Welcome to Clearwater Paper Corporation's Fourth Quarter 2016 Earnings Conference Call. As a reminder, this call is being recorded today, February 08, 2017. 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, Led. Good afternoon and thank you for joining Clearwater Paper's fourth quarter and fiscal year 2016 earnings conference call. Joining me on the call today are Linda Massman, President and Chief Executive Officer and John Hertz, Chief Financial Officer. Financial results for the fourth quarter were released shortly after today's market close. Posted on the investors relations page of our website at clearwaterpaper.com. you will find both the earnings press release and the presentation of supplemental information including outlook slides providing the company’s expectations, and estimates as the net sales, operating margin, adjusted EBITDA range and earnings per fully diluted share for the first quarter of 2017 and certain cost pricing shipment, production, maintenance and repairs and other factors for the first quarter and full year of 2017. In addition, we also issued a press release today announcing the expansion of our Shelby, North Carolina consumer products facility, which is also available on our website. Additionally, we will be providing certain non-GAAP information in this afternoon's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release or in the supplemental material provided on our website. I would like to remind you that during this conference call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. These forward-looking statements are based on current expectations, estimates, assumptions, and projections that are subject to change, and actual results may differ materially from the forward-looking statements. Factors that could cause actual results to differ materially include those risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission, including our Form 10-K for the year-ended December 31, 2015, and our quarterly filings on Form 10-Q. Any forward-looking statements are made only as of this date, and the company assumes no obligation to update any forward-looking statements. John Hertz will begin today's call with a review of the financial results for the fourth quarter and fiscal year 2016, then Linda Massman will give an overview of 2016s accomplishments update you with the progress on our previously announced objectives, provide more detail regarding our acquisition of Manchester industry and an overview of the business environment and the newly announced expansion in Shelby, North Carolina. That will be followed by our outlook for the year and the first quarter of 2017. Then we will open up the call for the question-and-answer session. Now, I'll turn the call over to John.

Thank you, Robin. In 2016, Clearwater Paper was focussed on our strategy to improve our cost structure particularly in the consumer products division with the overall company as well. To that end we made significant progress on warehouse automation, the continuous digester project and operational efficiencies. We’ve improved our overall adjusted EBITDA margin percentage by 40 basis points over 2015 despite a $57 per ton year-over-year decrease in Paperboard pricing. Within the consumer products division, we achieved a 320 basis point improvement and adjusted EBITDA margin percentage since we announced the current three year strategic plan at the beginning of 2015. With the completion of warehouse automation and the start up of the continuous digester to come in 2017, we believe that we are well on our way to generating the targeted 400 to 600 basis point improvement in CPD’s adjusted EBITDA margins as we leave 2017. The total productive manufacturing journey and focus on overall – and effectiveness to begin in 2015 has allowed us to significantly increase the operating uptime of our tissue converting lines. As a result we are able to streamline our converting asset base by closing the higher cost Oklahoma City converting operation and we anticipate easily absorbing that converting capacity across the remaining network. In addition, we took out approximately 32,000 tons of capacity with the shutdown of two of our highest cost paper machines Neenah Wisconsin at year end. We took those actions to optimize our operations through better asset utilization. As previously announced, we acquired Manchester industries in December which gives us approximately 190,000 tons of sheeting capacity to serve the folding and commercial print markets. Linda will provide more details in her remarks. Now turning to our fiscal year and fourth quarter 2016 results. First, I’d like to preface my comments…

Thank you, John. Hello, everyone and thank you for joining us today. We have a lot to get through, so we’ll go ahead and get started. I’d like to begin my remarks by sharing with you our excitement and announcing plans for our newest state-of-the-art tissue machine in Shelby, North Carolina. It’s a significant step for us and will strengthen the quality of our assets and provide long term earnings growth. I’ll provide many more details in a moment. But first I will share 2016 highlights and then discuss our high level outlook for fiscal 2017 and more specifically for the first quarter of 2017. 2016 was an evolutionary year for Clearwater Paper as we continue down a well-defined path to build a solid foundation for long-term success. We focus on things we can control to create shareholder value such as operating result and working capital management that generates strong free cash flow and returns on invested capital that exceed our weighted average cost of capital. Our balance capital allocation, the returns excess cash to shareholders while investing in the business to grow free cash flow in future years, and maintaining an optimal capital structure that minimizes our cost to capital, and I believe we executed well on those items in 2016. Discretionary free cash flow for 2015 was approximately $113 million, which at our current market value equates to a discretionary free cash flow yield of 10.7%. Our return on invested capital of 9.3% is well above our cost of capital. As John mentioned, we return $65 million in cash to shareholders in 2016 via share buyback, and we completed the second year of a three-year strategic capital plan and have delivered 320 basis points of adjusted EBITDA improvement in consumer products, which puts us well on our way…

[Operator Instructions] Your first question comes from the line of Paul Quinn with RBC Capital Markets. Your line is now open.

Hey, thanks very much and good afternoon. Few questions here, just on Manchester maybe you could go through…

Paul.

Paul, we lost you.

Are you there?

Well, I can hear you.

Okay. We just heard you. It’s okay. So can you repeat your question please.

Oh, sure. And you can hear me now right?

We can hear you.

Oh, Good. Okay. Just on the rational behind Manchester, I mean, I thing you guys were in this type of operational operations a while ago didn't really signal to the market that that you wanted to go downstream. So what’s change in the market conditions and are you worried about the lack of downstream customers as things get more consolidated there?

Yes. So I think you hit on one of the issues that things have consolidated downstream, but the way we view Manchester is a logical acquisition that enhances the SBS business as it gets us one step closer to that folding carton market which is our largest segment for SBS and its just a – Manchester is a great company, creates great value for their customers and its really a part of the industry that its pretty critical to the smaller folding carton customers and they do a great job of providing the inventory, the just-in-time inventory and the narrow rolls, the machine that’s required to make them successful. So we just thought as a pretty logical way to grow the business.

And Paul, I’d say, I think some of the logic where we got out of the converting side, [Indiscernible] was not competing with customers, we don't view this, this is kind of a halfway step, we won’t be competing directly with our converting customers we’ll still be selling them on the sheeted SBS.

Okay. And just over on the Shelby announcement that’s another one, its a little bit surprising because over the last couple years you guys have been talking about all the capacity adds that everybody else has been coming up with, So just I guess the question is I guess you figure that there's not enough capacity and that this machine isn’t needed. Second part would be why NTT technology as opposed to TAD, what’s the difference?

Yes. So, Paul, I think I’m going to reframe how you described our decision process for Shelby. So we look at our business and what our customer’s growth demand looks like. They are requiring additional growth and growth in particular in the premium and ultra segment of tissue. We’re currently pretty close to tapped out on the volume we can provide there. I mean, we can see them through for the next couple of years, but post-2019 we’ll be in a pretty tough position to provide that ultra capacity to our customers. And if we want to remain a good supply partners to them, this was going to pretty important part of our strategy. Keeping in mind, we are the leader in private-label retail tissue products with some of the best customers in the industry and we fully intend to maintain them as customers and service them well over the next decades.

All right. Last question I had just you described paperboard market is challenging price environment maybe you could give us some color on Q4 price realizations and what your outlook is for 2017?

Yes. We talked about the reduction in pricing that we experience in the fourth quarter and our prepared remarks and I would say that in our bridge that you see on page 22 in our deck, a lot of that price mix that you’re seeing associated with paperboard would be the full year impact of what we saw in 2016 carrying over into 2017.

All right. That’s all I had. Best of luck.

All right. Thanks Paul.

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

Linda, John, Robin hi, hope you are well.

Hi, Adam.

Welcome. One question on the leverage, I think I heard you say John, you’d be in late 2017, early 2018 levered I think 3.5 to 3.9 times just based on the CapEx that you outlined. That seems like among the most levered you were have been as a public company if I’m not mistaken, what gives you comfort in operating at such a high leverage range if indeed I heard you correctly?

Yes. You heard us correctly, its going to probably be high watermark and we’ve also talked in the context that where we would be comfortable which was 2.5 to 4x sort of pushes us to kind of the higher end for a short period of time in that space, but when we look at our cash flow that we generate strong cash flow, we feel comfortable with our ability to pay that down rather quickly and kind of get back into the more threes to higher two range.

And on CapEx I think you said 250 million in 2017, can you give us anything beyond 2017 just in light of the announcement earlier?

I think Linda talked about the fact on the paper machine we’d be spending about one-third of it in 2017 to approximately two-thirds in 2018 and then some might lop over into 2019. So if I take that in 2018 and if we spend $50 million on maintenance CapEx which is our normal that would put us at about $270 million in 2018 and then $50 million to $70 million in 2019 depending on if any of the paper machine spend pops over.

Okay. And on the buyback I know you said you'd still be able to do some buyback over the next three years or so, can you give us any sense as to how much you’ll be able to return to shareholders over that period?

Yes. So we will still return some cash to shareholders, but we’re changing the mix up little bit and prioritizing more of the invest in the business through the CapEx, but it will be less than what you’ve seen, we did 65 last year, I wouldn’t expect to see that much, but there will be some amount.

Okay. Just a couple on cost inflation, it look like it was actually more subdued in the fourth quarter than what you're expecting which came as somewhat of surprise at least to me just given everything we’re hearing about costs going up, so can you just talk about what was the positive surprise for you in the fourth quarter on the cost side and relatively [ph] of the $20 million to $25 million of cost inflation to which you’re guiding for 2017. What your specific assumptions are for some of the big commodities that you’re purchasing?

Sure. As it relates to your question on Q4, so we were pretty significantly hedged from a natural gas standpoint, so that’s one aspect. So, we were seeing some lower natural gas pricing and I guess what you’re seeing in the marketplace, I would say one of things you need for us with our Las Vegas mill is that it tends to really spike in the summer time and into the fall and so we see electrical usage and as well as pricing come down there. From the pulp standpoint we didn’t have any major outages, so we were relying on much more external than of our internal pulp. And then finally where you see a lot of these productivity initiatives and savings we’re getting from that we’ll show up in some of those cost buckets that you’re looking at on the bridge.

Got it. And just one pricing. If you -- what you have more, just given the price erosion you’ve experienced over the last couple years. Are you more concerned about further erosion on the boxboard side or the tissue side in 2017 and why?

Well, like Linda said, most what we see in the bridge there is more like a full year's worth of the lower prices on the SBS side, I mean SBS is more volatile than tissue and if there it’s stubborn, it’s going to move Vegas, its going to happen more on the SBS side. But…

And I think in my prepared remarks we said, our total sales will be flat to up 2%, so we definitely don't see anything of significance on the pricing side. I mean, there is some potential variability but not predicting it to be significant.

Would be sort of fair to say the risks are more skewed to the downside on the boxboard side just given where the dollar is and given your comments about the dollar earlier?

If I could, I have to pick one of the two I guess that would be the one, yes.

Okay. Thank you very much.

All right.

Your next question comes from the line of Dan Jacome with Sidoti & Company. Your line is now open.

Hi, how are you?

How are you, Daniel?

Not too bad. Appreciate all the details and the time. I just wanted to turn back to the Shelby expansion which looks quite interesting. I understand the rationale for the project giving the increasing share we’re seen on the private-label side, I just wanted to return back to Paul's question why the NTT machine exactly, I know when you did the first kind of capacity pushing because in 2010 you had the TAD machine and everything kind of we've read that the TAD machine is kind of like the best technology out there. So I just want to understand – just a little more clarity on why NTT, was it just simply like the economic made more sense as you were shaking out the bidding process or is there something else that maybe you could share?

Yes. Thanks for asking that again. I realized after we passed off, I hadn’t answer that question, so yes, we looked at all the different technologies and ultimately settled on NTT because it gives us the range of products that we’re going to need both premium to ultra quality product along that tissue and napkins and that kind of give us the ultimate flexibility we need to service the customers out of that location in combination with the TAD machine we pretty have there. And it does also have a pretty superior sustainability footprint which we’re pretty excited about.

Okay. Yes, that was kind of what I was getting at, so like from quality perspective things should remain kind of on par with what you've seen from the TAD machine, I guess that was my concern?

Absolutely.

Yes.

Okay. And then I know when you did the TAD machine you called out the East and Southeast customers and then today I think I only heard the Southeast, what’s happening with your east customers at they are been kind of you are that area less or they just going to be served by the current capacity?

I think it might just be a bad choice of words.

Got it. Okay. Moving on and then one last one. That makes -- that’s fine. And then moving capital return obviously lot of questions, it sounds again a attempt to buy back the CapEx steps up, but you don't have to answer this, but has a board -- that you had one new board member in the last 12 months, has the board -- has there been any incremental discussions about possibly introducing a dividend maybe after this extra CapEx cycle?

We actually had two new board members in the last year.

Great.

And the discussion we have at least one a year at our December meeting. We have that discussion, obviously the priority right now from a capital allocation standpoint as we’re in the CapEx, but that was still on the table.

It’s still on the table. Okay. That’s all I want. All right. Appreciate it. Thanks a lot.

Your next question comes from Chip Dillon with Vertical Research Partners. Your line is now open.

Yes. Good afternoon.

Hi, Chip. How are you?

Doing well. First question has to do with just if you could talk a little bit about a couple of market dynamics. I guess, one is, what are you seeing out there in terms of some of the FBB and similar to bleached board, you know offerings coming in from Europe, and what is your expectations in terms of their penetration and how that might particularly affect you all? And then secondly you know we certainly continue to see a long list of projects in the private label tissue world and I certainly, you know you guys are demonstrating that not all private label, I mean not all of those projects or all of the production is equal, and but I didn’t know if that that had become more of a concern, less of a concern as we go out over the next couple of years.

Okay, so a couple of those questions. We’ll take one at a time here. So the question on SBS and what kind of an impact are we seeing in some of these different types of paperboard particularly FBB which will be imported into the U.S. If I had my head my head for pulp and paperboard in the room, he would say FBB board has been around for a long time, so it’s nothing new to our sales team, to our customers or otherwise. It’s definitely you know getting more oppressed and you’ll hear more about it, but we have been selling our products in comparison to that that type of grade for three years, and clearly we believe that SBS has characteristics that are important for our customers with regard to printability, the surface standards and obviously it’s working for us and so you know just not a huge impact from what we are seeing. I mean there is a lot of talk about it, but we are not seeing a big impact yet from a supply perspective and penetration. Then moving onto the long list of projects and in private label tissue, as I said in my remarks, if we look out through to 2018and we add up all the capacity which we will note that we took out some capacity, and as I said in my prepared remarks, we’re still running at about a 97% efficiency if you look at demand to supply. And if you look a little bit further out, and how the market grows, I still don’t have a lot of concern over that because you only have a few more tissue machines including ours that are announced and the market is projected to grow in line with the population at a minimum, and that’s assuming no further private label penetration within retail store. So I think the market looks like it’s going to be pretty balanced for a while.

And if you separate kind of the ultra tier tissue from the traditional conventional, ultra is going at a much two to three times growth rate. And so, right now you can’t go by ultra quality paper on the market. And so it’s tight and I think it’s only going to get tighter.

And I guess on a qualitative basis, that’s very helpful. As a follow up, I kind of imagine there could be a degree of tentativeness among some of the retailers out there toward expanding into private label products. They certainly seem to be incentivized to you to – to obviously stock them, but that, only if their customers obviously adopt as well. And you did mention the 1% increase in the share of private label, how much of that share would you say is or how much of the market is really that premium in that you are attacking and also which – you know there is retailers would are obviously trying to see him that they would see as a way to tell you to keep their customers are used to using branded products.

So I’ll take those two questions. So the first question on retailer viewpoint on private label. So we are clearly seeing retailers focus on their store brand. I think they absolutely understand the power of their store brand as it relates to their consumers and customers are coming to the store. And they have store brand across categories, so tissue obviously isn’t the only one we know that. That is only growing, and that the data shows that with regard to market share, and you have retailers who are very focused on providing very high quality store brand products that attract foot traffic to their store. I mean it’s the only placed you can get that particular product is their retail store. So it’s a huge competitive advantage for these retailers. In addition, you have the couple of retailers from Europe who are beginning their entrance into the U.S. market and they have very strong presence with private label and very successful presence with private label and I think that will just further enhance the store brand image with consumers and the third thing I would say is if you look at millennial they are much less brand loyal than traditional shoppers. So they are, they don’t hesitate to use store brands infact, in many cases they prefer them. They have a lot of trust with the retailer base and therefore feel very comfortable using their store brands. But we think there is, there’s a lot of opportunity here in the retail sector and we’re going to be there to grow with our customers. And then I forgot what your second question, so would you like to remind me.

Oh and that just in terms of – yes just talking about the comfort level of the retailers and the customers and adopt – oh I’m sorry, the market share of that the premium into the market has of the private-label market. And I’m going to [Indiscernible] the objective.

Yes, no that is growing. So if you look at total tissue, I think it was since 2012 it’s actually grown about three and half times faster than the average tissue market, so you do see that top-tier premium in ultra category being preferred by the consumer.

I got that, but is that top tier, is that a third of that 25%, is it half of it? Can you just give us a feel for that?

Almost 50% I would say is that top tier, and growing.

Got you. Okay, thank you.

That were – numbers.

Thank you.

Yup, you’re welcome. Thank you.

[Operator Instructions] Our next question comes from the line of Roger Spitz with Bank of America. Your line is now open.

Thank you, and good afternoon.

Hi, Roger.

Hi, Roger.

Hey. What was Manchester’s LTM or 2016 sales and EBITDA?

Unable to disclose based on some purchase agreement.

Okay.

But if you can take the $10 million EBITDA and there was probably just a pitch [ph] less than a million about the synergy.

Okay. Thank you. And can you remind me what all in the CapEx was what [Indiscernible] shall be one, which I guess didn’t include CapEx for warehouse.

It’s a 260.

No 265, but we leased the warehouse with Shelby one, so they would have been pretty close to that 285 and then we are buying that warehouse that is currently under operating leases part of this.

Okay, all right, got it. And then on maybe I heard him correctly. I heard in the prepared remarks, there was a 44 million package from the local and perhaps state government and first I guess shall be two. How does that interact with the young full CapEx here, is that an offset to that or did I miss here the whole thing?

That’s basically tax credit.

Tax credit, okay. And I guess with CRB recent price increase on CRB, how do you think SBS pricing will respond that if at all. I mean it doesn’t sound like you are thinking it or respond much at all to the CRB price increase announcement recently.

Well typically that’s a positive, with something below us there’s a price increase and in terms of the quality stack, because you get some trade off. I am always looking at that, same for sure we are going to bullish on a SBS price increase but we are not.

Got it. That’s it. Thank you very much.

Yup.

I’m showing no further questions in queue at this time. I’d like to turn the call back to Linda Massman for closing remarks.

Great. Thank you. I appreciate that. So we look forward to of course to another solid year of progress towards training our cross cycle margin model. We remain excited, energized and ready to embark in our expansion in Shelby to meet the growth needs of our customers and to take on the challenges of 2017. And in particular, we want to thank our customers who make it better every day and for the support of our shareholders. So thank you for joining us and your continued interest in Clearwater Paper.

Ladies and gentlemen, that does conclude the Clearwater paper fourth quarter 2016 earnings conference call. We do appreciate your participation.