Welcome to Clearwater Paper Corporation's First Quarter 2019 Earnings Conference Call. As a reminder, this call is being recorded today May 1, 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, operator. Good afternoon and thank you for joining Clearwater Paper’s first quarter 2019 earnings conference call. Joining me on the call today are Linda Massman, President and Chief Executive Officer; and Bob Hrivnak, Chief Financial Officer. Financial results for the quarter were released shortly after today's market close. You'll find a presentation of supplemental information including an updated outlook slide providing the company's current expectations and estimates as to certain cost, product pricing mix, shipment volume and other factors for the second quarter of 2019 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 expectation, estimates, assumption 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, 2018. Any forward looking statements are made only as of today’s date and the company assumes no obligation to update any forward-looking statements based on new developments or changes in the company’s expectations. Linda Massman will begin today’s call with the highlights of our first quarter, followed by the Q1 financial results from Bob Hrivnak. Then, Linda will conclude our prepared remarks with an overview of the business environment and update on our strategic projects and our outlook for the second quarter of 2019. Then 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. Before I share some first quarter highlights with you, I'm happy to introduce Bob Hrivnak, our new Senior Vice President of Finance and CFO. Bob has been with us for nearly a month, has hit the ground running and has already had a positive impact within our organization. I'm excited for you to meet him. So let's begin with first quarter highlights. First quarter came in favorably as expected. All metrics were in line with our outlook for the first quarter, and we performed better on the top-line compared to our outlook. Without the impact from approximately $7 million of additional charges, the quarter would have compared favorably to the first quarter of 2018, and comparable with the fourth of 2018. The additional charges are associated with professional fees related largely to the evaluation of goodwill impairment and the assessment of material weaknesses in our internal control, and a natural gas pipeline supplyand the assessment and material weaknesses in our internal control and a natural gas pipeline supply disruption that temporarily increased the cost of natural gas at our Idaho Mill. Both the paperboard and consumer businesses executed well and delivered solid results in the first quarter. While paperboard was mostly responsible for the financial contribution, our consumer business continued to show improvement from both improved tissue prices and higher shift volumes of converted retail tissue, compared to the fourth quarter of 2018. In addition the implementation of our regional sourcing model in the consumer business continues to drive better operating results for the division. I'm very pleased to tell you that we started up our new paper machine in Shelby and are we're starting to produce paper. I like to think the Shelby team for achieving this critical milestone for our company. This investment allows us to grow with our customers and helps in the development and expansion of their private brand program. All the forecasted tons to be produced on the new paper machine in 2019 are committed to new and existing customers. I'll provide an update on our strategic projects and outlook for the second quarter and 2019, later in my prepared remarks. Now I'll turn the call over to Bob.

Thank you, Linda. Good afternoon, everyone. As Linda mentioned, I joined Clearwater paper about a month ago and I'm pleased to be here and we'll discuss our first quarter results. I'm looking forward to meeting you in person soon. In summary, our first quarter results were favorable and in line with our outlook on an adjusted basis for operating income and margin, EBITDA and EPS and our top line came in better than our Q1 outlook. Throughout 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 do not reflect our core operating performance. The reconciliation from GAAP to adjusted results is provided in our press release and supplemental materials posted on our website. For the first quarter of 2019 those adjusted EBITDA items netted to $1 million of pre-tax expense which includes non-operating pension and other post-retirement benefit costs of $1.3 million partially offset by a $350,000 benefit from the mark-to-market adjustments to our outstanding directors’ common stock units. In 2018, the company adopted a new accounting standard which requires all net periodic pension and post retirement costs other than service cost to be presented on a line outside of operating income. Beginning in the first quarter of 2019, these non-operating costs have been excluded from the calculation of adjusted EBITDA. The corresponding adjusted EBITDA amounts for prior periods has been reclassified to conform to this change. For the full year 2018, those adjustments amounted to approximately $4.9 million of ad backs to adjusted EBITDA. For adjusted net income, the adjustment includes a $300,000 after-tax benefit for the mark-to-market of outstanding directors' common stock units. So with, that let's discuss our results for the quarter. Our first quarter net sales came in at $429 million…

Thank you, Bob. Let me now bring you up-to-date on our strategic projects, provide a brief update on the market environment and conclude with our outlook for the second quarter and for the full year 2019. The startup of our new Shelby paper machine is underway. We expect the paper machine to be a full production run rate in 12 months. The 2019 production volume is committed already and the ramp up costs are expected to be in line with the typical paper machine startup curve. In addition, the last converting line at the site is being Commissioned and is expected to start producing cases for the customers by the end of Q2. Turning to the continuous pulp digester project in Lewiston Idaho. The digester continues to run well and we expect to be on track to maintain the $10 million annual run rate benefit achieved in 2018 from energy savings. We also continue to make progress in resolving the challenges with the associated polysulfide reactor We are nearing completion of the necessary qualification of the raw material components of the chosen catalyst. The timeline for manufacturing and delivery of a new catalyst remains on track for the end of 2019 with benefit realization still expected in 2020. Once we have installed the catalyst we then expect to optimize the pulp making process to work towards achieving the anticipated remaining $20 million of cost savings We also introduced NuVo our new brand of cup stock paperboard to the market this paperboard product is differentiated by the addition of up to 32% of post-consumer fiber along with superior print surface. Since the launch last month this product has generated excitement in the cup and foodservice markets Turning to our view of the market environment for each of our businesses and starting…

[Operator Instructions] And our first question comes from the line of Paul Quinn with RBC Capital Markets. Your line is now.

Yeah. Thanks very much, and good afternoon.

Hi, Paul.

Yeah. Just starting in paperboard here, your prices were up in the quarter where the list price is down, just wondering if that was mix or is that – is that just your particular customer mix?

I’d say, it’s a little bit of customer mix Paul, as well as usually with some of these recent price changes, we see a one-quarter to two-quarter lag before those price changes go into effect and as you recall, we had received reports and prices up and then they rolled back some of those price increases particularly around folding cartons. so I think that’s causing some other noise.

Okay. So would you characterise that is some unique earnings in this Paperboard side they’re going to be stable going forward or do you see a – do you see a little bit of drop because of that lag effect?

I think we're mostly through, through the lag for the most part and from our perspective, it seems like a pretty balanced market and pretty steady market. We talk a little bit about the seasonality being a little slower to come out of the seasonal downturn, but I think it looks like we're kind of back on track with what would be expected.

Okay. And then if I switch over the tissue and just Shelby two when that started up, how we should think about the contribution going forward I suspect it’s not going to be like Shelby one, if you could address those two?

Yeah. So with Shelby, we haven’t given the precise contribution but what we have said and we would still hold through is that we expect to have a pretty average start up. We expect that, we should be able to reach full run rate paper production on the equipment probably 12 months after start-ups about 12 months from now. This quarter, we are about $25 million of startup costs. Obviously you have some of those costs as you're building inventory and whatnot and then ultimately some incremental benefit as we see get through the back half of the year. But we also mentioned that half of the Shelby volume this year would be committed to optimizing our existing business and network and then half of that would be towards incremental volume.

Okay. So that’s $2.5 million costs in Q2, do you expect that to repeat in Q3 or will that be a drop in -- drop in costs?

Most of the cost that incur at the start-up of the machine with the building of inventory and whatnot, but we'll still see some costs as we move through into Q3, but it shouldn't be potentially as much.

Okay. And then just last one just on liquidity and leverage, it looks like you’ve got just over a $100 million in liquidity. Is this a low point or do you expect that at the end of next quarter?

Yeah. So basically the spend for Shelby is expected to be done by late Q2 early Q3. So as we discussed in the script, our expected cash CapEx for the year and that’s bulk maintenance CapEx and the two strategic projects is going to be in the $130 million to $140 million range. But most of that spend large portion is going to occur in the first half of the year might lead a little bit into Q3 due to timing of invoices. So bottom line is as we move into the second half of the year with the major CapEx spend completed, we're going to focus on execution and generating free cash flow and begin paying down our bank debt.

Okay. To put in other way, I guess your leverage is going up into Q2 but then it’ll come down at the back half of the year?

Right. Yeah. We’ll start working on that.

Thank you. That’s all I had. Best of luck.

Thank you, Paul.

Thank you. And our next question comes from the line of Adam Josephson with KeyBanc. Your line is now open.

Thanks. Good afternoon, everyone.

Good afternoon, Adam.

Hi, Linda. Just a couple nitty gritty questions, Fred. I hopped on a bit later my apologies if you addressed this in the prepared remarks but they – in the 2Q bridge, the 5 million of maintenance and repairs, correct me from wrong, that is separate and distinct from your major maintenance expenses $23 million to $27 million that you're expecting in the second half. So can you just help me with what that $5 million is and then I guess that's going to pop right back in 3Q but then you'll have the $23 million to $27 million of separate maintenance, that's a drag on EBITDA?

Yes, yes, absolutely. So it is distinct from our scheduled major maintenance that we've talked about being in the range of $23 million to $27 million in the back half of the year. What most of this $5 million is and there are puts and takes in this, but the biggest driver in this was -- we had some unscheduled unplanned maintenance related to a boiler in Lewiston that we had to repair and take care of in some of those costs are going to carry into Q2. But thereafter it all they’ll be over and done with presumably. Yes, that's correct.

Okay. And Robert, welcome by the way. Forgive me, if you addressed this already. Obviously there is a big working capital build in the first quarter. I think you addressed you building some inventories for Shelby and then there were some I think receivable issues and other issues you talked about. What are your expectations for the year for working capital, again? Forgive me if you already addressed this.

So in terms of working capital certainly with the Shelby project planned for completion we would expect – you know currently we have an increase in our inventory for – to help with the startup of Shelby. So that should normalize you know over the year. Then in terms of payables, you know certainly we've had you know significant CapEx spend. So we should see a normalization around that as well. certainly we’ve had significant CapEx spend. So we should see a normalization around that as well. With respect to receivables, there are a couple of the drivers. We had some cash collections – significant cash collections in the first week of April. So part of the increase was due to timing. And then another part of the increase, we have some new customer relationships. So we hope to – which caused an increase in the receivables. So we hope to normalize that as well over time.

So again – back to [ph] Michael. So working capital expectations for the full year, do you expect it to be a drag, neutral source? Can you just help me out there?

Maybe about a $20 million drag.

Okay. And then just – thank you for that Robert. And so, correct me if I'm wrong. Net debt to EBITDA was 4.9 at quarter-end and I think you said it well – is it going to get higher into [indiscernible] can you just help us with – I know your covenants were no longer tied to net debt to EBITDA at secured debt, but can you help me with how you expect your net debt to EBITDA to trend over the course of the year?

Yes. So basically, we've – I think we've disclosed before that our target range for debt to adjusted EBITDA is about 2.5 to 4 times. So currently with the large CapEx projects underway, we're above 4. But the view is as we move into the second half of the year and the large CapEx spending is completed that will give us the ability to generate more free cash flow, start paying down the debt. So over time, we want to get back into the range and then get closer to the lower part of the range over time.

Thanks for that Robert. And Linda, just a couple on your end markets, first and box board. So it’s been SBA seems to have been a bit schizophrenia in recent months. There was a price increase in the fall and then it got rescinded and then there was an announced price increase almost immediately after the previous price increase got rescinded and only two of the industry participants actually announced an increase, the rest didn't bother. So and it is obviously a new competitor in the U.S. There is some import pressure. So it's a bit of a strange situation. I know you said you think it's fairly balanced, but can you just help us understand why all these seemingly strange moving parts in recent months, Linda?

Yeah. I don't know that I’m going to be able to speak directly to what's happening in that pricing situation, but I'll just tell you that we've seen a tick up again in our backlog like you would expect to see heading into the second quarter and we're seeing a relatively stable and steady market, which is exactly what we had hoped to see. So we're feeling pretty confident about the paperboard market as we move to 2019.

And just one what are your backlogs, just compared to historical just so we have some perspective?

They would follow pretty close to what you would have seen last year, I mean pretty standard backlogs.

Okay. And then, just on the tissue price increases that you had announced and were implementing, you got, your prices were slightly up sequentially 4Q to 1Q, is that – are you expecting any more or is that pretty much all you're expecting, can you just talk about how the price increases when compared to what you were expecting?

Yeah, so what you are seeing on price in tissue is we had price increase last year that was announced and we’re starting to see -- well, now, starting to be seeing the continued positive impact as we flow into 2019 and really the focus for us this year is getting Shelby running well, producing good quality product and making sure that we fulfill our customer contract as it relates to the Shelby volume and optimizing our network to reduce cost.

Just last one on cost, Linda, you have that cost bucket of $0 million to $5 million drag sequentially. I don't know what's in there. Forgive me if you discussed this earlier, but can you just top -- what are you expecting on pulp. freight etcetera some of the items that were highly inflationary last year and we've seen considerable weakness in pulp markets in recent months. I'm wondering what exactly your expectations are along those lines for again, pulp and freight and whatever else might be moving in one direction or another? Thanks very much.

Yes, I think the good news is we're not continuing to see those kind of inflationary environments as we progress into 2019. So that's the good news. I would say that we expect pretty stable commodity cost. There might be some puts and takes maybe a little bit of reduction in pulp. But we're still seeing some pricing pressure on the wood fiber side, but overall, pretty stable commodity pricing for the balance of the year.

Sequentially, you mean?

Yeah.

Okay. Thanks, Linda.

Thank you. And our next question comes from the line of the Steve Chercover with D.A. Davidson. Your line is now open.

Hi, good afternoon and welcome to Bob.

Hi, Steve.

So I think you might have just said this, but did the Shelby number 2 start in the second quarter so there was no impact in Q1.

That’s right Steve.

So we have the startup costs to filter in. So then I just wanted to get back to the overall financial metrics surrounding Shelby, when you first announced that you expected $55 million to $65 million of EBITDA with about $17 million in depreciation, business conditions have changed since then. So first of all is that EBITDA target still attainable?

Yeah I would say Steve that we still see a path to that target in the, the big driver and factor there is this will produce in addition to conventional product also the ultra-product which as we talk about quarter-over-quarter is turning quite nicely in the private label tissue business, it’s the part of the market that's a little bit tighter and, and in high demand by consumers and so we think we're positioning this launch of Shelby really well as it regards consumer demand and what they're looking for from private label tissue. So we're feeling good about it.

Okay. Well that's comforting. Now with the $80 million in cost overruns, clearly the returns won't be what you first anticipated but does that get filtered into the overall investment and by extension, is the depreciation going to be higher than that $17 million you first talked about?

Yeah so, so you're right the return on this won't be the same. And we had talked about previously some of the impact of that. And yes it will factor into the depreciation.

So $20 million annual depreciation be a better number and you have published back at that?

I don't have that estimate in front of me but we can try to provide that information on the next call.

Okay. And maybe not a perfect segue but what is going on with the Lewiston digester is it fix still unattainable until 2020.

Yeah. So that is true. So we are completing the qualification for the raw materials components of the catalyst we've chosen as we talked about in the last call. Nothing much has changed with regard to the timeline for the manufacturing delivery of that new catalyst it remains on track to arrive to us by the end of this year 2019 and we’ll install it in the polysulfide reactor and then work quickly and effectively to optimize the pulp making process and really try to get after that remaining $20 million in cost savings that we would expect and we still expect to see those in 2020.

And you probably don't want to litigate on a conference call but I mean is there any recourse that you have to manufacture because normally these things I don't want to say that are available right off the shelf but it's unusual to see such a painful start up design that should be fairly proven technology I would think.

Yes. So our main focus is on getting the digester and polysulfide reactor working in this continuous flow environment and we’ll address some of those other issues down the road here.

All right. Thank you.

Thank you. Our next question comes from the line of Chip Dillon with Vertical Research. Your line is now open.

Hi good afternoon everyone.

Hi, Chip.

First question is as you ramp up the machine and the CapEx is completed. How much should we expect to see book interest expense go up because I would assume you've been capitalizing quite a bit of the debt that you've incurred and once you started up you've got to start expensing?

Yeah. So I can comment on the interest situation for Q2. So basically the interest for Q1 was about $8.5 million and we capitalized about $3 million of that. But you know as the projects get completed and our CapEx spending is reduced, our free cash flow should also increase over time which would give us the ability to pay down our bank debt.

Okay. So basically I guess starting the third quarter is the high watermark of interest expense would probably jump to around $11 million or $12 million and on a quarterly basis and then go down from there, is that a good kind of guess?

Yeah. I think you could do a back of the envelope.

Okay. Okay. That's good. And then you mentioned the liquidity of $103 million and it looks to me that you know we know as we look at the back half of the year you've got another $70 million so of CapEx which I believe will pretty much be covered by your depreciation. And so I guess the question is, is what I'm really getting at is you did say as opposed to the – not you, but I know the previous – the previous call we heard that the net debt would peak sometime around the end of the first quarter and beginning of the second. Now you're saying second to third and so I just wanted to find out if you could give us a good guess as to how much more - what’s the high watermark because right now it looks like your net debt ended the quarter at around $872 million. I mean as $900 million sort of the high watermark, could you go above that?

Okay. So, I mean, the way I would think about this in Q1 our cash CapEx spend and that's for both maintenance and the major project was about $71 million. And so in Q2, we expect to you know wrap-up or get close to wrapping up the Shelby projects. So you know you can do the math, we would you know have some additional CapEx spend in Q2, but it would be you know significantly lower than what we spent in Q1. And then as we move into Q3 and Q4 we should see a significant drop in our cash CapEx.

Okay. And maybe to I don’t know $10 million, $15 million a quarter is that probably a fair level?

Yes. I think that's a good estimate.

Okay. And I really appreciate all the answers. And Robert, you're doing a great job considering you've been there a month. When you look at the net debt I'm sorry the net working capital and I know Adam asked about this. He says I counted you know current assets minus cash current liabilities minus debt, it – the investment shot up about $80 million in the first quarter. And maybe you answered this, but what could we see that do for the rest of the year will from here on LB what would net working capital be a further drag or should we expect to see that come down?

Well, we're going to expect to see it down because you know for inventory levels it shall be you know we're in a start-up mode we saw an increase there. Then in terms of receivables we then in terms of receivables, we had a timing issue, where we had significant collections for the first week of April and then we also have some new customer arrangements which has caused the temporary spike in our receivables. But we expect to normalize that you know as we progressed through the quarter and then in terms of accounts payable you know we had a big timing issue with respect to our payables, we had you know significant invoices that you know spend was incurred last year toward the end of the year on Shelby and we had to you know have cash outlays for those in Q1. So there's a lot of noise in the system, but bottom line is I said earlier you know if we were to normalize our working capital, we see maybe across the year a $20 million dollar drag.

Okay. You mean, from the end of 2018 to the end of 2019?

Right, end to end. That’s right.

Okay, okay. So it means $70 million coming back, if I – if my math is right. And then last question for Linda, as we look at the Shelby machine you mentioned a 12-month start up. How much at – let’s say in 12 months, let’s say you get there, how – what proportion of the machine would you say is going to be used to service the ultra you know sector of the market and I recognize that, that may not be where you end up, because you might need to gradually phase up that mix as time goes on. But at least, when we get to a year from now, what would that mix be about?

Yeah I think it's hard to predict, sitting here today and I'm not trying to avoid the answer. I think we just need to get the production off the machine, we have the mix relatively figured out for this year but there will be changes to that, as we progress into 2020. So we'll keep you informed on that as we progress through the course of the year so that you know you have a good sense of what that mix is starting to look like, but we really need to start – you know getting through the startup first and making sure we have a good layer of the land before we try to lay out any prediction.

And last quick question. Any early look or range CapEx you want to give us for 2020?

Yeah. So for 2020, we're not planning any strategic CapEx projects, because I think we need to digest what we currently have executed on and you know start paying down our bank debt. So I think at a normalized level you could anticipate CapEx at the $60 million mark for the year.

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.

Yeah. Thank you for joining us, and for your continued interest in Clearwater Paper. And I hope everybody has a good day. Thanks.

Ladies and gentlemen, that does conclude the Clearwater Paper first quarter 2019 earnings conference call. We do appreciate your attendance.