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.

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.

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…

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,…

Thank you. [Operator Instructions] The first question is from Chip Dillon of VRP. Your line is open.

Yes, good morning – good afternoon.

Hey, Chip, how are you?

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?

No, those are two probably biggest contributions, correct.

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?

So the Q2 was $9 million, Q3 it’s going to be, call it, $18 million to $20 million.

And then 4Q is zero?

Correct, as the rate relates to the major maintenance [indiscernible].

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?

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.

Gotcha. And again, you’ve identified nine in maintenance and there was no maintenance in the first quarter, was there?

Correct.

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?

That’s correct, no maintenance in 2018.

Okay, great. Well, that’s very helpful. I’ll turn it over.

All right. Thanks, Chip.

Thank you. The next question is from Paul Quinn of RBC Capital Markets. Your line is open.

Yes. Thanks very much and good afternoon.

Hi, Paul.

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?

Yes, it’s always been in September.

Okay. So is it down? How long is it? Is it – are we talking like 10 or 15 days or?

It’s 20, 21 days.

21 days in September and the tie-in for the digester is going to happen right at the end of it?

Correct.

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?

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.

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?

It has, yes.

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?

Predominantly mix.

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?

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.

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?

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.

Okay, great. Thanks for the clarification. That’s all I had. Best of luck.

Thanks, Paul.

Thank you. The next question is from Adam Josephson of KeyBanc. Your line is open.

Good afternoon, Linda and John. Hope, you’re well.

Hi, Adam.

Hi, Adam.

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?

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.

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?

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.

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.

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?

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.

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?

Probably 99% of it.

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?

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…

Right.

…less production.

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?

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.

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?

Correct.

Okay. Thank you.

Thank you. The next question is from Steve Chercover of D. A. Davidson. Your line is open.

Good afternoon. Thanks for taking my questions.

Thanks, Steve.

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?

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.

Okay, thanks. And then can you remind me on the SBS pricing initiative. How much is there left to implement, if at all?

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.

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.

Yes.

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?

Yes, that is by design. The attractive piece of that business for is, is in Japan.

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.

And that’s out of the Lewiston mill, right?

Correct.

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?

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.

So it might come through a Kroger Safeway hours for, I guess.

Yes.

Okay. Thank you.

Thanks, Steve.

Thank you. The next question is from James Armstrong of Armstrong Investments. Your line is open.

Good afternoon.

Hi, James.

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?

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.

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?

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.

Okay. So it’s just parent – building inventory in parent rolls for the third quarter makes sense?

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.

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?

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.

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?

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.

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?

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.

Should those continue into – for modeling should that probably continue into 2018 at a lower level than the 37%, 38% you were at before?

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.

Okay, that’s helps. Thank you very much.

Thank you. And at this time, I would like to turn the call back over to Linda Massman for closing remarks.

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.

Ladies and gentlemen, that does conclude the Clearwater Paper second quarter 2017 earnings conference call. We do appreciate your participation. Thank you.