Good day, and thank you for joining us. Welcome to Clearwater Paper's Second Quarter 2021 Earnings Conference Call. Please note that today's conference may be recorded. Thank you. I will now pass the call to your first speaker today, Mr. Sloan Bohlen from Investor Relations. Sir, you have the floor.

Thank you, Joanna. Good afternoon, and thank you for joining Clearwater Paper's Second Quarter 2021 Earnings Conference Call. Joining me on the call today are Arsen Kitch, President and Chief Executive Officer; and Mike Murphy, Chief Financial Officer. Financial results for the second quarter of 2021 were released shortly after today's market close, along with the filing of our 10-Q. You will find a presentation of supplemental information, including a slide providing the company's current outlook 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 and in the supplemental information provided on our website. Please note Slide 2 of our supplemental information covering forward-looking statements. Rather than reread this slide, we are going to incorporate it by reference into our prepared remarks. With that, let me turn the call over to Arsen.

Good afternoon, and thank you for joining us today. Please turn to Slide 3. As you saw from our press release, the financial performance for the second quarter was better than our expectations. On a consolidated basis, the company reported net sales for the second quarter of $406 million and adjusted EBITDA of $15 million. A few highlights to mention. Our paperboard business continued to see strong demand. Based on that strong demand, we implemented previously announced price increases across our SBS portfolio. We successfully completed our largest major maintenance outage of 2021 in April at our Lewiston, Idaho mill, which impacted the business by $22 million. As previously discussed, our tissue business saw lower shipments, reflecting market trends. Consumers destocked their pantries and retailers worked through elevated inventory levels. Both industry data and our own sales orders point to a bottoming out of shipments in April. We started seeing a recovery in May. With the decrease in orders and elevated pulp price levels, we took downtime on our tissue assets to meet demand and reduce inventories, which impacted our fixed cost absorption. We also announced an indefinite closure of our Neenah, Wisconsin tissue mill and an exit from the away-from-home tissue market. These actions will result in a lower overall cost structure of our tissue business. In comparing the first quarter to second quarter 2021 raw material inflation was largely offset by the previously announced price increases in SBS and mix. And finally, we maintained ample liquidity of $297 million at quarter end and reduced net debt by $4 million. As noted during previous quarters, we remain focused on our top priorities during COVID, the health and safety of our people, and safely operating our assets to service customers. We're monitoring the latest trends and are adjusting protocols and policies to keep our people safe. Let's discuss some additional details about both of our businesses. Please turn to Slide 4 so that I can share a few comments on our paperboard business. As you recall, we estimate that approximately two-thirds of paperboard demand is derived from products that are more recession-resilient and one-third is driven by more economically sensitive or discretionary products. We continue to experience strong demand from our folding carton customers, and a recovery in food service segments. Demand for food packaging products and retail paper plates has remained healthy throughout the pandemic. We're also pleased with the market reception of our sustainability-focused brands with NuVo cup and ReMagine folding carton. Both are playing a role in our favorable market position, and our order books continue to be robust. We are diligently working to implement the previously announced price increases. Since the beginning of this year, Fastmarkets RISI, a third-party industry publication recognized price increases that totaled $130 per ton in folding carton and $100 per ton in cup, including the latest increases in July of $30 per ton in folding and $50 per ton in carton. Typically, it takes us up to two quarters before realizing most of these price changes in our financials. We will discuss the estimated impact on our 2021 results later in our comments. We completed our largest planned maintenance outage for 2021 during the second quarter. The economic impact from this outage to our adjusted EBITDA was $22 million, within our previously discussed range of $21 million and $24 million. My thanks to our Lewiston team for safely completing this important outage on time and on budget. Please turn to Slide 5 with some additional comments on our tissue business. Our industry view remains largely the same. The market for tissue in the U.S. is traditionally two-thirds at home and one-third away from home, with around 10 million tons per year of total demand. As consumers spent more time at home in 2020, there was a shift towards at-home consumption. Throughout the pandemic, we witnessed consumer pantry loading and retailers responding by placing higher orders with existing suppliers and seeking out tertiary suppliers, both domestic and international to meet demand. We believe that this could have led to more than a month of excess inventory in the supply chain by the end of 2020. Let me share some data in context pertaining to demand trends that we witnessed in the first half of this year. Consumers started to return to a more normal lifestyle in Q1 and Q2 as vaccines were becoming available and restrictions were being eased. This led to a reduction of at-home tissue purchases and destocking of consumer pantries. Based on IRI market data, consumer purchases, based on dollar sales, bottomed out in March. Due to these consumer trends, retailers were faced with higher inventories in Q1 and into Q2. In response, they reduced orders to manage their inventories. Based on Fastmarkets RISI data, retailer shipments of finished goods bottomed out in April. This is consistent with our order patterns. Both external data and our own internal order patterns are indicating that we're in a demand recovery period, which we believe will continue for the balance of the year. We believe the industry's long-term trends are healthy, and we expect continued growth in overall consumption and private brands continuing to gain share. Let me provide some additional detail on our tissue volume trends. We shipped 10.2 million cases in the second quarter, which was down approximately 36% and 13% compared to the second quarter of 2020 and the first quarter of 2021, respectively. Our low point for shipments was 3.1 million cases in April. Since then, we've had more month-over-month growth in May and June. We expect this improvement trend to continue throughout the fourth quarter. We're also closely monitoring channel and customer trends to ensure that we're aligned with areas in the market with the highest long-term growth potential. To adjust to reduce demand, high inventory levels, and high coal prices, we took significant asset downtime in the second quarter, which negatively impacted our profitability. We will continue to manage our production levels in Q3 and Q4 to service demand, reduce inventory, and minimize cost. Additionally, in the second quarter, we announced the indefinite closure of our Neenah, Wisconsin site with production ceasing in July. While our people in Neenah operated the site well, the assets were not economically viable. Retail volume from Neenah is being shifted to other lower-cost facilities, such as our Shelby, North Carolina mill. By closing Neenah, we're also exiting the away-from-home tissue business, where we had a small and subscale position. While the decision was the right one for the business, it is difficult for our people and the community. I would like to thank them for their commitment to each other, our customers, and Clearwater Paper over the last 10 years. With that, I'll turn it over to Mike to discuss our second quarter results, including the impact from the Neenah closure.

Thank you, Arsen. Please turn to Slide 6. The consolidated company summary income statement shows second quarter 2021, the second quarter of 2020 and the first half of each year. In the second quarter of 2021, our net loss was $52 million. Diluted net loss per share was $3.10 and adjusted loss per share of $1.07. The adjustments incorporate the impacts from the Neenah site closure as well as other adjustments. The impact of the Neenah closure activities in the quarter was $41.7 million. The noncash portion of the charge, $36.9 million was primarily a fixed asset impairment, but also included inventory and other reserves. The cash portion of the charge was for employee pay during a worn notification period and severance-related expenses of $4.9 million. We anticipate that we will have similar employee-related cash expenses in the third quarter, slightly above $4 million. These estimates reflect our best assessment at this time, and we will update them as appropriate as we monetize the assets at Neenah. The corresponding segment results are on Slide 7. Our paperboard business completed a major maintenance outage in the second quarter of 2021 that impacted us by $22 million, while consumer products saw lower production and demand. In our comments during the second quarter, we mentioned that our adjusted EBITDA could be close to breakeven for the second quarter of 2021 relative to the first quarter of 2021 adjusted EBITDA of $54 million. With $15 million of adjusted EBITDA for the second quarter, we came in better than our initial expectations. The improved performance relative to expectations included the impact of the Neenah closure, slightly better tissue demand, cost mitigation efforts, and better SBS price realization. Slide 8 is a year-over-year adjusted EBITDA comparison for our Pulp and Paperboard business in the second quarter. We have and are continuing to implement the previously announced price increases as well as experiencing some positive mix benefits with similar sales volumes as last year. Our costs were impacted by the major maintenance outage of $22 million as well as inflation in raw material inputs and freight. You can review a comparison of our second quarter 2021 performance relative to first quarter 2021 performance on Slide 14 in the appendix. Please turn to Slide 9, where we provide a year-over-year comparison of the second quarter, which represented what we believe is a bottom in tissue shipments in 2021 and peak shipments in 2020. Price and mix were a limited part of the story for tissue. Our sales of converted products in the second quarter were 10.2 million cases, representing a unit decline of 36% versus the prior year. Our production of converted product in the quarter was 9.6 million cases or down 40% versus the prior year. With the actions that we took at Neenah, drawdown of inventory, and lower incentive compensation accruals in SG&A, we were able to partially offset some of the raw material inflationary headwinds. We anticipate the financial impact from raw material inflation to increase in the coming quarters. You can review a comparison of our second quarter 2021 performance relative to the first quarter of 2020 on Slide 15 in the appendix. We also have finished goods production and other financial data on a quarterly basis on Slide 16 for both businesses. Slide 10 outlines our capital structure. Our liquidity was $296.5 million at the end of the second quarter. With the cash flow headwinds of the second quarter behind us, we believe we will generate more free cash flow in the back half of 2021 to further reduce our net debt. Maintenance financial covenants do not present a material constraint on our financial flexibility, and we do not have near-term debt maturities. Slide 11 provides a perspective on our third-quarter outlook and other key drivers for the full year 2021. Our expectations assume that we continue to operate our assets without significant COVID-related disruptions. As previously discussed, demand visibility in tissue as well as inflation expectations have and will continue to be unpredictable. I would like to focus my comments for the third quarter expected adjusted EBITDA of $40 million to $48 million and build up to that range from our second quarter adjusted EBITDA of $15 million. The planned major maintenance outage at Lewiston in April is behind us with a negative impact of $22 million. And we recently completed the planned outage at Cypress Bend this past weekend with an anticipated impact of $3 million to $5 million. The difference of the adjusted EBITDA impact between the second and third quarters resulted in an expected increase of adjusted EBITDA of $17 million to $19 million. Previously announced SBS pricing is expected to positively impact us during the quarter by $9 million to $11 million. We estimate that raw material cost inflation will negatively impact our business by $9 million to $13 million in the third quarter relative to the second quarter. When comparing the second quarter to our expectations for the third quarter, we believe that our previously announced SBS price increase could largely offset raw material inflation. Tissue shipments are expected to grow by 10% to 15% relative to the 10.2 million cases shipped in the second quarter. We shipped 3.7 million cases in July relative to our average monthly shipments of 3.4 million in the second quarter and our low point of 3.1 million cases in April. The recovery in tissue shipments is occurring, and we expect it to continue through the rest of 2021. As we expect to reduce inventories, we anticipate production being slightly below demand. With the closure of Neenah, we are exiting the away-from-home tissue business, which was approximately 100,000 to 150,000 cases per month and will mildly impact our converted shipment volume trend lines and comparisons. We will also receive the benefits during the third quarter from the Neenah closure. While we are not providing specific annual guidance for 2021, there are several drivers, assumptions, and variables we'd like to provide you with an update relative to 2020. We are expecting continued positive impact from the previously announced SBS price increases that are expected to result in year-over-year benefits of $40 million to $45 million. In our paperboard business, planned major maintenance outages are expected to reduce our earnings for 2021 compared to 2020 by $25 million to $27 million, which is down from our previous guidance. We are moving our headbox project at Lewiston from the third quarter of 2021 into 2022 to accommodate our strong paperboard demand. We have updated our guidance, including some adjustments to 2022 on Slide 20, which reflects our current plan. Our current view is that our tissue volume decline year-over-year will be above 20%, which is not adjusted for the impact of our exit from the away-from-home business. In total, from 2020 to 2021 input cost inflation, including pulp, packaging, energy, chemicals, and freight is expected to be $60 million to $70 million relative to our previous estimate of $65 million to $75 million. The majority of this inflation is in pulp. The Neenah site recently generated negative adjusted EBITDA. And by closing the site, we will avoid these losses and lower our overall cost structure by moving production to other sites. These actions will also help fully realize the benefits of the Shelby investment. In total, the benefit on a combined basis is expected to exceed $10 million annually, with full benefit realization occurring in the fourth quarter. For the full year 2021, we are also anticipating the following: we expect interest expense between $36 million and $38 million; depreciation and amortization between $104 million and $108 million; capital expenditures between $50 million and $55 million, which is slightly lower than prior expectations; and our effective tax rate is expected to be slightly higher than previous expectations at 26% to 27%. Let me turn the call back over to Arsen.

Thanks, Mike. I would like to reiterate my comments from last quarter regarding the actions that we are taking across the company to proactively address our market-driven headwinds and tailwinds. In our paperboard business, we're benefiting from the implementation of previously announced price increases and are maximizing production to meet demand. This includes moving some maintenance and a headbox installation from 2021 to 2022. In our tissue business, we're working with customers to offset higher costs through product and other changes. In addition to the market recovery in tissue demand, we're focused on growing our volume through various sales initiatives that have been discussed in previous quarters. Across both businesses, we're taking steps to reduce both short- and long-term costs. As previously discussed, we continue to focus on generating cash to reduce our net debt. Last quarter, I spoke about performance improvement efforts focused on improving core operations in the medium to long term, aimed at achieving the full profit potential of Clearwater Paper over the next several years. Given the inflation and competitive pressures in our industry, we are working to find ways like this effort to combat margin compression and achieve margin expansion. We're in the planning phases currently, and I look forward to updating you when we're in the execution phase. Let me remind you of why I think these businesses are well-positioned in the long run. For our paperboard division, we believe that the key strengths of this business are the following. First, we operate well-invested assets with a geographic footprint, enabling us to efficiently service our customers. We have a diverse customer base, which serves end markets that have largely stable demand. Second, not being vertically integrated enables us to focus on independent customers with unparalleled service and quality commitment. Third, we believe through product and brand development, the business is well positioned to take advantage of trends towards more sustainable packaging and food service products. Lastly, our paperboard business has demonstrated an ability to generate good margins and solid cash flows. Our Consumer Products division is a leader within the growing private branded tissue market. From our vantage point, we believe the key strengths of this business are the following. First, we have a national footprint with an ability to supply a wide range of product categories and quality tiers, which is an attractive sales proposition to our customers. Our expertise in manufacturing, supply chain, and transportation is a key differentiator. Second, there are long-term trends away from branded products to private brands. Private brand tissue share in the U.S. rose to over 30% recently, up from 18% in 2011. While these trends are impressive, we're still a long way from where many European countries are where private brands represent over half of total tissue share. Lastly, tissue is an economically resilient and need-based product. Historically, demand has not been negatively impacted by economic uncertainty. After we get beyond the COVID-related distortions in the market, we're optimistic that this business will generate meaningful cash flows over the long run. We're committed to improving our business to be successful both in the near and long term, and we believe that we will come out of 2021 a better and stronger operation than where we started. Our balance sheet is well positioned to support us with strong liquidity, limited financial maintenance covenants, and debt maturities, which are a few years away. We're working with our Board to develop a medium- to long-term capital allocation plan. We look forward to sharing more on these ideas, which include internal investments, external investments, and return of capital to shareholders as we get closer to our 2.5x target leverage ratio. In closing, I would like to thank our people for all that they do to keep our operations running safely and efficiently and for servicing our customers. I also want to thank our shareholders for their continued support. So with that, we will end our prepared remarks and take your questions.

Your first question is from Adam Josephson of KeyBanc Capital Markets.

A few for me. One on your inflation expectation for the year. It came down a smidge about $5 million. Is that pulp, Mike or Arsen, or is that something else? Just wondering what the moving parts there are.

So I think we had offsetting factors within pulp, freight, and some other items, and then some benefit actually on wood fiber in the Pacific Northwest. So that's kind of how things have changed around a little bit, and we're slightly better from an inflation standpoint.

Got it. Okay. And on the SBS commentary sequentially. So I think your commentary, Mike, implies about a $50 a ton sequential price increase in SBS. Just based on what the trade publication has recognized and your price lags, how much more can we expect from Q3 to Q4, above and beyond that $50 that seems to be happening from Q2 to Q3?

So I think you're heading down the right path that we do have some sequential improvement from third quarter to fourth quarter. And as you do the buildup, first quarter and second quarter was just below $6 million. We have some pulp price improvement happening there. And then you have the second to third quarter within the guide, and you can go from the, yes, third quarter to fourth quarter. So we can work through the math offline, but that will build up to around $40 to $45 million, and there's some nice sequential improvements occurring.

Got it. And I appreciate that. Arsen, one on tissue. I mean, you mentioned that once you get past the COVID distortions, hopefully, you'll be on a path toward greater cash flow. And a thought occurs to me, which is if I annualize your first half, Consumer Products' EBITDA, you'd be at $82 million. And that basically is in line with or averaged from 2016 to 2019 and then the fact the distortion was really last year when tissue EBITDA tripled because of COVID. And it seems like this year is actually more normal when I look at history. Is there a reason you would have me think otherwise?

Adam, you're referencing two quarters that are both somewhat unusual. Q1 was still affected by COVID, and Q2 saw a significant reduction in production, which hit our fixed cost absorption hard along with the rising coal prices. As we move into the third and fourth quarters, I believe we will see a more accurate reflection of our tissue baseline after COVID. Looking at the long term, we are focused on a few key areas. Primarily, we aim to benefit from the Shelby investment, which includes our decision to close Neenah to enhance our tissue cost structure. We are also committed to increasing our volume base to fully utilize our assets. We've experienced a lot of variability over the past year and a half, and we are eager to achieve some stability and focus as we move forward in the year.

I appreciate that. Just one last question about SBS. I believe you have reached capacity in that business for a period now. Your shipments were down about 1% in the first half, even with strong industry demand. Do you have any thoughts on the necessity to increase capacity in that business in the near or long-term future, considering your outlook for it?

Yes. I think, Adam, part of our longer-term capital plan involves a number of different projects. I think in the industry, there's the notion that you should get a little bit of volume increase year-over-year, and we'll continue to look at that. As you're aware about our system, we do have excess pulp capacity at the Lewiston site. So that might be an easier site for us to achieve some, call it, smaller capacity increases then.

Just a follow-up on Adam's last question regarding SBS. You have an interesting position with the non-integrated garden players. If you were able to obtain more capacity, could you increase the volume through that channel?

I think if we look at the last several quarters, we're in a position where we're oversold, and we are trying hard to service our existing customers and allocate product. Certainly, there are opportunities in the market in the long run for us to grow if we're able to move up our capacity in SBS.

Okay. All right. Last quarter, you gave us kind of the month to month to month in terms of the tissue shipments. Is it possible to get that for May and June and then also what you've seen in July, Arsen?

Yes. For July, I have the data available. We recorded approximately 3.7 million cases in July compared to an average of 3.4 million in the second quarter and a low of 3.1 million in March. This indicates sequential growth in our retail business. However, July was slightly affected by our exit from the away-from-home segment, which had some impact on our comparables.

Do you have any visibility regarding backlogs and what August looks like?

We typically have orders in our system as we start the month. Lead times on tissue can vary depending on customer, but it's a bit different from the paperboard market where you have backlogs. We essentially get the tissue orders and have a certain amount of time to deliver them. So August is looking reasonably healthy, and I think we'll continue to see the recovery.

Okay. And then, Mike, is it possible for you to give us a little bit more color on what's in that $9 million to $13 million of sequential input inflation in the third quarter?

Again, I'd say it's mostly pulp that's hitting us in the quarter, but freight has picked up in a big way. So those are the two key drivers of our inflation expectations quarter-over-quarter.

So I'm just curious because there have been a lot of widespread reports of pulp starting to ease in the trade press. And I wonder whether you're starting to see any advantage there. I think it's even showing up on the hardwood market. And then I think probably what you buy is mostly like bleached eucalyptus.

Yes. Reflecting back on Adam's question, we do see inflation coming off a bit in pulp, really in the fourth quarter, and this is more accounting fun in terms of when you actually buy the pulp to when you actually sell it. There's probably at least a quarter that we have flowing through our P&L.

And Mark, just to provide you with a bit more context, if you look at RISI, so March BEK was around $1,100, $1,140 a ton in June. And July, it's around $1,360. So to Mike's point, there is a lag in when we recognize the cost impact that rolls through our system. So that's happening here in Q2 into Q3.

Yes. And just to be clear, Arsen, for everybody that's on the call here. Those represent list prices, not actual prices paid, correct, after kind of discounts?

Correct. Absolutely right. So the typical structure, it's RISI list with a negotiated discount, and that resets on a monthly basis.

Yes. Okay. And then are you seeing any activity in terms of tissue pricing? Or do you think that this recent stories about kind of pulp weakness have kind of pulled the rug out from under that issue for now?

I think what we said before, Mark, is in both markets, price is determined by supply and demand. So if you look at current market dynamics in paperboard, they're quite favorable. I'd say, less so in tissue with the slowdown that we've seen and some of the curtailments that we've had to take on our assets. On top of that, you can look at some of the new capacity additions that are coming online in tissue. There's 150,000, 160,000 tons of private branded TAD capacity that's coming online this year. And while if you look at the overall market of 10 million tons, that's a relatively small number, but it's a more consequential number for the private branded.

Yes, yes. Okay. Just two last ones. How is your inventory at the end of June in tissue relative to where you'd like it to be optimally?

We're still at a higher level. We've reduced our inventory by approximately 15% to 20% from our peak, but there's still more to do. As Mike mentioned, we will continue to manage our production schedules for the rest of the year to reduce our inventory further.

Is that an issue that gets taken care of in the third quarter? Or is that something you see kind of carrying into the fourth quarter, just too hard to call at this point?

I think it's still difficult to call in this quarter, especially with our announcement on Neenah as we rebalance our system, but the team is working hard to manage our inventories down, especially with these elevated pulp prices.

Is there any way for you to quantify how much runway will be left at Shelby, especially considering the Neenah closure?

We plan to increase Shelby's converting operations by the end of this year, and I believe we are making progress. There is still potential for increased capacity at Shelby. Looking at our overall capacity and using last year's figures as a reference, we produced and sold around 60 million cases. The removal of the Neenah assets likely accounts for about 15% of our converting capacity. We anticipate operating at around 90% utilization and aim to enhance our capacity and sales through operational improvements in the next couple of years.

Your next question is from the line of Paul Quinn of RBC Capital Markets.

I’m trying to understand the shipment volumes on the tissue side. In Q2, you reported 10.2 million, and in April, it was 3.1 million. Is the growth for May and June linear at about 300,000 cases per month? Also, should I take the 3.7 million cases for July and add 150,000 cases for the away-from-home segment for Neenah?

I think what we mentioned is we expect 10% to 15% growth in tissue volume quarter-over-quarter. And so we did just over 10 million cases in Q2. So if you apply 10% to 15%, I think you can get to the average run rate in Q3.

Paul, for July's 3.7 million, we're still seeing some volume and sales in the away-from-home market. We were in the process of winding down production, which occurred early in July, and then we were getting finished goods out. Therefore, there's a bit of fluctuation in the numbers when comparing June to July. We'll also notice variations moving from July to August, but we believe we're on a solid trend. It may level off as we progress through the remainder of the year. The shift from April to May seemed to reflect retailers adjusting their supply chains and returning to a regular order cycle. Now, I believe consumers are simply resuming their usual purchasing habits as they deplete their pantry stocks from last year.

Okay. That's helpful. Maybe just on the paperboard side. You got the Slide 20, which is the maintenance schedule. Do you have any idea what's going to be even in 2023?

Paul, we're working on that now and we'll come out when we're ready with it.

These have to go down in 2023? Or is it just when?

I think we'll clarify that here in the coming quarters.

Okay. I remember seeing something about the Lewiston digester issue and the related lawsuits. Can you provide an update on what's happening there?

Yes, we have filed a claim regarding that matter. I don't believe there is any further update on it. Arsen, would you like to...

Yes. I think there are some unsettled issues regarding the continuous digester and the polysulfide equipment. So we're working through that, kind of discussing that with the manufacturer of that equipment. So at this point, we don't have a whole lot more to add about possible claims.

Okay. Any idea on timing of that?

Not at this time.

Okay. Any idea on expectations to hit the net debt target of 2.5x? When do you foresee yourself getting in a position that you're closer to that?

Yes. I think what we want to do, Paul, is just to get a better sense of how the rest of this year and next year is going to play out before providing commentary there. But we're continuing to make some progress and reducing the leverage that we have on the balance sheet.

Your next question is from the line of Adam Josephson from KeyBanc Capital Markets.

You reduced your CapEx guidance by $5 million, which is below your usual level of $60 million, and the first half expenditure was only $21 million. Can you explain what's going on with your CapEx? While it may be premature to discuss next year, I assume you plan to be at or above the $60 million mark next year based on current trends.

Adam, we are in the process of working through a multi-year capital plan to understand our base needs as well as what opportunities we have to improve our cost structure. I think what you're seeing this year is a little bit of that is due to shifting some installations into next year just to maximize paperboard production. Frankly, what you're also seeing is probably Mike and I providing a bit more scrutiny on our capital spending. In fact, I don't think there's anything major happening this year in order to curtail capital spending across our system.

I appreciate it. Arsen, you mentioned where your tissue inventories are and partly would only down your inventories further, but also perhaps waiting for pulp prices to come down further. Just wondering how much of a role your view on pulp prices plays and your willingness to ramp up production again. I would think that the two are very much related in the sense that as tissue demand has weakened, pulp demand has done the same and it's no coincidence that pulp prices have been falling for the last two or three months or so. Can you just talk about the interplay between pulp prices and your inclination to produce?

I would say the primary driver on production is demand, and the secondary is the inventory levels within our system. At some point, making inventory and paying to move it and store it beyond a certain level that is required doesn't make any sense. The pulp pricing is adding to that equation, right? It makes even less sense at really high pulp prices. So it's certainly a factor, but our production historically tends to be reflective of our demand with more moderate fluctuations in inventory. But where we've been here, the last quarters, we saw an upswing and then we took some pretty dramatic steps to curtail production to manage inventory in light of the pulp prices that we were seeing.

Yes, I completely understand. I may have overlooked your comments regarding where you believe industry inventories stand. I know your levels are still above your target. Considering the increasing spread of the Delta variant domestically, I am curious about the likelihood of another restocking cycle, or if we have moved beyond that point and the inventories are too high for it to be a significant factor. I would like to hear your thoughts on this matter.

It's hard to predict where this is going to go, and this is still pretty fresh. We're working with our sales team to see what our customer patterns are and consumer patterns are here with the Delta variant. There's another dynamic that we're also watching and this is around the channel mix. So we, as Clearwater, have historically been more geared towards the grocery channel. And if you look back in history, we were more than three quarters in grocery. We're probably just over half in grocery at this point. That benefited us pretty significantly last year with the grocery channel picking up in the first couple of quarters. This year, the channel has lost some share to club and mass. So in addition to what consumers are going to do, it's also about what do the channels do and what are the trends happening, what kind of trends do we see in our channels and how does it impact our business. So there are a few variables at play here around volume for the second half.

And why has that happened year-to-date, Arsen, to the best of your knowledge that grocery has lost that much share to club and mass?

If you think about last year with the lockdowns, I think a lot of people rediscovered their neighborhood grocery store as a quick way to get into a smaller footprint retailer to buy their products. I think this year, there's been a reversal of that. As there have been long-term historical trends more towards mass and club, and we've done a lot of work over the last five to ten years to shift our channel mix to some of those growth channels as well. But we're still more heavily represented in grocery than I think the market is.

I appreciate it. I have one last question, Mike, regarding the transition from Q3 to Q4. Maintenance will likely decrease a bit, and you should see an increase in SBS pricing based on what has already been recognized. Are there any sequential inflation changes expected from Q3 to Q4 that align with your full year guidance, or any other factors from Q3 to Q4 that I should be aware of?

I think on deflation, I hope we're hitting our apex here in the third quarter, and that will be maybe neutral third quarter to fourth quarter. I think sequentially, our expectation is tissue volumes to continue to grow throughout the remainder of this year, albeit at maybe a slower growth rate than coming off of that April bottom. I think those are probably the couple of key variables to think about for the remainder of the year.

Speakers, I am not seeing any other questions. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.