Welcome to Clearwater Paper Corporation's Fourth Quarter and Full-Year 2017 Earnings Conference Call. As a reminder, this call is being recorded today, February 5, 2018. I would now like to turn the conference over to Ms. Robin Yim, Vice President, Investor Relations of Clearwater Paper. Please go ahead.

Thank you, James. Good afternoon, and thank you for joining Clearwater Paper's Fourth Quarter and Fiscal Year 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 fourth quarter and full-year 2017 were released shortly after today's market close. Posted on the Investor Relations page of our Web site at clearwaterpaper.com, you will find both the earnings press release and the presentation of supplemental information, including outlook slides providing the company's current expectations and estimates after net sales, operating margin, adjusted EBITDA range, and earnings per fully diluted share for the first quarter of 2018. 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 Web site. 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, 2016, 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 statement. John will begin today's call with a review of the financial results for the fourth quarter and fiscal year 2017, then Linda will discuss the completion of our three-year strategic plan, the business environment, status of our expansion project in Shelby, North Carolina, our efforts to reduce corporate SG&A expenses, the recently-announced reorganization in Lewiston's Consumer Product Division, and our outlook for the first quarter of 2018, and then open up the call for the question-and-answer session. Now I will turn the call over to John.

Thank you, Robin. We ended 2017 with solid Q4 financial results that came in at the high-end of our outlook. Reflecting on the full-year 2017, Clearwater Paper's biggest accomplishment was completing our three-year strategic plan to reduce operating costs. In particular, the final warehouse automation installations were completed and the Lewiston pulp mill was upgraded with the new, continuous pulp digester that began production in October, and will improve pulp yield and quality, and lower operating costs. Since inception of this strategic plan, we have realized related annual cost savings of $95 million versus the 2014 cost structure, and left the year on a run rate to achieve the $115 million to $145 million in annual cost savings we outlined at that time. Those savings are helping to offset the negative impact of a rise in input cost and price compression experienced in paperboard and tissue since 2014. Because of the competitive environment, particularly on the tissue side, we have not been able to meaningfully pass the input increase on to our customers. Linda will talk about the additional measures that we are taking to effectively compete in this environment in the near-term and create shareholder value over the long-term. Now turning to our fiscal year and fourth quarter 2017 results; first, I would like to paraphrase my comments by stating that throughout the rest of my remarks I'll be distinguishing between GAAP and non-GAAP or adjusted results. The adjusted results exclude certain charges and benefits that we believe are not indicative of our core operating performance. Reconciliation from GAAP to adjusted results is provided in the press release and supplemental slides posted on our Web site. For the full-year, the EBITDA adjustments netted to $12 million of pre-tax expense, and included $11 million in costs associated with the closure…

Thank you, John. Hello everyone, and thanks for joining us today. Let me start with our key accomplishments in 2017. We made great progress streamlining our cost structure, which we expect will create shareholder value for the long-term. Toward that end, as John mentioned, since inception, we have realized $95 million of cost savings versus our 2014 cost structure, and we left 2017 on a run rate to achieve the targeted annual savings of $115 million to $145 million. Of the $95 million in savings, $37 million came from capital investments and $57 million was the result of our non-capital related operational improvements such as Lean Six Sigma and total productive manufacturing that drive out waste and improve our operating efficiency. We continue to remain focused on components of the cost structure that we can address in an effort to build a solid foundation for our long-term success as an efficient, low cost producer of Tissue and Paperboard. The benefit of these investments and actions should set the stage for improved returns and a more stable and improved market conditions. Throughout 2017, we continued our focus on addressing shifting market conditions in both Tissue and Paperboard. For example, we are restructuring the tissue converting operations in Lewiston due to the reduction we have experienced in conventional tissue demand. Second, we are addressing our corporate SG&A cost structure and external spend. We are currently executing on a plan that is expected to yield at least $20 million in annual SG&A cost savings that will occur over the next five quarters. We expect to see a $5 million reduction in adjusted SG&A this year versus 2017 and the full cost savings run rate as we leave Q1 of 2019 while these are difficult steps, they are necessary to maintain our longer-term competitiveness…

Thank you [Operator Instructions] Our first question comes from Chip Dillon with Vertical Research. Your line is open.

Good afternoon.

Hi, Chip.

Hi, Chip.

Thanks for all the details. Yes, the first question is on the -- if you could just remind us how much of, I guess, either the percent of the tissue sales dollars or of the tons, however, you want to tell us, were lost of that customer that we start seeing the impact up in the second quarter, and I guess that's the second quarter of '18. And I know on the last call, I believe you said that you had replaced a fourth of it. So, it sounds like you haven't made any further progress in just sort of you or why you think you'll get another 25% replaced by the end of this year?

Okay. So, in regard to your first question, I don't think we really talk specifically about the volume obviously is meaningful that we lost from our largest customer. I guess our confidence about going from 25% to 50% is just looking, I guess, opportunity-by-opportunity as we see how it's going to play out throughout the year and when bids are going to come up, and what we think our chances are and what the opportunity is.

Okay. And then on the cost side, I know -- you know, you guys do make some pulp, and almost everyone else in the business that's in private label does not, and I'm just wondering how that compares with the pricing dynamic you are seeing given that, I would imagine virtually all your competitors are just continuing to see prices move up, cost move up at a faster rate, and I would imagine you all are -- since you are roughly 50% integrated, at least as a company?

Yes, that's correct. We are going to be fully-integrated from a softwood pulp standpoint as the continuous digester ramps. And we typically see a price delta of our own internal cost, and by and large, we are using, you know, internally versus selling it on the open market. There's typically two-thirds of kind of what you'd see spot price or stated price out there.

Okay. And then, I noticed in the -- I think you all put out a press release not too long ago about getting some covenants changed with your banking group. And I didn't know -- I couldn't see if there is any cost to that, and if that's case, is that just a reflection of more competition in the banking industry, and then if you could just kind of talk through -- you gave us -- you said you were $137 million left on your revolver, and that just looks like with CapEx being what it is that you know, you are kind of skating close to the edge there and what kind of options do you have, if as you spend the 290 on CapEx this year, or how can you work your way through that?

Yes. So, in regard to the first question, so we are doing covenant -- was for ex-EBITDA growing 12 months. And we do not expect to go over four, but we are actually 0.9 right now. We did have a conversation with the bankers to see if there is a way just to get some flexibility even though we don't intend to go over four, and that what cost would that be and it sounded to be very, very attractive from a cost standpoint, and they are willing to work with us. And so, we kind of took the financial flexibility even though, as I said, we don't plan on going over 4X.

Right. And then again, if you have to draw -- is it your plan to draw down the whole revolver as you do your -- you know, finish Shelby up?

We won't get -- I plan it not to go down the whole thing. It will be more than we are sitting at right now. We do have an accordion feature at our discussion for an incremental $300 million. So, plan would be we don't need to avail ourselves with that, but we do have that.

And is that cost roughly the same as what you -- incurred interest rate is, or can you give us an idea of how much more that accordion would cost?

Be similar terms, yes.

Okay. And then lastly, thank you for all the details. You mentioned that you had deferred some of the CapEx, which first of all, sounds like that was a good thing because I guess whatever you spend in '18 and beyond is subject to faster depreciation. So that kind of begs two questions; one is how much more CapEx will be left next year? So, I assume it's 60 maintenance plus whatever is left on Shelby. And then secondly, what is kind of a good guess as to when you might start paying cash taxes now? How far out -- how many years is that pushed out?

Yes. So, I think I said we expect to spend 290 in CapEx next year.

In '18?

Yes. I'm talking '19. I'm talking '19.

Okay.

For '19, there is going to be about, call it, between $20 million and $40 million of CapEx related to Shelby that will go into '19. It's not anything that would hold up production. And so, we will just see how we move through the year in terms of how much of that is in '18 versus '19, but at the most it would be 40. And the second part of your question?

Oh, when you think -- just kind of a guess of range of years when you might be a cash tax payer, it seems like with the -- like I said, you push some of these CapEx into '18, I believe you get an immediate write-off of that, and that will just further I would imagine build your credits, and therefore I would imagine you don't become a cash tax payer, I'm just guessing for several years to come?

As I said, we are not going to be taxed cash payer in '18. From a timing standpoint to the extend we got 100%, I don't write-off from a tax perspective. That actually might have the effect of accelerating when we reduced RPN cash taxes in '19 or '20 versus, I guess, the old tax regime. The other thing we are seeing is we are already in a loss position in 2017 from a tax perspective, and with some of the accelerated depreciation and some of the provisions and the new tax law, we are able to add to that. And so, we are going to be able to recapture some losses going back a couple of years. That will be our benefit from a cash perspective here in kind of the mid to later part of 2018.

Okay. All right, great. Thank you so much.

Thank you. Our next question comes from Adam Josephson with KeyBanc. Your line is open.

Linda and John, good afternoon.

Hi, Adam.

Good afternoon.

Just a couple, one on the guidance; correct me if I'm wrong, you normally give a full-year outlook for EBITDA, it looks like you are refrained from doing so this time. Am I correct in thinking that, and if so, can you just give us a little more details to why?

We have some years, and we haven't some years. Last year, we did; two years ago, we did not. Year before that, I believe we did. And Linda in our prepared remarks kind of highlighted some of the variables that we are looking at as we sit here today. And in terms of, I guess, confidence and line of sight as how those variables are going to play out, right now it still feels like it's too early in the game right now for us to feel comfortable, and the range would end up -- to be comfortable being here. So, the approach we will take in is we are going to talk about each of those variables each quarter and kind of let you know what we are seeing, and kind of handle it that way.

Is the uncertainty mostly related to pricing or volume or rolls, or is that all the above and roughly equal amount?

It's all the above, it's also the -- those will all the above in retail marketplace in terms of what's the dynamics are within the segments or across segments. And you know, -- how quickly and what price we replace the lost volume from our major customer.

Okay. And in terms of the big -- you normally give us what maintenance is going to be year-over-year, John, I think you previously indicated that major maintenance would be around $30 million lower in '18 versus '17. Does that remain the case?

Correct, yes.

And then you have SG&A that will be lower by five, right?

Correct.

Are there any other buckets that you can give us, or is that the span of it?

Interest?

In terms of EBITDA? Yes.

Yes. No…

Not really.

It would have been in our script, nothing is skipping off my head.

Okay, so just those two. Okay. In your SPS, a question or two; you are obviously a mostly non-integrative producer, we all know there's been recent significant consolidation and integration in the industry. So, just as a mostly non-integrative producer, you know, what do you think of your position both short-term and long-term; obviously you lost a large customer because of an acquisition last year. Again, where do you see yourself within this industry that's clearly consolidating and integrating, while you're not really integrated?

Yes. Thanks, Adam. That's a great question. And we obviously are watching those industry trends pretty carefully. I guess the easiest way to say it is, we are very well matched player for independent converting customers like we've been historically. That's where we tend to have a lot of our volume. That's where we tend to focus. And then of course we do supply some of the integrative players more on a niche basis. Long-term, like you say, as the market shifts we are going to do access and protect our ability to place SPS volume at good marketplaces, and we will watch that and make good business decisions around that as we move forward.

And I would say I think our value proposition by not being integrated maybe gets a little stronger in the near-term, but obviously we got to watch that if we ended up at a time where all of our customers are also our competitors, it's not necessarily ideal.

And one more on SPS, John, do you see the domestic demand remain flattish as it was last year?

No, I think we might see demand up little bit; RISI had it up.

Going up little bit. We ended the year with strong backlogs. RISI has it going up about a percent. So we're seeing some pretty good demand characteristics.

Okay. And just one on tissue, I have asked this before, and I know you touched on it, but you are making a large investment in tissue at the same time as you are indicating that you are having real difficultly offsetting cost inflation, and in fact you are saying you are expecting your prices to go down next, for '18; excuse me, while your costs are going up, so it's a real squeeze there, right? And obviously your margins got squeezed in '17. So, what gives you confidence that you'll get a good return on this $340 million investment in that business, considering these pretty significant industry headwinds at least for the next year or two it would appear?

Yes. So, Adam, I will take that one. Let me paraphrase that with saying that we are competing in the tissue industry in the long-term. And look at our business and strategic decisions that way. So, we will start with that. So, the Shelby investment, as you know, is in ultra capacity. So we are putting in the ultra-tissue making capabilities, which is in line with the growing part of the market and what our customers are asking for. So, in my prepared remarks, I talked about the ultra-quality tissue market growing 12% over the last five years and then Fisher International which is a consulting firm to the industry predicted ultra-quality tissue is going be the fastest growing segment of the North American tissue market coupled that we are completely sold out on ultra-tissue and as I've mentioned in my prepared remarks right now, we're really trying to balance our fixed capacity with the growing needs of the market and our customers. So, as we look at it is one of the leading suppliers to the North American market, this is something we have to do or we're going to not be able to maintain all of our retail relationships and we don't expect market conditions to be disruptive in the long-term. So we'll continue to look at taking costs and the efficiencies and increasing our operating cash flows in the meantime, while we're going through these market conditions, but I think is necessary to maintain our retail relationships.

Last question, Linda, and thank you for that, is what do you think will change with respect to industry conditions at any point? And it sounds like there's more capacity coming out in '18 and '19. I think you said the market in dollar terms was flat in '17. So what are you expecting to change exactly, you're expecting capacity to come out or you're expecting demand to pick-up again or what gives you confidence that industry conditions will improve, if not in the next year then in the next two or three years?

Yes, so I'd say that's a difficult question to answer first and foremost, but I'll take a crack at it. First of all, I would say that we see this type of cost inflation that we've experienced during 2017 typical conditions would be that we should be able to pass along at least on that not all of those cost increases, but that coupled with what we saw on the retail side with all the disruption taking place, it's just been too severe to be able to do that with our retail customers. So I think the retail environment will eventually sort itself out, there were quite a few disruptions in 2017 changing technologies, changing partnerships. And so, I think that will settle itself out and will kind of have a better roadmap for the future and I also think that retailers focused on private brands will become increasingly strategic as it plays a bigger part of their overall economics. I think those are the main things that will happen. Now, I mean you saw us take some retail capacity or capacity out of the market with the Neenah machines and I think others will do the same as they look at their business and look at the market as it relates to that premium quality tissue trends.

Thank you so much, Linda. Appreciate it.

Thank you, our next question comes from Paul Quinn with RBC Capital Markets. Your line is open.

Hey, thanks very much.

Hey, Paul.

Just maybe the story on overall strategic plan, it sounds like you've made some pretty decent guidance or pretty decent flow-through in terms of cost savings on the original 115 to 145 but it sounds like you're in a different cost paradigm now and just if I look at your Slide 10 and the competitive environment here and add up what left to get there, it looks like somewhere in the $35 million to $50 million in cost savings from those projects, what are you doing in addition to that to get yourself back into and sort of the competitive position you were probably two to three years ago?

Yes, I would say, Paul, that when you when you look at kind of what we heard versus 2014 when we in the 2014 when we embarked on this, we've got the cost inflation that you talked about but the other kind of what you also have is Paperboard pricing in 2014 versus what we saw in 2017. So those are the -- those two components that we're overcoming. So in addition to that, we're really looking at our operational network particularly within the tissue business and I guess where we're sourcing from particular customers and maybe put a little bit more JV around that. So really to try to minimize miles on the road as well as doing some taking a look like we did in Lewiston, just within the mills whether there's operational efficiencies to be had, the daily…

Paul, yes, I think it's going to be an ongoing effort but looking for cost savings and efficiencies, thankfully we have thousands of processes across our mill everyday and many of those improved and you know thank goodness we have such an incredible group of employees working here at Clearwater Paper that are incredibly good with driving change and looking at ways in which we can operate our business better and I just believe we have lots of opportunities especially around the operating model as it relates to tissue. And it will just stay very, very focused on driving and operating cash flow.

Okay. And just sticking with tissue and just on Chip's question about the 25% of the major customer loss that you replaced last quarter but nothing incremental this quarter on the call here. Maybe you could just help us out understanding the bid process and your because it sounds like based of the number of bids in your success rate, you expect to have 50% done by the end of the year but is Q4 a period when there's no business out for bid?

So I would just clarify that a little bit, Paul. I think what we said last call was we had line of sight to 25% and what we've said this time is we actually have it in hand. So that's all in hand and then the incremental 25% by the end of the year. I don't know if you want…

So, we tend to know which retailers are putting their business up a bid in any given year, so we have pretty decent line of sight to that and we know what percentage of their volume we tend to have and typically what's going up for bid and what geographic locations they are, so we've looked at all that and given our cost structure, given our quality and capabilities, I think we have a pretty good opportunity ahead of us to get to that 50% mark. What's going to vary is what price can we price it and it's going to be at a price that makes sense or will sell parent rolls and that's our other alternative.

Okay. And just on the paperboard side, there are number of your competitors announce a price increase last week for 50 bucks, can you confirm that you're on board with that price increase?

So I'm going to say, we have not announced a price increase but we always consider those decisions based on our specific demand situation and what's in the best interest of our strategic customers and our company probably we did say backlogs are coming into 2018 in a very healthy way, we have good healthy customer demand and it's a pretty encouraging start to the year. So we'll be making our assessments about how to proceed throughout the year.

All right, that's all I had; best of luck.

Thanks, Paul.

Thank you. [Operator Instructions] Our next question comes from Kurt Yinger with D.A. Davidson. Your line is open.

Yes, thank you. First question…

Hi Kurt.

Hi, big moving pieces obviously maintenance and some of the strategic benefits in 2018, is there any way you could help quantify maybe some of the bigger offsets as you look at 2018?

Well, I think it's going to be what your assumption and what's going to happen with pulp. I think what's going to happen with oil and how that weeds into transportation. So I think the biggest variable that what Linda described in her prepared remarks and that's kind of what we're watching.

Okay. And then as we look past Shelby in 2018, how closely do you think that your CapEx in 2019 can sort of approximate the cost for just maintenance CapEx that you guys have sort of outlined at the end of the presentation?

Yes. So I've talked about we sit here right now we think $20 million to $40 million of Shelby won't hold up starting production but $20 million to $40 million of that will go into '19 and so I would say, I would assume maintenance CapEx of $50 million to $60 million plus $20 million to $40 million depend on where we fall within those ranges, that would set up what '19 would look like.

Okay. And then, obviously a lot has been talked about the headwinds in the current retail environment, I mean are there any specific channels where you see sort of the best opportunities?

I mean kind of emerging one right now is how do we describe that?

Limited assortment.

Limited assortment, so when you think about like all these in world, that's interesting because they're all marked for private label. So and then you know obviously the online thing is not going to pay attention to.

Okay. And then last question does there come a point where it's just impossible to place some of the lower value products at competitive price as customers move up the value chain with some of the more quality ultra-quality tier volume that's coming online?

I think there's always going to be a place for premium conventional quality tissue. The nice thing is we have the option either to sell it as a case product or as parent rolls depending on what the pricing structure looks like and we'll have to make those decisions kind of one situation at a time as we progress through the next couple of years.

I mean do the pricing as you try to win those I guess winning those contracts does it just get more competitive though as the new value comes online obviously more people are competing for what I would assume is a pretty similar set of contracts?

I think it depends again I think the key driver here is just how much retail disruption has taken place in 2017, right now the retailers have their own battle and our focus is on being a very good player for them, it's eventually going to sort itself out. And we expect this will be sort of grew in time and so I don't think this is the new normal so to speak, I think we're going to see a more stable retail environment in years to come.

All right, thank you very much.

Thank you, Kurt.

Our next question comes from Dan Jacome with Sidoti. Your line is open.

Good morning, how are you?

Hi Dan, how are you?

Not too bad, not too bad. Appreciate your time, couple of questions, it sounds like on the press release you had some comments on future tax reform items or buckets that you are still looking at, any sense of what that might be just for understanding or do you think the guidance you gave today's is pretty much, that was my first question?

Yes, I think the guidance we gave is pretty much, obviously it just came out and there're different interpretations or rulemaking that's going to happen as we move through the year. So that's kind of -- that's we're addressing with that comment.

Okay, just checking and then on the transportation cost headwind, I think that was mentioned I know I've heard it seems like almost everyone in forest product is talking about that, can you give us a little flavor of what exactly you're seeing at your facility and then again how much line of sight you have there like how long would that persist if it's going to?

The question was on transportation?

Yes, I think you mentioned something about the freight costs, right?

Yes, I mean there were some weather related disruptions obviously from the storms that caused not permanent kind of impacts, but where you're having to pay bounties whatever in order to get to move stuff. So that's working itself out of the system. Diesel is up year-over-year, so that's a continuing headwind.

Okay. So, most of it seems to be in the rear-view mirror, and it might be…

I wouldn't say that. I'd say a portion of it is as it relates to getting through the weather-related stuff, but I think between elevated diesel costs and then line haul rates under pressure just because there's not as many drivers as would be ideal.

Okay, that helps. I had a question on mix shift, if you have to go to more parent rolls because you're not able to pick up the loss volume from the loss contracts, would there be some sort of material difference under more parent roll scenario for your margins for the segment margins for consumer tissue, I'm just trying to see what the case would be if we got to that scenario?

Well, typically your case product is going to have a better margin than your parent roll, that's not always the case particularly when you get kind of into the more conventional value space, but trading up parent rolls versus ultra would have a noticeable impact but that's kind of not what we're talking about here because it is in the conventional space.

So let me see if I got that correct, if you -- the parent rolls typically, would that drive your margin down, if you had to go there?

That as a general statement, right, but if you get down to the conventional and lower quality stuff, sometimes you are better off just on at the parent rolls.

Okay. And then, in your line up, say, if you have to go to parent rolls, where would you and what area would you fall, would you be in the conventional side?

Yes, yes, yes, because the business that we lost at the major customer is all conventional.

So the margin headwind wouldn't be as bad as it might first think?

Correct.

Okay. And then, for paperboard, the pricing seems to be on ups, and I know you just said you didn't announce a price increase per se, but other than the -- what sounds like reduced imports, is there anything else on missing that's helping pricing or just looking for like a very high-level thought you might have there?

I think when you look at backlogs and everything, the demand that's there, yes.

Okay. Okay, great, just…

And I guess the other thing, if you go back to year plus, more in a way of U.S. companies exporting them when you are seeing it a year plus ago.

Okay. That's it from me right now. Thanks a lot.

Okay. Thank you. Ladies and gentlemen, that does conclude our question-and-answer session. At this time, I will turn the call over to Ms. Massman for any closing or additional remarks.

Great. Thank you. We look forward to another year of solid progress towards attaining our target across cycle margin model. Despite the challenging environment, which has changed more rapidly than expected, we have stated how to curve and continue to aggressively invest in projects to reduce costs, which we believe will position us for the growth when market conditions improve. We thank for customers who makes it better everyday, and for the support of our shareholders. Thank you for joining us and for your continued interest in Clearwater Paper.

Ladies and gentlemen, that does conclude the Clearwater Paper Fourth Quarter and Full-Year 2017 Earnings Conference Call. We do appreciate your participation. You may all disconnect.