Q1 2020 Earnings Call
During today's presentation, all parties will be in listen only mode.
Following the presentation the conference will be open for questions with instructions to follow at that time.
As a reminder, this conference is being recorded.
I would now let's turn to go over to your host Mr., Mickey Walsh, Treasurer, and Vice President of Investor Relations for Rayonier advanced materials.
Thank you Mr. Walsh you may begin.
Thank you operator, good morning, everyone. Welcome again to Rayonier advanced materials first quarter 2020, <unk> earnings conference call and webcast.
Joining me on todays call, our Paul Boynton, our chairman President and Chief Executive Officer, Marcus Smith, Our Chief Financial Officer, and Senior Vice President Finance and Frank refer to our executive Vice President of high purity and high yield cellulose businesses.
Our earnings release presentation materials were issued last evening and are available on our website at rainy or yeah dot com I'd like to remind you that in todays presentation. We will include forward looking statements made pursuant to the safe Harbor provisions of Federal Securities laws, our earnings release as well as our filings with the FCC.
Well some of the factor, which may cause actual results to differ materially from the forward looking statements we make.
There are also referenced on slide two of our presentation material.
Today's presentation will also reference certain non-GAAP financial measures as noted on slide three of our presentation. We believe nongaap financial measures provide useful information for management and investors, but non-GAAP measures should not be considered an alternative to GAAP measures reconciliation of these measures that are most directly comparable GAAP.
Financial measures are included on slide 16 through 20 of our presentation.
I'll now turn the call over to Paul.
Thanks, Mickey and good morning.
The cope with 19 pandemic has disrupted everyone's lives.
It has changed the way we work.
Well, we operate our plants in our offices and the way, we interact with our customers and strategic partners.
And while many aspects of our business have changed.
We remain a central for customers and for the products they produce.
Including products going into food pharmaceuticals, and a variety of imports industrial use applications.
We will continue to serve our customers with the best products and security of supply while maintaining the utmost focus on the safety of our employees.
As a cultural cornerstone of our company safety is always been Paramount at our facilities.
Coping 19 has brought on new safety challenges that I'm proud to say the team has had has met head on.
We've been monitoring the outbreak of the virus from our very early in the year.
And in January we started daily conference calls to understand its implications and we used to mitigate its impact.
We established a cobot Nike task, we're staffed with key leaders across the organization.
Guidelines and create protocols for employees to operate during the crisis.
He actions, including requiring all office support functions to work remotely as possible were put in place.
Our operations, where employees don't have the option to work remotely we installed physical barriers.
Moved interface equipment more possible.
Implement a strict practices of social dispensing and established other safety protocols, including wearing additional pp.
Limiting outside contractors and visitors from entering our site.
And enhancing our sanitation practices.
I'm very proud of the way our employees have stepped up to ensure booked a safe operations.
In quality production for our customers.
We're fortunate to say that none of our 21 manufacturing sites R&D centers and office locations have been directly impacted.
However, we recognize the ongoing risk.
And therefore, we will maintain these practices well beyond requirements to do so otherwise.
On the financial front, we were already reducing costs and driving improved cash flow.
Through lower capital expenditures and working capital improvement before the pandemic.
Last month, we announced curtailed production at our lumber and newsprint facilities to minimize losses.
We are well positioned with $145 million of liquidity.
However, given the uncertain future we have been in discussions with our lead banks to ensure that we have the flexibly to manage through the impact of the pandemic.
Well, we have challenges ahead first quarter results were positive when compared to prior year result.
As expected we started to see good momentum across most of our businesses.
As noted on slide five we delivered $27 million of EBITDA in the quarter on $410 million a sales.
Hey, $17 million EBITDA improvement from prior year.
Results were driven significantly by improved operational reliability and lower costs.
Merely at our high purity cellulose and paperboard businesses.
Additionally, we benefited from positive pricing momentum and forest products.
Hi, you'll put prices rebounded from the fourth quarter lows, well newsprint prices remain challenged.
Typically our first quarter cash flows are lower due to seasonal working capital requirements.
Well a significant focus we were able to improve Greek free cash flow by $35 million from prior year with improved operations and reduce capital expenses.
Now I'm going to ask Mark is to review the first quarter results.
And then I will share details of our corporate governance changes and provide market assessment before opening up the called two questions.
Marcus.
Thank you Paul.
Starting with high purity settle those on slide six first quarter sales decreased by $36 million driven by 30% decline in commodity pricing.
Primarily from viscose pulp and an 18% decline in C S volumes.
I shared with you in February the decline was driven by expected volume reductions.
Due to a decision not to pursue certain lower margin business.
And favorable sales timing in 2019.
These sales declines were partially offset by 30% increase in commodity volumes, driven by improved productivity and a 2% increase in CS prices.
EBITDA for the segment was $26 million up 1 million from a year ago.
The price and volume declines were more than offset by lower wood and chemical input costs and improve production reliability.
Turning to slide seven sales in our forest products segment improved by $7 million from the first quarter of 2019, driven by 5% price increase and a 1% volume increase for lumber products.
EBITDA for the segment increased $4 million to a positive 1 million.
Driven by stronger sales pricing, partially offset by higher costs, primarily related to duties for sales to the U.S.
As a reminder, EBITDA result includes $6 million for duties paid in the quarter.
Since the start of the softwood lumber duties on shipments into the U.S. in 2017, we have paid.
Total of $65 million of duties plus accrued interest of $3 million.
Based on the results of prior trade disputes can <unk> Canadian producers have historically recovered all or a vast majority of these duties upon resolution.
The next step in the process will come later this year.
As the terrorists are expected to decline from 20% to 8%.
Once the preliminary determination is finalized.
Turning to slide eight paperboard segment sales increased $3 million driven by 7% improvement in sales volumes.
EBITDA for the segment increased 7 million driven by lower raw material costs and improve sales volumes.
Turning to our pulp and newsprint segment on slide nine sales declined $4 million from prior year due to a 20% decline in high yield pulp prices.
Additionally results were impacted by 30% decline in newsprint prices, partially offset by an increase in sales volumes.
EBITDA for this segment decreased by $9 million to a 4 million dollar loss driven by the lower sales prices.
Turning to slide 10, and 11 on a consolidated basis operating income.
Improved $16 million from prior year due to benefits of cost improvements increased sales volumes productivity and lower SGN a cost.
These benefits were partially offset by price declines of 26% in commodity HPC.
30% in newsprint and 20% in high yield pulp.
The decline in these commodity prices negatively impacted operating income by 40 million in the quarter.
Sequentially.
Operating income improved by $20 million. This sequential improvement was driven by lower production costs, and SGN ace spending including favorable currency impacts.
The environmental charge that was taken in the fourth quarter of 2019.
Turning to slide 12, total debt remained at $1.1 billion.
Our net secured leverage ratio finished at 4.1 times.
Prior to a covenant requirement of not more than 5.4 times.
While the interest coverage ratio ended the quarter at 2.2 times compared to a covenant of 1.75 times.
18% cushion to the covenant.
We ended the quarter with 145 million of liquidity, including $43 million of cash $90 million available on our revolving credit facility and 13 million on a new factoring facility in France.
We are comfortable that this liquidity provides adequate cushion to operate our business as we have no significant near term debt maturities.
With that I'd like to now turn the call back over to Paul.
Hey, Thanks, Mark is [noise].
Before getting into our market assessment I.
I want to provide you with an update on some changes that we're making to our corporate governance as laid out on slide 13.
As previously shared.
In the back half of 2019, our board management reached out to over 80% of our shareholders to solicit feedback.
We heard three consistent themes board refreshment.
Separation of the chairman and CEO roles and better alignment of compensation.
To the shareholder experience.
Effective mid May.
We will be adding David Mariano if honest Smith to our board of directors to highly qualified individuals who will contribute significantly to the makeup of our board.
David has been an owner of Rayonier advanced materials stock for many years.
He has a history of a successful was as a successful industrial Weldon spring capital.
Including in our industry as former CEO of new sell.
An experience at Blackstone and Ernst and young.
Yes, when it comes to us with the background and financial management, and investing including roles at restoration capital Citigroup kit or Peabody as well as Ernst and young.
I'd like to take this opportunity to publicly thank David Brown, and Mark Oman, who will be retiring from our board in May after serving the company since before the separation from Rainier Inc. in 2014.
I wish them all the best in their future and I, thank them for their incredible guidance support professionalism and highest ethical standards.
In addition to these changes we also announced that we will separate the roles of chairman and CEO.
I will continue my role as CEO, Andy Director on our board.
And to allow bloomquist.
Will become our non executive chair effective may 19th.
So while it's been on the board since the separation in 2014 after career as CEO of general chemical and President of talk chemicals.
Hello brings over 25 years of industry experienced this role and I look forward to leveraging his knowledge as we navigate through these challenging times and emerge a stronger company.
Well the goal of returning value to our shareholders.
Lastly, our compensation committee, along with key members of our management team restructure our executive compensation to align more closely with shareholders interest and the current environment.
As a result, so total targeted compensation of the CEO has been reduced 38%.
And the long term incentive plan for senior management of the company.
Has been modified so that the majority of their long term compensation is tied directly to shareholder returns.
Additional details of the plan are laid out in our proxy statement filed with the FCC and available on our website.
Now turning to slide 14, I want to provide you with an assessment of our markets as viewed through the lens of Cobiz of the Coke 19 pandemic.
And high purity cellulose cellulose specialties has seen only modest impacts from the pandemic.
Price and volumes remain in line with original expectations.
Prices are expected to increase 2% well volumes are expected to decline, 7% to 8% on a contractual and agreed upon basis.
Between 11, and 12% after the favorable impact of sales timing in 2019.
We see strength in food and pharmaceutical end markets and weakness in automotive and certain industrial segments.
Acetate don't acetate tow demand.
Has remained stable.
While we see potential weakness and acetate industrial and textile ex applications.
With diversified end markets and customers, who in this environment focus on security of supply.
Demand for these key products have been relatively stable.
However, we remain cautious about the balance of 2020.
For our commodity HPC products, we are seeing positive price momentum in fluff.
Due to strong demand.
We expect to maintain or grow these prices through 2020.
Meanwhile, the market for viscose pulp remains extremely weak as demand for textiles has further decreased with many shopper staying at home in response to covert 19.
We do not see a near term catalyst to reverse the demand weakness in this market.
As such we will continue to shift more productions towards fluff and paper grade Pope's to maximize profitability to the extent possible.
We have also been the beneficiary of favorable would chemical and energy pricing in recent quarters.
We are watching these markets closely as future price and availability of key raw material inputs could having a significant impact to our profitability.
In our forest products business, we've seen a dramatic decline in demand for lumber.
Due to restrictions on residential constructions and concerns a future housing start activity.
As such the positive pricing momentum we saw in the first quarter quickly eroded.
We are operating these phil facilities on a market driven basis.
Balancing demand for lumber with availability of wood chips for our mills as we maximize profitability and optimize cash flows into markets return to more normal levels.
Later this year, we expect a reduction of of duties for lumber sales from Canada into the United States from 20% down to 8%.
The U.S. reaches a final determination on the softwood lumber duties.
We have seen limited impact from covert 19 on our paperboard business sales.
Margins are improved from lower raw material costs offset by some mixed aggregation due to covert 19.
We expect to run this asset at normal levels.
Hi yield pulp has been another bright spot with positive pricing momentum and solid demand since the beginning of the year.
Meanwhile, newsprint demand has declined significantly due to lower newspaper sales and lower page count.
We idled or newsprint mill for two weeks early in the second quarter and we'll continue to operate in a manner that best Optimizes profitability.
We know these are uncertain times, where employees and for our shareholders.
We have taken and we will take actions necessary to protect our employees and our businesses to manage through these market conditions.
I believe the company is significantly undervalued due to both the negative impact of the China trade dispute and now the cobot 19 pandemic.
We believe these issues are temporal in nature and not attributable to the fundamental value of our business.
Within the high purity cellulose commodity products alone.
There's been a price decrease of 200 to $250 per tonne for commodity viscose and fluff pulp just in the past 12 months.
With approximately 500000 tons of HPC commodity products.
There is a significant EBITDA leverage.
And these commodities as they returned to more normalized levels and these prices will return.
In the meantime, we're focused on controlling costs preserving cash and executing on reliable operations.
We will persist emerge a stronger more resilient company.
And with that operator, please turn the call over to questions.
Thank you we will now be conducting a question and answer session.
He would like to ask a question. Please press star one on your telephone keypad.
Hey, confirmation John will indicate your line is another question Q.
The press star to he would like to remove your question from the Q.
Participants using speaker equipment, it may be necessary to pick up your hands up before person Sarkies one moment. Please when we pull for questions.
Thank you. Our first question comes from the line of Steve Chercover with D.A. Davidson. Please proceed with your question.
Thanks, Good morning, everyone.
Anymore. So I think the most encouraging statement in your release is that Q2 will be well above Q1, 19, but can you refine that for US does that mean cut the loss by how EBITDA doubles.
Hit breakeven I mean, what does that mean.
Yeah, I can let markets expand on or Frank is sitting here as well, Steve but look we're looking forward to.
Continued stronger HPC environment.
Well you saw in our comments of where volume was for the first quarter, which is well below what we anticipate the volume to be.
So that's got to start folding into the balance of the quarters. If we can receive though the orders lined up for the second quarter. So a lot of its just flat out driven by stronger HPC and stronger EBITDA that business.
Yeah, and Steve its Marcus as you know a last year forest products was a difficult start to the year. So when you compare that year over year.
We'll see that deliver a change as well.
Well I was going to say last year.
HPC was a difficult start to the year.
This coming wherever and then the Noah's Ark situations down in the south so how does that play into the improvement.
That was that a lot of that was in Q1, Steve So that that would have been reflected Q1 over Q1. So what you saw as you know the weak pricing environment and commodities really offsetting getting back onto the operational improvements.
And the wood cost piece of the quarter over quarter and Steve as you know a in March the Chinese government provided a mechanism for producers in China to get a exemption from the duties so year over year. That's that's a nice pickup for our core business as well.
Okay.
So let's talk a little bit about your pro active conversations with your back how would you characterize them.
The more amicable amicable today than last summer.
And does the covenant coverage get easier as you start to last the really.
We quarters that you put up in the first quarter 2019.
Yes, Steve its Marcus so so as you saw in in our release.
Our operating with with a cushion or buffer call it of in the range of 20%.
And obviously given the.
Uncertainty of the markets. We are the mine that it was best to be preemptive.
And maintain a dialogue with our lead banks.
And as you mentioned, it's it's it's all about flexibility or our last amendment. There is as you know there is a step down in the covenants and we just thought it would be best to have a have a dialogue and that dialogue is a good dialogue just to make sure make sure that we have the flexibility to continue to navigate through these markets.
Yes, Steve just to add and I think I get it and your tone there, but mark this is saying that it does look we got high quality lenders and we're having good quality conversations with them, it's been very positive so.
We look forward to updating you and when it's appropriate.
Okay. Thanks, So just switching to the segments for my last couple of questions are there any new product developments.
Noting on the specialty cellulose side.
Look we are as we've talked about in the past in the recent past two we've narrowed our R&D down to some really.
More impactful new product efforts that we've got underway the ones that can actually benefit for us from from now within the next three years and at this point time, we have nothing to update on it but we have a lot of I think a good momentum that we're building on and I think at the right time, we'll we'll share that with you, but I don't think is appropriate given where we are in the dialogue with our.
Partners and the trade well and I would tell you Steve We believe we'll see some benefits from those new products in the second half of this year.
Okay. Thanks, Frank.
And then the saw mills are back up and running most part I think your mills are particularly well suited to produce studs.
So can you comment on that and did the.
Did the downtime impact your chip supply for the your Canadian pulp and paper assets.
Yes, Hi, Steve its Marcus Good question as you mentioned, we were around 50% started and 50% random.
So when we looked at planning.
Our downtime we are obviously taking into account into context, the chip supply for our paper and pulp Mills and in addition, the demand we're seeing in the market.
And you know, we're pretty clear in our disclosure that the stock market.
Given our program sales with the Big box stores has has had better pull through.
And so we kind of balance that between the two mills.
Randomized study.
Okay, and then finally newsprint was challenge just thanks, I pads and kindles.
And then you get Kobin, which is basically killed off advertising so what's the prognosis for Cabot spacing.
Thank you.
I always ask what is it still first core tile meal and does that even matter.
Yes, well I think two good perspectives on that yes. It is a still high quality of first quartile mill in terms of its operating costs there.
But to your second point doesn't matter look into an experience that we're in right now the whole industry is in right now.
We're estimating industries estimating that the market is going to be down for newsprint.
30%.
And this was off of what we had thought was about a 15% decline.
For the year and already noted that the first quarter is about 12%. So you got to get that 30% in the back half of two or 2020, so you're talking to 35, 40% down in the back half of the year and to your point, how do you manage that regardless of what tile your end it's difficult when the demand just is not there.
Sure Steve So we did take it down as we talked about that facility in the first couple of weeks at the beginning of the of the second quarter, we're going to continue to match demand and our production. So we're going to be.
Very.
Focused on that Theres a lot of demand.
Oh.
Decline right now there is impacting other facilities as well.
Again, if you take a 30% decline on a 3 million.
Ton plus market for say, you've got about a million tons out right and right now you've got.
At least that in downtime going on currently but it would have to stay down so I think you're going to see some ultimate demand destruction beyond what we anticipated of the 15% for sure that just will never come back.
And to make that work, we're gonna have to see assets close out of this of this business going forward.
Because I don't think theres any way to get the balance and the pricing back.
Now Steve you as you know this has been going on for quite some time. This is not new phenomenon is just accelerated right now in 2020.
And what has happened in the past as you do have assets as shut in prices come back and rebound to have the right balance and we expect that to happen, but I think you're just going to see acceleration of that process in 2020.
But it is low cost how is it situated to end markets.
Other mills to the best year knowledge.
It is a low cost it is a first quartile at the mill of course, one thing you always have to factor in there as transportation to your customers right and I think thats the variable that we got to continue to monitor and as customers go out.
Then you got to say what was the next customer what's the distance and what's the impact on that on your cost. So that's the balance we got to achieve at our particularly facility and captors casing.
Got you okay. Thanks Stacy.
Yes, Thanks, Steve.
Our next question comes from the line of John Babcock with Bank of America Merrill Lynch. Please proceed with your question.
Good morning, I guess I want to start out if you could kind of talk about end market trends, particularly in I pretty stelios.
And lumber.
And also pulp to some extent just generally what you've seen in April and then how that's kind of evolved in may.
So I'll start this is frank on the HPC side, so starting with the cellulose specialties.
Each end market has reacted differently.
The acetate tow market has been very stable all the customers reporting have been a consistent with that outlook and we've seen good demand for the acetate tow, which is a very significant part of our business.
Still to this state.
The acetate.
For industrial and textiles has seen some weakness as we look forward here, it's smaller part of the business, but again, those and facing markets, what plastics and textiles have been a bit softer than spend the tow business, which has been stable on the either side.
Across the board, it's been relatively strong.
Food and pharma, obviously being driven by strong consumption, but even the construction segment has been strong as we that's we look at up the demand patterns that we see here.
We are cautious about the second half of the year in construction.
Given what's going on with cobot et cetera, but.
Some of our.
Industry sources are focused on putting people back to work through construction projects as a way to get economies going again, and so our customers, although cautious or optimistic about.
What the second half of that year could look like.
Where we've seen the biggest negatives have been in the automotive end market sales tire cord and filtration products I have had a significant declines in outlook, which has been offset by some of the strength we've seen in the other the other sectors to date.
So that's the cellulose specialties, so relatively stable ought to forecast, but saying that we are very cautious about the outlook because we don't know how and when these economies open up what order patterns and other things will look like as we move forward here, but to date, we feel pretty good about it.
In the commodity sectors of the absorbent materials fluff market has seen strong pricing very solid demand.
And our price increases in those markets.
Most people believe that that will go through the summer in some of our customers believe it may go significantly longer through the end of year. So we'll just have to keep an eye on where that absorbent materials are in the viscous market. So that's been the by far the most challenging segment when you look at.
Textiles, and I'll just use the U.S. and many of our customers are in China. When you look at textiles into U.S. March a sale retail sales of clothing manufacturers are clothing stores was down roughly 50%.
And that's manifested itself in significantly lower capacity utilization.
And.
In many of the.
Let's go staple fiber manufacturers and downtime in certain areas like India, where it's been government mandated to some extent, but even in Europe. We've seen some closure. So VSS. So our demand has been keeping up but it is by far the weakest market that we were entertaining at the moment so.
All in.
That's probably our biggest stop soft spot, but again I'd just caution.
The one thing we now is that visibility is difficult both for us and our customers in this market.
We're going to have to be flexible and move move around quickly to deal with changes in demand patterns across the different segments.
Thanks Frank.
John Hopefully that's helpful and you just added to the question about the forest products in the lumber right. So.
And as we've noted.
The the.
Maybe even somewhat surprising, but maybe not that remodeling repair side of the business has been very strong. So these are your your retail buyers your home depot lows. So those customers have continued to buy so that has benefited.
Half of our facilities.
That are focused in on basically started type of products. So that's been actually strong through this whole timeframe. So that that's the good news our random lengths facilities, a little less so which is a little bit more dependent on kind of housing starts. If you will a new construction. So that's been kind of the drag on the business, but the good side of that as we've had good demand for our study business.
And Paul the one thing I would add as when we look across our products, including viscose. Those are good long term markets. The growth is there we're dealing with a significant temporal issue.
At the bottom of the cycle. So as Paul mentioned, we've got about 500000 tons of commodity sales in our portfolio. We believe even those that have strengthened our well off of what their normalized levels will be so the turn will happen. The question is more of why and then asked.
Whether its fourth quarter of this year or early next year as we start to see some of these markets rebound to more historical normalized levels, absolutely fractions of a huge leverage factor there and John on the lumber markets, we are seeing signs, saying and you're probably seeing this and the newspapers as well of states reopening construction.
Just last week, Pennsylvania, and Texas opened up so that should drive some better demand and the industry has been quick to respond to adjust supply.
Which as at least stabilize the western base benchmark pricing for lumber.
Okay.
Helpful.
Just kind of on the CF side of things I was wondering if you could talk about what sort of flexes allowed in.
Contracts from a pricing standpoint, I mean clearly.
Things things I guess are seem okay. I mean, obviously it depends by end market, but I was wondering if if things material materially word a weekend in customers might become more distressed per se how much flaccid there in those contracts to allow for kind of price adjustments in that scenario.
Yeah, typically we don't see price adjustments in the CF market.
We plan for and our customers planned for and everyone plans for.
The prices to be.
Fixed for the for the year.
So that usually is a reasonable.
I think the bigger risk as you know if demand.
Makes a significant hit.
There are a abilities for customers to to lower some of their demand.
There's incentives for them not to and in many cases, but there are clearly the ability that if they have no end market demand they won't be taken as many tons from that so thats, where you would see the weakness is in the volume not likely not in the price side.
Okay.
And then just kind of falling on.
Next question, just with regards to kind of the discussions you've had with banks I mean do you have any sense that this could ultimately lead to some higher costs for the company.
How are you kind of thinking about that and.
Also if you can just kind of remind me what EBITDA level is that you'd have to kind of clear to.
Be able to make the covenant the next step of the covenants.
Yes, its marcus.
As we said we.
Given the uncertain markets, we thought it was best to be preemptive. So it's it's a bit early to the start commenting on specifics that you're looking for John.
But again I'd like to stress that the dialogue has been positive and constructive.
Okay.
But I can you help relative to the cushions that we disclosed.
On our covenants as you know we're.
The Covenant Amendment does have a step down in in the LTM EBITDA, but we're still maintaining a reasonable cushion to our business plan right now.
Okay. Thanks, and then just last question before I turn it over I was wondering I mean, it seems like cost was a pretty good positive for the company during the quarter, how much of that cost.
It was from low raw materials versus generally cost improvements.
Just a second here.
Sean if we can kind of give you a ballpark Marcus.
Yes, its markets again, so if you look at our.
HPC segment as you know last year, we had.
Challenges are on wood, so year over year, that's that's a big change and as global GDP has.
[noise] contracted we have seen chemical pricing coming coming down as well as energy inputs.
So you're seeing a lot of direct input being reduced so the key ones being would.
Chemicals and energy.
I think you have to be careful though looking forward.
Frank mentioned at well given these uncertain times some of those inputs can turn against such as chemical based on supply and demand.
But.
And then lastly, as you know we had the challenges that Tim is coming with a with the energy Island last year and a much more reliable operations this year.
And.
I'd like to also highlight to you probably saw this in the corporate segment.
There are some some improvements there.
A portion of is a portion of it is FX related we're showing our a 14 million dollar change a 7 million or that is related to FX.
Then some is based on variable compensation around 5 million.
And then expense, we're seeing signs that our focus on discretionary spending is delivering some savings as well that's reflected in there.
Yes, that's what thanks.
Thanks, Thanks, John a good balance as Mark has said between operational improvements that as Steve noted last year was a terrible start to the year and we didnt. Unfortunately repeat that again, just cost would chemicals, all benefiting as well so good balance between the two.
Yes.
As a reminder, if he would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Paul Quinn with RBC. Please proceed with your question.
Yes, Thanks learning does.
And Paul.
Hey, just question on a HPC here just on the commodity side, you've got quite a bit of exposure to any event.
You want to shift from from discuss the philosophy. If you could just give us your current mix and then how much of a shift shifting into.
Yes, so when you think about it.
Paul We've said, we're going to try to dedicate at the beginning the year last year. Our strategy was this year to dedicate our C line to fluff.
As much as possible. So we can debt, we can push up pretty much all of the C line or the predominant amount of C line.
Into the fluff market. So that's a 200000 plus facility.
That we've talked about before.
So that's there there's also some.
Some opportunity to do it and one other line.
And fernandina and so we're exploring that but again it it's not we have made that grade there in the distant past and we're looking at that now in regards to mitigation plans. If we see weakness in the viscous market to take advantage of that as we can see obviously, a little bit more difficult given its not.
It hasn't been in the market in that product, but we do see opportunity there to do some things. So we have flexibility in a number of our assets and so that's really what we're going to try to maximize but it's not unlimited flexibility I should point out.
Okay, so you're going to be moving to more fluff, but it's still be majority of viscous at the end of today.
I think it'll be relatively balanced.
Okay.
Okay, then we make source, we make some other commodity grades Paul but all in its relatively balanced.
Yes.
Thanks for that Frank and then maybe just on forest products mentioned.
You are working to order files and rates are reduced what's the current operating rate and what's the difference between stud mills and random like mills.
Yeah, Paul its market. So so in April we.
Took some downtime at our saw mills, obviously to adjust to the market and a good way to look at it on on studs, we were kind of taking two weeks and on random a bit longer say three weeks.
And then going forward, we will adjust as we see demand coming in but as we mentioned.
The study business and given that pricing as converge there where the gap is down.
We're seeing good good demand on the studs side with our big Bucks a sales. So we'll continue to look at that but obviously in this market you would you would expect to higher waiting to random.
Okay, and then just lastly.
Your bankers.
Broached the idea of asset sales are you still pursuing that.
Yes so.
Paul look as you know we ran extensive process last year I think we were successful obviously, we believe and.
Good sale and good value for our the company on the sale of the Tan how we concluded that process.
But we as I had our core were an HPC business and so we're going to always look at it opportunistically going forward.
But yes, you can imagine this market, there's there's not a lot of anything happening on anyone side as far as I know.
HM.
All right, let's go ahead like Uh Huh.
Thanks, Paul.
Our next question comes from the line of Steve Chercover with D.A. Davidson. Please proceed with your question.
Yeah. Thanks, a follow up well Paul just prompted.
My question.
With the 10 out of the mix how should we in court heard me incorporate that into your.
Guidance for Q2, indicating that things will be better.
Sorry, Steve I'm thinking about your question, how do we incorporate that into Q2 I.
I think I think 10.
The Tam have profitability in Q2, or we including that profitability in the year over year performance.
Yeah, I think it's we'd look at an apples to apples comparison and exclude metaneb and anything that we're we're comparing here.
So we mentioned year over year the forest products.
Frank spoke to HPC the other business that year over year is would be experiencing benefits is our paperboard business given given that market pulp is down right. That's a partial upset.
Got it okay. So you'll try and presented absent Mccann and we shouldn't be concerned that the lack of Mccann.
Yeah, it's still to be better despite that being out of the Max.
You could you Steve I think for for your analysis I would look at our Q2 last year and just normalize it from a tan without maintain and you'd be at a 20 million dollar corridor.
So dollar 20 million.
Yes.
Last year, if you take our take adjusted EBITDA last year, and then normalize it from a 10.
And that's the whole company.
Correct Yeah.
Okay. Thank you.
[music].
Our next question comes from the line of pair Josh Misra with Aaron Berg. Please proceed with your question.
Thanks, Good morning, so for second quarter.
I'm not sure if your raw material cost because already know when our luck Dan would you say, 100% arts, maybe less than that.
Some of our raw material is obviously chemicals, you tend to have storage on site for call. It.
10 days to 14 days, so a lot of that isn't locked in forever.
Certainly would supply is something you have greater control of in Canada.
Energy pricing will will somewhat follow the market.
So a bit of a mix.
Yes. It appears Josh asked the question you're getting at is certainly we see some potential volatility and chemicals, particularly around our caustic in maybe sulfur which is coming out of the refining of crude.
So we're watching that carefully.
And were.
Largely covered for the second quarter is as Marcus is talking about given where we are today in may but there's some exposure and the in June certainly and certainly in the back half the year right. So it's what we've got to make sure. We're right on our toes on to make sure that we got one supply to at appropriate cost to run our facilities.
Got it.
As the electricity also a big part of your cost structure.
Yes, certainly for a mechanical operation such as newsprint and high yield pulp, but Fortunately, we operate in low cost energy jurisdictions.
For that.
But certainly those mills would be the higher consumers of electricity.
And then at a as you know at to Miss coming we actually export and sell electric grid electricity to the to the grid.
And in France.
Okay, and then I guess lastly on the.
Fluff market.
That's trends that you're seeing got both pricing and volume or maybe slightly more color to up the great.
Sorry repeat that question.
So in the fluff market the some of the strength that you're seeing at ER and I saw in Q1, I'm still seeing in Q2.
Uh Huh anyway, you could quantify that on a year over year basis I understand.
Both pricing and volume or bad mostly just volumes, yes, yes. It should be did we've we've got higher volumes and higher pricing in our fluff products for the year, we havent broken that out for people historically, but both volume because we have been dedicating more of a Jeff sub C line to fluff this year.
And the pricing has been increasing through the for the first part of the year. There is a little bit of a lag effect and pricing as we see it flow through but it has been going up month over month and Frank you today. The order book is strong and the order book is strong and out a bit. So we're we're feeling good about at least this this next quarter and fluff.
And you probably saw receive index did go up $40 and in April.
And given the supply is more concentrated that bodes lease better for those price increases.
Got it thanks guys.
Our next question comes from the line of John Babcock of Bank of America Merrill Lynch. Please proceed with your question.
Hey, guys just a just a quick follow up here just on working capital you had a pretty decent usage in one q. I was kind of wondering if you could talk about what happened there and then also.
We should think about to Q.
Sure John its Marcus.
You know if you look at working capital and I'll address some in their components.
The inventory obviously, we went through our seasonal build the working capital on logs in the in Canada.
We did see that on our trade accounts receivable some slowdown.
Coming out of the a yearend.
And we're focused on bringing those percent overdues back in line.
And.
The other thing that you'll see in our disclosure.
Is that given the cares act and the development there.
Actually had a a receivable established.
For some noel's that we can carry back and that's $20 million as well.
Looking forward.
I would say that Q2 Q3.
We'll see some higher capex given the timing of shutdowns you saw our capex level for toward a one was was slightly lower.
Than usual, but.
Currently we feel that on working capital you were focused on it.
And we're obviously in this uncertain market looking to be.
Neutral or slightly a negative.
So.
John if I could just to add to that you know and the.
Guidance, we gave in February we talked about four components of our our act now efforts and Marcus's took you through one of them, which is your question around working capital.
Yes, we'd all agree we're behind in our plan for that which.
For the reasons stated and we think we can move that back on track and again logic is this is driven around how running some our business right now and moving out shutdowns and things, but also keep in mind there. The other three components right Capex reduction, which were right on track corporate cost elimination I'd say, we're right on track operating cost improvement.
Also right on track so of the of the four components that we provided to you guidance of three of those I say, we're right on track and you're right. We're off track on working capital, but we've got plans to get that back on on the path that we need to be on and.
And we're going to reiterate.
Maybe mark as you just make sure we talk.
The tax benefit later on as well.
Yeah as I mentioned the.
The 20 million related to the the cares Act.
So the path forward on that is once we file our June July Inc. income tax return.
We should be able to secure that $20 million refund in the back end of year. So obviously that will improve our our situation on that and back in.
Okay. So that will show up in cash flow does that show up on the income statement at all or.
There's a given the the difference in statutory rates there is a tax benefit in the first quarter to reflect the 35%.
Just the 21%.
But the 20 million I spoke to was is mainly the cash.
Yeah. Thanks, that's all it.
Thanks, Joe.
We have reached the end of the question and answer session I would now turn the floor back over to management for closing comments.
Hey, Bill Thanks, Operator, and then thanks, everybody for your time today and certainly as we all recognize these are challenging markets.
But we are taking the actions to ensure one that we got the safety of our employees.
Focused on that too we've got security of supply for our customers and three the future value of the company.
And for our stockholders is right on top of our priority. So we appreciate your questions and your focus and we look forward to giving you updated guidance again next quarter. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.