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Clearwater Paper Corp (CLW) Q1 2019 Earnings Call Transcript

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Clearwater Paper Corp  (NYSE: CLW)
Q1 2019 Earnings Call
May. 01, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Robin Yim -- Vice President, Investor Relations

Thank you, Operator. Good afternoon, and thank you for joining Clearwater Paper's first quarter and fiscal 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 quarter were released shortly after today's market close. You will find a presentation of supplemental information, including an updated outlook slide providing the Company's current expectations and estimate as to certain costs, 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 materials 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, 2018. 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 expectations.

Linda Massman will begin today's call with the highlights of 2018, followed by the Q1 financial results from Bob Hrivnak. 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 second quarter of 2019. Then, we'll open the call for the question-and-answer session.

Now, I will turn the call over to Linda.

Linda K. Massman -- President and Chief Executive Officer and Director

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 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 were associated with professional fees related largely to the evaluation of goodwill impairment and the assessment and material weaknesses in our internal controls, 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 shipped 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 starting to produce paper. I'd like to thank 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 programs. All the forecasted ton is 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.

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

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 will 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 cost 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 add 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 or flat with the fourth quarter, which was better than the outlook range of down 1% to 2%. This was largely due to realization of previously announced price increases for both paperboard and tissue products and higher shipped volumes of retail tissue to new and existing customers. This was partially offset by seasonally lower paperboard shipments coming off a strong fourth quarter.

First quarter adjusted gross profit was $45 million or 10.4% margin, a 48 basis point decrease from the fourth quarter. That was mainly due to items discussed in our outlook for Q1, including an unprecedented increase in natural gas prices due to a pipeline disruption that impacted the Idaho mill, higher external pulp prices as favorable 2018 contracts with inflationary caps expired, and higher wood fiber cost resulting from extended wet weather conditions near our Arkansas mill. All of which were partially offset by an improvement in freight and third-party warehousing costs in the consumer division.

Adjusted SG&A expense was $31 million or 7.1% of first quarter net sales which is up $4 million versus Q4 2018, primarily due to professional fees largely related to the material weaknesses and goodwill impairment. Adjusted operating income of $14 million or 3.3% of net sales were in line with our outlook range of $18.5 million. Adjusted EBITDA was $40 million or 9.3% of net sales and was in line with our outlook for adjusted EBITDA of $37million to $43 million. That compares to $47 million or 10.9% in Q4. Net interest expense of $8 million was up $1 million compared to Q4.

Turning to taxes, our Q1 effective tax rate was 15.9% which was lower than the combined statutory federal and blended state tax rate of approximately 25%. This difference was the net result of a number of adjustments, including a benefit from federal tax credits. The annual outlook for the effective tax rate could be highly sensitive to changes in estimates of pre-tax earnings and other adjustments, including federal and state tax credits.

First quarter 2019 GAAP net earnings were $3.8 million or $0.23 per diluted share and on an adjusted basis $3.5 million or $0.21 per diluted share, which was in line with the outlook range of $0.16 to $0.40. That compares to adjusted net earnings of $7.4 million or $0.45 per diluted share in the fourth quarter of 2018. Non-cash expenses in the first quarter of 2019 included $26 million of depreciation and amortization, $2 million of net non-cash pension and retiree medical expense, and $1 million of non-cash equity-based compensation expense.

Now, I'll discuss the segment results. Consumer Product net sales were $223 million for the first quarter of 2019, up a $11 million or 5% compared to the fourth quarter of 2018. The solid top line results were due to higher average prices coupled with a 5.6% increase in retail shipment tons, and a 6% increase in converted case shipments to new and existing customers. Consumer Products adjusted operating income in the first quarter of 2019 was $1.3 million or 0.6% of net sales versus $900,000 or 0.4% in the fourth quarter. The improvement was mainly due to continued implementation of the regional sourcing model, which has contributed incremental savings in freight and third-party warehousing cost.

However, this was more than offset by higher pulp prices and the rise in price for natural gas, due to the disruption at the pipeline that services the Idaho mill. As a result, CPD adjusted EBITDA of $16 million was up from $15.7 million in Q4, 2018. The adjusted EBITDA margin was 7.2% compared to 7.4% in Q4.

Now, turning to the Pulp and Paperboard division. Net sales of $205 million for the first quarter of 2019 were down 4.9% coming off with strong fourth quarter. Shipment volumes were 7% lower due to seasonality. However, price improved 1.9% on average, reflecting previously announced price increases. Pulp and paperboard's adjusted operating income for the first quarter of 2019 was $29 million or 14.3% of net sales, compared to $32 million or 14.7% of net sales in the fourth quarter. The decrease in operating margin primarily resulted from higher natural gas prices that I mentioned previously. Paperboard's Q1 2019 adjusted EBITDA margin was $38.9 million or 18.9%, compared to 19.2% in the fourth quarter.

Now turning to the balance sheet. Capital expenditures were $43 million in the first quarter of 2019, our expected total cash CapEx for 2019 remains unchanged at approximately $130 million to $140 million. Balance sheet CapEx remains at approximately $80 million for 2019. We had $202 million of short-term borrowings outstanding under the revolver at quarter end, long-term debt outstanding at March 31st remained unchanged at $675 million and includes $100 million of three year fixed rate revolver borrowings. The secured leverage ratio for covenant purposes was 1.62 times last 12 months adjusted EBITDA versus a covenant of 2.0 times. We now expect total net debt to peak in late Q2 or early Q3 depending on timing of cash flows and begin decreasing there after.

With regard to our liquidity, we ended the first quarter with $12 million of unrestricted cash and we had $91 million available under the revolver. During the first quarter, we used $29 million of cash for operating activities. This was mainly due to higher working capital levels, as we prepare to start production on the new paper machine in Shelby, seasonally higher finished goods inventory in paperboard and accounts receivable levels that were elevated reflecting changing customer arrangements and timing of collections.

This concludes my remarks, and I will now turn the call over to Linda Massman, who will discuss the Company's outlook.

Linda K. Massman -- President and Chief Executive Officer and Director

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 of 2019.

The start-up of our new Shelby paper machine is under way. We expect that paper machine to be at 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 a typical paper machine start-up 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 catalysts. The timeline for manufacturing and delivery of a new catalysts 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 toward 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 with the North American tissue market. The IRI panel data estimated in dollar terms reflect positive momentum for private brands. First, the total tissue market grew approximately 5% year-over-year. Second, private brands grew 12% versus 2% for national brands over the same period. Third, private brands ended the first quarter with 30% market share, compared to 28% a year ago. And last, the data points with a strong consumer acceptance and growing preference for private brand products, especially in the ultra quality category.

RISI's forecast for net new tissue capacity from 2019 through 2021 remains unchanged at 444,000 tons, which over the long-term averages out to approximately 150,000 tons per year and in line with 1% to 1.5% tissue growth per annum. Assuming all that capacity comes online as scheduled, plus net imports and using RISI estimates for demand in North America, the demand to North American capacity ratio in 2021 is unchanged and forecasted to be approximately 97%.

Turning to North American paperboard. RISI's outlook for 2019 has not changed since our last earnings call. RISI expects a balanced market with stable to improving conditions for the year and operating rates averaging 96%. RISI's forecast includes price increases for both folding carton and cup stock in the back half of 2019 for a variety of reasons ranging from a move away from single use plastic packaging to the premium pricing of CUK versus SBS. Industry and backlogs remains steady and we are seeing seasonally more order activity but the improvement did start a bit later than last year.

Now to our second quarter 2019 outlook compared to the first quarter of 2019. We expect consolidated net sales to be up 3.5% to 4.5% sequentially, primarily due to improved mix and higher paperboard shipments and converted case volumes of tissue. Consolidated adjusted operating margin to be in the range of 2% to 4%. The quarter will be impacted by about $2.5 million of higher costs related to the start-up of a new paper machine. Natural gas prices and usage are expected to improve by $2.5 million. Higher wood fiber prices have persisted into the second quarter, particularly in Arkansas due to weather. Maintenance and repair costs are expected to be about $5 million and the combined statutory federal and state tax rate is approximately 25%. We expect all of this to result in adjusted EBITDA in the range of $36 million to $44 million an adjusted net earnings for fully diluted share in the range of 0 to $0.34.

When considering the balance of 2019, I would like to point out that if we exclude the charges associated with material weaknesses and goodwill impairment and the rare pipeline disruption in the first quarter, our adjusted EBITDA would have been approximately $47 million. In the second quarter, adjusted EBITDA will be impacted by start-up costs for the Shelby paper machine and maintenance and repairs totaling $7.5 million. As we stated in our last call, in the back half the year, we expect to incur $23 million to $27 million of major maintenance expense. Please note that, we are evaluating the option of bringing a portion of the Q3 major outage forward into Q2.

So while there may be variability in our quarterly adjusted EBITDA, it doesn't change the overall guideposts that we provided on our fourth quarter call. To conclude, we remain confident and focused on the key drivers for achieving our current year plans and longer term success, which include producing high-quality products for our customers that are in line with end-consumer preferences in a growing and dynamic private label market and in the SBS packaging market. This also includes the focus on our cost structure and optimizing our facilities and equipment to generate greater cash flow.

Before we turn the call over to the operator for Q&A, I want to welcome on the two new additions to the Clearwater Paperboard, John Corkrean and Joe Laymon. John, serves as a Executive Vice President and CFO for HB Fuller and brings nearly two decades of financial leadership experience to our team. Joe Laymon serves on the Board of Directors at Peabody Energy, where he is Chair of the compensation committee, as well as a member of the health, safety, security and environmental committee, and previously served as Vice President of Human Resources and Corporate Services at Chevron Corporation. We believe their experience and new perspective will be invaluable to our Board and Company.

And with that, we'll now take your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Paul Quinn with RBC Capital Markets. Your line is now open.

Paul Quinn -- RBC Capital Markets -- Analyst

Yeah, thanks very much, and good afternoon.

Linda K. Massman -- President and Chief Executive Officer and Director

Hi, Paul.

Paul Quinn -- RBC Capital Markets -- Analyst

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

Linda K. Massman -- President and Chief Executive Officer and Director

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

Paul Quinn -- RBC Capital Markets -- Analyst

Okay, so would you characterize it as -- do you think earnings in the paperboard side they're going to be stable going forward? Or do you see -- see a little bit of a drop because of that lag effect?

Linda K. Massman -- President and Chief Executive Officer and Director

I think we're mostly through the lag for the most part. And from our perspective, it seems like a pretty balanced market and pretty steady market. We talked 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.

Paul Quinn -- RBC Capital Markets -- Analyst

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?

Linda K. Massman -- President and Chief Executive Officer and Director

Yeah. So with Shelby we haven't given the precise contribution, but what we have said and would still hold true is that, we expect to have a pretty average start-up. We expect that we should be able to reach full run rate of paper production on the equipment, probably 12 months after start-ups, so about 12 months from now. This quarter we have about $2.5 million a start-up costs, obviously you have some of those costs as you're building inventory and whatnot. And then ultimately some incremental benefit as we 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 it would be toward incremental volume.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay, so that $2.5 million costs in Q2, do we expect to repeat in Q3? Or would that be a drop in cost?

Linda K. Massman -- President and Chief Executive Officer and Director

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.

Paul Quinn -- RBC Capital Markets -- Analyst

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?

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

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 both maintenance CapEx and the two strategic projects is going to be the $130 million to $140 million range. But most of that spend, a 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 executions and generating free cash flow and begin paying down our bank debt.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay, so put in another way. I guess your leverage is going up in the Q2, but then it will come down at the back half of the year?

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

Right. Yeah, we'll start working on that.

Paul Quinn -- RBC Capital Markets -- Analyst

That's all I had. Best of luck.

Linda K. Massman -- President and Chief Executive Officer and Director

Thank you, Paul.

Operator

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

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks. Good afternoon, everyone.

Linda K. Massman -- President and Chief Executive Officer and Director

Good afternoon, Adam.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Hi, Linda. Just a couple nitty-gritty questions. I hopped on a bit late, so my apologies if you address this in the prepared remarks. But in the 2Q bridge, the $5 million of maintenance and repairs. Correct me if I'm wrong, that is separate and distinct from your major maintenance expense of $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 a separate maintenance, that's drag on EBITDA?

Linda K. Massman -- President and Chief Executive Officer and Director

Yeah. Yeah, 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 it, and some of those costs are going to carry into Q2.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

But thereafter at all, they'll be over and done with, presumably?

Linda K. Massman -- President and Chief Executive Officer and Director

That's correct.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Okay. And then, 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 are 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.

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

So in terms of working capital, certainly with the Shelby project planned for completion, we would expect -- currently we have an increase in our inventory for -- to help with the start up of Shelby. So that should normalize over the year. Then in terms of payables, certainly, we've had significant CapEx spend. So we should see a normalization around that as well. With respect to receivables, there are couple of key 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.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

So again (inaudible) So working capital expectations for the full year, do you expect to be a drag, neutral, a source, can you just help me out there?

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

Maybe about a $20 million drag.

Okay. And then just -- thank you for that, Robert. So correct me If I'm wrong. Net debt to EBITDA was 4.9 at quarter=end and I think you said it -- is it going to get higher in 2Q before it. Can you just help us with -- I know your covenants are 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 trend over the course of the year?

Yeah, 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 under way, 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.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks for that, Robert. And Linda, just couple on your end-markets, first in boxboard. So it's been -- SBS seems to have been a bit schizophrenic in recent months. So 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. And there's 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 just all these seemingly strange moving parts in recent months Linda?

Linda K. Massman -- President and Chief Executive Officer and Director

Yeah. I don't know that I'm able to speak directly to what's happening in that pricing situation, but I'll just tell you that we've seen take 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 paperbroad market as we move through 2019.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

And just one -- what are your backlog just compared to historical -- just so we have some prospective.

Linda K. Massman -- President and Chief Executive Officer and Director

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

Adam Josephson -- KeyBanc Capital Markets -- Analyst

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?

Linda K. Massman -- President and Chief Executive Officer and Director

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.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

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.

Linda K. Massman -- President and Chief Executive Officer and Director

Yeah, 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.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Sequentially, you mean?

Linda K. Massman -- President and Chief Executive Officer and Director

Yeah.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Okay. Thanks, Linda.

Operator

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

Steve Chercover -- D.A. Davidson -- Analyst

Hi, good afternoon and welcome to Bob.

Linda K. Massman -- President and Chief Executive Officer and Director

Hi, Steve.

Steve Chercover -- D.A. Davidson -- Analyst

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.

Linda K. Massman -- President and Chief Executive Officer and Director

That's right Steve. Yeah.

Steve Chercover -- D.A. Davidson -- Analyst

Got you. So we have the start-up 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?

Linda K. Massman -- President and Chief Executive Officer and Director

Yeah, I would say Steve that we still see a path to that target and 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 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.

Steve Chercover -- D.A. Davidson -- Analyst

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?

Linda K. Massman -- President and Chief Executive Officer and Director

Yeah, 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.

Steve Chercover -- D.A. Davidson -- Analyst

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

Linda K. Massman -- President and Chief Executive Officer and Director

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

Steve Chercover -- D.A. Davidson -- Analyst

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

Linda K. Massman -- President and Chief Executive Officer and Director

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.

Steve Chercover -- D.A. Davidson -- Analyst

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 to something that should be fairly proven technology I would think.

Linda K. Massman -- President and Chief Executive Officer and Director

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.

Steve Chercover -- D.A. Davidson -- Analyst

All right. Thank you.

Operator

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

Chip Dillon -- Vertical Research -- Analyst

Hi, good afternoon, everyone.

Linda K. Massman -- President and Chief Executive Officer and Director

Hi, Chip.

Chip Dillon -- Vertical Research -- Analyst

My 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 that?

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

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.

Chip Dillon -- Vertical Research -- Analyst

Okay. So basically, I guess starting in the third quarter, 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?

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

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

Chip Dillon -- Vertical Research -- Analyst

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, it 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. 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, is $900 million sort of the high watermark, could you go above that?

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

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 ywrap-up or get close to wrapping up the Shelby projects. So you can do the math, we would 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.

Chip Dillon -- Vertical Research -- Analyst

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

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

Yes, I think that's a good estimate.

Chip Dillon -- Vertical Research -- Analyst

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. RISI are counted 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, we'll look from here (inaudible) will net working capital be a further drag or should we expect to see that come down?

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

Well, we're going to expect to see it down because for inventory levels at Shelby, 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 as we progressed through the quarter. And then in terms of accounts payable, we had a big timing issue with respect to our payables, we had significant invoices that spend was incurred last year toward the end of the year on Shelby and we had to have cash outlays for those in Q1. So there's a lot of noise in the system, but bottom line is, as I said earlier, if we were to normalize our working capital, we see maybe across the year a $20 million drag.

Chip Dillon -- Vertical Research -- Analyst

Okay. You mean, from the end of '18 to the end of '19?

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

Right, end to end. That's right.

Chip Dillon -- Vertical Research -- Analyst

Okay, OK. So it means $70 million coming back, 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 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?

Linda K. Massman -- President and Chief Executive Officer and Director

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 have a good sense of what that mix is starting to look like, but we really need to start -- you know getting through the start-up first and making sure we have a good layer of the land before we try to lay out any prediction.

Chip Dillon -- Vertical Research -- Analyst

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

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

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 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.

Operator

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.

Linda K. Massman -- President and Chief Executive Officer and Director

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

Operator

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

Duration: 49 minutes

Call participants:

Robin Yim -- Vice President, Investor Relations

Linda K. Massman -- President and Chief Executive Officer and Director

Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer

Paul Quinn -- RBC Capital Markets -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Steve Chercover -- D.A. Davidson -- Analyst

Chip Dillon -- Vertical Research -- Analyst

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