Clearwater Paper Corp (CLW) 2019 Q1 法說會逐字稿

Welcome to Clearwater Paper Corporation's First Quarter 2018 Earnings Conference Call.

As a reminder, this call is being recorded today, May 1, 2019.

I would now like to 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 will find a presentation of supplemental information, including an updated outlook slide, providing the company's current expectations and estimates 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 material provided on our website.

I would like to remind you that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended.

These forward-looking statements are based on current expectations, estimates, assumptions and projections that are subject to change, and actual results may differ materially from the forward-looking statements.

Factors that could cause actual results to differ materially include those risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 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, 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'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 were associated with professional fees related largely to the evaluation of goodwill impairment and the assessment in 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 shipped volumes of converted retail tissue compared to the fourth quarter of 2018.

In addition, the implementation of our regional sourcing model and 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 them in 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 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 pretax expense, which includes nonoperating 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 costs to be presented on a line outside of operating income.

Beginning in the first quarter of 2019, these nonoperating costs have been excluded from the calculation of adjusted EBITDA.

The corresponding adjusted EBITDA amounts for prior periods have been reclassified to conform to this change.

For the full year of 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 a 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 $12.5 million to $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 $37 million 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 pretax 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.

Noncash expenses in the first quarter of 2019 included $26 million of depreciation and amortization, $2 million of net noncash pension and retiree medical expense, and $1 million of noncash 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 $11 million or 5% compared to the fourth quarter of 2018.

The solid top line results were due to higher average prices coupled with the 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 a 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, and in the first quarter of 2019, our expected total cash CapEx for 2019 remains unchanged of approximately $130 million to $140 million.

Balance sheet CapEx remained 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 31 remained unchanged at $675 million and includes $100 million of 3-year fixed-rate revolver borrowings.

The secured leverage ratio for covenant purposes was 1.62x, last 12 months adjusted EBITDA versus a covenant of 2.0x.

We now expect total net debt to peak in late Q2 or early Q3, depending on timing of cash flows and begin decreasing thereafter.

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.

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 start-up of our new Shelby paper machine is underway.

We expect the 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 the 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 catalyst.

The timeline for manufacturing and delivery of the 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 food service 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 reflects 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% in market share compared to 28% a year ago.

And last, the data points to 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 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 margins 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, and adjusted net earnings per 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 cost for the Shelby paper machine and maintenance and repairs, totaling $7.5 million.

As we stated in our last call in the back half of 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 guidepost 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 includes producing high-quality products for our customers that are in line within consumer preferences in a growing and dynamic private-label market, and in the SBS packaging market.

This also includes a 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 the 2 new additions to the Clearwater Paper board.

John Corkrean and Joe Laymon.

John serves as the Executive Vice President, CFO for H.B. Fuller and brings nearly 2 decades of financial leadership experience to our team.

Joe Laymon serves on the Board of Directors of 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 in value -- will be invaluable to our board and company.

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

(Operator Instructions) And our first question comes from the line of Paul Quinn with RBC Capital Markets.

Just starting on Paperboard here.

Your prices were up in the quarter where the list price is down.

Just wondering if that was mixed?

Or 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 RISI price changes, we see a 1 to 2 quarter lag before those price changes go into effect.

And as you recall, we had RISI reports on prices up, and then they rolled back some of those prices -- increases, particularly around folding cartons.

So I think that's causing some of the noise.

Okay.

So would you characterize it as -- do you think, earnings on the paperboard side are going to be stable going forward?

Or do you see a little bit of a drop because of that lag effect?

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.

Okay.

And then if I switch over to tissue and just Shelby 2 when that started up, how we should think about the contribution going forward?

I suspect it is not going to be like Shelby 1, yes, if you could address those two?

Yes.

So with Shelby, we haven't given the precise contribution.

But what we have that -- and we 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.

Paper production on the equipment, probably 12 months after start-up, so about 12 months from now.

This quarter, we have about $2.5 million of start-up cost.

So 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 towards incremental volume.

Okay.

So that $2.5 million cost in Q2, do you expect that to repeat in Q3 or would that be a drop-in cost?

Most of the costs should incur at the start-up of the machine with building of inventory and what not.

But we'll still see some costs as we move, flow into Q3, but it shouldn't be potentially as much.

Okay.

And then just last question, just on liquidity and leverage.

It looks like you've got just over $100 million in liquidity.

Is this the -- is this a low point or do you expect that at the end of next quarter?

Yes.

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 2 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 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 major CapEx spend completed, we're going to focus on execution and generating free cash flow and begin paying down our bank debt.

Okay.

So put another way, I guess, your leverage is going up in the Q2, but then it'll come down in the back half of the year?

Right.

Yes, we'll start working on that.

And our next question comes from the line of Adam Josephson with KeyBanc.

Just a couple nitty-gritty questions, I hopped on a bit late, so 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 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 I guess that's going to pop right back in 3Q, but then you'll have the $23 million of $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 it, and some of those costs are going to carry into Q2.

But thereafter it will, they'll be over and done with, presumably?

That's correct.

Okay.

And then, Robert, welcome by the way.

Forgive me I -- if you addressed this already.

Obviously, there's 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.

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, a 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 in 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, it's back to my -- so working capital expectations for the full year, do you expect it to be a drag, a neutral, a source, can you just help me out there?

May be 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 million at quarter end, and I think you said it will -- is it going to get higher into 2Q before -- can you just help us with -- I know your covenants were no longer tied to net debt to EBITDA, it's 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 2.5x to 4x.

So currently with the large CapEx projects underway, we're above 4x.

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.

And Linda, just a couple on your end markets.

First in boxboards.

So it's been -- SBS seems to have been a bit schizophrenic 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 2 of the industry participants actually announced an increase, the rest didn't bother.

So -- and there 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 just all these seemingly strange moving parts in recent months, Linda?

Yes.

I don't know that I am going to be able to speak directly to what's happening in the pricing situation.

But I'll just tell you that, we've seen tick up again in our backlogs like you would expect to see heading into the second quarter.

And we're seeing a relatively stable and steady market, which is exactly where we would hope to see.

So we're feeling pretty confident about the paperboard market as we move through 2019.

And just one -- what are your backlogs just compare it 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 are implementing.

You've 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 went compared to what you're expecting?

Yes.

So what you're seeing on price in tissue is we had a price increase last year that was announced, and we're starting to see -- well, not 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 contracts 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 to $5 million drag, sequentially.

I don't know what's in there.

Forgive me, if you discussed this earlier.

But can you just -- what are you expecting on pulp, freight, et cetera, 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?

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 costs.

There might be some puts and takes, I mean, 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?

Yes.

And our next question comes from the line of Steve Chercover with D.A. Davidson.

Welcome to Bob.

So I think you might've 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.

Yes.

Got you.

Okay.

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 EBIDTA target still attainable?

Yes.

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

So we're feeling good about it.

Okay.

Well, that's comforting.

Now with the $80 million in cost overrun, 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 run rate you first talked about?

Yes.

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 will be a better number, can you help us bracket 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 the fix still unattainable until 2020?

Yes.

So that is true.

So we are completing the qualification for the raw material components of the catalysts we've chosen.

As we talked about in the last call, nothing much has changed with regard to the timeline for the manufacturing and 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 the manufacturer.

Because normally these things -- I don't want to say they're 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.

Yes.

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

Our next question comes from the line of Chip Dillon with Vertical Research.

My first question is, as you ramp up the machine and you -- 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 start it up, you've got to start expensing that.

Yes.

So I can comment on the interest situation for Q1.

So basically, the interest for Q1 was about $8.5 million, and we capitalized about $3 million of that.

But 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 in the third quarter, the high watermark of interest expense would probably jump to around $11 million to $12 million.

And on a quarterly basis, and then go down from there.

Is that a good kind of guess?

Yes.

I think you could do back of the envelope.

Okay.

Okay.

That's good.

And then you mentioned the liquidity of $103 million.

And it looks to me that 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 that's not you, but I know the previous manners -- 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, let's see $872 million.

I mean is $900 million short of the high watermark, could it 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 projects, was about $71 million.

And so in Q2, we expect to ramp up or get close to ramping up the Shelby project.

So you can do the math, we would have some additional CapEx spend in Q2, but it would be 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 -- $10 million or $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, at least as I count it, 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 can we see that do for the rest of the year?

Will from here on out be -- will networking capital be a further drag?

Or should we expect to see that come down?

Well, we're going to expect to see it come down because for inventory levels at Shelby, as we're in a start-up mode, we saw an increase there.

Then in terms of receivables, we had a timing issue where we had significant collections 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 progress 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, I said earlier, if we were to normalize our working capital, we say maybe across the year, a $20 million drag.

Okay.

You mean from the end of '18 to the end of '19?

Right.

End-to-end.

That's right.

Okay.

Okay.

So that 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, 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 face up that mix as time goes on.

But at least when we get to a year from now, what would that mix be about?

Yes.

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 up 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 getting through the start-up first and making sure we have a good lay of the land because we try to land any predictions.

And last quick question.

Any early look or range of CapEx you want to give us for 2020?

Yes.

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 can anticipate CapEx at the $60 million mark for the year.

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.

Yes.

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.