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Clearwater Paper Corp (CLW -0.23%)
Q2Â 2019 Earnings Call
Jul 31, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to Clearwater Paper Corporation's Second Quarter 2019 Earnings Conference Call. [Operator Instructions].
I would now like to turn the conference over to Ms. Robin Yim, Vice President, Investor Relations of Clearwater Paper. Please go ahead.
Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer
Thank you, operator. Good afternoon and thank you for joining Clearwater Paper's second 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 second 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 for the range of adjusted EBITDA for the third quarter of 2019, and certain cost, pricing, shipment, production, and other factors expected to impact the third quarter of 2019 posted on the Investor Relations page of our website at clearwaterpaper.com. 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, including but not limited to adjusted EBITDA for Q3 2019.
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 and Form 10-Q for the quarter ended March 31, 2019, as well as our earnings release and supplemental information. Any forward-looking statements are made only as of this date, and the company assumes no obligation to update any forward-looking statements. 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. Linda Massman will begin today's call with the highlights of our second quarter, followed by the second quarter 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 third quarter of 2019. 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 and Chief Executive Officer and Director
Thank you, Robin. Hello everyone and thanks for joining us today. For the second quarter, I am happy to share with you some good performance. All metrics were in line or above our outlook for the quarter. Our top line growth was better than we expected, and we generated $44 million of adjusted EBITDA, which is on the high end of our outlook range. Both the paperboard and consumer products businesses performed well and delivered solid results in the second quarter. First, I'd like to highlight that pulp and paperboard achieved record shipments and revenues and was a strong financial contribution in the quarter. Second, our consumer products business continued to show improvement with higher shipped volumes of converted retail tissue compared to the first quarter of 2019.
In addition, benefits in transportation costs from the implementation of our regional sourcing model continue to contribute to cost savings. Partially offsetting this were the expected start-up costs related to the new paper machine in Shelby, North Carolina. We are pleased with the progress and quality of paper we are producing, and are still on track to reach the full production run rate in late 2020. I want to take this opportunity to thank the pulp and paperboard team for delivering excellent results, and the consumer products team for making great progress this past quarter.
We also took the opportunity to strengthen our balance sheet, reduce interest costs, and term out our debt to give us the flexibility to execute on generating cash flow and paying down debt. We completed the refinancing of our $400 million revolving credit facility with a $300 million covenant light, 7 year Term Loan B that was rated BB+ and Ba1 by S&P and Moody's respectively. We also effectively utilized the strength of our balance sheet by establishing an asset-based revolver to provide working capital liquidity at a lower borrowing cost based on the quality of the underlying short-term assets. While we were approximately one year from refinancing the bank revolver, we took advantage of a favorable interest rate environment to go ahead with these new facilities now. These credit facilities are expected to provide the operational flexibility and liquidity needed as we focus on generating free cash flow to de--lever our balance sheet. I'll provide a more detailed update on our strategic projects and outlook for the third 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. In summary and as Linda stated, we had a strong second quarter. The results were in line with our expectations on an adjusted basis for EBITDA, operating income and margin, and our top line came in above our Q2 outlook due to the strength in our pulp and paperboard business. The exception was EPS, which came in just under the low end of the range. 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 earnings release and the supplemental slides posted on our website. For the second quarter of 2019, the adjusted EBITDA items netted to $1.6 million of pre-tax expense, which was mainly due to $1.5 million of non-operating pension and other postretirement benefit costs. So with that, let's discuss our results for the quarter.
A summary of consolidated GAAP results is shown on slide 18, and non-GAAP adjusted results are shown on slide 19 of our supplemental slide deck. Our second quarter net sales came in at $452 million, up 5.4% over the first quarter, which was better than our outlook range of 3.5% to 4.5%. This was largely due to excellent SBS production levels in the quarter, which led to record paperboard shipment volumes and revenues. Second quarter adjusted gross profit was $42 million or a 9.3% margin, a 106 basis point decrease from the first quarter. This was mainly due to items previously included in our Q2 outlook for maintenance and repair costs at the Idaho, Arkansas, and North Carolina mills, which came in at $5 million and in line with our outlook. In addition, Shelby's start-up costs came in at $3.6 million versus a forecast of $2.5 million. These costs were partially offset with a $3 million improvement in energy costs.
Adjusted SG&A expense was $27 million or 5.9% of second quarter net sales, which is down $4 million or 12.4% from Q1, primarily due to lower professional fees and other expenses. Operating income of $15 million or 3.4% of net sales were in line with our outlook range of 2% to 4%. Adjusted EBITDA was $44 million or 9.7% of net sales, which came in on the high end of our outlook and was up from $40 million or 9.3% in Q1. Net interest expense of $11 million was up $2 million compared to Q1 due to the overall higher borrowing levels and lower capitalized interest as we completed construction and initiated start-up operation of the Shelby paper machine. Turning to taxes, our Q2 effective tax rate was 115%.
Tax affected items in the second quarter of 2019 had a greater impact on a percentage basis on our $2.9 million of pre-tax book income compared to $4.6 million in the first quarter of 2019. As we stated in our last earnings call, our 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. Second quarter 2019 GAAP net loss was $400,000 or a $0.03 loss per diluted share and, on adjusted basis, a $400,000 or $0.02 loss per diluted share, which was below the low end of the outlook range of $0.00 to $0.34 earnings per share. That compares to adjusted net earnings of $3.5 million or $0.21 per diluted share in the first quarter. Non-cash expenses in the second quarter included $29 million of depreciation and amortization, which is up $3 million over the first quarter with the completion of our Shelby expansion and $2 million of total pension and retiree medical expense.
Now I'll discuss the segment results. The consumer products results that I will be referring to can be found on slides six and 20 of the supplemental materials. Net sales were $224 million for the second quarter of 2019, up $1 million or 45 basis points compared to the first quarter. The improved top line results for primarily due to a higher mix of retail shipments in the second quarter, as we had a 3.8% increase in retail shipment tons and a 1.4% increase in converted case shipments. Consumer products' operating loss in the second quarter 2019 was $5.1 million versus $1.3 million of operating income in the first quarter. As I previously mentioned, this was mainly due to expected costs associated with the start-up of the new paper machine in Shelby and higher depreciation expense. As a result, consumer products' EBITDA of $12.3 million was down from $16 million in Q1 2019. The adjusted EBITDA margin was 5.5% compared to 7.2% in Q1. Now turning to the pulp and paperboard division, the results I will be referring to can be found on slides seven and 20 in the supplemental materials.
As Linda highlighted in her opening remarks, in the second quarter the team achieved record level revenues and shipment volumes. Compared to the first quarter, net sales were $228 million, an increase of $22 million or 10.8%, and shipment volumes were up 11%. In addition, the average price per ton ticked up 30 basis points to $1,004 per ton versus Q1. Pulp and paperboard's operating income for the second quarter of 2019 was $34 million or 14.8% of net sales compared to $29 million or 14.3% of net sales in the first quarter. The improvement in operating margin primarily resulted from improved absorption of fixed costs over higher production volumes and expected improvement in energy costs once the Pacific Northwest natural gas pipeline disruption was resolved. This was partially offset by maintenance in the second quarter.
Paperboard's second quarter adjusted EBITDA and margin were $43 million and 18.9% respectively. This represents an increase of $4 million or 10.8% compared to Q1. Now turning to the balance sheet, cash capital expenditures were $37 million in the second quarter of 2019 and $108 million year to date. Our expected total cash capexfor 2019 remains unchanged at approximately $130 million to $140 million. We had $235 million of short-term borrowings outstanding under the revolver at quarter end. Long-term debt outstanding at June 30 remained unchanged at $675 million, which includes $100 million of 3-year fixed-rate revolver borrowings. The secured leverage ratio for covenant purposes was 1.65 times last 12 month's adjusted EBITDA versus a covenant of 2.0 times. We still expect total net debt to peak in Q3. With regard to our liquidity, we ended the second quarter with $42 million of unrestricted cash, and we had $57 million available under the revolver.
As Linda mentioned in her opening remarks, we recently completed the refinancing of our revolving credit with a $300 million, 7-year Term Loan B and a $250 million asset-based revolver to utilize the underlying credit quality of our short-term assets. The new credit facilities are covenant light, which means there are no maintenance covenants. Now both credit facilities are expected to provide the additional operational flexibility and liquidity as we focus on de-levering our balance sheet. During the second quarter, we generated $44 million of cash from operations. Working capital provided a net source of approximately $12 million compared to the $62 million drain in Q1, which was negatively impacted by the near completion of the Shelby expansion and a change in certain receivable terms. The improvement in Q2 is primarily due to a focus on managing working capital, driven mainly by an improvement in trade payables.
That concludes my remarks, and I will now turn the call back over to Linda Massman.
Linda K. Massman -- President and Chief Executive Officer and Director
Thanks, 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 third quarter. We started up our new Shelby paper machine early in the second quarter. At this early stage, we are producing paper products with quality specs in line with our expectations. As I mentioned last quarter, the 2019 production volume is fully committed and the ramp-up costs in total are still expected to be in line with the typical paper machine start-up curve, despite coming in approximately $1 million higher in the second quarter versus our outlook. The final converting line at the facility was installed and started producing cases for customers near the end of the second quarter, in line with the plan I discussed on the previous earnings call. I want to take this opportunity to thank our team for their continued hard work and focus. Regarding the continuous pulp digester project in Lewiston, Idaho, the digester continues to run well and is producing the expected energy savings.
The delivery timeline for the new catalyst remains on track for the end of 2019. Once the catalyst is installed and calibrated to optimize the pulp making process, we will work to achieve the remaining estimated $20 million of cost savings benefit in 2020. 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 the private brands. First, the total tissue market grew approximately 6.5% year-over-year. Second, private brands grew 8.9% versus 5.4% for the national brands over the same timeframe. Third, private brands ended the second quarter with 31% market share compared to 30% a year ago. And the data continues to point 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 for the North American market has been lowered by 46,000 tons to 398,000 tons which, over the long-term, averages out to approximately 133,000 tons per year, and in line with 1% to 1.5% tissue demand 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%. While there have been no recent announcements of capacity additions, if that were to occur, we estimate that the earliest any new capacity could come online is early 2022. Turning to North American paperboard, RISI's outlook for 2019 is that the market remains balanced based on the ebb and flow of industry capacity.
They are forecasting periods of tightening supply and commensurate pricing changes associated with capacity adjustments. RISI's forecast still includes price increases for both folding carton and cup stock in the back half of 2019. According to AF&PA, as of the second quarter the industry operating rate was at 92.8% compared to 95.1% a year ago. The lower operating rate is largely attributable to planned industry outages during the period. Industry backlogs reported by RISI continue to remain steady in the 5-week range. Now to our third quarter 2019 outlook compared to the second quarter of 2019, we expect consolidated net sales to be flat to down 1% sequentially; consolidated adjusted operating margin to be in the range of minus 0.5% to plus 1.5% due to several key variables including, first, the major maintenance outage at our Lewiston mill is expected to range in cost from $16 million to $19 million.
Second, we expect between $4 million to $5 million in net cost savings, primarily from lower pulp and transportation costs. And last, we expect our annual tax rate to be approximately 60%. We expect this to result in adjusted EBITDA in the range of $24 million to $32 million and adjusted net loss per fully diluted share in the range of $0.24 to $0.39. I'd like to add that the remaining planned major maintenance outage for the Arkansas mill is scheduled for the fourth quarter, with an estimated cost ranging from $7 million to $8 million. To conclude, I'm very pleased that the majority of our strategic capital investments are completed, our new paper machine is up and running and producing quality products, the catalyst delivery for the pulp digester is on schedule for the end of the year, and we have a capital structure that can provide us with the liquidity and flexibility required as we remain focused on generating operating cash flow to de-lever our balance sheet.
And with that, we will now take your questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] And our first question is from Adam Josephson with KeyBanc. Your line is open.
Adam Josephson -- KeyBanc -- Analyst
Bob good afternoon. Just a couple of questions and I'll get back in the queue. In terms of the new term loan credit agreement and the asset-based revolver, Bob, I know you mentioned they're no maintenance covenant and they're covenant light. And I got on late, so I may have missed some of what you said with respect to this debt. But can you just help me with what changes have occurred with respect to your covenants, interest rates, any fees you had to pay, etc.? I know previously you had a 2-to-1 leverage ratio with the secured debt and now your covenants will be considerably looser than that. But just compare and contrast what your covenant situation and fees, interest rates, etc., used to be and what they are post this debt issuance.
Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer
Okay. All right. Thank you, Adam. So to start off, we were in compliance with our covenants at the end of Q2. So the key driver for the refinancing, we wanted to take advantage of the current interest rate environment, which is very favorable. We also thought about our previous credit facilities. The fact that they matured in 2021, we would need to have refinanced in 2020. So we thought, given the favorable market environment, let's move forward on the refinancing now. So I'll talk about Term Loan B and then the ABL revolver. So with the Term Loan B, we set up a structure to optimize terms and conditions for the market. And the benefit of the Term Loan B is that it gives us added financial flexibility to pay down debt in a covenant light manner. So our Term Loan B has an extended maturity for 7 years and with prepayment flexibility after 6 months.
And a big benefit of this as well is the opportunity to work with a larger group of lenders rather than mainly the commercial banks. Then with respect to the revolver, the revolver is our working capital facility to help manage our day-to-day operations. And it allows us to utilize the strength of our balance sheet, our strong receivables and high quality inventory, in a covenant light manner. And it will also lower our short term cost of borrowing as we execute our plan to pay down our debt. So overall, we thought this was a very positive project for us and we're very happy with the outcome.
Adam Josephson -- KeyBanc -- Analyst
And just to elaborate on that, Bob, you mentioned the word covenant light a few times. Can you just be a little more specific?
Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer
Okay. So basically with the Term Loan B, the collateral is primarily our fixed assets, which are high quality. So with a bank facility, basically you have maintenance covenants, typically the leverage ratio and the interest coverage ratio. So the fact that the Term Loan B is -- the security is arranged differently, it's covenant light. We don't have the maintenance covenants that we had with the bank facility. And then with the ABL revolver, covenants would only come into play if we had less than 10% capacity left on our borrowing capability. So again, we're collateralizing the debt utilizing our high quality receivables and our inventory.
Adam Josephson -- KeyBanc -- Analyst
Okay. Thanks for that, Bob. And I'll just ask a couple on the guidance bridge and then I'll get back in the queue. And forgive me, you or Linda, if you already went over this. But in terms of the price mix being down $2 million to $3 million sequentially, is that in tissue or SBS? Can you just elaborate on that?
Linda K. Massman -- President and Chief Executive Officer and Director
It's a little bit of mix across both parts of the business. And then, Adam, it's also a further realization of the RISI price decline of $20.00 that was issued back in February that takes into account some contracts that are up for that renegotiated price here as we move into Q3.
Adam Josephson -- KeyBanc -- Analyst
And the mix you're talking about, is that a seasonal thing or is that specific to this year?
Linda K. Massman -- President and Chief Executive Officer and Director
It's specific to this year. It's just a shift really across both sides of the business.
Adam Josephson -- KeyBanc -- Analyst
Okay. And then just one other on the bridge. The cost benefits of $4 million to $5 million sequentially, how much of that is pulp versus other? And relatedly, to what extent did you benefit from these plummeting pulp costs in 2Q?
Linda K. Massman -- President and Chief Executive Officer and Director
Yes, I'd say the bulk of the $4 million to $5 million is both pulp and transportation. I guess I would say it's probably somewhat evenly split, maybe $3 million related to pulp.
Adam Josephson -- KeyBanc -- Analyst
Got it. Thanks, Linda. I'll get back in the queue. Thank you.
Linda K. Massman -- President and Chief Executive Officer and Director
Okay. Thanks.
Operator
Thank you. Our next question comes from Paul Quinn with RBC Capital Markets. Your line is open.
Paul Quinn -- RBC Capital Markets -- Analyst
Hey, Thanks very much. Good afternoon. just a couple questions on Shelby II. I see the start-up costs were a little bit over your forecast at $1.1 million. What was the difference between your forecast amount and the actual start-up cost? And then if the $3.6 million is the Q2 cost, what are you expecting in Q3, Q4 and early next year?
Linda K. Massman -- President and Chief Executive Officer and Director
Yes. So we thought we would have about $2.6 million of start-up costs this quarter, so we're just slightly over that. And I would say that's more of a timing issue. We're not expecting anything significant moving into Q3. And as you know, I'm sure, but I'll just state it so that others on the phone may hear it as well, start-up costs are typically -- as you're starting up the machine, you do produce some paper that's not sellable. And off grade paper is what we call it. And then, of course, you have the absorption since you're not running all the production tons off that equipment, but you have a lot of the fixed costs associated with it. So that should start balancing out as we move into Q3.
Paul Quinn -- RBC Capital Markets -- Analyst
Okay. So we are still expecting a cost on Shelby II in Q3, but it's not going to be in the $3.6 million range. Are you suggesting that's going to be break-even?
Linda K. Massman -- President and Chief Executive Officer and Director
No. There'll still be some cost, but just not material enough to break it out.
Paul Quinn -- RBC Capital Markets -- Analyst
Less than $1 million?
Linda K. Massman -- President and Chief Executive Officer and Director
Yes.
Paul Quinn -- RBC Capital Markets -- Analyst
Okay. And then I guess flipping over to the paperboard side, you mentioned RISI has the order backlogs around 5 weeks. What are Clearwater's backlogs?
Linda K. Massman -- President and Chief Executive Officer and Director
I'd say we're consistent with what you hear about with RISI. So it was a good quarter for us. We feel real good about how the business has turned out. And have a great customer base and had a really nice quarter, so a huge thank you to our paperboard team for delivering such great results.
Paul Quinn -- RBC Capital Markets -- Analyst
Okay. Then just on the Lewiston facility itself, where are we at with the contract negotiations?
Linda K. Massman -- President and Chief Executive Officer and Director
Yes. So we are still making progress. We've been meeting with the union over the last two days, today included. Both parties are continuing to work toward ratifying a contract. I'd say we're committed to reaching agreement. This is consistent with what you've heard before. But we are committed to reaching an agreement that supports the long-term viability of that Lewiston mill operations and of course our employees, so consistent with what we've stated before.
Paul Quinn -- RBC Capital Markets -- Analyst
Okay, that's all I had. Thanks very much. Good luck.
Linda K. Massman -- President and Chief Executive Officer and Director
Thanks, Paul.
Operator
Thank you. And our next question comes from Steve Chercover with DA Davidson. Your line is open.
Steve Chercover -- D.A. Davidson -- Analyst
Good afternoon everyone. So I guess my first two questions I'll also lump under the guise of timing. With respect to Shelby, on the Q4 call you said you expected the new machine would be at full capacity within 12 months. And today you said that it would be the end of 2020. And given the April start-up, that sounds more like 21 months. So what's changed? Why is it slower?
Linda K. Massman -- President and Chief Executive Officer and Director
Yes. I think we said 12 to 18 months for -- 12 to 24 months for full production. So I'd say we're on track with what we originally thought with regard to Shelby. We think over the course -- I mean, of course we're going to continue to make progress through '19, but I would say really hitting that full production run rate sometime during 2020. And then, of course, need that full production rate before we can hit the full shipment run rate, which will happen commensurate after that.
Steve Chercover -- D.A. Davidson -- Analyst
Okay, thanks. And also we'll call this a timing question. I was under the impression that 2020 was supposed to be basically a maintenance free year, and now it looks like that's no longer the case. The maintenance is down only $3 million to $8 million, and it's at Lewiston primarily. Does that have something to do with the catalyst and the digester?
Linda K. Massman -- President and Chief Executive Officer and Director
We're planning that conservatively right now. Historically, we said Lewiston would be on a maintenance plan, maintenance schedule of every 18 months and then, of course, Arkansas every 24 months, so that would be off cycle. So right now that's our best placeholder, and we're going to continue to assess that as we move through the balance of this year and work on getting that catalyst implemented and seeing what we really need to get done next year.
Steve Chercover -- D.A. Davidson -- Analyst
Okay. Well, I'm used to being wrong, so was I wrong that next year was going to be a very light maintenance year?
Linda K. Massman -- President and Chief Executive Officer and Director
No. If we followed the 18 month schedule, there would not have been maintenance next year, yes.
Steve Chercover -- D.A. Davidson -- Analyst
Okay. Thank you. And then in previous presentations, you specifically broke out pulp as an EBITDA item in -- or, sorry, as an item in your EBITDA bridges. And since we expected that to be a real tailwind, how come you've now kind of lumped it in with transportation instead of keeping it discrete?
Linda K. Massman -- President and Chief Executive Officer and Director
Yes, I'd say once it becomes material, we'll break it out. But this year, and I think we've stated this before but it is a bit confusing, we had a number of contracts last year that were quite favorable that, as we cycle through those, we will definitely be getting the benefit of a pulp cost reduction. But year-over-year, it's relatively flat to slightly better. And then once we get through this cycle, we should start seeing the benefit of pulp.
Steve Chercover -- D.A. Davidson -- Analyst
Okay. And then two more for me, please. So between the sequential price mix and the cost and the lower SG&A that you guys expect, which bucket is most of that going to drop into? Will it be within the tissue business or across both businesses?
Linda K. Massman -- President and Chief Executive Officer and Director
Are you talking about the third quarter outlook, Steve?
Steve Chercover -- D.A. Davidson -- Analyst
Well, you can talk about Q3 and then going forward. I'll take all the info you want to offer.
Linda K. Massman -- President and Chief Executive Officer and Director
Okay. So going forward into Q3, we talked price mix, that there'd be a little bit of a headwind. And we attributed some of that to mix across both parts of the business, but also that RISI price decline that's just catching up with some of our contracts now. Also for Q3, we have the major planned maintenance in Lewiston that's a big driver, and then we have some tailwinds related to pulp and transportation. So that's the big drivers Q2 to Q3. Going forward into next year, we have, of course, the continuing benefits of Shelby that will benefit us, as well as working on getting the remaining benefit out of the Lewiston digester once that catalyst is in place and working.
Steve Chercover -- D.A. Davidson -- Analyst
Okay. And then do you still have cross cycle EBITDA targets by segment and on a consolidated basis? Have they changed?
Linda K. Massman -- President and Chief Executive Officer and Director
I think we have removed those and those are no longer in the supplemental.
Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer
Right.
Steve Chercover -- D.A. Davidson -- Analyst
Are they constant from what you had anticipated before?
Linda K. Massman -- President and Chief Executive Officer and Director
I think those need to be revisited, given the macroeconomic conditions we've seen over time on the tissue side. Still very confident in both sides of our business. I mean, as you know, the tissue business continues to grow. Private label trends are all very positive, so we feel good about that side of the business. But with the supply situation, that really, from what we've said, doesn't really stabilize until the end of 2021 when all the capacity works through the system. So once we get through that state, I think it'll be a lot easier to create those cross cycle targets again that'll be more meaningful. On the paperboard side, as you know, we were well above those cross cycle margins for quite a few years and continue to do quite well on that side of the business as well, from our own perspective as well as market conditions.
Steve Chercover -- D.A. Davidson -- Analyst
It's a terrific business. Okay, last question and I won't get back in the queue. Just in terms of the benefits from the capital investments, I'm referring to slide eight, you've told us $55 million to $65 million from Shelby, $25 million to $35 million from Lewiston. I know you can read too. But in the past, you have kind of tethered those benefits to a point in time. And I'm just wondering are those benefits tethered to 2018 cost structures, or are they just -- regardless of what happens to costs, do you expect to pass through any costs that might encroach and get that EBITDA?
Linda K. Massman -- President and Chief Executive Officer and Director
So those would have been timed out at the timing of when the decisions were made. So I think that's the closest timing. But if you were to ask that question about do we still feel confident we can deliver those cost savings on an go-forward basis, the answer is yes.
Steve Chercover -- D.A. Davidson -- Analyst
So all things being equal, we should have, what, $80 million to $100 million incremental EBITDA by the end of 2021. All right. Thank you.
Operator
Thank you. Our next question comes from Chip Dillon with Vertical Research.
Chip Dillon -- Vertical Research -- Analyst
Yes good afternoon Linda. First question just to make sure we have this absolutely right, so the start-up costs were $3.6 million in the second, and they'll be less than $1 million in the third. And should that, barring any unusual -- I mean, according to your plan, I should say, sort of stable at $1 million per quarter until you get up to full production?
Linda K. Massman -- President and Chief Executive Officer and Director
I would say that the bulk of the start-up costs you saw really in this quarter. And as things start to line out better, they should just be somewhat immaterial for us. But it is a start-up over the timeframe that we talked about, so there are puts and takes that happen over the course of that time. But it should get easier as we get further into the start-up cycle.
Chip Dillon -- Vertical Research -- Analyst
Okay. And this is more for Bob. Bob, it looks like working capital, net working capital, was looking obviously very low when you had a lot of payables for the project. And it looks a little more normalized now. I might be wrong about that, but I was a little surprised about the net debt going up. I know the third quarter you have all the maintenance expense. But if I look at capex, if you're doing $130 million to $140 million, I mean, you're already within $30 million or so, give or take, of that already for the whole back half of the year. So how much more should we see net debt go up in the third quarter?
Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer
Yes. So basically, yes, just to kind of recap the working capital situation, in Q1 we had a drain of about $62 million. But in Q2, on the payables side we began to normalize so we had a net source of cash from working capital of $12 million. And you're right. In Q2, we had cash from operations of $44 million. If you look at the supplementals, we have a graph in there that goes back to like 2015. This would be a more normalized quarter for cash from operations based on history. So with that background in mind, let's talk about net debt. So we expect our net debt levels to peak in Q3 due to the timing of payments. And the net debt levels, however, should be in line -- closely in line with where we were at the end of Q2, which was $890 million.
Where you're going to see a little bit of volatility, though, is going to be with our leverage ratio. So in the second half of the year, we have the major maintenance outages. So we have the one in Q3 for Lewiston, which is going to cause our last 12 month's EBITDA to decline, and it's going to cause the net debt to EBITDA ratio to rise. So it's important to note, though, that the net debt levels should start coming down in Q4. So we're going to peak, be a little bit above the Q2 level, peak in Q3, and then in Q4 begin coming down. But our leverage ratio in Q4 is expected to rise due to the lower last 12 month's EBITDA. And this is going to be caused by the major maintenance outages in Q3 and Q4. So hopefully that makes sense.
Chip Dillon -- Vertical Research -- Analyst
It does. And by the way, yes, I'm just looking at the absolute level. So you said a little above the 2Q level. I mean, Q1 it was $872 million. Are you saying we should expect the third quarter to come in as high as $890 million before it starts coming down?
Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer
I would say roughly that level, maybe slightly higher, and then we anticipate it coming down in Q4.
Chip Dillon -- Vertical Research -- Analyst
Okay. And then looking at the interest expense, and I would imagine the -- I think you're guiding to somewhere around $11 million to $12 million, I just got off that slide, for the third quarter. Are you still capitalizing very much, or is that kind of what -- or maybe it might be a smidge higher because you're going into the fourth quarter with a little higher debt. But should that sort of represent the quarterly peak, approaching $12 million?
Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer
Yes. Yes. So on the Shelby project, because we're up and running, we're no longer capitalizing interest.
Chip Dillon -- Vertical Research -- Analyst
Got you. And is there any benefit if we had a rate cut today? Are you sensitive to any of the -- if there are further rate cuts?
Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer
Well, yes. So our credit facilities are tied to LIBOR. So if there are future rate cuts, whatever impact is on LIBOR would be a benefit to us.
Chip Dillon -- Vertical Research -- Analyst
Got you. And then last question is I see you -- not to be too specific, but you put in one of the slides, I think sort of ongoing capex for next year, $60 million is a good number to use. So I kind of thought it was closer to $70 million. But you're now saying, just so I'm clear, that we should see capex be $60 million next year and perhaps '21 as well just as you work that debt down?
Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer
Exactly. Yes, that's our plan.
Chip Dillon -- Vertical Research -- Analyst
All right, got you. And one last one. You gave on one slide the benefits of the project at Lewiston, the EBITDA number, and it says it starts early next year, I believe. Is that fairly immediate or will that have to phase in over a while?
Linda K. Massman -- President and Chief Executive Officer and Director
So that should be pretty much -- well, it's hard to say. It should mostly be somewhat immediate assuming everything starts up well. If there is any unforeseen circumstances that we aren't contemplating today, then of course it might be a little bit slower. But we would expect that to be the full year.
Chip Dillon -- Vertical Research -- Analyst
Okay, great. Thank you.
Operator
Thank you. And we have a follow-up from Adam Josephson with KeyBanc. Your line is open.
Adam Josephson -- KeyBanc -- Analyst
Linda thanks. Thanks so much for taking my follow up. Just, Linda, one cleaning up question on pulp, and then I just have a couple others. So can you just help us? I forget. Someone else asked you about pulp. Can you quantify to the extent possible how much of a drag higher pulp was last year, how much of a benefit you're expecting this year? And I think you indicated that you'll get even more benefits next year from what's already happened just based on the nature of your contracts. Can you just help me to the extent possible with the impact that pulp had last year, this year, and it could have next year?
Linda K. Massman -- President and Chief Executive Officer and Director
So Adam, I might need to get back in touch with you about last year, because obviously there was quite a headwind there with regard to pulp. This year it's really flattish year-over-year just given the prior year contracts versus seeing some declining pulp. And based on when it peaked and started to decline, it's really going to be pretty flat this year. And then we should expect some incremental benefit next year. We do have a slide in our supplementals that now includes some of the sensitivities around some of our key commodity items. And in there you could make your own assumptions about where you think pulp's going to go and see how much of an impact it will have on us, depending on what your outlook for pulp is. So that is I think a pretty helpful slide for you.
Adam Josephson -- KeyBanc -- Analyst
Right. And that would be with -- the impact would obviously be with some sort of lag based on the nature of your contracts.
Linda K. Massman -- President and Chief Executive Officer and Director
Yes. Yes.
Adam Josephson -- KeyBanc -- Analyst
Right. Okay. And just a couple on the PACE Multiemployer Pension Fund that's in your K. Can you just talk about why you haven't withdrawn from that fund as many, if not all, of your paper industry peers have?
Linda K. Massman -- President and Chief Executive Officer and Director
Yes. So thanks for the question, first of all. And you can imagine we look at this pretty carefully and have over time. And we'll continue to monitor PACE. And we call it PIUMPF. It's our multiemployer pension plan that covers our USW members out of our Lewiston facility that participate in that plan. We looked at a whole range of options related to PIUMPF or PACE, and obviously carefully considered those options. At this point, the best course of action for us, we believe, is to remain in the fund. And so we have not withdrawn or made any plans to withdraw. And you may know this already, but just in case it needs to be highlighted for anybody else on the phone, the decision as to whether or not we continue to participate in the plan is negotiated as part of our collective bargaining agreement. So the decision doesn't rest solely with us, OK? In addition, if we did negotiate to withdraw, we do believe it would require a replacement plan, which would result in increased costs. So at this point, we're not choosing to move out and withdraw and incur incremental costs, and we're just going to stay in the plan.
Adam Josephson -- KeyBanc -- Analyst
And just -- I'm sorry. Go ahead, Linda. Sorry.
Linda K. Massman -- President and Chief Executive Officer and Director
No, go ahead, Adam.
Adam Josephson -- KeyBanc -- Analyst
I think in your K you estimate that -- I think the present value of the future payments, if you were to withdraw, would be about $78 million. But as you just mentioned, you'd also have to be a part of a replacement plan, which would result in additional costs above and beyond that $78 million. Am I understanding it correctly?
Linda K. Massman -- President and Chief Executive Officer and Director
Yes. So if we were to withdraw, we would have to pay that withdrawal liability like you referred to. And then in addition, we would have to negotiate a replacement plan of some amount, some benefit to replace that plan. So if you just use what we currently have at the annual cost of $5.8 million, that's a high watermark if you negotiate up to a like-to-like replacement plan, as an example of an incremental cost.
Adam Josephson -- KeyBanc -- Analyst
Got it. Okay. Thank you, Linda.
Operator
Thank you. And 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
Great. I just wanted to say thank you for joining us and your continued interest in Clearwater Paper. And I hope everybody has a great day. Thank you.
Operator
[Operator Closing Remarks]
Duration: 51 minutes
Call participants:
Robert G. Hrivnak -- Senior Vice President, Finance and Chief Financial Officer
Linda K. Massman -- President and Chief Executive Officer and Director
Adam Josephson -- KeyBanc -- Analyst
Paul Quinn -- RBC Capital Markets -- Analyst
Steve Chercover -- D.A. Davidson -- Analyst
Chip Dillon -- Vertical Research -- Analyst
