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Clearwater Paper Corp (CLW 1.09%)
Q3Â 2018 Earnings Conference Call
Nov. 08, 2018, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to Clearwater Paper Corporation's Third Quarter Earnings Conference Call. As a reminder, this call is being recorded today, November 8, 2018.
I would now like to turn the conference over to Ms. Robin Yim, Vice President, Investor Relations of Clearwater Paper. Please go ahead.
Robin S. Yim -- Vice President, Investor Relations
Thank you, Chris. Good afternoon and thank you for joining Clearwater Paper's third quarter 2018 earnings conference call. Joining me on the call today are Linda Massman, President and Chief Executive Officer; and John Hertz, Chief Financial Officer. Financial results for the third 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 outlook as to certain costs, price mix, shipment volume and other factors for the fourth quarter of 2018, 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 information 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 31st, 2017 and our quarterly filings on Form 10-Q, as well as our earnings release and supplemental information. Any forward-looking statements are made only as of this date and the company assumes an obligation to update any forward-looking statements.
Linda Massman will begin today's call with a brief review of the third quarter, followed by the Q3 financial results from John Hertz. Then, Linda will conclude our prepared remarks with an overview of the business environment and update on our strategic projects and our outlook for the fourth quarter and then we'll open the call for the question-and-answer session.
Now, I'll turn the call over to Linda.
Linda K. Massman -- President & Chief Executive Officer
Thank you, Robin. Hello, everyone, and thanks for joining us today. I'd like to start with a few opening remarks before John presents the financial results. For the third quarter, we exceeded our financial outlook, thanks in large part to the outstanding results produced by our pulp and paper board team. I want to take this opportunity to thank them for delivering excellent results. Solid production performance, coupled with strong demand, led to another sequential record shipment quarter for the group.
Our consumer products business saw improved operating results compared to the second quarter, as the work to improve our operating model has begun to provide benefits. The accelerated start-ups of two Shelby converting lines, contributed to improved results, while allowing us to take miles off the road and to reduce transportation costs.
In the quarter, we completed the sale of a recycle tissue mill located in Ladysmith, Wisconsin. While it was a well-run operation, it was not aligned to our focused strategy of producing premium and ultra-quality tissue for the retail market. In addition, we proactively worked to address our balance sheet and liquidity to provide flexibility to finalize our strategic projects and navigate the current environment. We are confident that changes that John will discuss, provide the flexibility we need in our balance sheet for this foreseeable future.
We also remain focused on successfully executing our key capital initiatives, which include achieving the full benefit from the Lewiston continuous pulp digester and the expansion work at our Shelby site. I will provide further details later in today's prepared remarks. For now, I will say that I firmly believe we are focused on the activities that will contribute to the long-term success of Clearwater Paper.
Now I will turn the call over to John.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Thanks, Linda. Q3 was a solid quarter from a financial performance perspective as we delivered $49 million of adjusted EBITDA, which exceeded the high end of our outlook range by $3 million. Before I get into the specifics of our third quarter 2018 results, I'd like to preface my comments by stating that throughout the rest of my remarks, I will be distinguishing between GAAP and non-GAAP or adjusted results. The adjusted results exclude certain charges and benefits that we believe are not indicative of our core operating performance. The reconciliation from GAAP to adjusted results is provided in the press release and supplemental information posted on our website.
For the third quarter of 2018, those items totaled $22 million of pre-tax benefits of which $23 million was associated with the gain on the sale of Ladysmith mill, which closed in August. That is offset by $1 million of pre-tax expense primarily related to the mark-to-market adjustments of our directors' equity-based compensation.
Turning now to Q3 financial results, net sales came in at $426 million, down 1.3% from the second quarter of 2018 and just below the low end of our outlook range. Lower retail tissue shipment volumes and the impact of the sale of Ladysmith were largely offset by previously announced paperboard and tissue price increases, record shipment volumes in paperboard and improved product mix.
Third quarter adjusted gross profit of $50 million or 11.8% margin improved by 1.2 points from the second quarter. The increase was primarily driven by higher paperboard and tissue pricing and progress on our CPD operating model and that was partially offset by seasonally higher energy costs in only two months of Ladysmith contribution in the quarter.
SG&A was $26 million or 6.2% of third quarter net sales, which is down $1 million from Q2 and reflects the continued progress of our SG&A cost reduction efforts. We expect to be at the total annual SG&A savings run rate of $20 million, beginning Q1 of 2019. Adjusted corporate expense was approximately $13 million of SG&A spend in the third quarter, which is down $0.5 million from Q2.
Adjusted operating income was $25 million or 5.8% margin, which exceeded our outlook and came in $6 million higher than Q2. As I previously mentioned, adjusted EBITDA was $49 million or 11.5% of net sales, exceeding the high end of our outlook range and up $6 million versus the second quarter. Net interest expense of approximately $8 million was consistent with Q2.
Turning to taxes. On an adjusted basis, we had a tax rate benefit of approximately 40% in Q3 versus an expense of 26.5% in the second quarter, primarily due to the recognition of approximately $10 million of alternative energy production tax credits. Without those credits, the Q3 adjusted tax rate would have been a provision of 23.1%.
Third quarter 2018 GAAP net earnings were $34 million or $2.08 per diluted share, and on an adjusted basis $22 million or $1.35 per diluted share, well above our outlook for Q3 due to operational performance and the tax credits. Without those credits, adjusted EPS would be $0.74 per diluted share. That compares to Q2 adjusted net earnings of $7 million or $0.43 per diluted share.
Non-cash expenses in the third quarter of 2018 include $25 million of depreciation and amortization, approximately $3 million of total equity-based compensation and approximately $2 million of non-cash pension and retiree medical expense.
Now I'll discuss the segment results. For the third quarter of 2018, Pulp and Paperboard generated net sales of $215 million and shipped record volume of just over 218,000 tons. Net sales were up 2% versus the second quarter due to realized price increases and strong demand driven in part by customary pre-buying ahead of previously announced price increases.
Average sales price per ton of $985 in Q3, was up $13 per ton compared to Q2. Pulp and Paperboard's Q3 operating income was $38 million or 17.8% of net sales as compared to $34 million or 16.2% of net sales in the second quarter, reflecting continued strong production performance coupled with the favorable market conditions. Pulp and Paperboard's Q3 adjusted EBITDA margin was $48 million or 22.2%, which is well above the cross-cycle target model of 19%.
Now turning to Consumer Products division, Q3 net sales were $212 million, down 4.5% compared to the second quarter, that was due to expected lower retail tissue shipment volumes and the Ladysmith sale that was partially offset by improved product mix within the away-from-home and parent roll categories and the impact of the announced price increases. Consumer Products Q3 adjusted operating loss narrowed to $1 million versus a loss of $3 million in the second quarter. Improved pricing, a richer product mix and the operating model savings were partially offset by increased costs for energy and pulp in the Ladysmith sale. CPD adjusted EBITDA of $13 million was up $2 million from Q2. The adjusted EBITDA margin was 6.3%, up 1 point from 5.2% in Q2.
Now I'll turn to the balance sheet. Capital expenditures excluding capitalized interest were $82 million in the third quarter of 2018, with $75 million for the Shelby expansion. As of the third quarter, capital expenditures totaled $246 million. Balance sheet capital expenditures for the year are now expected to be $310 million, which is above the previous outlook range of $275 million to $280 million. The revised 2018 CapEx spend includes a $40 million to $50 million increase in the cost estimates of the Shelby project, offset by a total reduction of approximately $30 million in the discretionary CapEx budget for 2018.
Linda will cover the details of the cost increase in her progress report on the Shelby expansion project. 2018 cash CapEx is now expected to be approximately $280 million and 2019 cash CapEx is expected to be between $100 million to $130 million. We had $100 million of borrowings outstanding under the revolving credit line at the end of the quarter. Long-term debt outstanding at the end of Q3 was $675 million, which is a $100 million increase from Q2, reflecting the conversion of a $100 million tranche of the revolver to a three year fixed rate term borrowing loan that will reduce interest costs and floating rate exposure. Our leverage ratio was 3.97 times last 12 months adjusted EBITDA at the end of Q3.
We've been proactively -- We've been proactively working to reduce our balance sheet and related covenant risk, in order to give us the financial flexibility to finalize our strategic projects and mitigate some of the current market conditions. After quarter end, we amended certain covenants associated with our revolving lines of credit. The leverage covenant has been amended from a total debt ratio to a secured debt only ratio which only covers amounts outstanding on the current and long-term portion of the revolver. The covenant is 2 times adjusted EBITDA through 2019, and then steps down to 1.5 times adjusted EBITDA, thereafter. Had the amended leverage covenant been in place for Q3, the ratio would have been 0.75 times.
The interest coverage ratio covenant has been amended from 2.25 times to 1.25 times and an asset coverage ratio -- coverage test of 1 to 1 has been added. These amendments provide us with added financial flexibility as we complete the Shelby project in Q1 of next year. We now see our debt levels peaking in Q2 of '19 and declining thereafter.
With regard to our liquidity, we ended the third quarter with $76 million of unrestricted cash, and we had $192 million available under the revolver. During the third quarter, we generated $10 million of cash from operating activities or 2.4% of net sales, down from 18.5% in the second quarter. Working capital was a cash flow headwind in Q3 due to the elevated paperboard sales near the end of the quarter, seasonal increases in pulp, log and ship inventory and the timing of accrued interest in payroll payments. We expect cash flow from operations to be in the range of $55 million to $60 million for the fourth quarter.
We did not repurchase any shares in the third quarter under the $100 million share repurchase authorization, which leaves approximately $30 million remaining under that authorization. So in conclusion, Q3 was a solid quarter for us from a financial performance standpoint, and we amended our credit agreement in order to provide balance sheet flexibility.
I will now turn the call over to Linda Massman, who will discuss our progress on our strategic projects, the business environment, and the company's outlook.
Linda K. Massman -- President & Chief Executive Officer
Thanks, John. I will now provide an update on our strategic projects, then discuss the market environment and what we expect for our business segments. Finally, I will give you our outlook for the fourth quarter.
I'll start with our Shelby expansion plan, which is nearing completion and on schedule to start producing paper in the first quarter of 2019. As I mentioned, the acceleration of two converting line start-ups at Shelby has helped to improve the Consumer Products division's operating model by lowering transportation and external warehousing costs. We expect these improvements will continue into the fourth quarter and beyond.
Our total Shelby project costs are forecasted to be $40 million to $50 million higher than the original estimate, the majority of which is due to external factors. The revised estimated costs for Shelby is now $380 million to $390 million. To offset the increased costs related to the Shelby project, we proactively and aggressively reduced other capital expenditures in 2018 by approximately $30 million.
The external factors that contributed to higher costs include: first, the finalized engineering plans required additional materials, primarily steel that was impacted by the recently imposed tariffs; second, the recent hurricanes as well as the wet spring and summer significantly increased overtime costs to maintain the schedule; and last, a very tight construction market in the Southeast, which is driving higher labor costs. While we have been combating rising costs, we believe we are taking the appropriate steps to aggressively mitigate a big portion of those costs by prudently reducing other capital spending.
Turning to the continuous pulp digester project in Lewiston, Idaho. The new digester is currently delivering about a third of the expected financial benefits. We believe we have made progress in resolving our digester challenges, and currently have a path to fix it, which we believe will take 9 months to 12 months, primarily due to the lead times needed to procure the additional components. So we expect to see the remaining benefits late in 2019 and into 2020.
Unrelated to the digester project, at the end of October, we experienced a process upset in the pulp mill that required system downtime. Paper machine production continued throughout this event at reduced rates with purchased pulp. While the issue has been resolved, incremental cost of the purchased pulp and the related cost to address equipment are expected to impact fourth quarter results by up to $4.5 million.
Now, let's turn our attention to the market environment for both business segments. Starting with Consumer Products. The IRI panel data for third quarter indicates that total US retail tissue market measured in dollar sales is up 2.9% compared to a year ago. Over this period, private brands grew 9.1% and national brands were up 0.5% (ph). For the past two quarters, private brands have remained at a record high market share of 29.8% of the total US tissue market, which is up 1.7 points compared to the third quarter of last year and up 3 points since the third quarter of 2016.
Industry trends remain unchanged. North American demand is still tracking to population growth of approximately 1%. Private label continues to gain market share versus the brands and the consumer's preference for ultra-quality tissue products continues to expand, resulting in 2.3% growth year-over-year, while all other quality tiers are down over the same period. Additionally, private brands led the growth in ultra-quality tissue with 12.6% growth year-over-year, compared to a decline of approximately 1% for national brands.
The most recent RISI forecast for net new North American tissue capacity from the beginning of 2018 through 2021 is 623,000 tons. Over the last 12 months ending July, net imports totaled 526,000 tons. If net imports stay consistent through 2021, the North American demand to total capacity ratio is estimated to be a healthy 97%.
Since the second quarter of 2018, RISI has adjusted their forecast by accelerating the closure of 66,000 tons from the second quarter of '19 to the fourth quarter of 2018. And they have pushed out a total of 70,000 tons of new capacity from 2019 to 2020, and they removed 75,000 tons of new capacity from 2021.
Our expectation for the tissue market long term is for private label to continue the current momentum and gain market share versus the brands. While we expect the market to remain healthy long term, we are currently experiencing competitive pressures, made worse by rising input costs and therefore expect to see some volatility near term.
Turning to our Pulp and Paperboard business, the demand environment for North American paperboard was solid and operating rates increased to 97.6% in the third quarter of '18, compared to 92.1% last year. Industry backlogs were down 3.1% since the beginning of the year, as reported by the American Forest & Paper Association.
While we see seasonal slowness coming off of a period of previously announced price increases, we do not see any structural change in current SBS market conditions. We see the outlook for 2018 as for operating rates to average 96%. Liquid packaging and food service grades of paperboard are expected to grow 1.8% in 2018 and approximately 1% in 2019, due to continuing shift favoring paperboard packaging over plastics and polystyrene foam for environmental reasons.
RISI's latest five-year outlook for US export volumes is for a healthy average annual growth of 4.3% through 2022. RISI reported the folding carton prices have increased $50 and cup stock prices have increased $70 per ton, since the beginning of the year.
With that market environment in mind, let's turn to my final topic today, our outlook for the fourth quarter. Compared to the third quarter, we expect consolidated net sales to be down 1% to 2% sequentially, due to seasonality. We're projecting our consolidated adjusted operating margin for fourth quarter to be in the range of 4% to 5.5%, compared to 5.8% in Q3, primarily due to further improvement in the Consumer Products operating model, however, continued upward pressure on pulp prices and higher external pulp usage, due to the pulp processing issue in October.
Our fourth quarter outlook is for an adjusted EBITDA ranging from $40 million to $46 million. The Q4 adjusted net earnings per fully diluted share outlook is in the range of $0.39 to $0.56. We expect our adjusted tax rate for the fourth quarter to be approximately 31% plus or minus a couple of points and 15% for the full year. The key variables we see determining where we land in that range, our paperboard and tissue market conditions, and changes in commodity costs, especially pulp, and transportation.
In conclusion, we are aggressively managing our business to mitigate balance sheet risk, reduce other discretionary CapEx and improve our operating model and CPD, while continuing to improve service to our customers. With the tremendous dedication and desire of our team to win, we can continue to make Clearwater Paper stronger and more value to our customers and shareholders. We appreciate your participation in today's call and would now like to open it up to your questions.
Questions and Answers:
Operator
(Operator Instructions) And our first question comes from Paul Quinn with RBC Capital Markets. Your line is now open.
Paul Quinn -- RBC Capital Markets -- Analyst
Yes, thanks very much and good afternoon.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Hey, Paul, how are you?
Paul Quinn -- RBC Capital Markets -- Analyst
Pretty good. Just curious -- looking back on Q3 outlook from in this summer and when I look at the bridge for the quarter, things didn't pan out exactly as predicted, which often happens, just wondering what the difference was on price and mix, you expected that to be lower, but it was up quite a bit, maybe you could just discuss the differences, what you expected and what you got?
Linda K. Massman -- President & Chief Executive Officer
Yes, so Paul, I would say, that's primarily been on the paperboard side is what I'm guessing you're seeing. And I would say we've just had a little bit better ability of push through price and we've also seen improved mix in the product versus what we would have expected a few months ago.
Paul Quinn -- RBC Capital Markets -- Analyst
Okay. And then on the volume side, we expected some incremental means, but you didn't get that, what happened on the volume side?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Well, the paperboard volume was up, and that's largely due to the fact that we had some pre-buys happening ahead of the announced price increase. On the tissue side, we expected volume to be down as we have a full quarter without the loss of significant customers after business.
Paul Quinn -- RBC Capital Markets -- Analyst
Okay and then just flipping over to the Lewiston pulp digester, what are the parts that you need for -- and why weren't those parts installed when you actually got the new digester up and running?
Linda K. Massman -- President & Chief Executive Officer
Yes, so it wasn't that the parts weren't installed. What is required to get the remaining benefit is going to be a modification to the original polysulphide unit and at the same time, we're going to have to optimize the CO2 reactor. The biggest issue is the original polysulfide catalysts that we were using has been proven to be ineffective in our process, and therefore has to be replaced. And the particular catalyst that we need is one of the key congestion points with the solution. There is quite a significant lead time associated with that. We've ordered the catalyst and are now just waiting for that long lead time for its arrival, but in test scenarios, we believe this is the fixed to the promise (ph), it worked well in our testing environment.
Paul Quinn -- RBC Capital Markets -- Analyst
What was the catalyst that you're using? Was that something new on the market? Was it unproven technology and then it didn't work for you and then now you're changing or --
Linda K. Massman -- President & Chief Executive Officer
I would say there is a variety of catalysts (inaudible), yes, there is a variety of catalysts that can be used and the one that our vendor chose has proven to be ineffective. So, we are now moving to a catalyst that I would say is probably a little bit more commonplace in the industry.
Paul Quinn -- RBC Capital Markets -- Analyst
Okay and then just looking at the spending, I guess on Shelby 2, the 13% sort of cost bump is unfortunate, so maybe you could outline, John, what -- how you expect the spending -- the remaining spending on the machine to be going forward and then next number of quarters?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Yes, are you interested from a cash standpoint?
Paul Quinn -- RBC Capital Markets -- Analyst
Yes, I'm just trying to bridge here, where you get peak debt in Q2. So, I just want to try to be able to do that, but I need to know the kind of the spending on that major item to be able to do it?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Yes, so we'll probably spend $90 million to $95 million (ph) cash in the fourth quarter and then, about $50 million-ish (ph) in the first quarter of '19 and the balance in Q2 of '19, that's from a cash perspective.
Paul Quinn -- RBC Capital Markets -- Analyst
Balance in Q2 '19. All right, that's all I had. Best of luck, guys, thanks.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
All right, thanks, Paul.
Operator
Thank you. And our next question comes from Adam Josephson with KeyBanc Capital Markets. Your line is now open.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Hi, good afternoon everyone, thanks for taking my questions.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Hi, Adam.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Hi, John. John, on the covenant amendments, how much of that was related to the Shelby cost overrun? I just -- I ask is -- I believe you loosened your covenants as recently as January and then obviously you got $71 million in cash for the sale of Ladysmith. So, I wasn't expecting you to amend your covenants again this quickly. So just help me with what drove the timing and nature of this?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
I would say we've been analyzing and considering, switching to the secured only covenant for the past six plus months. I would say, when we kind of came to light after the final engineering drawings were done in August on Shelby, that there was going to be that much more of an overrun that caused us to go from strongly considering that -- let's just go ahead and do this. Just didn't want to have it be that tight as we move through Q1 and Q2.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay, and just -- you said you'll reach peak debt levels in 2Q. What do you expect your net debt to EBITDA ratio to top out at in 2Q, I presume it will top out in 2Q?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Yes. So, under the revised covenants, the secured only, we expect it to top out around probably 1.2.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
And on net debt to EBITDA?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
And so that's going to translate to about 4.4.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay. And then the -- just a couple others, the tax benefit, the alternative energy production credits, obviously, you were not anticipating those three months ago. So can you just help me with what happened there?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Well, with tax -- it was something we're working on, but it's very uncertain as to whether or not. We thought that it would fly or not with IRS. So there is a whole bunch of analysis and then uncertainty at that time. This relates to the continuous digester in Lewiston. We're able to produce a little bit different black liquor and more of it that allows us to produce more energy in the recovery boiler. So that's about as tactical as I can get on it, but that's what drives the tax credit.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay. The customer pre-buying in your SBS business that you talked about, I assume you were not anticipating that when you gave guidance. So, you came in about $6 million higher than the midpoint of your guidance, how much of that was driven by the pre-buy, just out of curiosity?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
I'd say $1 million to $2 million was the pre-buy.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay, and then, as Paul alluded to, your pricing in SBS was -- Linda just said, it was better than you were expecting. Obviously, there was an SBS price increase you announced $50, RISI recognized just $20 of the $50. So I'm just struggling a little bit to reconcile, you're only getting $20 of an announced $50, at the same time as your pricing in the quarter -- your realized pricing was actually better than you thought it would be. So can you help me square those two things?
Linda K. Massman -- President & Chief Executive Officer
Yes, so Adam, I am going to probably take it up a notch with those price increases, and I'm using a combination of what we've seen this year, we'd expect on an annualized basis for that to be about an incremental $30 million and I would say that we expect half of that to be in '18 and about half of that to be in 2019. Hopefully that answers some of the questions you have on pricing.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
I just, I am still a little -- pricing was better than you expected in the quarter, but you only got $20 of the $50 announced price increase at the same time, so something clearly fell short in terms of the attempted industry wide price increase. I'm just -- I'm struggling to understand what is fundamentally happening with SBS conditions and pricing given your better-than-expected success by the industries worse-than-expected success at the same time, if you follow my logic.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Well, I think when you look at Q3 and what happened versus what we -- what our outlook was, we are expecting to get more in the way of price increase from the previous price increase, but to have that pretty much fully offset by mix shifts to more (inaudible) and what transpired was, we got a little bit more in the way of the price increase and we didn't have the mix shift.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay, and just lastly, in terms of the guidance, the ( $40 million to $46 million ), where do the Lewiston disruption? Is that coming in the -- are you expecting any sequential improvement in your tissue business. Just out of -- because I know you've previously said that with the cost savings et cetera, you are expecting sequential improvement over the balance of the year, correct me, if I'm wrong there.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Yes, we are expecting a couple of million improvement in the consumer business.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay. Thank you, John.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Thanks, Adam.
Operator
Thank you. And our next question comes from Steve Chercover with Davidson. Your line is now open.
Steven Chercover -- D. A. Davidson & Co. -- Analyst
Thanks, good afternoon, everyone. So John, actually you answered part of my first question, which was with respect to what earnings would have been absent the tax benefit. But I was looking at slide 16, and your adjusted net earnings are close to -- in the current quarter were close to your cross-cycle target. So if everything was normalized, would you be expecting earnings in the $1.30 ZIP Code (ph).
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Everything normalized?
Steven Chercover -- D. A. Davidson & Co. -- Analyst
Yes, which will never happen.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
I am not sure I am quite following your question.
Steven Chercover -- D. A. Davidson & Co. -- Analyst
I guess what I'm saying, if (inaudible) was at its cross-cycle margin expectation and paperboard was at its cross cycle expectation.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Got it. Okay, I got it.
Steven Chercover -- D. A. Davidson & Co. -- Analyst
Would you be expecting to earn $1.25 per quarter (ph)?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
I think that's probably the way the math works out.
Steven Chercover -- D. A. Davidson & Co. -- Analyst
Will look forward to that. And then I also wanted a little more elaboration on this alternative energy. I mean, is there a new black liquor tax bonanza that's pending for the industry?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Well, if they're putting in new continuous digester, then maybe they would, but there's nothing new that I think is broadly applicable across the industry.
Steven Chercover -- D. A. Davidson & Co. -- Analyst
Okay. So this is really a Lewiston benefit?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Yes.
Steven Chercover -- D. A. Davidson & Co. -- Analyst
Got it. And then I hate to follow on these other questions but -- so as we have stopped out of $20 out of the $50, and yet your realizations in the quarter, your margins were better than your cross-cycle target. So, A, did you push really hard for that increase, and B, is this a testament to your cost position and the quality of your assets?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Well, we always work hard on the price increases, but I think it's more to do with production.
Steven Chercover -- D. A. Davidson & Co. -- Analyst
And then on the maintenance front, I think, you really haven't had anything in 2018. When's the next major maintenance for either Lewiston or Cypress Bend?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Q3, it's got to be -- one in Q3 and one in Q4.
Steven Chercover -- D. A. Davidson & Co. -- Analyst
In next year, both?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Yes, so there will be two in '19.
Steven Chercover -- D. A. Davidson & Co. -- Analyst
So what's the cumulative total of those?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
So that can range from, call it $20 million to $30 million depending on what has to be fixed or what they find when they get in there -- between the two of them.
Steven Chercover -- D. A. Davidson & Co. -- Analyst
Okay. So we got like a $30 million headwind in '19 that's not facing us this year.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Correct.
Steven Chercover -- D. A. Davidson & Co. -- Analyst
Got it. Okay. That was it. Thank you.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
All right. Thanks, Steve.
Operator
Thank you. And our next question comes from Chip Dillon with Vertical Research. Your line is now open.
Salvator Tiano -- Vertical Research Partners -- Analyst
Hi guys, this is Salvator Tiano filling in for Chip, how are you?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Good, thanks. How are you?
Salvator Tiano -- Vertical Research Partners -- Analyst
Great. So my first question is on tissue and the significant increase in parent roll production. So, first of all, do you have any data that would show, if you can demonstrate a little bit how you're thinking about the loss over the Kruger volumes versus what you're gaining through the strategy. Essentially, what -- how are you mitigating, by how much are you mitigating your operating loss in the segment, if it's something you have and you could provide. And secondly, based on what we're seeing in this quarter, how should we think about the parent roll volumes in Q4 and 2019 and obviously the effect on the weighted average price in tissue.
Linda K. Massman -- President & Chief Executive Officer
Yes. So, I would say the increase in parent rolls is related to the large volume of business we lost with the retailer. What we had said previously is still true that we've replaced about 50% of that volume with replacement cases. I think, it was about 60% with replacement cases. The balance of that is shifted into parent rolls. I would say that that's probably a pretty good steady state environment to expect going forward. I mean, we will continue to look for opportunity to convert those parent rolls into finished cases, but at this point, that will be normal course, bringing on new business through bid activity and market opportunity that lines up with what we are producing those parent rolls.
Salvator Tiano -- Vertical Research Partners -- Analyst
Great. And just following up on tissue, I think one of your competitors has officially started up at least one machine and probably is doing so for the second as we speak. As we look into 2019, do you see within your portfolio, any risk to volumes potentially, any other losses because my understanding is, they may still, both these guys and perhaps some new entrants, they may, still need some new volumes to fill. So is there anything else that we should think about -- should we thinking about in 2019?
Linda K. Massman -- President & Chief Executive Officer
I would say, we have been seeing and as new machines come online, we will continue to see pressure in the competitive situation. And like I said in my prepared remarks, that's going to create some near-term volatility, but we are seeing competitive activity both branded and private label. I would say, the activity appears to be trying to drive volume on the branded side and on the private label side, really looking to convert parent rolls into those finished cases, and trying to sell out some of the new capacity. So I think no large step change in market conditions, just more of the same, and I think it will be market conditions, it will be with us here for the foreseeable future as we work through some of this new capacity that's coming online.
Salvator Tiano -- Vertical Research Partners -- Analyst
Perfect, thank you. And on going back to the tax credit, you already talked where it's coming from but -- so again, looking further out, you had $2 million you mentioned last year. So, is it something that we could see on a recurring annual basis, and if so, is there an estimate that we could put in our models?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Not specifically as it relates to this particular tax credit with the continuous digester in Lewiston, but tax planning is something that we are doing every day and looking for opportunities. It's not something that really lends itself to an outlook, however, but it's something that we're doing all the time.
Salvator Tiano -- Vertical Research Partners -- Analyst
Okay, perfect. Thank you very much.
Operator
Thank you. And our next question comes from Roger Spitz with Bank of America. Your line is now open.
Roger Spitz -- Bank of America -- Analyst
Thank you and good afternoon. Could you --
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Hi, Roger.
Roger Spitz -- Bank of America -- Analyst
Hi. Could you repeat the CapEx you gave either, I don't know what that was 2018 or Q4 '18. And did I hear you give a Q4 '18 operating cash flow during your prepared remarks?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
We did, yes. So our -- I assume you're focusing on cash CapEx as opposed to GAAP balance sheet?
Roger Spitz -- Bank of America -- Analyst
I'd like the CapEx that you're going to report on your cash flow statement.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Okay, cash CapEx. So, yes. So, we think cash CapEx for 2018 is going to be around $280 million and for 2019, we said between $100 million and $130 million.
Roger Spitz -- Bank of America -- Analyst
And did you -- did I hear you give the Q4 operating cash flow or did I just mishear that?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
No, you heard that correct and we said it would be between $55 million and $60 million, cash flow from operations.
Roger Spitz -- Bank of America -- Analyst
$60 million. Right, OK. And then, what did that make an assumption in terms of working cash, excuse me, working capital inflow within that $55 million to $60 million in Q4.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Yes. So, we think we're modeling working capital will be a tailwind in Q4 in the area of $25 million to $30 million.
Roger Spitz -- Bank of America -- Analyst
Perfect, thank you very much.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Yes.
Operator
(Operator Instructions) And we do have a follow-up with Adam Josephson with KeyBanc Capital Markets. Your line is now open.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Thanks everyone for taking my follow-up. Just, John, one more on the 2019 bridge, someone, it might have been Steve asking about -- your maintenance will be up by about $30 million next year, are there any other big buckets that you would have us be mindful of, I know you -- you're burning on Shelby, you've got ongoing cost savings initiatives, but any big buckets other than the $30 million drag from major maintenance next year?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Well, we'll get the full effect of the paperboard and tissue price increases.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
That would be an incremental, what, $15 million, John, next year?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
So on the paperboard side $15 million -- no, that's on the tissue side.
Linda K. Massman -- President & Chief Executive Officer
No, that's paperboard, $15 million on paperboard and then on the CPD -- on the CPD price increase, which is tissue, we're expecting that to be about $20 million annually, about 25% of that should occur in '18 and the balance will be in '19.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
So a different $15 million.
Linda K. Massman -- President & Chief Executive Officer
Yes.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay. And then, should we, I mean, so that's price, are you thinking of that as net or gross price, because obviously there'll be inflation in the business next year as there is every year. Right?
Linda K. Massman -- President & Chief Executive Officer
Yes, that is a gross number.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Yes. Okay. And is there a general inflation number percentage basis or dollar basis that you would have us think about annually?
Linda K. Massman -- President & Chief Executive Officer
I think, maybe not a strict percentage, but I'd say the areas that we'll be paying a lot of attention to will be pulp and our wood costs and transportation, which we're working very aggressively to try to offset any increases through our operating model but there's puts and takes there that will try to -- try to beat that inflation environment as much as we can.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Right. Just two others. Linda, just on SBS again, the backlogs are still pretty healthy although they've been coming down really over the past few months and obviously, Sappi added capacity, RISI's been talking about import pressure to some degree. So, and obviously -- the Sappi situation, the import situation was what limited the latest SBS price increase to $20 of the $50, how would you characterize current conditions?
Linda K. Massman -- President & Chief Executive Officer
I'd say the current conditions are strong. We are in a decent market. I know the backlogs have actually been declining since July, like you mentioned. So pretty robust demand in the summer months. I'd say, what we're seeing is pretty common with regard to this time of year and seasonality, and we feel good about the paperboard market.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay. Thanks Linda. And John, just back to cash CapEx for a moment. So the '19 number of $100 million to $130 million, what should we -- how much of that remind me of Shelby and what would -- I know maintenance is always difficult because companies barely just spend maintenance, but how would you have us think about ongoing CapEx beyond '19, just given the Shelby impact?
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Yes, so the Shelby piece of the cash CapEx for '19 is going to be around $85 million and then the balance is going to range between, call it $15 million and $45 million.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Sorry, say that again. I'm a little confused.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Okay. Shelby cash CapEx for '19, it's going to be around $85 million.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Okay and your other CapEx--
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Then for maintenance and any other strategic capital would range from $15 million to $45 million.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
So it's just -- and is that a reasonable number to expect on an ongoing basis just $30 million of CapEx or I mean, that sounds very low.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
No, I mean with elevated Shelby CapEx, we are tightening the screws both this year and next year on our other CapEx. What we traditionally have said from a maintenance CapEx standpoint is we spend around $50 million a year and then from a strategic capital standpoint, not in a big major project environment that we spent around $25 million.
Adam Josephson -- KeyBanc Capital Markets -- Analyst
So, right. So normally, you've spent $75 million and you're saying from this point for post Shelby, it would be not $75 million but more like $30 million?
Linda K. Massman -- President & Chief Executive Officer
I would say that would accurate until the balance sheet gets in better condition.
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
We will be on a CapEx tie-up for the next year plus (ph).
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Right. Okay, thank you very much.
Linda K. Massman -- President & Chief Executive Officer
You're welcome.
Operator
Thank you. Ladies and gentlemen, that does conclude our question-and-answer session. At this time, I would like to turn the call over to Ms. Massman for any closing remarks or any additional remarks.
Linda K. Massman -- President & Chief Executive Officer
Yes, thank you everybody for joining us today and for the great questions. And we do appreciate your continued support and interest in Clearwater Paper.
Operator
Ladies and gentlemen, that does conclude the Clearwater Paper Corporation third quarter 2018 earnings conference call. We do appreciate your participation and everyone have a great day.
Duration: 48 minutes
Call participants:
Robin S. Yim -- Vice President, Investor Relations
Linda K. Massman -- President & Chief Executive Officer
John D. Hertz -- Chief Financial Officer, Senior Vice President-Finance
Paul Quinn -- RBC Capital Markets -- Analyst
Adam Josephson -- KeyBanc Capital Markets -- Analyst
Steven Chercover -- D. A. Davidson & Co. -- Analyst
Salvator Tiano -- Vertical Research Partners -- Analyst
Roger Spitz -- Bank of America -- Analyst
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