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Clearwater Paper Corp (NYSE:CLW)
Q3 2019 Earnings Call
Oct 24, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Clearwater Paper Corporation's Third Quarter 2019 Earnings Conference Call. As a reminder, this call is being recorded today, October 24, 2019. I would now like to turn the conference over to Ms. Robin Yim, Vice President, Investor Relations of Clearwater Paper. Please go ahead.

Robin Yim -- Vice President, Investor Relations

Thank you, Daniel. Good afternoon, and thank you for joining Clearwater Paper's third 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 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 expectations and estimates for the range of adjusted EBITDA for the third quarter of 2019 and certain costs, pricing, shipment, production and other factors expected to impact the fourth 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 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 31, 2018 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 no 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 Bob Hrivnak.

Then Linda will conclude our prepared remarks with an update on our strategic projects, followed by an overview of the business environment 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 Massman -- President and Chief Executive Officer

Thank you, Robin. Hello everyone and thanks for joining us today. I am pleased to share with you that we had a good third quarter with solid execution across the company. We are making good progress toward ramping our expanded tissue operations and we saw continued strong performance from our pulp and paperboard operation.

Adjusted EBITDA for the quarter came in at $31 million, which was on the high end of our outlook range for the third quarter. Our net sales to $445 million included strong growth in retail tissue due to expanded business with new and existing customers. This was partially offset by paperboard shipments returning to more normalized levels after record breaking shipments and net sales achieved in the second quarter.

We are managing our strategic capital projects to completion. The new Shelby facility is progressing well and we are servicing customers from this facility. We're still building our production capabilities and are currently producing in the range of 50% to 60% of capacity. This keeps us on target for reaching the full production run rate by mid-2020. We had successful plans major maintenance outages at both of our mills Lewiston, Idaho in the third quarter and we just completed the Cypress Bend, Arkansas outage in October. As a result, we are not planning to schedule any major maintenance outages in 2020, with the next major maintenance scheduled in 2021. I will provide a more detailed update on our strategic projects and outlook for the fourth quarter later in my prepared remarks.

Now, I'll turn the call over to Bob.

Bob Hrivnak -- Chief Financial Officer

Thank you, Linda. Q3 was a solid quarter from a financial performance perspective, as we delivered $31 million of adjusted EBITDA, which was on the high end of our outlook range. Before I get to the specifics of our third quarter 2019 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 2019, those items totaled approximately $2.8 million of pre-tax expense, which includes $1.4 million of non-operating pension and other post-retirement benefits costs, $1 million of reorganization related expenses and $400,000 of mark-to-market adjustment of director's equity based compensation.

So with that, let's discuss our results for the quarter. A summary of consolidated GAAP results is shown on slide 18, and beginning adjusted results are shown on slide 19 of our supplemental slide deck. Our third quarter net sales came in at $445 million, down 1.5% from the second quarter of 2019. Growth in retail tissue shipment volumes were offset by the return to normalized paperboard shipment volumes. Third quarter adjusted gross profit of $26 million or a 5.9% margin declined by 3.4 points from the second quarter. This was mainly due to the plan major maintenance outage at Lewiston and higher depreciation. On the positive side, we saw lower input costs for external pulp and energy.

Adjusted SG&A was $28 million or 6.2% of third quarter net sales, which is up $1 million from Q2. This resulted in an adjusted operating loss of $1 million and adjusted EBITDA of $31 million or 6.9% of net sales. Net interest expense of $13 million was up $2 million compared to Q2 due to lower capitalized interest. Turning to taxes, our Q3 effective tax rate was 44% versus 115% in the second quarter. Tax affected items in the second quarter of 2019 had a greater impact on a percentage basis of Q2 pre-tax book income of $2.9 million compared to Q3 pre-tax loss of $19.7 million.

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 credits.

Third quarter 2019 GAAP net loss was $11 million or $0.66 per share, and on an adjusted basis, a net loss of $8 million or $0.50 per share, which was below our outlook range for Q3 of $0.24 to $0.39 loss per share due to higher than expected depreciation. This comparison to Q2 adjusted net loss of $400,000 or $0.02 loss per share. Non-cash expenses in the third quarter of 2019 included $32 million of depreciation and amortization, an increase of approximately $3 million from Q2 2019, $3 million of total equity based compensation and approximately $1 million of non-cash 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 slide six and 20 of the supplemental materials. Net sales were $229 million for the third quarter of 2019 up $4 million or 1.9% compared to the second quarter. The improved top line results were primarily due to a 5.4% growth in converted case shipments resulting from expanded business with new and existing customers.

Consumer products operating loss in the third quarter of 2019 was $4.4 million versus an operating loss of $5.1 million in the second quarter. This was mainly due to higher retail shipment volumes and favorable pulp costs, partially offset by higher depreciation. As a result, consumer products adjusted EBITDA of $15 million was up from $12 million in Q2 2019. The adjusted EBITDA margin was 6.4% compared to 5.5% in Q2. Now turning to the pulp and paperboard division. The results that I will be referring to can be found on slide seven and 20 in the supplemental materials. For the third quarter of 2019 pulp and paperboard generated net sales of $217 million and shipped 215,000 tons. Net sales were down 4.8% versus the second quarter as paperboard shipments returned to more normal run rates from the record levels set in the second quarter.

Pulp and paperboard's operating income for the third quarter of 2019 was $17 million or 7.9% of net sales compared to $34 million or 14.8% of net sales in the second quarter. Third quarter operating income was impacted by $19 million of planned major maintenance expense at the Lewiston, Idaho mill, partially offset by a $3 million decrease in maintenance at the Arkansas mill. Other positive impacts at our Idaho mill include lower natural gas prices and electricity costs and lower external pulp prices. This resulted in paperboard's third quarter EBITDA and margin of $28 million and 13%, respectively.

Now turning to the balance sheet, cash capital expenditures were $17 million in the third quarter of 2019 and $126 million year-to-date. Our total cash capex for 2019 is expected to come in at the high-end of the range previously provided of approximately $130 million to $140 million.

We had $58 million of short-term debt outstanding under the $250 million dollar ABL facility. Long-term debt outstanding at September 30th, was $875 million, which includes a $300 million, seven year Term Loan B, and $575 million of fixed rate senior notes. We ended the quarter with a total leverage ratio of 5.7 times last 12 months adjusted EBITDA. As we said last quarter, Q3 is expected to be the high watermark for net debt. In the fourth quarter we expect to see a modest decline in total leverage.

With regard to our liquidity, we ended the third quarter with $8 million of unrestricted cash. During the third quarter we used $31 million of cash from operations. Working capital was a $48 million net use of cash, primarily due to a significant reduction in trade accounts payable and timing of interest payments on the bonds, offset by a $20 million reduction in receivables and inventory.

This concludes my remark and I will now turn the call back over to Linda.

Linda Massman -- President and Chief Executive Officer

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 fourth quarter. I am pleased with our progress as we ship products and service customers from our new Shelby facility. We are making both ultra and conventional products in Shelby that are meeting customer quality expectations.

As I mentioned, we are ramping production and currently producing at approximately 50% to 60% of capacity, which is in line with reaching the full production run rate by mid-2020. Following that, we expect to reach the full shipment run rate in 2021 and see the full year benefit in 2022. Until we reached full production run rate, keep in mind that production costs will continue to be elevated. We have a historically strong customer mix of premium retailers and are a meaningful supplier to most of them. We have continued to gain new customer volume and retain existing customers, albeit in a highly competitive environment given recent capacity additions. This is demonstrated by year-over-year growth of 8% in revenues and 11.6% in case shipments.

Private label continues to gain share and we are positioned to benefit from this positive trend given our leadership position that is indicative of our service and product quality capabilities. Regarding the continuous pulp digester our project in Lewiston, Idaho, we remain on schedule to install and implement the catalyst by the end of the year. 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 5.5% year-over-year. Second, private brands grew 11.3% versus 3% for national brands over the same period. Third, private brands ended the second quarter with 31.5% market share compared to 29.8% a year ago. And the data continues to point to strong consumer acceptance and growing preference for private brand products, especially in ultra-quality category. Private brand growth in the ultra-segment continues to outpace total category growth for bath tissue and paper towels.

We see forecasts for net new tissue capacity from 2019 through 2021 for the North American market has been lowered by 33,000 tons to 365,000 tons resulting from that announced closure of another supplier's paper machine in Arkansas [Phonetic].

Over the long-term, the total new capacity averages out to approximately 122,000 tons per year and we believe in line with 1% to 1.5% tissue demand growth per annum. Assuming all of that capacity comes online as scheduled, plus net imports and using RISI's estimate for demand in North America the demands to North American capacity ratio in 2021 is forecasted to be approximately 98%. While there have been no recent announcements of capacity additions, if that were to occur, we estimate that the earliest of any new capacity cloud online is early 2022. Turning to North American paperboard, RISI's outlook for the remainder of 2019 is a balanced market. According to AF&PA as of the end of the third quarter, the industry operating rate was 92.7% compared to 95.3% a year ago, and relatively unchanged from the second quarter operating rate of 92.8%.

Industry backlogs reported by RISI are 4.6 weeks and 4.5% lower than backlogs a year ago. At the end of the second quarter RISI reported industry backlog of approximately five weeks. We believe the food service segment of the industry is positioned to benefit from the trend of box board away from polystyrene and single used plastics.

The longer term trend for bleach board remains positive, as consumer products companies continue to look for more environmentally sustainable packaging alternatives. Now to our fourth quarter 2019 outlook, compared to the third quarter of 2019, we expect consolidated net sales to be down 1% to 2% sequentially due to seasonality in paperboard. Consolidated adjusted operating margin to be in the range of 2.5% to 4.5% due to several key variables.

First maintenance is expected to be $11 million to $12 million lower as the major maintenance outage at our Cypress Bend, Arkansas mill will ranging costs from $6 million to $7 million. Second, we expect cost to improve up to $3 million due to lower raw material costs. And last we expect our annual tax rate benefit to be approximately 34%. We expect this to result in adjusted EBITDA in the range of $38 million to $46 million and adjusted net earnings per share ranging from a net loss per share of $0.15 to fully diluted net earnings per share of $0.27. In conclusion, we're now developing plans focused on internal execution to ensure we are well positioned to improve operational performance and generate cash flow to delever our balance sheet.

And with that, we will now take your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Paul Quinn with RBC Capital Markets. Your line is now open.

Paul Quinn -- RBC Capital Markets -- Analyst

Hey, thanks so much. Good afternoon.

Linda Massman -- President and Chief Executive Officer

Hi, Paul.

Paul Quinn -- RBC Capital Markets -- Analyst

Just maybe starting on the paperboard's side, just you cited RISI's backlog numbers where do the backlog is at Clearwater and what is that on a year-over-year basis up or down?

Linda Massman -- President and Chief Executive Officer

Yes, I would say we usually don't and in fact we don't disclose our specific backlog, but we just tend to follow industry backlog trends, I think is a fair statement.

Paul Quinn -- RBC Capital Markets -- Analyst

So you're saying your backlogs are consistent with what you're seeing in RISI or you just don't want to disclose it?

Linda Massman -- President and Chief Executive Officer

The trends are consistent.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay, trends are consistent. And just kind of confusing what's going on with pulp right now. I've got some guys that see prices picking up in Q4 and then I've got others that expect continuous weakness and just wonder what your expectation for how long how long this pulp pricing tailwind will benefit you guys? And whether that 270,000 tons that your purchased includes the expansion at Lewiston or not?

Linda Massman -- President and Chief Executive Officer

Yes, so the 270,000 tons include the expansion. And also, with regard to the pulp market, I don't really have a strong prediction for you. We're reading probably very similar information that you are. We're grateful for some of the bulk price declines, but we are seeing different indications depending on what type of pulp you're talking about whether it's soft wood or hard wood.

Bob Hrivnak -- Chief Financial Officer

Okay. And then just on the I guest, Shelby to I think linen, in your comments, you mentioned that it's going to run full mid-2020. And then, I think on slide eight, here, we've got full shipment run rate expected 2021. What's the six month delta between those?

Linda Massman -- President and Chief Executive Officer

So it's the -- full production is when we're actually producing what we expect the targeted production off the machine, and then selling through the shipment run rate would be the six month timeframe.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay, got it. And then -- that's helpful. And then just lastly, what -- any update on Lewiston's labor issue?

Linda Massman -- President and Chief Executive Officer

Yes. So the company has presented its best in final contract offer to our Lewiston labor union. And this week is when they are voting on the contract and we should know an outcome at the end of this week.

Paul Quinn -- RBC Capital Markets -- Analyst

Best of luck. Thanks very much.

Operator

Thank you. And our next question comes from Adam Josephson with KeyBanc Capital Markets. You line is now open.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks, everyone. Good afternoon.

Linda Massman -- President and Chief Executive Officer

Hi, Adam.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Hi, Linda. One more on Paul so it was a pretty substantial benefit sequentially in 3Q $4.5 million and then in the 4Q slide deck, you have other costs above zero to $3 million sequential benefit. I am just wondering how much more pulp savings you have sequentially and into next year just based on what you've seen the pulp prices and based on how your contracts are structured?

Bob Hrivnak -- Chief Financial Officer

Okay, yeah. So let me talk about this. So when you evaluate pulp prices, you need to take into account the price ceilings that we have in our contracts. So just to give you some background, external pulp prices were flat for us as the end of Q3 on a year-over-year basis because our 2018 pulp contracts had these price ceilings or inflationary caps. And certainly, at the beginning of the year, the pricing in those contracts gets readjusted. So while we benefited from lower pulp prices in 2019 on a year-over-year basis, we are actually flat year-to-date.

So, just to give you some additional context year-to-date on a year-over-year basis, pulp prices are down about 7% to 10%. But from the high watermark in Q4 of 2018, pulp prices are down about 15% to 20% through the end of September this year. So given the structure of our contracts, we're not yet at the crossover point. So hopefully that was helpful.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Can you just explain a bit -- so I guess I'm not exactly sure what you're saying then for -- in terms of the applications sequentially into 4Q and thereafter.

Bob Hrivnak -- Chief Financial Officer

Yes. So I mean, if pulp prices continue to go down, our contracts will be reset and then we would enjoy the benefits in the future. So the trend is favorable.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

But if they stay flat from where they are today, Bob. You're saying there are no more sequential benefits to come.

Linda Massman -- President and Chief Executive Officer

So, Adam, maybe I'll try to explain it. So as we experience increasing pulp cost through 2018, there was accumulation of escalating cost. In 2019, until the savings on pup crossover that cumulative headwind, we won't see a year-over-year benefit. But it's still benefiting us because pulp prices are coming down. So going into 2020 if that were to hold, you should see a benefit.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Got it. Okay. And just one more on 2020 on that topic, so maintenance is going to be $25 million lower next year, because you now have eliminated your planned maintenance outage at Lewiston to next year, and you talked about the Lewiston pulp optimization savings to Shelby expansion and you have your run rate savings targets for Lewiston and then, obviously, the EBITDA target for Shelby. Can you just talk about just the puts and takes for next year as you see it thus far you have $25 million lower maintenance presumably you have based on your run rate X amount of Lewiston savings, X amount of Shelby EBITDA,etc. Can you just help me with any of that to the extent you can?

Linda Massman -- President and Chief Executive Officer

Yes, so we'll, as part of our fourth quarter update usually provide some outlook going into 2020. So we'll definitely have a more comprehensive update on the next call. But you did pick up on a number of the larger items, of course we also talked about pulp and which direction you think that's going to go on a go forward basis into 2020.

Of course, we also have the pricing environment, the competitive environment in both tissue and paperboard, as we said in our prepared remarks. We definitely see a very competitive environment in tissue albeit we're holding our own and attracting new business and retaining our current customer. And RISI has called for a relatively stable paperboard market, so those two other factors. And then maybe the other big factor just thinking on my feet here would be capex and that comes into more normalized range for us going into 2020.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Right. Thank you. And just Bob a couple on balance sheet and cash flow. So working cap was a, -- I think it was about a $45-ish million drag and you attributed it to the reduction in accounts payable and the timing of interest payments on the bonds. Can you just help me a bit more with was that what you were expecting working capital to be it was a little kind of worse than what we had and why the reduction in payables?

Bob Hrivnak -- Chief Financial Officer

Yes, so basically, we went through a major refinancing move to the ABL structure. So, through the financing activities, we were in a position where we increased our liquidity. So then management made a decision with respect to payables to change the timing to ensure that we make faster payments to our valued customers. So, the customer relationships are very important to us.

Another factor, as you're thinking about your model through the end of the year, we've also eliminated our accounts receivable factoring programs, because we're moving to -- again the ABL has a lower cost structure than factoring. So we're going to change our outlook for working capital. I think, previously we communicated that there would be about a $20 million drag year-over-year for the full fiscal year, and we've updated our outlook. We believe the impact now will be about a $50 million to $60 million drag. And the key drivers there would be again movement away from factoring, and also timing of our payables.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

And then -- I appreciate that, Bob. So if working cap is going to be a $50 million, $60 million drag this year, just based on the fact that you're eliminating factoring, what impact should that have on next year? Should we assume flattish working cap or perhaps another drag or maybe even a source? Can you just help me a little bit there?

Bob Hrivnak -- Chief Financial Officer

Yes. So, you know, Adam, I think what we will do on the Q4 call is address our outlook for next year. But I think, we're getting back to a more normalized level, based on previous years.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Okay. Just one last one on your leverage. So you're at 5.7 at quarter end, you said it would be down a touch in 4Q, so by year end maybe it'll be at 5.5, 5.6. Any thoughts as to how you think that will trend next year, Bob, just based on your early thoughts about EBITDA, capex, working cap,etc? Just how much lower you would expect that to go from call it 5.6 at year end?

Bob Hrivnak -- Chief Financial Officer

Okay. So, yes, I'm not going to give specific targets, but I can give you a framework on how to think about next year and the future. Yes, so if you go back and review our historical performance and say you focus on 2016 to 2018. So on a pro forma basis, we generated slightly north of $100 million of free cash flow per year on average, under the assumption that capex would be $60 million a year, and that's our investment target per year for the foreseeable future.

However, the numbers that I just shared don't reflect the more recent challenging and competitive pricing and cost environment in CPD. They also don't include the full benefits from our strategic capex projects. And it's also important to know when you focus on 2020 we're not planning a major maintenance outage. So there's certainly a number of other factors that would impact our projected cash flow for 2020. And our plan is to discuss this more during our year-end call.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks so much, Bob.

Operator

Thank you. Our next question comes from Steve Chercover with D.A. Davidson. Your line is now open.

Steve Chercover -- DA Davidson -- Analyst

Thanks. Good afternoon, everyone. Hopefully this is an easy one, what was it to push appreciation up by $3 million in Q3 and that we'll pull it back down by the same amount in Q4?

Bob Hrivnak -- Chief Financial Officer

Yes. So basically we had a slight increase to depreciation expense in Q3, this was primarily due to accounting adjustments related to our fixed assets. So, companies generally do a routine annual fixed asset cleanup work and this adjustment to depreciation resulted from that. So the adjustment in total is not material to the company and we view it as just a slight increase for the quarter.

Steve Chercover -- DA Davidson -- Analyst

So $28 million probably a decent run rate going forward now that Shelby is up and running?

Bob Hrivnak -- Chief Financial Officer

I think so, yes. Yes, Shelby, the annual run rate for Shelby should be around $17.5 million.

Steve Chercover -- DA Davidson -- Analyst

Okay, thanks for that. And then, with respect to Lewiston and the new catalyst being implemented by the end of the year. So first of all, is there any downtime or maintenance associated with that changeover, I mean, do you have to purge or flush out any systems?

Linda Massman -- President and Chief Executive Officer

So, Steve, we've done all the maintenance, major maintenance we're going to do in Lewiston was completed already this year. So it is just a matter of even the catalyst and implementing it into the system.

Steve Chercover -- DA Davidson -- Analyst

Okay. So that's what we dealt with in Q3. Okay, and I mean, is it a step function change the $25 million to $30 million, or is there any kind of ramp as that catalyst is functional?

Linda Massman -- President and Chief Executive Officer

I would expect a ramp. Again, it's a new piece of equipment for us it's somewhat difficult to predict. But generally speaking, when something like this is implemented, there's always learning curve and things that need to get adjusted as we progress. So I'd expect some sort of a ramp.

Steve Chercover -- DA Davidson -- Analyst

Okay. And I think Adam tried to get at this, but with respect to the ramp at Shelby, the exit rate we use the midpoint is $60 million in 2021. Do you think you'll get a third or a half next year, how would you like us to think of it?

Linda Massman -- President and Chief Executive Officer

Yes, I think we will comment on that in the fourth quarter call when we have another quarter under our belt and another quarter of operating the equipment there. But I think suffice to say we feel good about where we are running currently at 50% to 60% production run rate versus our target and on track -- that keeps us on track to getting to our full run rate by mid-2020. So with another quarter, we should be able to give a little bit better indication of that.

Steve Chercover -- DA Davidson -- Analyst

Okay. And then hopefully I can even articulate this, but in your earnings bridges pulp was in the slides, then it was out now it's back in. So was the $3 million benefit first of all to tissue was that anticipated in your Q3 guidance?

Bob Hrivnak -- Chief Financial Officer

So, yes, that would have been baked into our outlook.

Steve Chercover -- DA Davidson -- Analyst

Okay. And, I guess, it's up to us to make our assumptions going forward and then kind of the same thing on pulp and paperboard presumably outside pulp sales to the extent there are any would have been reflected in price mix, but then you've got a benefit of $1.5 million so I was a little confused there.

Linda Massman -- President and Chief Executive Officer

Yes, outside pulp sales are de minimis the best so nothing that needs to be modeled or worried about.

Steve Chercover -- DA Davidson -- Analyst

So the $1.5 million that we see on slide seven benefit from pulp, I guess, where does that come from or is that...

Bob Hrivnak -- Chief Financial Officer

So you're looking at slide seven.

Linda Massman -- President and Chief Executive Officer

Lower external pulp prices in Idaho.

Steve Chercover -- DA Davidson -- Analyst

So, why would that be a benefit?

Bob Hrivnak -- Chief Financial Officer

That would be outside pulp.

Steve Chercover -- DA Davidson -- Analyst

That you are buying to put into the bleach board?

Linda Massman -- President and Chief Executive Officer

Right.

Steve Chercover -- DA Davidson -- Analyst

Got it. Okay. All right. Thank you.

Linda Massman -- President and Chief Executive Officer

Thank you, Steve.

Operator

Thank you. [Operator Instructions] Our next question comes from Chip Dillon with Vertical Research. Your line is now open.

Chip Dillon -- Vertical Research -- Analyst

Thank you very much, and thanks for the details. My first question has to do with -- I appreciate it was mentioned that leverage would come down slightly in the fourth quarter and I just didn't know if you would -- I know your net debt ended the third quarter it looks like here at I don't know around $915 million. Do you expect that to come -- that raw net debt number to come down, not debt actually $917 million? Do you -- would that come down or will it be just because EBITDA would be up, which actually it looks like it's going to be down. So I would have to assume that based on your guidance, because you did 47 a year ago. So I guess my question is, you are telling us that debt or at least cash will build, how much would that likely be?

Bob Hrivnak -- Chief Financial Officer

Yes. So, let me let me walk you through this because this can be a little bit complicated. There's the net leverage ratio and then there's net debt. So basically for Q4, we expect to see a modest decline in our net debt or our total leverage, how we want to look at it. And we've actually started paying down our ABL in Q4. But also in Q4, if you focus on the net leverage ratio, we're expecting that to stay flat or potentially have a modest decline.

And the reason for the slight difference, a component of this calculation is the last 12 months adjusted EBITDA. So basically if you look at last year, Q4 of last year we came in at the high end of our outlook range for Q4 of 2019. So this is the reason why we might potentially stay flat in terms of net leverage ratio. But you're spot on, we're focused on solid predictable execution and driving strong operating cash flow and one of our top priorities is to pay down our debt. So this is going to continue into the future.

Chip Dillon -- Vertical Research -- Analyst

Got you. And is $60 million or $65 million sort of a good number to use for capex next year?

Bob Hrivnak -- Chief Financial Officer

We said $60 million. Basically the split would be $50 million of maintenance capex and $10 million of strategic.

Chip Dillon -- Vertical Research -- Analyst

Okay. And then on the Lewiston project, I know the expected adjusted EBITDA benefit from everything is $25 million to $35 million. And can you tell us how much we've seen already and therefore, how much more should we get from the catalyst project?

Bob Hrivnak -- Chief Financial Officer

Yes. So basically, we started receiving benefits from the El pop [Phonetic] back in 2018. So we had about $10 million of cost savings, primarily related to energy and chemical costs. So our forecast for 2019 is to achieve the same level of benefit. So basically $10 million per year. So then, with once the catalyst is installed and calibrated, our view is then we would achieve the additional benefits. We've provided a range for that of $15 million to $25 billion.

Chip Dillon -- Vertical Research -- Analyst

Okay. Got you. So the $10 million is not, it's not like $10 million plus $10 million. It's like $10 million in each of 2018 and 2019. And then it jump up to $25 million to $35 million. So that can be pretty meaningful next year then. Okay. So, I mean, I'm not trying to pin you down, but you're saying so I understand you there's $15 million to $25 million from that, there's the $25 million, which I know will reverse in 2021 from the lower maintenance costs. And then there's the other moving pieces that we've talked about, as we think about next year, is that fair?

Linda Massman -- President and Chief Executive Officer

Yes.

That's right.

Chip Dillon -- Vertical Research -- Analyst

Okay.

Linda Massman -- President and Chief Executive Officer

And we'll be a little more clear about that on the fourth quarter call, which is when we typically provide more color around that.

Chip Dillon -- Vertical Research -- Analyst

Okay. And the question about on the factoring situation. Have you always factored and now you're not factoring your receivables? And is the reason because I know rates are low because you've had to collateralize those receivables somewhere else, which I guess even though you may not be factoring them. They have to sit on your balance sheet.

Bob Hrivnak -- Chief Financial Officer

Yeah, so, so basically the factoring program started because we needed additional liquidity, but since we've revamped our capital structure we've been able to phase out that program. Because the ABL revolver is price very attractively. So I don't know if that answers your question.

Chip Dillon -- Vertical Research -- Analyst

Yeah, no, I think it does. Yeah. So got you. And then, lastly, when you think about I know you gave us and by the way, thank you for giving us this maintenance schedule it's very helpful. As we think about 2021 and 2022, do you see anything that would require your capex to go much above that $60 million level? In other words, do you have a boiler that needs a lot of work let's say in 2021, or 2022. Or is it reasonable to say that adjusting for inflation that you can stay at that level in 2021 and 2022 to achieve the de-leveraging you're talking about?

Bob Hrivnak -- Chief Financial Officer

Yes, so I think the maintenance schedule that we provided in the supplementals, that's our most likely outlook based on the information that we have today.

Linda Massman -- President and Chief Executive Officer

And Chip, I would just tell you that our objective is to generate cash to pay down debt. And in order to do that, we said we would stay within the limits of the $50 million of capex as we work to delever the balance sheet.

Chip Dillon -- Vertical Research -- Analyst

So just so I'm clear. So you don't know of any need to spend a much above that through 2022. Not that you won't, because something in the underlying changes, but you are saying at this point, you don't see a piece of equipment that's so big that has to be replaced that would knock that materially higher.

Linda Massman -- President and Chief Executive Officer

That's correct.

Chip Dillon -- Vertical Research -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from Roger Spitz with Bank of America. Your line is now open.

Roger Spitz -- Bank of America -- Analyst

Thank you. Good afternoon.

Linda Massman -- President and Chief Executive Officer

Hi, Roger.

Roger Spitz -- Bank of America -- Analyst

Hey. So in the answer to the reduction of the payables your first comment was that if I heard it correctly, you just want to reduce or pay faster your payables with your customers. I guess, why did you -- if I heard that, why did you make that decision? Obviously, that's a big bite into your cash flow and your cash position.

Bob Hrivnak -- Chief Financial Officer

Yes. So basically our view is we want to maintain a good relationship with our vendors. And, we want to pay to meet the terms that we've agreed to contractually. So that's our intent.

Roger Spitz -- Bank of America -- Analyst

I mean, I'm going to -- I guess what I would read into that was maybe that during the last few quarters, where things were a little more stressed if you will, you were moving the terms out, and then you're bringing them back into where they really want to have been, is that a fair read?

Bob Hrivnak -- Chief Financial Officer

Yes, I think the way I would frame it is we want to maintain good relationships with our vendors and suppliers.

Roger Spitz -- Bank of America -- Analyst

Okay. I'm going to ask a few on factoring just to make sure I understand it your Q wasn't out yet. So I'm looking at your Q2, Q. And the way I read it on page nine, I recognize you probably don't have the queue in front of you. But it says the factoring says 16.9. Should we assume that as of June 30th, that 16.9 of factored receivables was deconsolidated from your balance sheet. Is that the way to read that?

Bob Hrivnak -- Chief Financial Officer

I think, yes. Right.

Roger Spitz -- Bank of America -- Analyst

Okay. Okay. And I know you've talked about phasing of the number what was -- your Q wasn't out yet what was that number in September if it wasn't zero, because it was gone at September 30th.

Bob Hrivnak -- Chief Financial Officer

I'm sorry, I didn't miss the first part of the question regarding what the...

Roger Spitz -- Bank of America -- Analyst

For September 30th, what was that outstanding reconsolidated number, if not zero. Yes, if you have in the hand we can look for Q2, you got rid of the...

Bob Hrivnak -- Chief Financial Officer

We eliminated certain programs that we had because we moved to the ABL structure.

Roger Spitz -- Bank of America -- Analyst

Got it. So that program was $30 million factoring program that is gone. The paragraph just at the bottom of that in the Q2 suggest that you then entered subsequent to June 30th an additional program. It actually almost sounds like a supply chain financing, except that is -- that type that is not under the supply chain financing paragraph, it's under the account purchase agreement, did you -- when you say September to June 30th you entered into another arrangement with the finance -- third-party financial intermediary, is that a separate factoring program than the $30 million program that you got rid of?

Linda Massman -- President and Chief Executive Officer

Roger that's related to a customer program. So we can take advantage of supply chain financing from a customer.

Roger Spitz -- Bank of America -- Analyst

Okay. So that actually refers to supply chain because the next paragraph down, which is under the word -- under the heading supply chain financing is that one and the same you have a supply chain financing program that you've implemented.

Linda Massman -- President and Chief Executive Officer

It's a similar program, it depends on what side of the equation you're on in this particular case it'd be program with our customer.

Roger Spitz -- Bank of America -- Analyst

Okay. And in the supply chain financing, which in the Q2 is actually referring to back to December 2018 for some reason, but it says $20.8 million but then it says that's on your balance sheet is your supply chain financing actually on balance sheet and not deconsolidated?

Linda Massman -- President and Chief Executive Officer

Yes, that's also been unwound. And because of the terms and conditions in which we agreed some of that ended up on the balance sheet as debt.

Roger Spitz -- Bank of America -- Analyst

Okay. So -- and I'm just trying to figure out what your total ''debt like is' should we assume since you entered into this $30 million facility -- factoring facility in or about June 2018, that the only thing that's really been deconsolidated is that anything outstanding under your $30 million factoring facility and that any other things such as supply chain financing or any other arrangements have all been on balance sheet.

Linda Massman -- President and Chief Executive Officer

Yes, I think you can look at our debt balances when the Q comes out and that will be inclusive of debt. I think that's a fair way to look at it. And you'll see in the details that there are zero balances on supply chain financing and factory.

Bob Hrivnak -- Chief Financial Officer

That's right.

Chip Dillon -- Vertical Research -- Analyst

Okay, I got it. And if I can move on from there is -- thank you very much for the amount of raw materials you purchased in the presentation regarding the polyethylene purchase, is that used -- you purchase that more to coating the inside of your cup stock or is that polyethylene film that you used to package your tissue or is that both?

Linda Massman -- President and Chief Executive Officer

It's the coating for cup stock.

Roger Spitz -- Bank of America -- Analyst

Okay. And is that more, maybe not terribly important. So it was just more curiosity on my part is that more LLDPE or LDPE or a mix or you not know because it's not important for -- as much for your company as it might be for things I'm thinking about?

Linda Massman -- President and Chief Executive Officer

It's low density.

Roger Spitz -- Bank of America -- Analyst

Low density. Okay. And lastly, I think you've said that most role of Shelby to tissue is contracted out if I recall that correctly, does that mean that most all of your tissue was contracted out of your machines?

Linda Massman -- President and Chief Executive Officer

No, I think that would be not the way to think of it. So we said that of the expected benefits related to Shelby, roughly half would be optimization of our existing network and half would be incremental volume. And then of the incremental volume, we said that about half was already committed to by existing customers, roughly.

Operator

Thank you. And our next question comes from Adam Josephson with KeyBanc Capital Market. Your line is open.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks, everyone, for taking my follow-up. Just one more on pulp, sorry to beat a dead horse on this. Can you -- and I may have asked this question on the previous call, but Bob, can you talk about how much of a drag pulp was for you when it was up $200, $300 a ton? And I think you may have mentioned $10 million or so. And then how much of a benefit you expect it to be this year? And then how much more you think there will be where that came from again, if you were just to flat line pulp here?

Bob Hrivnak -- Chief Financial Officer

Yes, OK. So I covered this a little bit earlier. So, while we certainly benefited from lower pulp prices in 2019 year-over-year on a year-to-date basis, we're actually flat because of these price caps. So that's 2018 verses 2019 year-to-date year-over-year. So as pulp prices continue to come down sequentially, we will see benefits. But, certain contracts were not at the crossover point because of these caps.

Linda Massman -- President and Chief Executive Officer

And Adam, I might just -- you probably know this chart in here, this is probably the easiest place to go. I mean, you know, it gets confusing based on the mix of pulp you use and whatnot. But on page 16, we have that sensitivity where it says if we see a per unit change in pulp, and this is just all grade, of course, is a different weighted mix for us. But nonetheless, $20 should equate to about little over $5 million of EBITDA. That's a really good rule of thumb.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Right. So last year you had a drag of what it was a $10 million or so if memory serves full year drag from higher pulp?

Linda Massman -- President and Chief Executive Officer

Yes, that's pretty close.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

And it's been flat this year. So presumably you would get something on the order of a $10 million benefit, if not more so next year. Is that the right way to think about it if it's been no impact to you?

Linda Massman -- President and Chief Executive Officer

And it's all depending on prices. But yes, all things being equal.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Well, I'm just saying if you flat line where it is now, it should be a nice $10 million plus benefit next year I would think. And then just on an SBS, Linda. So you had the sappy tons come in earlier this year, you have the GP crosser tons coming out literally this month. Can you just talk -- I mean SBS backlogs or operating are down quite a bit this year down about 300 basis points as the sappy tons have come in. Operating rates around 92%, 93%.

How much of an impact do you expect the cross ton exit to have? And would you expect a meaningful uptick in backlogs operating rates next year as a result of that? Because you characterize the market as balanced, even though operating rates have come way down this year. So Just a little more thoughts on where you think this market is and where it may be heading given the capacity shut.

Linda Massman -- President and Chief Executive Officer

We agree with RISI as it relates to a relatively balanced market. So some of the tons going out and the tons coming in are relatively balanced. I hate to use that term again, but it's the right way to describe it. I think timing is different because some have come down and others are still coming in. And I think some of these operating rates I believe are difficult to really surmise a lot about the market from. Because you of course had the mill tonnage going out. We took a major down in the third quarter we know other mills took major downs in the third quarter. So while I can't explain exactly what's going on with those operating rates, I think a stable market is a good way to describe this right now. And industry backlogs would generally support that statement.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

And so you think the best way to look at the market is the backlogs, not necessarily the operating rates?

Linda Massman -- President and Chief Executive Officer

I think, you look at both and you try to discern what conditions are taking place that might have an influence on either one of those two metrics. And I think we have some explanations for why those operating rates might be lower temporarily. And considering backlogs are relatively stable. I think, we're feeling fairly comfortable that this is still a good solid market. Nothing we're overly concerned about.

Yes, I wish it was that easy, but generally speaking, you would expect some correlation, right. And we did see a positive price move last year that has had a positive impact to this year. I'll tell you by no means does that cover the increased input costs we experienced over the last several years. So we are still underwater as it relates to the inflationary costs. But you are absolutely right it's a very competitive market. And we have very astute retailers and there are always negotiations taking place around price that aren't always completely tied to commodity cost changes.

Operator

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

Linda Massman -- President and Chief Executive Officer

Great. Thank you for joining us today and for your continued interest in Clearwater Paper and everybody have a great day. Thanks.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Robin Yim -- Vice President, Investor Relations

Linda Massman -- President and Chief Executive Officer

Bob Hrivnak -- Chief Financial Officer

Paul Quinn -- RBC Capital Markets -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Steve Chercover -- DA Davidson -- Analyst

Chip Dillon -- Vertical Research -- Analyst

Roger Spitz -- Bank of America -- Analyst

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