Aug 2, 2017
Executives
Robin Yim - Vice President, Investor Relations John Hertz - Senior Vice President and Chief Financial Officer Linda Massman - President and Chief Executive Officer
Analysts
Chip Dillon - Vertical Research Partners Paul Quinn - RBC Capital Markets Adam Josephson - KeyBanc Capital Markets Inc. Steven Chercover - D.
A. Davidson & Co.
James Armstrong - Armstrong Investments
Operator
Welcome to the Clearwater Paper Corporation’s Second Quarter 2017 Earnings Conference Call. As a reminder, this call is being recorded today, August 2, 2017.
I would now like to turn the conference over to Ms. Robin Yim, Vice President, Investor Relations of Clearwater Paper.
Please go ahead.
Robin Yim
Thank you, operator. Good afternoon and thank you for joining Clearwater Paper’s second quarter 2017 earnings conference call.
Joining me on the call today are Linda Massman, President and Chief Executive Officer; and John Hertz, Chief Financial Officer. Financial results for the second quarter were released shortly after today’s market close.
You will find a presentation of supplemental information, including an updated outlook slides providing the company’s current expectations, and estimates for the range of adjusted EBITDA for the third quarter and the full-year of 2017, and certain cost, pricing, shipment, production and other factors expected to impact the third quarter of 2017, posted on the Investor Relations page of our website at clearwaterpaper.com. I would like to remind you that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended, including but not limited to, adjusted EBITDA for Q3 and full-year 2017.
These forward-looking statements are based on current expectations, estimates, assumptions, and projections that are subject to change, and actual results may differ materially from the forward-looking statements. Factors that could cause actual results to differ materially include those risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission, including our Form 10-K for the year-ended December 31, 2016 and Form 10-Q for the quarter ended March 31, 2017, as well as our earnings release and supplemental information.
Any forward-looking statements are made only as of this date, 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 and in the supplemental material provided on our website. John Hertz will begin today’s call with a review of the financial results for the second quarter, and then Massman will provide an overview of the business environment and our outlook for the balance of the year, and then we will open up the call for the question-and-answer session.
Now, I’ll turn the call over to John.
John Hertz
Thank you, Robin. Q2 was a solid quarter financially and operationally for Clearwater Paper, as we delivered adjusted EBITDA at the midpoint of our outlook range and continue to make progress on our strategic initiatives.
Before I get to the details of the 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 excludes certain charges and benefits that we believe are not indicative of our core operating performance.
Reconciliation from GAAP to adjusted results is provided in earnings release and supplemental slides posted on our website. The second quarter of 2017 those items netted to an approximate $200,000 pre-tax benefit and are primarily comprised of $1.5 million benefit related to the mark-to-market adjustment to our outstanding directors’ common stock units and approximate $1.3 million in charges, primarily associated with the closed facility in Long Island, New York and Oklahoma City.
With that, let’s get to our results. Our second quarter net sales came in at $430 million in below our outlook of flat to up 1%, primarily due to a 4,000 ton decrease in consumer product shipment volume and a 3,000 ton decline in paperboard shipments, all of which was partially offset by an improved paperboard product mix and the 3% improvement in SBS pricing.
Versus Q2 2016, net sales were down 1.6%, due primarily to a 31% decline in non-retail tissue shipments as a result of the December 2016 closure of two paper machines in our in Neenah, Wisconsin mill. As an offset in our Paper – Pulp and Paperboard division, paperboard shipments average prices were up due to the Manchester acquisition.
Second quarter adjusted gross profit of $50 million, or 11.7% margin declined 129 basis points from the first quarter, due in large part to $9 million of planned major maintenance expense at the Arkansas mill, higher chemical costs, and higher external pulp prices, all of which was partially offset by lower wages and benefits. Adjusted SG&A expense was $31 million, or 7.1% of second quarter net sales, which is flat with Q1.
Adjusted corporate expense was $14 million of SG&A spend in the second quarter, essentially flat with the first quarter. Adjusted operating income was $20 million, or 4.5% margin.
Adjusted EBITDA was $45 million, or 10.5% of net sales, net to midpoint of our outlook $42 million to $48 million. That compares to $49 million, or 11.3% in the first quarter and $66 million, or 15.2% in the second quarter of 2016, which did not include any major maintenance costs and had compared with lower input costs for natural gas, pulp, chemicals and packaging supplies.
Net interest expense in Q2 was $8 million, which was essentially flat with Q1. Turning to taxes.
On an adjusted basis, our Q2 effective tax rate was 33% versus 38.3% in the first quarter and in line with our outlook of 34% plus or minus a couple of percentage points. Second quarter 2017 GAAP and adjusted net earnings were both approximately $8 million, or $0.48 per share, which is below the midpoint of our outlook of $0.44 to $0.63 per share, due to accelerated depreciation on certain assets in the quarter.
That compares to an adjusted net earnings of $11 million, or $0.64 per share in the first quarter and $24 million, or $1.37 in the second quarter of 2016. Non-cash expense in the quarter of 2017 included $26 million of depreciation and amortization and $400,000 of total equity-based compensation.
Employee headcount at the end of the second quarter was approximately 3,200, which is down 100 heads from Q1, primarily due to warehouse automation and the closure of the Oklahoma City converting facility. Now discuss the segment results.
Consumer products net sales were $232 million for the second quarter of 2017, down 4.3% compared to the first quarter, primarily due to a 17.6% decline in non-retail tissue shipments, as incremental parent rolls were converted to support our forecasted demand for the balance of the year. Retail sales declined by 1% and converted cases by 3%, due to weaker product mix within the ultra-grade tissue and forecasted and pure promotions in the quarter, due to tight supply of certain products.
Consumer products adjusted operating income in the second quarter of 2017 was $12 million, or 5.1% of net sales essentially flat with the first quarter. CPD adjusted EBITDA of $28 million, or 11.9% was up from $27 million, or 11.1% in Q1.
Now turning to the Pulp and Paperboard division, net sales of $198 million for the second quarter of 2017 were up 1.4% versus the first quarter, due to richer product mix and good prices, which were partially offset by a 1.5% decline in shipment volumes. Average sales price per ton in Q2 was up 3%, or $28 per ton compared to Q1 Pulp and paperboard adjusted operating income for the second quarter of 2017 was $22 million, or 10.9% of net sales, as compared to $27 million, or 14% of net sales in the first quarter.
The margin impact versus Q1 was due in large part to the $9 million of major maintenance costs at our Arkansas mill. Pulp and paperboard’s Q2 adjusted EBITDA was $30 million, or 15.1% margin, down from $35 million, or 18.1% in the first quarter.
Now, turning to the balance sheet. Capital expenditures were $48 million in the second quarter of 2017, of which $39 million was spent on strategic and other ROI positive projects.
Expected CapEx for the year is approximately $250 million, of which $100 million is for the new paper machine in Shelby, $90 million for strategic projects and $60 million for maintenance CapEx. To-date, we have spent a total of $89 million.
We had $108 million of borrowing outstanding on revolver at quarter-end. Long-term debt outstanding on June 30, 2017 remain unchanged at $575 million.
Turning to the stock buyback program. In the second quarter, we did not repurchase stock due to our focus on the strategic projects.
That leaves approximately $30 million remaining under the current authorization. With regard to our liquidity, we ended the first quarter with $9 million of unrestricted cash and we had $192 million available under the revolver.
During the second quarter, we generated $58 million of cash from operating activities, or 13.5% of net sales, up from 10.4% in the first quarter. That’s primarily due to working capital management improvements by reducing day sales – days sales outstanding and extending days payable outstanding.
That concludes my remarks. And I will now turn the call over to Linda Massman, who’ll discuss the company’s outlook.
Linda Massman
Thanks, John. Today, I’ll provide some additional commentary on our second quarter performance, and I’ll take a look at the market environment and what we expect for our business segments.
Finally, I will tell you what we expect for the balance of the year. Second quarter adjusted EBITDA performance came in at the midpoint of our outlook and I was especially pleased to see we generated $58 million in cash flow from operations, or 13.5% of revenues, due to improvements in working capital management.
Both of our business segments performed well in the second quarter, but that performance was dampened a bit due to some challenges in achieving the volume and mix we had forecasted for the tissue business. Looking first at our Consumer Products division, business remains solid from a demand standpoint, as John mentioned.
Total sales dollars were down 4.3% sequentially, driven by lower pricing and volume. We experienced a different sales mix within our tissue product than forecasted.
That resulted in lower sales and led to a tighter than forecasted inventory position, which mainly limited promotions in the quarter to build needed supply of certain products to support demand in the second-half of the year. For the Pulp and Paperboard business, shipment volumes declined 1.5%, but net sales were up 1.4%, due to a richer product mix away from commodity grade paperboard.
Demand remains solid in the second quarter and our backlogs were up and in line with industry trends and tracking comfortably above level at this time versus the last two years, and is now tracking close to levels seen at this time in 2013, which was a robust year for SBS. Regarding our three-year strategic plan announced in 2015, we have seen a cumulative cost reduction of $70 million through the second quarter of 2017, which is on track to achieving total cost savings of $115 million to $145 million.
Our biggest and most visible strategic project by continued pulp digester is in the final stages of completion with installation and testing of final equipment and instrumentation underway. Start-up remains on track for early fourth quarter and we’re excited about the capabilities and efficiencies that digester will bring to our operation.
We’re also now in the homestretch with warehouse automation and realizing the benefits of the completed installations in Shelby, Las Vegas and Lewiston. The annual run rate contribution to EBITDA through the second quarter was $14 million.
The remaining installation at our Elwood, Illinois facility is moving along very well and is approximately 75% complete. Regarding our new tissue machine and warehouse project in Shelby, North Carolina, I’m happy to report that project remains on schedule and within budget.
Design engineering is currently the project the team is focused and we have now started to clear the sites and grade the land in preparation for construction. We have made great progress against our three-year strategy to help us win in today’s marketplace.
We remain focused on producing the finest quality products, while driving cost savings and efficiencies to utilize our network and capabilities to meet the changing needs of our customers. Let’s turn our attention now to my second topic, the market environment for both business segments.
Starting with Consumer Products. The IRI data for Q2 indicated that the U.S.
retail tissue market measured in dollars sales was down 3.5% compared to Q1, due to seasonality and lower branded promotional activity compared to Q1. Based on current IRI scan data, private label gained a point in market share, while the brands were down a point in the second quarter.
Private label market share was approximately 25% of total retail tissue according to IRI and Clearwater Paper share of private label was approximately 3% Our ad tracking service indicated that traditional promotional print ads by the brands was seasonally lower quarter-over-quarter, which was a factor in the 3.5% decline in U.S. retail tissue market sales for the second quarter.
The most current RISI forecast for net new North American tissue capacity through 2019 is 986,000 tons. If the total capacity comes online, as scheduled, and using RISI estimates for demand in North America, the demand and capacity ratio in 2019 will be 98%.
Please note, this demand to capacity ratio does not factor in imports. We’re facing commodity cost inflation, as we progress through the third quarter.
Originally, we forecasted a decline in pulp cost, but instead it is a headwind going into the third quarter. Pulp inflation also has a bigger impact in our third quarter this year, because we are building pulp inventory in preparation for our Lewiston outage at a time when pulp prices were elevated.
In addition, chemical costs are also up. Turning to our Pulp and Paperboard business, the demand environment for the North American paperboard is equally encouraging.
RISI’s outlook for 2017 remains unchanged, with operating rates averaging 94%. Through June of 2017, the American Forest and Paper Association reported a 95.3% operating rate compared to 94.3% for the same period last year.
Order backlogs reported by AF&PA were up 37.5% at the end of the second quarter, compared to levels reported during the same period last year. AF&PA data for SBS backlogs through the second quarter have been trending steadily upward since late 2016.
Industry backlog levels at the end of the second quarter were 5.9 weeks, up from 3.9 weeks at the end of 2016. This is the highest backlog level since April of 2014.
RISI has revised their outlook for 2017 U.S. export volumes to grow by 5.1%, which is the reason for us to deliver their forecast for a decline in export volumes of 4.2% in the March 2017 forecast.
On a year-to-date basis, AF&PA has reported a 3.9% increase in exports compared to the same period last year. RISI’s outlook for imports of competing substrates remained flat for the year.
In February, we mentioned that one of our top tier paperboard customers was seen being acquired by a competitor. Since the announcement, our sales team has been focused and working hard to refill the sales pipeline.
We have made significant progress to-date and believe that our paperboard sales team can completely close the gap by year-end. With this market environment in mind, let’s turn to my final topic today, our third quarter outlook, compared to the second quarter and our outlook for the balance of the year.
Compared to the second quarter, we expect consolidated net sales to be up 1% to 3% sequentially, primarily due to seasonality and improved paperboard and tissue product mix. We’re projecting our consolidated adjusted operating margin for Q3 to be in the range of 3% to 4.5%, compared to 4.5% in Q2, primarily due to the major maintenance scheduled at our Lewiston, Idaho mill, which includes the start-up of our new continuous digester, higher pulp cost, which is magnified by both higher than forecasted prices for the third quarter and the increased volume purchased this quarter’s scheduled outage at Lewiston, and higher seasonal energy costs due to higher electrical rates at our Las Vegas mill.
Our third quarter projections are for an adjusted EBITDA ranging from $40 million to $46 million, and adjusted net earnings per fully diluted share in the range of $0.34 to $0.50. The key variables we see determining where we land in that range are paperboard and tissue market conditions and the major maintenance outage at our Lewiston, Idaho mill.
As we look at the full-year commodity pricing, especially for external pulp and chemicals has been a headwind in the first-half of the year, and is forecasted to be a headwind well into the third quarter. Declines in external pulp prices have yet to materialize.
In addition, the consumer tissue business remains difficult to predict, given the rapidly evolving retail landscape, which adds risk for the second-half of our original forecast. Therefore, we’re revising our full-year EBITDA outlook to a range of $190 million to $210 million.
While we are facing a few challenges related to commodity cost inflation and retail market conditions remain difficult to predict, we are aggressively managing this business to build more strategic value for our customers and developing a network of assets to produce at the lowest cost. This substantial transformation we are undertaking to create value for our customers and our shareholders is only possible because of the dedication and desire of our employees to win.
They are undertaking massive projects and change to make Clearwater Paper stronger and a value-added partner to our customers. We appreciate your participation in today’s call.
I would now like to open it up for your questions.
Operator
Thank you. [Operator Instructions] The first question is from Chip Dillon of VRP.
Your line is open.
Chip Dillon
Yes, good morning – good afternoon.
John Hertz
Hey, Chip, how are you?
Chip Dillon
Doing well, thank you. First question is, just want to make sure I have this right.
I was just pulling these numbers together. It looks like the fourth quarter, if you hit the middle of your range of $200 million for the full-year EBITDA, I guess, that would have suggested the fourth quarter could – would be like in the mid to high-50s.
And I guess, that – as I look at that versus the third where you are 43, then how much of that improvement, it looks like half of it will roughly come from the maintenance, and I guess most of the rest would come from the digester project, is that roughly fair?
John Hertz
No, those are two probably biggest contributions, correct.
Chip Dillon
Okay. And could you just review for us on that how much we should say the impact of the maintenances is by quarter throughout this year in millions of dollars?
John Hertz
So the Q2 was $9 million, Q3 it’s going to be, call it, $18 million to $20 million.
Chip Dillon
And then 4Q is zero?
John Hertz
Correct, as the rate relates to the major maintenance [indiscernible].
Chip Dillon
Yes. No, I just have to ask you this, if again, if you look at your year-to-date EBITDA and maybe I have made a few tweaks that might not comfort to what you have, but I think I have it pretty much right.
It looks like, if you – again, you do 43 in the current quarter and that’s on top of looks like 94 year-to-date. So that would be like 137, so get to that number, I guess, you’re looking at maybe it’s closer to $60 million.
And that – it just seems to me that almost all of that, if maintenance is $19 million less in the fourth quarter, you can almost say where is there any benefit from the digester. And maybe there’s a seasonal element I’m missing, or maybe the real impact on digester doesn’t hit till next year.
I mean, how should I think about that?
John Hertz
Yes. So the digester will ramp in the fourth quarter and we will see some benefit, but not the full run rate benefit.
And for your seasonality question, typically, paperboard is lower from a volume standpoint Q4 and Q1, but that’s how it’s played out in the last two years. But if you look over history, that’s typical seasonality.
Chip Dillon
Gotcha. And again, you’ve identified nine in maintenance and there was no maintenance in the first quarter, was there?
John Hertz
Correct.
Chip Dillon
Okay. So you add it all up, it looks like that you’re approaching the high-$20 million range for this year.
And if I recall, you should have no maintenance in 2018, is that correct? And then, obviously, you have some in 2019?
John Hertz
That’s correct, no maintenance in 2018.
Chip Dillon
Okay, great. Well, that’s very helpful.
I’ll turn it over.
John Hertz
All right. Thanks, Chip.
Operator
Thank you. The next question is from Paul Quinn of RBC Capital Markets.
Your line is open.
Paul Quinn
Yes. Thanks very much and good afternoon.
John Hertz
Hi, Paul.
Paul Quinn
Question on Lewiston maintenance, I thought that was going to be in July, is it done yet, or is this been moved to August, or did I get that right?
John Hertz
Yes, it’s always been in September.
Paul Quinn
Okay. So is it down?
How long is it? Is it – are we talking like 10 or 15 days or?
John Hertz
It’s 20, 21 days.
Paul Quinn
21 days in September and the tie-in for the digester is going to happen right at the end of it?
John Hertz
Correct.
Paul Quinn
Okay. Just in terms of you mentioned the customer you’ve lost on the paperboard side.
I suspect this is MTS. It sounds like you are confident on selling the volume.
I’m just wondering what your anticipated drop in mix or margin looks like right now?
John Hertz
Yes, so we’ve made very good progress since that was announced. We feel pretty good of where we’re at both from replacing the volume and doing it at a mix, that’s not going to be dilutive to our overall paperboard EBITDA.
Paul Quinn
Okay. So it should be – sounds a lot better.
I guess, that market has significantly picked up since Q1 when you were very nervous about?
John Hertz
It has, yes.
Paul Quinn
Okay. And just looking at the tissue side, it looks like retail tissue prices are down, kind of 1.8% in the quarter.
Is that really mix, or do you see anything changing in that place going forward in that segment?
John Hertz
Predominantly mix.
Paul Quinn
Okay. And then just, I guess, since the last quarter we talked, there has been a couple, I guess, vocal North American entrance and a couple German super discounters.
And Linda, maybe you can sort of walk me through how you think they’re going to change the North American marketplace. And I suspect that will be a positive for private label in terms of use, but I also suspect that they will be very aggressive on pricing.
How do you expect Clearwater to do with their expansion?
Linda Massman
Yes. So let me just kind of back up and say sort of that’s one component of what’s changing in the retail landscape, but we also see online retailers acquiring bricks and mortar retailers.
We are seeing a shift in general mix from bricks and mortar to digital. So, I mean, there’s a lot of change right now happening in the retail environment.
And we fully expect that to continue to evolve in a pretty rapid pace as we’ve seen in the first-half of this year. We do think it is a good sign from a private label perspective, especially as retailers really begin to try to figure out how they can strategically position themselves and differentiate themselves in the marketplace.
And we see a lot of them thinking hard about how they’re going to use their store brands to drive traffic and retention of their customers. So we do think, it bodes well for private label.
And given our focus on private label and success in the past, we think we’re uniquely positioned to help our retailers get the consumers attention.
Paul Quinn
Okay. And then just lastly, I just – it’s Q1 and Q2 there seem to be a transportation headwind there of $3.6 million, what’s that related to?
John Hertz
So you’ve got to look at that in conjunction with the benefits that we see on wages and benefits Paul. So if you remember, we called – we shutdown the Oklahoma City facility.
And by doing so by not having that location there in Oklahoma, it increased transportation costs into that region. But that’s more than offset by the kind of the fixed cost savings that we achieved by doing that primarily in wages and benefits.
Paul Quinn
Okay, great. Thanks for the clarification.
That’s all I had. Best of luck.
Linda Massman
Thanks, Paul.
Operator
Thank you. The next question is from Adam Josephson of KeyBanc.
Your line is open.
Adam Josephson
Good afternoon, Linda and John. Hope, you’re well.
John Hertz
Hi, Adam.
Linda Massman
Hi, Adam.
Adam Josephson
Linda, just one, your outlook commentary, you talked about the consumer tissue business remaining difficult to predict, which added risk to your forecast and was one of the reasons why you reduced your full-year guidance. What exactly do you mean by remaining difficult to predict?
Linda Massman
Yes. So if I go back to what I said in response to Paul’s question with regard to the changing and evolving retail landscape, it’s changing rapidly and we’ve seen that in the first-half of the year with regard to different acquisitions and entrance in the market, as you mentioned, all the needle.
That is changing how retailers think about going to market just thinking about how they use their space, whether it be digitally, or on the shelf and how they mix out their product. And we’re in conversations with our retailers on how best to partner with them to really get the consumers attention and to drive that loyalty to their star brands.
Now, with that comes some risk from our perspective. As you’re aware and we’ve mentioned, we are relatively sold out on our ultra quality product, so – and which is why we’re also doing the Shelby two machine.
So as we predict what product is likely to be demanded in the second-half of the year. If our demand varies significantly from our forecast, there’s likely to cause some mild – slightly more than mild supply chain disruption for us, just given the tightness of our ultra capacity until we bring that second shelving machine up.
So that’s what I mean by. It’s just difficult to predict exactly what mix to expect for the back-half of the year, as retailers reassess their situation and what they want to drive from a private label perspective.
Adam Josephson
Okay. John, just on your commentary that sales were a bit below your forecast on account of lower tissue volume and mix.
And I think, you said lower paperboard volume was up. Can you address the first part of the lower tissue volume and mix and what exactly drove that?
John Hertz
Yes, I’d say, there’s probably a couple of things. One is, from a mix standpoint we were, as Linda said, below kind of a weaker, that’s the better word, than our original forecast.
And so from an average sales price perspective that impacted the top line. And then additionally commentary about incremental parent rolls than we otherwise would have and converting those for purposes of what our forecast and expectation is for the second-half of the year rather than being parent rolls sales, we converted that to converted paces.
Linda Massman
And, Adam, that’s a great example of this uncertainty in how to negative through this retail environment. So in the second quarter, while the mix is still good, it was just different than what we originally expected.
So we had built product inventory to meet a certain forecast. And when demand came in, it was for a different mix of product, which required us to shuffle some things around from the supply chain perspective and those cases the places we otherwise wouldn’t have expected.
It required some changeovers that otherwise wouldn’t have had to take place in order to make the product to meet the demand. So those are the things that are difficult to accurately pin down in this rapidly evolving retail environment.
So we’re nimble. We’re quick.
We know how to do this, but given our tight capacity on ultra product, it’s just going to be kind of just tight rope a little bit until we get that second Shelby machine up and running.
Adam Josephson
Got it, and thanks for that clarification, Linda. And John just back to the sales commentary for 2Q about lower than expected paperboard volumes, if I heard you correctly.
I know you’re saying how backlogs have significantly improved, your demand has improved, you’re more confident in the market. But I think you said that paperboard are actually lower than you expecting.
Am I – did I hear that correctly?
John Hertz
No, not lower than we are expecting. We’re pretty much running full out and sold out quarter-over-quarter.
And so it’s going to drive that, maybe probably mostly mix.
Adam Josephson
Okay. And just and also on that point, paperboard volumes were up 8,000 tons from a year ago.
How much of that was Manchester?
John Hertz
Probably 99% of it.
Adam Josephson
So is the reason you’re not – you didn’t have organic volume growth, is just your full out or, I mean, should one expect you to have some organic growth in that business?
John Hertz
So, there’s always creep, I guess. And keep in mind, in the second quarter we had the Arkansas outage.
So that mill being down for the six days, bit of it was, I mean…
Adam Josephson
Right.
John Hertz
…less production.
Adam Josephson
Okay. And just back to the tissue business for a second, your margins were down, I think, 150 bps from a year ago, and they were down closer to 200 bps in the first quarter.
I know, your input costs were up. But one would think you would be able to pass on those higher costs right in the form of higher prices.
But I guess, it just points to level of competitive activity that’s occurring that you haven’t been able to do so. If that’s the case, do you expect to recover these higher input costs at some point over the balance of the year or next year, or how should we think about your ability to recover higher input costs in that business, given the level of competitive activity that’s occurring?
John Hertz
Yes. So it is the competitive activity, but it’s also keep in mind with private labels typically, we are not price leaders.
We follow the brands. If the brands were to increase prices, we would follow.
I think we were normally a year or two ago when we led a price increase, but you typically not see private label doing those.
Adam Josephson
Got it. So as long as they don’t do so, it’s going to be hard for you to be flattish on margins to the extent you have any cost inflation it sounds like?
John Hertz
Correct.
Adam Josephson
Okay. Thank you.
Operator
Thank you. The next question is from Steve Chercover of D.
A. Davidson.
Your line is open.
Steven Chercover
Good afternoon. Thanks for taking my questions.
John Hertz
Thanks, Steve.
Steven Chercover
So the first one is just with respect to the Long Island closure impact. It’s been six quarters now.
And I’m just wondering how long is this going to persist? It’s actually larger than it was before?
John Hertz
Yes, this is pretty much it, I think end in October. So you won’t be seeing that much anymore.
The reason it’s more than it was for the last couple of quarters is that, we had asset write-off related to a Long Island asset.
Steven Chercover
Okay, thanks. And then can you remind me on the SBS pricing initiative.
How much is there left to implement, if at all?
John Hertz
Well, we were $50 as announced. I guess, if you look at our average sales price, it’s up $28.
We will of course endeavor to get the full $50, but I don’t know what I want to say, I’m skeptical, but no guarantees on it.
Steven Chercover
Well, I mean, I guess, if the backlogs are better and we’ve had a swing between what would look like a decline in exports to growth that’s good.
John Hertz
Yes.
Steven Chercover
Go for it? And another one on bleach board.
So your market share in folding cartons and food service is basically in line with your domestic market share. But it’s way lower in liquid packaging.
So is that by design? And are the margins in liquid packaging smaller to the other applications?
John Hertz
Yes, that is by design. The attractive piece of that business for is, is in Japan.
Linda Massman
And the reason it’s attractive for us in Japan is, they are a customer base, absolutely appreciate high-quality and high service, which is exactly where we play very, very well. And so it’s incredibly great fit for our asset based and for our sales and service team.
Steven Chercover
And that’s out of the Lewiston mill, right?
John Hertz
Correct.
Steven Chercover
Okay. My final question, since you’ve mentioned the evolving retail landscape, may I’ll ask the obligatory e-commerce question, because if you look on Amazon at the tissue category, everything is branded.
So could you offer Amazon a private label brand, or would that be your legacy customers?
Linda Massman
Steve, I’d say, anything is possible, okay, because I do believe the retail environment is changing so dramatically that no solution is necessarily off the table for us. But you are right, it is predominantly branded at this point.
I would venture to guess that will change in time if it follows course to what we’ve seen Amazon do in the past, start with brands and then they move more into private label. But keeping in mind that we also have our bricks and mortar retailers that are very focused on building their e-commerce platform as well and trying to figure out how to leverage their physical space to their advantage with their e-commerce platform.
And so we are working pretty closely with those retailers to try to find some really good solutions for them as well to drive that business online.
Steven Chercover
So it might come through a Kroger Safeway hours for, I guess.
Linda Massman
Yes.
Steven Chercover
Okay. Thank you.
John Hertz
Thanks, Steve.
Operator
Thank you. The next question is from James Armstrong of Armstrong Investments.
Your line is open.
James Armstrong
Good afternoon.
John Hertz
Hi, James.
James Armstrong
Hi. The first question I have is, given the changing environment in consumer products, should we expect shipment levels to stay around the Q2 levels through the back-half of 2018, or should those rebound somewhat just as – as you get everything in order?
John Hertz
No, I think for rebound, particularly in the third quarter, Q4 tends to be a slower shipment quarter for us on the tissue side. So they might rebound strongly in the third and then level out a little bit.
James Armstrong
Yes. And could you talk a little bit about what drove the lower volumes?
Was it anything one, in particular or was it just a timing thing?
John Hertz
I think from a volume standpoint, I don’t know if you heard my comment about diverting some parent rolls that in a normal quarter, we probably would have shipped into converting to set ourselves up for – on a forecasted demand in Q3 and Q4. So those were parent rolls sales that otherwise might happen in another quarter, but didn’t.
James Armstrong
Okay. So it’s just parent – building inventory in parent rolls for the third quarter makes sense?
John Hertz
Yes. And the other thing that Linda alluded to in her comments was, we did see lower promotional activity.
And I think wasn’t just us, but the brands as well.
James Armstrong
And that brings me to my next question. Are you seeing any increase in promotional activity, or any higher competitive pressure from the branded players as you go into third quarter?
John Hertz
Q2 is actually down from a promotional activity. And I don’t know, if that could be called seasonal or not, but we fully expect that continue to live in this kind of high promotional environment.
James Armstrong
Fair enough. Switching to paperboard, could you describe a little bit what you are seeing in newer markets on the imported paperboard side?
Are you seeing increased competition where you compete, or is it just somewhere else?
John Hertz
No, I mean, it hasn’t really hurt us much. It’s mostly in the lower-grade stock, light stock, more in the East Coast, as it relates to European importers.
But we’ve seen a kind of, I guess, flatten out a little bit.
James Armstrong
Okay, that’s helps. And then lastly, just a modeling question.
What’s driving the lower tax rate in 2017? And should that continue into 2018?
John Hertz
We’re taking advantage of some tax credits as it relates to some of the CapEx that we are doing. And we’ve got potentially some other kind of energy-saving type of credit that we’re working on.
James Armstrong
Should those continue into – for modeling should that probably continue into 2018 at a lower level than the 37%, 38% you were at before?
John Hertz
James, I probably, when you’re looking out in the future like that, I probably just stick with our kind of 35%, 36%. I mean, the one thing that’s visible from the GAAP financials is our cash tax rate, which is dramatically lower and going to be dramatically lower again, in 2018, as we get bonus depreciation on some of these CapEx projects.
James Armstrong
Okay, that’s helps. Thank you very much.
Operator
Thank you. And at this time, I would like to turn the call back over to Linda Massman for closing remarks.
Linda Massman
Thank you. We completed a solid first-half of 2017, and we’re excited and focused on the opportunities we have ahead of us through the rest of the year.
Thank you for joining us today and for your continued interest in Clearwater Paper. And a final note will be at the following conferences over the next three months; Jefferies in New York on August 8; KeyBanc in Boston on September 12; RBC in Las Vegas on September 14; and Deutsche Bank in Scottsdale in early October, and we hope to see you there.
Thank you, everyone.
Operator
Ladies and gentlemen, that does conclude the Clearwater Paper second quarter 2017 earnings conference call. We do appreciate your participation.
Thank you.