Good day, ladies and gentlemen, and welcome to the Clearwater Paper Corporation's Fourth Quarter and Full Year 2018 Earnings Conference Call. As a reminder, this call is being recorded today, March 12, 2019. 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, Andrew. Good afternoon, and thank you for joining Clearwater Paper's fourth quarter and fiscal year 2018 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 of 2018 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. 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 materials 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, 2017, 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. Linda Massman will begin today's call with the highlights of 2018, followed by the fourth quarter financial results from John Hertz. Then, Linda will conclude our prepared remarks with an overview of the business environment, an update on our strategic projects and our outlook for the first quarter and full year of 2019. After that, we'll open the call for the question-and-answer session. Now, I'll turn the call over to Linda.

Thank you, Robin. Hello, everyone, and thanks for joining us today. Let me start with an overview of 2018. Our results were largely driven by the strength and execution of our pulp and paperboard business, strong demand which led to record production and shipment and hard work of our dedicated and innovative teams. For the year, we generated $1.7 billion in revenues, flat versus 2017 and $177 million of adjusted EBITDA, down 7% from 2017. From a macro perspective, Clearwater Paper operates in an incredibly dynamic environment that is undergoing tremendous change and as we have said over the past month, 2018 was a challenging year for the tissue side of the business and the overall industry. However, we made progress on the strategic priorities we established for 2018. Some of our key accomplishments include implementing a regional operating model in our consumer products business which is beginning to produce results by taking millions of miles off the road and reducing external warehousing costs. While we are in the early stages, the team is making great progress in improving CPD margins. Second, we accelerated the start-up of our new converting lines in Shelby, North Carolina which has also contributed to taking additional miles off the road and reducing transportation costs. Third, we completed the sale of our recycled tissue mill in Ladysmith, Wisconsin which allows us to focus on our strategy of producing premium and ultra-quality tissue for the retail market. And fourth, we continue to work on realizing the full benefits of our continuous pulp digester at our Lewiston mill. While we anticipate some headwinds will continue in 2019, which we’ll discuss later on the call, we believe our strategic investments and the improvements in our operations position us for future growth in a rapidly evolving market. Regarding our…

Thank you, Linda. Let me start with a couple of high level comments on the full year 2018 and then get into some specific comments on Q4. 2018 was a challenging macro environment and we were adversely impacted by a competitive private label tissue market and significant commodity and transportation cost inflation. In 2018, we saw $28 million of tissue price and mix erosion versus 2017 and $40 million of commodity and transportation cost inflation versus 2017. We were able to overcome a significant portion of those headwinds through cost reduction programs and productivity gains, the lack of a major outage in 2018 and achieving higher selling prices in both businesses in the second half of the year. During the year, we delivered $177 million of adjusted EBITDA which is $13 million lower than 2017 due to the price mix erosion and cost inflation previously mentioned. Cash flow from operations remained strong at $169 million, approximately 10% of net sales. Before I turn to Q4, 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 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 $178 million of pre-tax expense largely due to the $195 million of non-cash impairment charge due to a goodwill and $8 million in reorganization-related expenses, all partially offset by a $24 million gain on the sale of Ladysmith mill and a $2 million mark-to-market benefit associated with directors’ cash settled common stock units. For the fourth quarter of 2018, the EBITDA adjustments netted to $195 million of pre-tax expense largely due to the goodwill impairment charge. Now to the…

Thank you, John. Let me now share more details regarding our strategic projects, discuss the market environment and what we expect for our business segments. Finally, I will conclude with our outlook for the first quarter and for the full year of 2019. I’ll start with our Shelby expansion plan which is nearing completion and is scheduled to start producing paper in Q2. We expect the total cost to complete this expansion will run approximately $420 million which is $80 million higher than the original estimate. This is also an increase of $30 million versus what we had estimated as of Q3. As John mentioned, we experienced some of the same issues identified during the third quarter such as default weather conditions and higher costs of labor, materials and construction. Also, engineering became more specific as it relates to the equipment as we moved through the last year of the project. In addition, we implemented new leadership at the plant to ensure that our strategy remains on track to meet our customer commitments and service our current customer volumes. In fact, all of the 2019 production from the new machine capacity is committed to existing customers. Our decision to take a more conservative approach and commission the paper machine in stages to ensure smooth ramp up of production is what led to a slightly later start-up. Before I move on, I’d like to thank the team for their hard work and dedication throughout this challenging process. As expected, the accelerated start-up of the converting lines and regional warehouse continues to drive savings in transportation and external warehouse costs which ultimately contribute to the improved operating earnings trend in our consumer business. We expect the new paper machine to be running at full capacity within 12 months. All of the 2019…

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

Hi, guys. This is Salvator Tiano speaking for Chip. How are you?

Hi.

Hi, Salvator. How are you?

I’m good. So a couple of questions. I just looked sort of at the easy [ph] things which are on the how should we think a bit about tissue? I think last quarter there was – you’re maintained high levels of parent roll tissue shipments offsetting essentially the Kroger loss volumes and we saw this quarter a decline. And I’m wondering what does this mean as we go forward? Is this Q4 kind of the right mix to think about for the remaining of the year, first of all? And secondly, the non-retail pricing came up significantly and I wonder why that is? Is it because of lower, again, parent roll versus away from home shipments or what else drove that?

Yes. So the reduction in parent roll shipments was largely due to the fact that we had sold Ladysmith late in the third quarter and that was pretty much all parent roll shipments coming out of that facility.

And with regard to the pricing, non-retail going up?

Yes, and that’s – it’s a function of not having the Ladysmith in the mix because it was recycled paper. So we don’t have as high as a pricing on that.

Okay, great. And then a little bit to clarify on Shelby. You mentioned that the – firstly, on the start-up, you mentioned it is a little bit delayed versus original expectations. You mentioned now Q2. When we think first of all Q2, are we talking April 1st or are we talking June? And secondly, how are you – now that you know essentially you’re almost in the finish line, but it seems the project is not going to deliver an attractive return to the contrary given all the stress it puts on the equity value of the company. I’m not really sure it added a lot of value. How is the company thinking about – how is the feedback process internally about making these decisions and making sure they’re corrected and in the future large projects are taken a little bit with less risk, making sure that you don’t see the same issues that you saw right now where the leverage was really high, you had to amend your covenants many times. What is being done internally to make sure you’re not going to see that again?

Yes, so let’s start with your first question regarding Shelby and the start-up and whether or not we can give more specificity other than just Q2. I’d say at this time we’re just saying we’re going to start the tissue machine in Q2, just a slight difference from what we originally expected and the slight difference just being somewhat semantics on how we’re starting up the machine. We’re really taking a very thorough and thoughtful approach to methodically commissioning all the systems and ensuring that they work well together before we begin up the machine. The capacity and the production coming out of the new investment in Shelby is critical to our long-term strategy to be able to meet our customer commitments. As I talked about on the market trends, we’re seeing strong demand in the ultra category and this is also where we are capacity constrained. So Shelby will give us extra capacity to be able to meet those customer commitments and we indicated we already have customer contracts to meet our 2019 production. So we feel so good about the ability to take care of what our customers are looking for from us and the investment in Shelby. You asked about the project and some of the extra spending and some of the surprises we’ve had along the way. I think any time you’re looking at a multiyear project in an environment that is as dynamic as the tissue industry and one that has undergone so much change over the past few years, it’s always difficult to predict at the beginning of that kind of a project what kind of conditions you’re going to be faced with going forward. But your thoughts about how do we manage risk and how do we look at this going forward? I would tell you we take that very seriously at a management level and at a Board level with regard to making large capital investments and how we look at the risk, how we’ll manage through it. Our team has been actively engaged in trying to mitigate these cost increases that we’ve seen as it relates to the economic conditions in which we’re investing a lot of capital and a lot of these being cost of labor, cost of construction material, things that are somewhat difficult to avoid to keep a project on track and on time. But I will tell you like any major project we will go back, we will look at what could we have done better, what could we have done differently and that will absolutely be taken into consideration to make us better going forward.

Great. Thank you very much.

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

Thank you and good afternoon.

Hi, Roger.

Hi. I wonder if you could discuss a little further some of the reporting control weaknesses. Do you expect any impact on sales and EBITDA and what were some of the key issues that you identified from this?

Yes, we don’t expect any impact on sales or EBITDA. It’s a balance sheet reclassification within current liabilities. I’d refer back to my commentary that is associated with the supply chain financing and we ended up making a payment to a vendor and that shouldn’t have happened. And so the controls over that program in particular and over more call it judgmental complex accounting issues in general is where we need to tighten up those controls.

Okay. And you impaired Cellu Tissue for a variety of reasons. You pointed to tissue pricing, freight and other general market environment forces. Why wouldn’t those adverse impacts cause you to impair at the legacy Clearwater Paper assets or was there something about Cellu Tissue that was different from legacy Clearwater? Obviously, legacy Clearwater was more ultra toilet tissue and Cellu Tissue was down towards the dollar, but it sound like these were sort of general market issues?

They were general market issues, impaired goodwill at first. And once that happened from a cash flow standpoint, we had enough to support the remaining assets within the CPD division.

Got it. And lastly and I can take this offline and it just came up on EBT, the transcript. But you mentioned that there’s balance sheet CapEx of 80 million which I guess I’m taking that to mean that’s what you’ll show on your cash flow statement and then you said there’s cash capital expenditures 130 to 140. Which is the CapEx or what’s the difference between those two numbers? I’m unfamiliar with that.

Yes, actually it’s the opposite. The 130 to 140 is it will show up on the cash flow statement but using accrual basic accounting would actually hit property, plant and equipment on the balance sheet is the 80 million.

You were referring to the PP&E in the balance sheet. Okay, got it. All right, thank you very much.

Thank you. Ladies and gentlemen, that does conclude the Clearwater Paper fourth quarter and fiscal year 2018 earnings conference call. We do appreciate your participation and you may now disconnect. Everyone, have a wonderful day.