Welcome to Clearwater Paper Corporation's Fourth Quarter and Full Year 2019 Earnings Conference Call. As a reminder, this call is being recorded today, February 26, 2020. I would now like to turn the conference over to Mr. Sloan Bohlen, Investor Relations. Please go ahead.

Thank you, Dalam. Good afternoon, and thank you for joining Clearwater Paper's fourth quarter and full year 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 fourth quarter and full year 2019 were released shortly after today's market close. You will find a presentation of supplemental information, including an outlook slide, providing the company's current outlook as to certain costs, price and mix, shipment volume and other items for the first quarter of 2020 and for the full year of 2020, which is 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 the comparable GAAP information is included in the press release or in the supplemental information provided on our website. Please note, Slide 2 of our supplemental information. Rather than rereading the slide, I’m going to incorporate it by reference into our prepared remarks. Linda Massman will begin today's call with an overview of the fourth quarter 2019. Bob Hrivnak will then follow with a detailed review of the results for the quarter and full year. Then Linda will conclude our prepared remarks with an overview of the business environment and update on our strategic projects and an outlook for certain items in the first quarter and full year 2020. And then we'll open the call for the questions and answers. And now I will turn the call over to Linda.

Thank you, Sloan. Hello, everyone and thank you for joining us today. We will begin on Slide 3 of the supplementals to provide some business highlights for the fourth quarter. We finished the quarter with net sales of $436 million, which were driven by another strong quarter in tissue, which grew sequentially for the fifth consecutive quarter and were up 8% over the fourth quarter of 2018. Total sales growth was partially offset by lower paperboard shipments given a challenging compare from the fourth quarter of 2018. To be clear, we are enjoying relatively strong paperboard conditions with favorable backlogs compared to recent history for this time of year. Most importantly, margins across both segments expanded both sequentially and on a year-over-year basis to drive a 4% operating margin for the fourth quarter. Bob will touch on more of this in his prepared remarks. In terms of adjusted EBITDA, lower input pulp and fiber costs as well as lighter maintenance and expense timing drove adjusted EBITDA of $52 million. The best result we've had over the last eight quarters, despite a maintenance outage at our Arkansas mill. Now turning to Slide 4. Let's look back at 2019. For the year, we recorded $1.8 billion in sales, which is up about 2% from 2018. Recall that our 2018 result include approximately $17 million of revenue from our Ladysmith, Wisconsin operations that we sold in August of 2018. Revenue growth was closer to 3% for the year, if we exclude sales from our Ladysmith operation. This growth was driven from both of our businesses. In 2019 adjusted EBITDA was $167 million. The year was affected by planned maintenance outages and the startup of the new paper machine at our Shelby, North Carolina facility, which gives us capacity for future growth in distribution…

Thank you, Linda. My comments will be focused on our quarterly results. First on our overall operations and then I will provide color on the individual segments and conclude with some discussion on the financial position. Turning to Slide 6 of the supplemental, fourth quarter net sales of $436 million grew 2% on a year-over-year basis, due to the strength in both divisions and was down 2% sequentially as growth in our consumer products was more than offset by lower paperboard sales. We are reporting net income of $2 million or $0.12 per diluted share, compared to a net loss of $11 million or $0.66 per diluted share in the third quarter of 2019, and a net loss of $188 million or $11.39 per diluted share in the fourth quarter of 2018. On a non-GAAP basis, we are reporting adjusted income of $6 million or $0.37 per diluted share in the fourth quarter of 2019, compared to a loss of $8 million or $0.47 per diluted share for the third quarter of 2019, and adjusted income of $7 million or $0.45 per diluted share in the fourth quarter of 2018. Adjusted EBITDA was $52 million in the fourth quarter of 2019, compared to $32 million in the third quarter of 2019, and $47 million in the fourth quarter of 2018. Let me provide some color on each of our segments and their results for the quarter as compared to the prior quarter and prior year quarter. Let me start with Consumer Products and then move to Pulp and Paperboard. While our businesses are integrated through our pulp operations, each business operates in different markets and faces different opportunities. Therefore, I will walk through each segment independently. Let's refer to Slide 8 for an adjusted EBITDA bridge between the third and…

Thanks, Bob. Before we review our outlook for 2020, I will provide some color on the markets that we operate in which includes RISI’s view of the market environment for each of our businesses. Starting with the North American tissue market. The IRI panel data estimated in dollar terms reflects positive momentum for private brands. First, the total tissue market grew approximately 6% year-over-year. Second, private brands grew 10.9% versus 3.9% for national brands over the same period. Third, private brands ended the fourth quarter with a 31.8% market share compared to 30.4% a year ago. The data continues to point to strong consumer acceptance and growing preference for private brand products especially in the ultra quality category. Private brand growth in the ultra segment continues to outpace total category growth for bath tissue and paper towels. RISI’s new tissue capacity over the long-term averages out to approximately $130,000 tons per year and we believe in line with 1% to 1.5% tissue demand growth per annum. Assuming all that capacity comes online as scheduled plus net imports capacity utilization is expected to remain between 95.5% and 96% per RISI. Turning to North American paperboard, RISI's outlook for the remainder of 2020 is 93% capacity ratio, which is flat compared to 2019. According to AF&PA as of the end of the fourth quarter, the industry operating rate was 91.9% compared to 93.5% a year ago, and down slightly from the third quarter operating rate of 93.2%. Industry backlogs reported by RISI are 4.2 weeks and about 6% lower than backlog a year ago. At the end of the second quarter RISI reported industry backlog of approximately four weeks. We believe the food service segment of the industry is positioned to benefit from the trend of box board away from polystyrene and…

[Operator Instructions] Our first question comes from Adam Josephson with KeyBanc Capital Markets. You line is now open.

Linda and Bob, good afternoon.

Hi Adam.

Hi Adam.

Hi. Bob, to start off with pulp, I know we kind of beat this topic into the ground on the last call. But if you recall there were several questions about why you weren't expecting more of a pulp related benefit than what you seem to be guiding to, when you talked about these caps in your contracts and then, and that was in late October, pulp really hasn't moved much if at all since then and now you're – you positively pre-announced in-part on seemingly much lower than expected pulp cost. So I'm just little confused what changed from late October to now given that the pulp prices really didn't change since then and we were asking before why you weren't getting more of a pulp benefit and now you're reporting this huge pulp benefit? So I'm just a little confused as to what's going on. I'm hoping you can explain it.

Yes. So basically Adam our – the way our pulp contracts are now set up, we have a contractual volume level in the contracts, but we also tie the pricing to the RISI index. So we've moves away from the historic caps that we talked about, like in 2018 which impacted the year-over-year analysis in 2019. So basically in our 2020 outlook, we're projecting that based on market indexes, the forecast for the year we should get a $15 million to $20 million benefit.

Right, I’m just saying relative to the initial guidance you gave for 4Q, what dramatically changed if pulp prices didn’t actually move? Is it that you changed how your contracts are set up and then you got this immediate benefit from that change or was there something. I’m just trying to understand what would have caused you to much better than you thought given that, there really was no movement in pulp prices from then to when you positively preannounced. Correct me if...

Yes. So, Adam we started to see the benefits in the second half of the year. If you look at the bridge on Slide 6 in the supplemental, okay, so basically from Q3 to Q4 we have a pulp in wood fiber cost benefit that reporting us over $7 million. So that's latter half of 2019, we began to see the benefit and the net benefit will flow through 2020.

Okay. And in terms of the favorable timing of expenses that helped you in the quarter, Bob, forgive me if you elaborate on this and I missed it, but what exactly was that and to what extent is that coming out of your 1Q 2020 guidance?

Okay. So I want to make sure I understand the question. Are you interested in...

When you pre-announced, you said it was the quarter’s better than you thought in part because of the timing of expenses.

Yes. So basically we pre-announced toward the end of January, as we were in the process of closing our books, we recognize that we would have a favorable cost impact from wood fiber and Pulp, a couple of million dollars. Then we had two major maintenance outages in the second half of the year. So there was lower than expected, what I would call routine maintenance spend that got pushed into Q1. That was another couple of million dollars. And then we had some favorable items. For example, we had a tax credit. We had some adjustments and lower other miscellaneous costs, which generated another $2 million benefit. So recognizing that we had about $6 million of favorable items, we thought it was important to update our guidance range.

Right and I appreciate that. But just, Linda, I think you gave an SBS market overview, and I may have missed part of that, but how exactly are you thinking about the market now? Obviously RISI reduced SBS Folding Carton in February by 30 held food service. Can you remind us how much of your SBS business is Folding Carton versus food service? What the timing lags are and what the impact you're expecting in 2020 from those February reductions?

Yes. So, I will Adam. So with regard to our mix of SBS, I would say that Folding Carton is about 50% and the balance primarily is food service. There's some other little pieces and parts in there, but a big portion of the balance is food service. So in looking at the end of the year, we ended the year with strong backlogs, so that was great. We looked at – look at RISI forecasting utilization to be flat in 2020 versus in 2019 so roughly at about 93% utilization for the industry capacity. Yes, there has been recently RISI came out with a lower SBS Folding Carton price and all of those together. I mean, I guess I would just summarize it as it's definitely a competitive market. There's some shifts taking places as we saw one competitor come out and another come in and we're just working through those supply changes.

Got it. Thanks. And Bob just one on CapEx, I think you guided to CapEx of $45 million to $50 million this year. I think the company previously indicated that maintenance was about $60 million; correct me if I'm wrong there. But why are you expecting to spend below maintenance? It doesn't seem like a sustainable situation for very long-term. Just trying to understand your CapEx plan for this year and perhaps even going into next year. If you're going to underspend maintenance this year presumably you'd have to outspend maintenance next year.

Yes. So basically I think when you look at the CapEx budget, this is primarily maintenance CapEx and it's really in line with our historical maintenance spend. Because if you go back the last three to five years, we – our CapEx was high because of the strategic projects that we were focused on. But I think this particular level of maintenance CapEx is appropriate for our business because it is in line with what we've done historically. We're also focused this year on generating positive free cash flow so we can deliver our balance sheet.

Thanks so much, Bob.

Thank you. Our next question comes from Steve Chercover with D.A. Davidson. Your go ahead.

Thanks and congratulations, Linda. Must be nice to transition knowing that progress is underway.

Thank you, Steve. Yes.

So I guess I'm also trying to just drill a bit more into the expectations for pulp and fiber, because obviously the annualized the Q4 benefits, we were $25 million, $30 million tailwind. So can you parse the difference between what happened in Pulp? And what happened in your wood, which I assume is chips?

We're not going to go into that level of detail, but on Page 12 of our 2020 outlook, management has a view based the market index projections that we have a tailwind $15 million to $20 million. That's certainly an assumption and that could potentially change during the year. But that's our current view.

Okay. So can you tell us what RISI is projecting for the grades that you buy in 2020 versus the 2019 average?

I don't have that kind of detail, but I think our view is fit. The outlook slide on Page 12 would capture what our expectation would be regarding pulp and woodfiber.

Alright. You probably can't answer this one either then, but do you know if RISI’s assumptions were established before the magnitude of the coronavirus was really understood?

I don't have that kind of insight.

Yes, I don’t know.

Alright. So I'm not trying to trip you, but...

Well, let's switch gears. Hopefully, you should know this. On tissue, can you just detail the two or three most significant capacity additions that are competing with you on the retail side?

Yes. So in terms of tissue, there is pressure coming from a couple of angles. First of all, the retail landscape continues to be under pressure. There's a lot of competition among grocers, mass, club and dollar stores. So that's a headwind that we're facing. And then there is a lot of new capacity coming on board over the next two years, which is going to put pressure in the space short-term. Tissue market is growing, but as new capacity comes on board it can be somewhat lumpy in terms of the absorption of that capacity.

And Steve, I might just add that and we usually report these numbers and we did this time to private label clearly growing. And if you look at the two, if I break-up into two segments in that private label into ultra and conventional ultra is growing faster. And if you look at history, I would say more of the competitive threat has been in the conventional side of the business and more competitive pressure there. And so that's an extra detail I guess we'd provide.

Okay. Two more quickly, and then I'll turn it over. Can you articulate what makes the NuVo cup stock different from your legacy cup stock?

Sure. So this is a new branded cup stock for us as we talked about and it includes up to 35% post-consumer fiber, which is what's different for us. And so far, the brand is being very well received by the market. It does allow for flexibility by our customers in how much post-consumer fiber goes into the cup stock composition. And they can pick up to 35%. And I would just say, it obviously is a great cup. It maintains a beautiful and effective print surface, which we love to see and provide to our customers. And I did say this in my prepared remarks, but I'm going to say it again. We were named a finalist in RISI’s Packaging Innovation award, which we're very proud of and I just want to congratulate the team for such a great new product.

And that post-consumer fiber is that mixed. I don't want to call it waste, but mixed paper or office paper. What's the grade that you use there? It must be pretty sanitary.

Yes. And that's what it is for the most part.

Okay, last one. Why is depreciation lower in 2020 than 2019? Considering we've got a full year of Shelby in the mix?

Well, I think we have – if you look at our total asset base, we have assets that are depreciating over time and some of them the depreciation is starting to roll off. So I would argue, in terms of our outlook for 2020, the depreciation that we're projecting is about $110 million. That would be depreciation and amortization versus $115 million in 2019. So, I mean, it's a small change.

Got it. Okay. Thank you.

Thanks, Steve.

Thank you. Our next question comes from Paul Quinn from RBC Capital Markets. Please go ahead.

Yes. Thanks very much. Good afternoon.

Hi, Paul.

I'm confused on the $7.4 million pulp savings that you called out, but Adam asked the question and we've got a partial answer. But I'm also confused on the maintenance side. I mean, you guys guessed sort of or estimated at $11 million to $12 million savings, where the extra savings come from?

So I'm not sure I understand the question. Are you focused on pulp or maintenance?

No. Just on your guide for the quarter, you thought maintenance would be $11 million to $12 million and you got $15.3 million. So, if I just take the mid point $11 million to $12 million, there's a $4 million difference there and just additional savings. I'm just wondering where that came from?

Okay. So, basically from Q3 to Q4, if you think about it, the Lewiston outage in Q3 was a much larger event than the outage that we had in Arkansas in Q4. So that's really a big piece of the delta that's shown on Slide 6 in the supplementals.

Yes. I understand that Lewiston being a larger facility, it’s going to higher maintenance costs.

Yes. It’s about – For the outage, you can think about it this way. If you look at the total pie, Lewiston let’s say 75%, I would argue Arkansas 25%. So it's a larger component. We had more expense in Q3 than we did in Q4 given the size of the outage.

And I think Paul, another part of your question, we were lower on maintenance expense in Q4 than we originally thought. Some of that is from just a pure timing perspective. We'll blow into Q1 given where the projects were scheduled and what work was done in Q4 versus Q1.

Okay. Thanks, Linda. That was kind of the answer I was trying to – hoping to get. And then I guess the other question that I just had on paperboard. RISI dropped the price, I guess that's going to flow through. Just wondering what percentage of your mixes will be effected by that.

Yes. So we have about 50% of our businesses in folding carton, so that's a good rough number to use. And keep in mind, in our guidance for our outlook for 2020, we factored all of these pricing changes and whatnot into those estimates. So they're fully in there.

Okay. No, I understood the 50% that you’re folding carton. So it doesn't apply or it doesn't affect the remaining 50% in any way?

No, no.

Okay. And then just a market outlook question on paperboard. I think some people were surprised with the price drop with RISI. Do you anticipate any further price drops in 2020?

Yes. I'm not going to try to predict what RISI is going to publish by any stretch of the imagination. But I would just say that all of the pricing action that we foresee is built into the outlook we provided. So it’s all in there.

All right. That’s all I had. Best of luck.

Thanks Paul.

Thank you. Our next question comes from Adam Josephson from KeyBanc Capital Markets. Please go ahead.

Linda and Bob, thanks so much for taking my follow-ups. Bob, just one more cash flow question. I think you said, you expect to generate positive cash flow this year and I don’t have had time to go through all the moving parts and I’m not certain what your cash tax it will be. But when you say positive, are you talking 20%? I assume you’re not talking north of 50%. So something between zero and 50%, is that a reasonable assumption?

So Adam, what we’ve done on the 2020 outlook slide on Page 12, we’ve provided other assumptions that can be used with the assumptions for EBITDA impact to generate free cash flow range. So we’ve provided that to investors and analysts. So you can take our ranges and come up with your own forecast, where you think we’re going to be. But the bottom line is the free cash flow that we generate, priority is going to be to delever our balance sheet.

Would you mind – can you just do the math for me? I mean, if it’s all laid out there, can you just give us a range in that case?

We actually – we’re not going to provide our estimates. But I think if you look at the assumption page, you’ll easily be able to generate a free cash flow number.

Okay. Linda, just one on tissue. You talked about the ongoing capacity additions expected to continue driving competitive market. Do you see any light at the end of the tunnel here? I mean, in a commodity business, of course when conditions are weak, typically supply gets taken out. And in this case supply is actually being added, not subtracted. So at what point do you expect industry conditions to stabilize and for that matter meaningfully improve?

Yes, Adam. I think that is a difficult question to answer. I would say that we didn’t anticipate all of the capacity additions that have come online. Well, we’re focused on here is everything that we can control. So we don’t obviously control competitor actions. And so what we are focused on is working closely with our retailers, ensuring the quality of our product is on target and on mark with what they want offer for their store brands, ensuring we can meet their customer service needs, which of course are increasing in demand every year that we’re in this business. And just really bring Shelby up and getting the benefit that we expect out of Shelby.

Sure. Now I understand. And then on SBS, as you mentioned, Linda, you have one big chunk of supply getting taken out toward the end of last year. You have another chunk that’s been gradually coming on over the past couple of years and it will continue to ramp up this year. So perhaps, you’re thinking that those two may roughly offset each other. I don’t want to pull words in your mouth, but tell me if you think I’m mistaken along this line. So do you expect any meaningful change in industry conditions compared to where they are now in terms of these low-90s operating rates and backlogs in the low-400s et cetera, et cetera?

Yes. And I think the way, you characterize it, it is a fair way to characterize it. And I would just say we can definitely agree and see line of sight to what RISI is forecasting with regard to 2020 being at a close to a 93% utilization. That feels about right.

Right. Okay. Thanks so much, Linda.

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

Great, thank you. And thank you everybody for joining us today and for your continued interest in Clearwater Paper. Have a great day.

Thank you. Ladies and gentlemen, that does conclude the Clearwater Paper fourth quarter and year end 2019 earnings conference call. We do appreciate your participation. You may now disconnect.