Welcome to Clearwater Paper Corporation Second Quarter Earnings Conference Call. As a reminder, this call is being recorded today, August 1, 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, Judy. Good afternoon, and thank you for joining Clearwater Paper's Second Quarter 2018 Earnings Conference Call. Joining me on the call today are Linda Massman, President and Chief Executive Officer; and John Hertz, Chief Financial Officer. First, I’d like to apologize for the delay and any confusion caused by the release of the results today. Our service provider released the information prematurely than retracted it, which caused the delay in publishing the information on a timely basis, after the close of the market. NASDAQ hosts and manages our IR website, and we explicitly instructed them not to release our results until a set time after the market close, which is consistent with prior quarters. Now, that has been fixed, so the financial results and a presentation of supplemental information, including an updated outlook slide, providing the Company's current expectation and estimate for the range of adjusted EBITDA for the third quarter and certain costs, pricing, shipment, production and other factors expected to impact the third quarter of 2018 has been posted on the Investor Relations page of our website at clearwaterpaper.com. I’d like to remind 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 our expectations for adjusted EBITDA for the third quarter. 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, 2017, and Form 10-Q for the quarter ended March 31, 2018, 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 statement. 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. Linda Massman will begin today's call with a brief review of the second quarter, followed by the Q2 financial results from John Hertz. Then, Linda will conclude our prepared remarks with an overview of the business environment and our outlook for the third quarter. And then, we will open up the call for the question-and-answer session. Now, I’ll turn the call over to Linda.

Hello, everyone, and thanks for joining us today. Before John presents the financial results, I’d like to start with an overview of the second quarter. We delivered results at the high end of our expectations for all of our metrics. The paperboard division’s financial performance exceeded our expectations while the tissue business met our expectations. In our efforts to maximize cash flow from operations, we’ve had great success in executing a number of working capital initiatives. As a result, we are able to lower our leverage ratio to 3.95 times. Our Pulp and Paperboard team delivered a very strong quarter with record production levels and record shipments combined with strong demand and improved pricing. Our Consumer Products business delivered results in line with what we expected. Demand for private label, ultra-quality tissue remained strong, which netted up nicely with the planned start-up of our incremental capacity at the beginning of next year. In the premium segment of the tissue business, competitive conditions remained challenging and we continue to experience high freight and pulp costs, which don’t appear to ease anytime soon. We have put forth tremendous effort to offset these rising costs with our pulp optimization initiatives, mill cost structure work, SG&A cost reductions, and operating model efforts. Now, John will walk you through financial details.

Thank you, Linda. Before I get to the details of our 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 exclude certain charges and benefits that we believe are not indicative of our core operating performance. The reconciliation from GAAP to adjusted results is provided in the earnings release and the supplemental slides posted on our website. For the second quarter of 2018, three items essentially netted each other out as approximately $2 million in charges primarily related to the previously announced Lewiston reorganization and the SG&A cost reduction initiative were offset by $2 million benefit related to the mark-to-market adjustment to our outstanding directors' common stock units. So, with that, let's get to our results. Our second quarter net sales came in at $432 million, down 1% from Q1, and in line with our expectations. Higher paperboard pricing and record paperboard shipments on the Pulp and Paperboard side were more than offset by weaker mix on the Consumer Products side related to the lost conventional tissue volume and large customer that we have previously discussed. As a result, parent rolls shipment volumes were up, while retail converted case shipments were down. Second quarter adjusted gross profit, $46 million or 10.6% margin, improved by 36 basis points from the first quarter due to higher paperboard pricing and cost controls within the mills which was partially offset by the weaker tissue mix. Lower adjusted SG&A expense reflects the progress of our SG&A cost reduction efforts. SG&A was $27 million or 6.3% second quarter net sales that is a reduction of approximately $2 million from Q1. Adjusted corporate expense was $13 million of the SG&A spend in the second…

Thanks, John. Now, I’ll talk about our strategic priorities. First, regarding our new tissue machine, converting and warehouse project in Shelby, North Carolina. The project continues to progress on schedule with the paper machine start-up expected in the first quarter of 2019. Further network optimization includes the early start-up of converting operations in the new warehouse at our Shelby facility in the third quarter. This will allow us to take cost out of our supply chain as we continue optimizing our network of assets and our operating model. The hiring and training of employees are also on track with the majority of hiring complete. Second, we remain on track with our previously announced cost reduction initiatives as well as the optimization of our operating assets to match demand. The price increases we announced last quarter for certain products and grades of tissue are being implemented and will help to mitigate rising input costs for external pulp and transportation. Third, the pulp digester in Lewiston continues to ramp up and produced improved quality pulp as well as incremental tons. Our Pulp and Paperboard division which is about half of our business, continues to operate well and market conditions remain strong. Record paperboard production and shipments and steady demand led to growth in backlogs in the second quarter which was in line with industry trends. Let’s turn our attention now to the market environment for both business segments. Starting with Consumer Products. The IRI Panel data for Q2 indicates that total U.S. retail tissue market measured in dollar sales was flat compared to Q2 ‘17. Over this period, private brands were up 5.1% and national brands were down 2.2%. In the second quarter, private brands reached to record high market share of 29.8% of the total U.S. tissue market, which is up…

[Operator Instructions] Our first question is from Adam Josephson from KeyBanc. Your line is now open.

Good afternoon, everyone. John, one on the moving parts in ‘18 versus ‘17 that Linda just laid out. Correct me if I am wrong. But a few pieces have changed. The tissue pricing has gotten a little better, more favorable, pulp has gotten worse. Everything else I believe stayed roughly the same. So, I think when I add it all up, it’s roughly the same as what you mentioned three months ago. Is that right?

I think, the math works out to be pretty similar. Yes.

Okay. You mentioned -- you talked about managing working capital and making some strides there, and obviously cutting some of your CapEx projects just in an effort to manage your balance sheet. Can you talk about what you're doing on working capital? I noticed your accounts payable went up quite dramatically sequentially and year-over-year. So, just wondering what's going on there, what your working capital expectations are for the year and whether they’ve changed from where they were three months ago.

Yes. So, in terms of the increase in accounts payable which was a about $100 million versus last quarter, by far the biggest chunk of that is associated with the Shelby project and these accruals or payables we have associated with that construction progress. We also had, from a timing standpoint, some increases in things like accrued interest, accrued payroll, just depends on what day of the calendar those things fall on and we have to make those payments. And then, we did have some increases in trade AP [ph] to a lesser extent. I’d say what we’re -- initiatives wise what we’re doing is there’s a significant push on supply chain financing, and we’re seeing that in some of our construction progress, vendors as well as the broader trade accounts payable balance as well as some kind of renegotiation and pushing out of terms across the board. When you look at working capital overall, it was $35 million, $36 million tailwind for us this quarter. When you look at the components of that, it was a reduction of accounts receivable, about $20 million, at the time of accruals that I talked about before for about $10 million and then a reduction in trade AP of about $5 million.

And in terms of the -- your expectations for the full year benefit from working capital, John?

Yes. I’d say, it’s probably elevated since -- from three months ago, just given the initiatives and efforts we’ve put in place here. But, when you look at the full-year, I would say, we should be coming in and around the 12% of revenue, plus or minus area.

Okay. compared to -- yes.

That’s cash flow from operations.

Okay. So, I’ll do the math offline. And then on reducing some of the CapEx projects. What are you cutting back on and are those reductions sustainable?

Yes. It kind of falls in the discretionary bucket. I call it -- so, we’ve got maintenance CapEx that we have to do, otherwise, we’ll have much bigger problems. And so, we’re not cutting that -- not cutting up our nose to spite our face on that kind of stuff, but kind of the non-Shelby, non-absolutely have to do stuff and that’s what we’re tightening the screw.

And then, just two others, one on your guidance, John. So, you’re guiding to flattish EBITDA sequentially 2Q to 3Q. Anything meaningful change in 3Q to 4Q that we ought to be mindful of?

Not really. I mean, I think you’ve got some upside in terms of transportation in pulp and volume that kind of gets offset by some incremental maintenance where we’re doing at the hog fuel maintenance in Lewiston.

From 3Q to 4Q you are talking. Right?

No from 2Q to 3Q.

Right. You are guiding to flat -- what I was saying is, you are guiding to flattish EBITDA sequentially 2Q to 3Q. I’m saying from 3Q to 4Q, are there any big moving parts that we ought to be mindful of?

Yes. We are going to see the benefit of a lot of cost initiatives, network optimizations that we are doing in the CPD area start to really bear fruit there, as we get to two converting lines up in Shelby, as we put some constraints about the business we take and where we get sourced from in terms of the mills network, reductions in transportation…

We talked about SKU rationalization and redesigning some of our products to reduce the manufacturing costs. We’ve actually gone into our mill network related to some of our volume reductions and we’ve actually taken quite a bit of cost out of our mill network. We have reduced over a 100 mill positions. We’ve shut down some converting lines that just don’t have the volume to be running. And we have done a lot of network resetting already, as it relates to warehouse and lanes and how we schedule our paper machines to optimize to this new mix environment.

And just one on the tissue market. Obviously, I think you said in your results in tissue were in line with your expectations, but obviously you lost money on an EBIT basis. And your competitors obviously have not been doing well in tissue either and haven’t really had much in the way of a positive outlook on the market in the next quarter or few quarters for that matter, even though one of them just announced a large price increase in tissue, whether or not that sticks is to be determined. But, I know what internal initiatives you have to improve that business. But, do you have any reason to expect industry conditions to meaningfully change in the next few quarters, particularly given the additional capacity coming on? And if you could just talk a little more about industry conditions and tissue, and I’d appreciate that.

So, we’ve talked a little bit about some of the broader trends as it relates to private label and the adoption of continued growth in private label at retailers. So, those are all positive trends from our perspective, and particularly in the ultra quality segment where we are seeing almost 9% growth. And we talked a little bit last quarter about how we were able to offset some of these cost pressures and some of the industry trends we are seeing through a lot of mix efforts over the years. And we also talked about how those mix efforts were going to be somewhat limited until we got our new Shelby capacity, because quite frankly we are sold out in ultra capacity. And we don’t have any more to sell until our Shelby machine comes up and begins. So, I think that’s probably the broadest, positive trend we see in tissue and what we are experiencing. Like I said on the call, we don’t really see an easing in transportation or pulp costs, so we will be fighting that more likely than not for the balance of the year. So, I think we are driving towards -- I should also mention, we did talk about price -- which is a price initiative to cover our cost increases that we’d already experienced. And we announced that to customers and then initiated that last quarter, and we are beginning to see the benefits of that roll through. And we will just continue to evaluate where our customer demand characteristics are and look at the different inputs affecting margin and what ability we have to offset and manage them and make our decisions going forward. But, really happy that we have lot of these cost initiatives well underway that are beginning to take hold and we will continue to look for those types of opportunities.

Our next question is from Chip Dillon from Vertical Research. Your line is now open.

The first question has to do with the Shelby situation. It is obvious from the increase in payables. And as you did say, your true CapEx is flowing through. What is sort of the latest on when you think you will further switch on that machine? And give us a view of sort of how you see the ramp-up again as it looks like from now?

So, we’re going to turn the switch on the machine in Q1 of next year from a manufacturing standpoint, it will ramp over from a capability standpoint over 3 to 6-month period. And then, from selling it out, from a shipment standpoint that will work itself through the -- in the next year.

And when you say first quarter, I don’t mean to overly tie you down, but is this something that's looking -- we’re in early August now, could that be -- is that going to be like end of March or could it be February or even January?

Yes. It should be early in the first quarter is what our anticipation would be at this point. And it won’t start up on typical curve or you run with little more manageable, and we will ramp that up and get sufficient volume there and appropriate product quality and then, we will switch this into more ultra quality mix, probably a little bit midpoint to later in the year.

That’s helpful. And then, on the working capital, John, just -- I hate to overly tie you down, but I think many of us on this line would look at everything in the current assets section and not count cash in the current liability section, not count debt. And that number was 173 at the end of ‘17. And I just want to know again how should we think about what that number does at year-end, especially keeping in mind that -- I think you said on the last call that while the actual physical work on the machine will be done at year-end, there could still be some that doesn't show up on the cash flow statement, because it will instead be embedded in payables. I just want to make sure we understand where that number is going because it was such a big windfall for you in the second quarter, so to speak.

Yes. I guess, the way I would answer that is if you look at our cash flow statement, so, I’ll do this from a cash perspective, not on the fixed asset to the balance sheet. We had spent about $86 million of cash through the first six months of the year. From a cash standpoint for the year as it relates to Shelby, we think will spend, depending on supply chain financing arrangements and terms in the kind of call it, $200 million to $230 million range. So, that I would say that we’re going to spend another incremental 110 to $140 million of cash as it relates to the Shelby project over the last six months of the year. I’m not really going to necessary guide to what we think we are going to do from a cash flow from operations perspective in Q3 and Q4, other than percentage of revenue I talked about before.

That's very helpful. So, again, the way you're thinking about running the business, your CapEx will be 275 to 280, but there might be the sort of lag I guess of $50 million or so that you won’t actually pay till next year. And keeping that in mind -- first of all, your view on that, and then keeping that in mind, what do you think CapEx will be next year, both either as you think about it or as it’ll hit the cash flow statement, maybe both ways?

I think, CapEx -- as it hits the cash flow statements, it’s probably going to be around $100 million. And it's hard to tell from a timing standpoint when it actually hits the balance sheet. But at this point, I would probably say around a $100 million for both.

And so, then, basically after you’ve finished Shelby, your CapEx is going to I guess normalize at something in that range per year, or maybe even a little lower for a while?

Yes, lower than that. So, our normal CapEx when we’re not doing a big project like this, has been around $75 million, and that’s $50 million of maintenance and $25 million of strategic. We probably are going to be putting ourselves on a little bit more of a CapEx guide, once we’re done with Shelby. So, it could be even less than 75.

And last question, how -- I heard you say something about relaxing terms, maybe you are talking about something you did in the past. But, how are things kind of with the banks and in terms of -- I mean, it seems you’re now in the home stretch. Are you seeing any pressure to have to take any unusual measures to keep them happy through the end of this process and into next year, whether it’d be an asset sale or any kind of an equity raise?

No, not at all. Our conversations with the banking syndicate have been very constructive. We have active dialogue with them about different ideas and stuff, and they’re very receptive to some of our thoughts.

And Chip, I would say that we did make the statement, we expect to be in compliance with our debt convents. And I think we’re very confident. We’ve taken the necessary actions to mitigate any concern along that area through the different operational cost initiatives that are currently underway. And then, of course, we’ve got some early successes in our focused initiatives to improve working capital and cash flow. So, I think we feel confident that we’ve addressed these.

Thank you. Our next question is from Paul Quinn from RBC Markets. Your line is now open.

A question on just paperboard prices. It looks like yours went up $12 quarter-over-quarter, the $50 price increase, what should we expect the balance to be in Q3 here?

In terms of how much incremental?

Yes. I mean, you won’t get the full 50 plus you’ve got liquid packaging that I don’t think you’ll see till ‘19. So, I am just thinking is it -- should it shake out somewhere in that 30 to 35 range, so an additional 18 to 23 in Q3?

Yes. We think we’re probably kind of flattish just what’s going on with mix, as we look Q2 to Q3.

And then, in terms of the customer on the tissue side -- on the customer or is that -- there’s been talk about at length, seems -- I seem to recall that you're getting some of this volume back in Q3. So, I would expect your tissue mix to improve, but it looks from your guidance that it’s not?

So, what’s going on, keep in mind Paul that we had about a half quarter’s worth of Kroger in Q2. And as that wound down -- now, it started back up again in Q3. And we’ve said that we’ve identified 60% of that lost volume, but that’s not all coming on all at the same time. So, I think you are actually going to have from a converted case standpoint less in a way of volume in Q3 than in Q2 and you’ll see more….

And then, just in terms of -- I think, Linda, you made a comment on the Lewiston digester is still ramping up. Where are we on that start-up curve? And are we going to get there at -- fully hit the ramp-up by the end of Q3 or is that a Q4 by the end of Q4?

Yes. I think it’s not going to be as early as Q3. So, the project started up at the beginning of the year, as you know, and we are on the start-up curve now. We are seeing increase for both products [ph] and quality. Where our opportunity remains now is on yield and output to achieve our run rate savings that we’ve projected for the project. So, we are about a third of the way there if you do it on an annualized basis. We are working to deliver the balance as quickly as possible -- as soon as we kind of tightening down that timeframe for you, we will. But I think we need to get through the start up curve a little bit more before we can finalize that.

And I hope this transfer between I guess the Pulp and Paperboard division and tissues, is that at cost or is that done at market?

At cost.

So, if I backed out expected profitability on that, would you be EBITDA positive in Q2 on tissue?

I don’t have the math in front of me, but it would be less than it is.

Less than it is, okay. Fair enough. I think that’s all I had. Hey, thanks very much. Best of luck.

Thank you. Our next question is from Steve Chercover from Davidson. Your line is now open.

So, on the continuous digester, you are one-third of the way through that thermometer graph where we still have about 20 million to come, is that right?

Yes. That’s about right.

And then, for the -- I call them the thermometer graphs, but they are not presented in this quarterly slide deck. How much is left on the warehouse to automation and the other opportunities?

There are pretty much -- we have achieved what we said we were going to do or going to achieve. So, that’s kind of why we took the slide out.

The digester is the remaining piece and what we have committed to do is just put our progress on the front page of the supplemental, so you can track it there from now on.

And I think you engaged some consultants to help you identify I guess, perhaps some new bucket of cost saving initiatives. When we provide us an update with that?

SG&A?

Yes. So, we did -- as we talked about the SG&A improvements quarter-over-quarter, what we did say was we were going to get to $20 million of savings but we won't get to that full run rate until 2019. So, we kind of have waves that are occurring through 2018 and so it will ramp itself up through the year.

And finally, and again it seems like a follow-up question. On SBS, why is your position so weak in liquid packaging? Is that a less lucrative grade? I mean, are you there because -- by design or is there an opportunity?

Yes. I’d say our market position is not weak. We actually have really good quality board. We are selling into the Japanese market, primarily, I mean almost exclusively our product which is a very discerning consumer base. So, we feel very confident we have great product quality. It’s really by design as to the mix we want to run on our equipment and where we thought the market conditions lent itself best for the capacity of our assets. And so, we’ve actually had pulled back, it’s been a few years now, out of the export market and really just kept the business that was looking for the highest quality liquid packaging board and that’s where we’ve chosen to spend our time and attention for that part of the business.

That was my understanding that you had a very high quality product. So, is -- I don't want to call it a problem but is the situation that your board is actually too good for lack of better words for liquid packaging?

No, not at all. We could sell in other markets if we wanted to. It’s just how we’ve chosen to mix out the assets to ensure we have I guess maybe the best mix, given our assets structure to maximize our profitability.

Our next question is from Roger Spitz from Bank of America. Your line is now open.

I just want to be clear. I think, your answer is clear but just for the avoidance of doubt, is the actions you are taking now, movement of CapEx other things, release of working capital for cash, you don’t see yourself getting anywhere near your maintenance covenants. Is that what you’re telling us, right?

Correct.

Perfect. And going back to your Q1 call on the Q&A, when you did the high level year-over-year 2018 EBITDA buckets, is maintenance still a $30 million tailwind as you mentioned then, perhaps that I just didn’t hear it?

It is.

It is okay.

It is. That wasn’t one of the things that we articulated in the script but that is, maintenance -- yes.

Thank you we have time for follow-up question from Adam Josephson from KeyBanc. Your line is now open.

Thanks for my follow-up. Linda just one on SBS. I think you mentioned in the presentation back in March, perhaps at the end of March that you thought perhaps the SBS market would come under modest or moderate price in the second half because of the Sappi start-up. Correct me if I'm wrong there. And if I'm remembering correctly, has your outlook changed since then?

Yes. We don’t consider that to be an impact to our outlook for the balance of the year. So, yes, I would say, it probably has.

What changed exactly?

We haven’t seen the anticipated volume in through the SBS market like we thought it might -- are you still there, Adam?

Hello? Operator?

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.

First of all sorry for the abruptness. I don’t know what happened there with trying to answer your question, Adam. We will kind of figure that out. But, thank you everybody for joining us today and for your continued interest in Clearwater Paper. On a final note, we’ll be at the RBC Conference in Las Vegas in September and we hope to see you there. Thank you.

Ladies and gentlemen, that does conclude the Clearwater Paper Corporation second quarter 2018 earnings conference call. We do appreciate your participation.