we hope to see you there.

Thank you.

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

We do appreciate your participation.