Welcome to Clearwater Paper Corporation's First Quarter 2017 Earnings Conference Call. As a reminder, this call is being recorded today, April 20, 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, Liz. Good afternoon and thank you for joining Clearwater Paper's first quarter and 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 first 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 at the certain cost, cost pricing mix, shipment, production and other factors for the second quarter of 2017, posted on the Investor Relations page of our website at clearwaterpaper.com. Additionally, we will be providing certain non-GAAP information in this afternoon's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release or in the supplemental material provided on our website. I would like to remind you that this presentation contains 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. Any forward-looking statements are made only as of this date, and the Company assumes no obligation to update any forward-looking statements based on new developments or changes in the Company's expectation. John Hertz will begin today's call with a review of the financial results for the first quarter, and then Massman will provide an overview of the business environment and our outlook for the second quarter of 2017, 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. We continue to make great progress on our strategic initiatives in the first quarter. The continuous digester is on track with the scheduled start in early Q4. We are now live on warehouse automation in Shelby, Las Vegas and Lewiston, with Elwood on track to go live in the third quarter. Operations results came in within our Q1 guidance ranges with top line metrics at the high end and bottom line metrics towards the low end, and I’ll discuss our operating results in greater detail in my prepared remarks. Before I get to our first quarter 2017 results, I would 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 our press release and supplemental materials posted on our website. The first quarter of 2017 those adjusted EBITDA item netted to $1 million pretax and includes $2 million charge associated with the announced closure of our Oklahoma City converting site and $500,000 in residual cost from the closed Long Island, New York facility, all which was partially offset by a benefit of $1.5 million from the mark-to-market adjustments to our outstanding directors' common stock units. For adjusted operating income, items netted to $5 million free tax which includes a $6 million charge for the closure of Oklahoma City consisting of the $2 million mentioned above plus $4 million of accelerated depreciation. So with that, let's get to our results. Our first quarter net sales came in at $438 million, up 2.8% versus the fourth quarter that it at the high end of our outlook…

Thanks, John. Hello, everyone, and thanks for joining us today. As I talk about our business, you're going to hear the news as generally positive. Today, I'll provide some additional commentary on our first quarter performance, and then 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 the second quarter to look like for us relative to Q1. First quarter performance came within our outlook, and I was especially pleased to see we generated $46 million in cash flow from operations or 10.4% of revenues. Net sales came in on the high end of our outlook. This reflected strong demand for products in both the Consumer and Pulp and Paperboard divisions, including a positive contribution from Manchester Industries acquired at the end of 2016. All other outlook metrics fell on the lower end of the ranges provided. As John explained in his comments, these results were impacted by price/mix in paperboard, unplanned outages in Las Vegas and Shelby that led to higher transportation costs to position inventory, and accelerating the implementation of advanced supply chain processes and tools. Our two main business segments performed well in the first quarter. Looking first at our Consumer Products division, business remains strong from a demand standpoint. Both retail shipments and case volumes picked up and average price per ton benefited from seasonal trends and the richer product mix of higher retail tissue sales. For the Pulp and Paperboard business, shipment volumes grew and the division shipment volumes benefited from the addition of Manchester. Demand remained solid, and our backlogs were up and in line with industry trends and tracking comfortably above levels at this time versus the last 2 years. Overall, we've made impressive advances in starting our…

[Operator Instructions] Our first question comes from the line of Adam Josephson with KeyBanc.

Linda or John, one question about the quarter. So the -- correct me if I'm wrong, but the unplanned outage in Las Vegas, that was obviously in the fourth quarter, as were the planned production curtailments, those were in December, so presumably, you're aware of all that in early February, right, when you gave the EBITDA guidance of $48 million to $56 million. And so why would any of that -- I realized you had another unplanned outage. But for those other factors, you're likely were well aware of when you gave the guidance. I'm just a bit confused there.

Yes, the planned curtailments was factored into the guidance range that we gave for Q1. It wasn't known -- or the impacts of which was the Shelby outage, and maybe kind of the final straw, caused us to -- have to do kind of unnatural acts from a transportation standpoint to service all our customers with inventory.

And remind me what outage expense you're expecting in 3Q compared to the $9 million to $10 million in 2Q?

So typically, Lewiston is going to be, call it, $17 million to $19 million.

So you'll have...

That's all in, including lost shipments.

So that's your cumulative expense for the year. Is that what you're saying?

Yes, and that's direct expenses plus, I guess, lost sales.

Okay. So your maintenance outage will be flattish sequentially in the 3Q. Is that right, roughly?

No, we're going to be about $8 million to $9 million in third quarter for the Arkansas shutdown in the second quarter.

In addition -- so okay, your maintenance outage is going up $9 million to $10 million in 2Q sequentially, right?

Yes.

And then in 3Q?

So sequentially then, there will be an incremental $7 million or $8 million.

So all else equally, you'd be down sequentially in 3Q from the $45 million at the midpoint to which you're guiding for 2Q, right?

Everything else equal.

Okay. Just -- so it would take -- it seems like a huge fourth quarter to get to your full year guidance, correct me if I'm wrong there.

Yes. And like I said, as far as Linda said, we've got the price increase out there. We'll see how that plays out in the marketplace. And then the impact of a customer that was acquired in -- how that ends up impacting us. So those are the 2Q variables as to whether we're able to get in that range.

And to that point, John, I mean, what is your contingency plan for those tons?

I think we're less worried about the volume than we are about the mix. I think if we get into kind of play great and stuff like that, we think we can feel pretty comfortable we can find a home court, but that's not necessarily where we want to.

Right, right. Okay. Now what were your organic paperboard volumes up or down in the quarter year-on-year?

By organic, you mean without Manchester?

Correct.

So we're flattish.

You're flattish. Okay. And would it be fair to assume you'd expect flattish SBS demand for the year?

Well, typically, SBS is, from a seasonal standpoint, lower in Q4 and Q1 and higher in Q2 and Q3. For the last couple of years, we've seen stronger Q4s than we have in the history. We would expect to see volumes, and I'll call it pre-acquisition volumes, to creep slightly. I mean, we do get some creep in production each year out of the paper machines.

Right. So presuming your SBS volume is roughly flat for the year, right, just -- and that's where the markets been in years' past, right. It's roughly flat. Can you just help me with why your backlogs and industry backlogs would have so sharply increased year-to-date, particularly when I keep reading about how weak CPG demand has been year-to-date? I'm struggling to understand why backlogs would be up 25% year-to-date given flat demand or seemingly flat demand.

Yes, so Adam, don't know the exact reason for that, but I think what we would attribute it to, more likely than not, is maybe some of the CPG demand is a little bit more back-looking versus the backlogs that we're seeing are more forward-looking, because we saw how to produce the product, ship it, get through their supply chain. And so I think that would be the primary reason.

But if you're saying, Linda, that SBS demand is going to be flattish for the year, it doesn't sound like there's going to be -- you're expecting some huge acceleration in growth rates in the latter part of the year, right? I'm just trying to understand if the market is fundamentally flat, why would backlog be so sharply accelerating? I just am struggling to understand that.

I think with regard to -- we are currently producing and selling everything we produce. So that's part of the reason why the demand is expected to be flat and backlogs are indicative of what the market demand is.

Okay. And now on your call -- the fourth quarter call, you guys characterized SBS market conditions as challenging, right, and that was early February. And then about a month later, obviously, announced a price increase. So can you help me with what would have so dramatically changed over the course of a month? It just seems odd to go from challenging market conditions to a price increase a month later.

Yes. So again, it surprised us too when we saw kind of a little dip down in February and then March came back pretty strong, and we saw some good improvements in backlog since mid-February. That surprised us a little bit as well. And then, of course, it just takes a little bit of that demand to kind of make a decent change in the industry. And for that reason, we decided to implement the price increase as well...

Right, sure. And so this is based on supply/demand, not cost inflation, this SBS increase, should I assume?

It's both. I mean, we're seeing cost increase as well.

Where exactly?

In wood fibers, in particular, chemicals, energy. Energy was more seasonal, but definitely in chemicals and in wood fiber.

Okay. And just one last one, I'll get back. The investment in your tissue business that you announced last quarter obviously took investors by surprise. And you obviously saw it in the stocks subsequent to your earnings release. I mean, are you -- you've had about significant operational improvements in that business over the last couple of years, but those have been largely offset by pricing pressure, right? What gives you confidence that continued operational improvements in that business will not continue to be largely, if not entirely, offset by continued industry pricing pressure?

Yes. So we did announce the tissue machine last quarter and we talked about why it was important for us with regard to our customers were asking for ultra and premium capacity. We're currently out of that capacity or selling everything we make with regard to that capacity. So adding capacity was important for us and the ability to be able to meet the demands of our customers. And there currently isn't any available for purchase. So in order to continue to meet the consumer demand, that's important. I think it's probably pretty prudent to expect continued price pressure in conventional tissue. We've seen it historically, continues to happen, definitely more weakness on the economy and value side than on the premium and ultra-premium side of the business. We do see on the premium and the ultra-premium segment the demand for that part of the business and that tissue is growing pretty substantially. It is forecasted to grow 4% to 5% per year. Since 2012, it's grown 3.5 times faster than the overall tissue market. And currently, you can't get that kind of paper today on the marketplace. And back in 2015, I think you've alluded to this, when we introduced our strategic initiatives, which we lay out on our deck, we talked about we're going to focus on the variables of our business that we can control, and we laid out a number of improvement efficiencies at which we're delivering on. We're very confident we'll deliver on them through the balance of the year. And we're going to continue to ways -- look for ways to become more efficient and to meet our needs of our customers with good product quality and good service metrics.

Our next question comes from Chip Dillon with Vertical Research.

Yes. First question has to do with the just thinking about the buyback you made in the first quarter. At least on our estimates, it looks like you guys are going to be borrowing -- assuming that you have, for solid operations this year or next year, probably upwards of $10 a share, I guess, $150 million, $160 million above and beyond your cash flow to finance the end of the 2015-ish, and the Shelby machine, and I just didn't know if you thought it was a good idea to keep buying back stock given the heavy CapEx ahead of us?

Well, I mean, if you look back into our history over the last 3 or 4 years, we significantly have ratcheted back the, I guess, call it, the run rate of our stock buyback. So we think it's important to continue to nip at that a little bit, but we've obviously taken that back from kind of trajectory we're on over the last 3 or 4 years, but largely for the reasons you've just articulated.

Okay. And then just to make sure I understand the maintenance pattern. You mentioned it would be $9 million to $10 million higher in the second quarter. And did you say it would go up again in the third quarter above the second quarter level or stay at the second quarter level in the third quarter?

Yes. So I've got to be careful here because if you just focus on the major maintenances and ignore -- we've got lots of other maintenance that occurs that is not major maintenance. But if you just focus on the major maintenance, we're going from the $8 million to $9 million spend for Arkansas in Q2 to, call it, a $17 million, $18 million spend in Q3. But that's not -- I mean, we do kind of balance the rest of our maintenance spend. So on a total maintenance envelope, you're probably not going to see a $7 million to $8 million increase.

Okay. But the point is the maintenance should come way down in the fourth quarter, like the sequential drop-off could be $15 million or so. Is that fair?

At least, yes.

Okay. So it's going to come way down. Okay, got you.

And then the other thing, Chip, is I think we've said this before, but so to make sure you're aware. In 2018, the way the different -- the schedule lines up for major maintenance, we won't have any in 2018.

So basically, this year, it looks like the total all-in is like, and maybe you said and I just missed it, it's like $25-ish million for the year and next year is 0. Is that the way to think about it?

Correct.

Right.

Okay, that's very helpful. Okay. And then as you think about the tissue markets -- or let me ask you this, 2 questions about last question -- 2 parts is, when you think about the Shelby machine, is there a point at which you kind of are off the diving board up in the air meaning that you -- have you -- are you absolutely fully committed at this point to having to build it this year or next year? Or just hypothetically, could it to be pulled back up to some point? And then, I guess, the second thing is, just talk a little bit about how you see the competitive marketplace, just given that there are others out there with TAD and similar type quality machines in the process -- I guess, I don't know if the quality is as good as yours, but at least they're purporting to be good quality, aimed at the private label market in the United States, and if that's really any issue for you at this point?

Well, I would say with regard to the first part of the question, we're probably off the diving board in the air. Linda, do you agree with that?

Yes.

With regard to the second part of your question, I mean, if you look at RISI's list of announced paper machines that could give you a little bit of pause. But as Linda articulated it when you break the market down between traditional, conventional and ultra-premium, ultra-premium has grown, I guess, they forecast...

4% to 5%.

4% to 5%, at least 3 times historical, and the fact that you -- we can't go out and buy ultra-premium parent rolls, and we're very tight, and so those market dynamics, I think, allow for that capacity. And as you look out through the next couple of years, well, like I said, when you look at RISI, you might take a pause. I think we'll probably get through it okay.

Our next question comes from Paul Quinn with RBC Capital Markets.

Yes. Just a little bit mystified like Adam on the paperboard side, just with the reversal, and I guess the strength you're seeing now in the marketplace. Is that -- and I sort of heard some of the comments, which you refer to the export tonnage that would seemed up. Is that one of the sort of key metrics or key variables that has changed the market overall?

Yes, the export is going up definitely and backlog is going up.

Import seems flat.

But that export is industry, that's not you guys. You're not a big export player, right?

Yes. All of our exports go to Japan and it's pretty much consistently 10% or so of our total shipments.

Okay. And then just on the cost side, didn't see a lot of cost pressure from rising pulp prices. Is that -- do we expect that to be lagged into Q2 with less pricing coming up?

Yes, yes.

How material will that be in Q2?

I think it's going to be about a $1 million to $2 million impact on the tissue side of the business.

Okay. And just on the tissue side, with the brands holding steady on market share in Q1, anything that you can do that changes that dynamic going forward? I mean, obviously, it looks like they're higher in the digital and online -- or in-store promotions. Is that something that you guys can take advantage of or change some of your marketing attributes?

Yes, we work with our customers to be able to provide promotions. And of course, we'd have to rely on their network to be able to do that since we're not a branded player. We're a store brand, so we have to rely on how they deliver store brand coupons, promotions, et cetera. But yes, we absolutely work with them on the same ideas.

We've had 2 of our larger customers who clearly kind of have grown their private label component versus the brands. So that's encouraging for a couple of our bigger customers, just kind of sweeping in the whole market, I guess.

Yes. I'm just trying to get the bigger picture that I've covered you for a while now and it seemed like you're making great gains. The whole private label industry was making great gains in the early years. And now it seems like you're stalled out. Is that what you expect going forward? Or do expect now to be able to accelerate your penetration?

Yes. I mean, we definitely think, long term, it continues to go up. And I guess a little pause here, but we're optimistic that we start to rise again.

Our next question comes from [Indiscernible].

Just a couple of questions. First, just staying on tissue. And this is obviously longer term in nature. But obviously, the ultra-premium category is doing nicely. Do you think that once Shelby 2 is done, you're going to be able to maybe produce more ultra-premium relative to what you do now? Or is it going to kind of remain the same balance with the premium?

Yes. No, that'll be -- particularly for bathroom tissue ultra-premium, and we think we'll get there with towels as well by the time Shelby goes live. Our anticipation we'd probably -- we'll be able to do both kind of traditional conventional as well as ultra-premium. So it gives us that flexibility, but our expectation would be weighted much more towards the ultra-premium.

Okay. I mean, that's helpful. I think some of the concern I hear from investors is that there's a lot of capacity coming online. I get that. That is kind of causes some fear at the beginning, but you also said the industry is supposed to stay at a 97% operating rate, right? And historically, RISI has been pretty spot on with those forecasts. I guess what I'm asking is some of this other capacity coming online, are they also going to be able to do a large chunk of ultra-premium tissue they wanted to?

Yes. A lot of the capacity is either TAD or NTT, which both of those give you the ability to do the ultra-premium. There is a portion of it that's traditional conventional as well though.

Okay, okay, good to know. And then just on the -- I think you said tax rate, there might be an ability for you at the lower end of your guidance from a credit -- I'm sorry if I missed it, what quarter would you expect that or to drop?

That will be in third quarter. It's tied to going live on our continuous digester in Lewiston.

Third quarter, okay, that's good. And then I guess the customer that was acquired, I think we all know who you were speaking about. What do you have to wait a little more to have more visibility on that? I think that acquisition was announced around the last time you reported. So I'm just trying to figure out what you need to see.

So I guess, first of all, we have to see whether it actually closes or not. Second of all, we have to see, they were acquired by a competitor of ours, how much of the capacity that our customers are buying. Do they take internal? And then after that, we have to figure out if they do, do that, where our capacity lands, whether it's the folding carton or plate, folding cartoner will be positive, plate would be probably worse from a mix standpoint.

Okay, okay. And then you said folding cartoner, so is this the Manchester that's supposed to help your, let's I call it, I don't know, folding carton footprint? Is that -- do you guys feel comfortable with that sort of outlook?

Yes.

Yes.

Okay. And then, just one last one, sorry. You said you had a customer that's been increasing the amount of private label. Is that on the grocery side, if you can comment on that?

Yes, on grocery side.

[Operator Instructions] Our next question comes from the line of James Armstrong with Armstrong Investment Research.

If you want to answer the last one before I ask, go ahead.

You guys didn't hear it?

Oh, no. There was a siren. We couldn't hear it. I apologize.

Yes, just go ahead.

Okay. The first one was, how big was the impact from the inventory positioning in the first quarter? I'm just trying to gauge that magnitude. And do you think this will reverse in the second quarter?

Yes. So it's about $5 million-ish, and we would reverse in the second quarter.

Okay, perfect.

Wait, I answered the wrong question. You mean the transportation incremental costs?

Yes.

Yes.

Okay. That's about $1 million, and it should reverse itself.

Okay, perfect. Just to make sure. And second, corporate costs were down a whole lot. Is that a sustainable level? Or was it just related to just the quarter and likely will go back to previous levels?

I think they're pretty flat.

They're flat, yes.

Okay. Oh yes, adjusted -- okay, fair enough.

If you're looking at GAAP, James, it has the mark-to-market impact of the Board of Directors stock units, and those -- since the stock price went down, you see a benefit come through.

Okay. That's what the differential is. So it's whatever happens to the stock, fair enough. And then, lastly, in -- for the quarter, what do you think the major factor is in the second quarter between the high end and the low end of the guidance?

I'm kind of broken record here, probably paperboard pricing.

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.

Thank you for joining us today and for your continued interest in Clearwater Paper. On a final note, we'll be at the following conferences in the second quarter. We'll be at Goldman Sachs Leveraged Finance Conference in Palos Verdes, California. We'll also be at Deutsche Bank's Industrials and Materials Summit in Chicago and Citibank's Small and Mid-Cap Conference in New York. We hope to see you all there.

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