Q2 2020 Domtar Corp Earnings Call
Ladies and gentlemen, welcome to the downtime Corporation Q2, 2020 earnings conference call with financial Analyst at this time all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session.
Our asked a press star one to register for question.
Should you require any assistance during the call. Please press Star then zero on your touched trends show.
As a reminder, this call is being recorded.
Now I'd like to turn the meeting over to Mr. Nicolas <unk>. Please go ahead.
Thank you good morning, and Lucky tour second quarter 2020 earnings call.
Our speakers today will be John Williams, President and Chief Executive Officer, and the young people Senior Vice President and Chief Financial Officer.
I wanted to yell will be supported by Michael Garcia from our pulp and paper decision and Michael Fagan from the personal care Division.
During the call references will be made to supporting slides and you can find the presentation to the investor section of the website.
As a reminder, all statements made during the call that are not based on historical facts are forward looking statements subject to a number of risks and uncertainties many of which are outside our control.
I invite you to review don't Trust filings to the Securities commissions.
Listing of those.
Finally, certain non U.S. GAAP financial measures will be presented and discussed you can find the reconciliation to the closest GAAP measures in the appendix of this mornings release as well as on our website.
With regards to the review of strategic alternatives for personal care Division, we do not intend to comment on the details of the process unless and until we haven't updates to share so with that.
Over to John.
Thank you Nick and good morning, everyone.
For discussing our second quarter results I must recognize and thank all teams across all different businesses.
Personally been inspired to watch everyone come together to play soccer challenges embracing new ways of working and decides to be taking actions to serve our customers in the face of unprecedented conditions.
First off of 2020 has been extraordinary by any measure.
No one could have anticipated the scale of the impact from this pandemic on the global economy.
And on our own businesses, along with the decisions, we'd have to make to keep up people customers and communities safe.
I'm very proud of how teams worked together to assess the risks understand the consequences and take decisive action.
Some of these decisions are not been easy.
We're aware of the impact, especially for those employees affected.
But I believe the response was the right one for the short medium and long term both for all people and all business.
Oh second quarter began during the early stages of the cobot 19 pandemic.
As we started the quarter, we see clear simple priorities to manage the business successfully through the important challenges the what happening with our customers with the economy and with the operating environment.
We swiftly implemented various actions to maintain all financial flexibility, including a tight control on operating expenses, reducing our inventory counselling and deferring some capital investments and suspending on capital allocation plan.
We also announced several key strategic initiatives. This morning, but will position dumped all for sustainable and successful future.
Let me begin with a review of the quota and I'll comment further on some of the strategic initiatives following Daniels financial review.
In paper the months of April and May well, particularly challenging those restrictions closures and the resulting impact on consumer mobility had a significant effect on paper demand.
Several of our customers aggressively reduced inventories to Max lower sales and to conserve cash.
The impacts varied somewhat across the channels with office supply facing the biggest volume challenge as offices across North America was closed.
Merchant channel was also down as commercial printing slowed significantly in most markets. As a result, we made several adjustments draw mill operations to mitigate the impact of lower paper demand.
We were acting quickly and were able to make decisions that allowed us to route capacity in fixed costs through extended the idling of some or all operations as well as reducing inventories.
We took down the Ashdown paper operations and the Kings Fulton holes will mills for the majority of called it too.
In addition to these moves we took extended downtime Johnson bugs and Rothschild.
As a result, we removed 297000 tons of all paper capacity.
In the near term some of the kian nodes to demand will be school reopenings the level of returning to the office and of course direct mail advertising. Nevertheless July demand was a small improvement on June I was tracking to our expectations with activity and momentum gradually increasing despite the recent gross income.
Hi, good cases in the U.S., although we took significant market downside in coated too we have been able to reduce costs, while initiating cash conservation initiatives across the network.
[noise], we've reduced paper inventory by 22000 tons in quarter, two and 52000 tons year to date.
Average paper prices were down $16 per tonne, which was primarily a mix effect driven by relatively higher exports and flex volume and a drop off in high value merchant and office supply grades.
In pulp global nature of the business and the deferring end use markets have led to very rate impacts from Cobas 19.
She end use markets in tissue and towel and personal care I've experienced very strong demand and kept our order books full.
Pulp shipments have increased 13% through the first topic 2020, with fluff pulp increasing by nearly 12% over 2019.
Towards the end of the quarter, we began to see some demand softness in China related to the drop off in printing and writing However, North America remains strong with a solid consumer tissue market.
Oh focus will remain on keeping inventories lean throughout the supply chain as the overall pulp supply demand balance is still on so.
Average pulp prices for $17 per ton high up those price increases were realized in China or an old grades I didn't fluff pulp in all markets.
Operationally, we had a strong production and cost performance across the pulp business. Despite some would procurement challenges of the Canadian mills.
In personal care quota to sell soften following a record first quarter, which was driven by pantry loading stemming from the cobot 19 pandemic.
However, direct to consumer channels continued to deliver well above expectations as consumers adapt a new at home behaviors.
As expected revenues were lower than in the prior quarter, we'll be at 6% high year to date versus prior year.
Juice desk DNA spend good cost control and improved operational efficiencies supported a solid EBITDA performance.
Quota to ended with an EBITDA margin of 14.4%, which was 160 basis point improvement when compared to quarter, one and the highest divisional margin since quota for 2015.
We had a very strong manufacturing quarter with record production volumes in April and set production records of several facilities, which drive cost per unit down versus quarter one.
Our operating rates have continued to improve driven by a shift in our customer assortment that increase volume, which has opened up additional capacity across our network.
This underpins our ability to continue to scale up an add significant new customer wins.
Turning to our overall outlook, we expect the environment to remain challenging.
Paper, we expect demand to remain weak with some incremental recovery in quarter, three and towards year end.
We expect near term pulp markets to be impacted by seasonal softness elevated global inventories a weak demand trends from paper markets.
Personal care will continue to benefit from the impact from new customer wins and productivity gains.
Overall raw material costs are expected to remain stable.
So to wrap up we're preparing for a range of scenarios and remain confident in our ability to maintain our overall strength and stability as well as to continue to support our customers.
We remain focused or what we can control and we will be agile and resilient as events unfold with that let me turn the call. They would have done yield for the financial review before making further comments on some of those strategic initiatives. The way we announced this morning Daniel.
Thank you Johnny good morning, everyone.
Let's start by going over the financial highlights of the quarter on slide slide.
Reported this morning net earnings were 34 cents per share for the second quarter.
Net earnings of nine cents per share for the first quarter of 220.
Adjusting for items, our earnings were 36 cents per share in the second quarter compared to earnings of nine cents per share for the prior quarter.
EBITDA before items amounted to $91 million compared to $95 million into first.
Let's turn to the sequential variation in the earnings on slide six.
Consolidated sales were 266 million dollar lowered into first quarter due mostly to lower selling our paper business and to a lesser extent lower sales in our personal care business depreciation and amortization was 1 million dollar lower when compared to the first quarter and as Ginny was 9 million.
Dollar lower than the first quarter, largely due to lower discretionary spending and $4 million a wage subsidy.
Our second quarter effective tax rate was affected by the change in mix of earnings recognition of additional tax credits and the impact of the cares act, which granted something you'd be ability to carry back tax losses generated in the U.S. into any 22 effects you would.
Hi, your statutory tax rates.
Now turning to the cash flow statement on slide seven.
And I suppose from operating activities amounted to $67 million, while capital expenditures amounted to $40 million. This resulted in a free catch you up $27 million in the second quarter.
Our net debt to total capitalization ratio stood at 30% Walt totally liquidity amounted to $906 million at the end of the second quarter.
Turning to the quarterly waterfall on slide eight.
When comparing the first quarter EBITDA before items decreased by $4 million due to lower volume and mix was $61 million lower productivity for $43 million and lower selling prices for $1 million. These were partially offset by lower maintenance costs for $41 million.
The recording of 33 million dollar benefit related to a which subsidy and the for doing that but nonproduction agreement lower fixed costs for $16 million lower raw material costs were $5 million lower as ginny costs for $5 million and a favorable exchange rates for 2 million.
And offers.
[noise] now there was your business segments, starting on slide nine.
The pulp and paper segment sales were down 22% when compared to the first quarter and 27% lower when compared to the same period last year did the abuse white sand was $66 million, which was flat compared to the first quarter of 2020.
Paper business on slide 10.
Sales were 34% the word gustus last quarter and were 36% floor addresses the same quarter last year. They bid there will be swipe, James West $59 million and included $13 million of words subsidy.
Sure paper shipments were 32% lower when comparing the first quarter and 33% lower when compared to the same pace last year.
Front beckstrom prices for all our paper grades were $16 per ton lower than than last quarter, Lars <unk>, largely drove the product and customer mix.
George I or July paper shipments were about 20000.
More than yeah, but for the second quarter, showing incremental improvement that you couldn't be starting.
Our July paper prices were relatively stable when compared to the second quarter.
And we saw we expect a better mix.
Let's turn the call business on slide 11.
Sales were 12% higher just as the last quarter and were 4% of the work. This is the same failed last year that submitted a bid they'll before it was $7 million second quarter results include the $7 million benefits from the termination, though but none projection that gordmans related to our former lipinski pulp mill.
And $11 million benefit of words subsidy.
Shipment weren't temptress thing I've got so the first quarter and a 15% when compared to the same period last year I bet spot prices increased $17 per metric ton versus the first quarter.
Our July prices were slightly above the average or the second quarter.
Let's look at page 12.
Arbitrary inventory decreased by 22000 ton when compared to last quarter, while pulp inventories decreased by 2000 metric tons.
Our personal care business on slide 13.
[noise] south decreased 14% when compared to last quarter and were flat. This isn't the same quarter last year, mostly due to pinch reloading, which occur in the first quarter.
BW swipe them was $33 million $1 billion lower than the first quarter and $13 million higher than the same quarter last year.
Slide 14 up line or making scheduled for the remainder of the year finally, giving the two investment announced today. We are now expecting spend between 160 and the hundred $70 million in Capex this year and degrees of $20 million Gustus, our expectation last quarter.
So this concludes my financial review and will that help tend to call back to John John.
Thank you Daniel over the last several months, we've adapted quickly to changing white paper market conditions.
Through this period consistent with past practice, we've carefully reviewed our assets and operations and determined that implementing a companywide cost savings program accelerating our plans to convert all kingsport, an x. down paper assets and exploring alternatives for our personal care business will help best positioned on top of the future.
Which I can proactive steps that we're confident will result in a leaner stronger organization and enhanced value for all stakeholders.
Let me begin with a cost savings program. Our plan is in direct response to the major transitions in all markets consistent with our priority to position dumped off of long term success.
In line with these goals and current market conditions, we have commenced a significant cost savings program with a targeted $200 million an annual run rate savings to be realized by the end of 21.
The cost savings initiative includes capacity reductions in asset closures middle level cost savings and Rightsizing support functions.
This program will streamline operations maximize productivity and improve operating margins.
It's also expected to improve communication flow and cross functional collaboration leveraging more efficient business processes.
As part of the cost savings program, we will permanently close uncoated freesheet paper manufacturing of the Kingsport, Tennessee and pull here in Michigan Mills, the remaining paper machine and Ashdown Hawkins, so and the converting senza enrich fields, Tennessee, which serves kingsport.
These actions will permanently reduce the company's annual uncoated freesheet paper capacity by approximately 721000 short tons.
As a result in a workforce reduction of about 780 employees.
[noise], the Kingsport NACS down paper machines, which had been idled since April 2020, well not resume operations. The push your own enriched field operations are expected to shut down by the end of the first quarter 2021.
The cost savings program is an important to necessary steps that will significantly improve our free cash flow and return on invested capital and enables all Repurposing program.
We have a talented and dedicated workforce itself. So.
Decisions that affect people I never easy however, we're taking the necessary steps to better position all business.
Sure.
Proving out performance, creating synergies across our network and rethinking all support functions a pivotal components of our cost savings plan as we create more agile streamlined and efficient coal business, that's well positioned for long term success.
Let's move onto the asset conversion announcements those who followed our company knows that we regularly evaluate the merits of repurposing assets to generate earnings and enhanced value for shareholders.
Decision to convert both Kings school and Ashdown is consistent with the right amount, which we made public nearly two years ago.
We will continue to be implemented as we adjust all white paper capacity to match customer demand.
Let me begin with the King School conversion.
We've seen a significant global shift in demand away from fine paper grades, while we expect the decline to level off as the economy recovers and businesses reopened we do not believe the paper the mom will reach its pre pandemic levels and we have determined some time ago Containable will maximize the value of the King school assets.
There are number reasons why we're excited to enter the containable market.
First and foremost, it's the largest paper grade market in North America, and enjoy solid growth prospects. It's a 40 million ton market, which has grown at about 2% for approximately 800000 tons per year.
Containable product support a variety of industries, including agriculture manufacturing and distribution.
Align with many of today's mega trends, including the growth in E Commerce and environmental awareness, we chose Kingsport as office conversion location because of its scale capabilities and geography.
Looking at scale once fully operational things vote will produce a market approximately 600000 tons of high quality recycled linerboard and me, Jim which will make it the second largest recycled containerboard machine in North America.
Kingsport has the potential to be one of the lowest cost recycled linerboard mills in the country.
Realizing a high quality paper machine originally built in 2000 to where the speed of 4000 feet per minute and 346 inches wide.
Capabilities on the occasion things will be a premier producer of high strength linerboard corrugated medium and packaging grades with a unique and compelling value proposition for our customers.
The offering lightweight containerboard as well as have the capability to provide industry standard grades utilizing proprietary fiber technology to develop superior strength to characteristics. The mill is well positioned to be the go to supply out.
Independent converges, but quality service and innovation.
Less than a day's dry from over 60 independent corrugated customers, serving food beverage and ecommerce market, representing nearly 4 million tons of annual containerboard tomorrow.
We expect the conversion to take approximately 28 to 31 months, which means we will complete the project at the latest by the first quarter of 2023.
The conversion is expected to cost between 303 hundred $50 million, but the majority of those costs incurred in 2021 and Twentytwenty too.
Re purposing that Kingsport Bill provides don't all the very best strategic entry point into a growing market with a very competitive low cost asset.
We view this as a strategic first step to building a large value writing business in the Containable market.
We've already placed the order for the stock preparation system from voice.
Provide us with all elements of the system, including receiving conveyors pulping fiber separation screening cleaning and reject kindly.
The second part of our plan is the conversion to 100% softwood and fluff pulp, but actually down on console.
Fiber line conversion will require $15 million to $20 million a capital investments to convert the remaining fiber lines of softwood, which will take 12 to 14 months from the time approval.
In the interim Ashdown will produce additional market hobbled pulp until it converts the fiber lines to sell football.
The conversion of the fiber lines of 100% softwood is also necessary for an eventual expansion into containerboard.
Following the fiber line conversion Ashdown will be a world class market pulp mill with an estimated annual production capacity of 775000 tons of fluff and softwood pulp.
We're very excited about both of these attractive opportunities.
With these two conversions Tom talked continues to deliver on its strategic roadmap by making value, creating investments and its world class facilities. After this and provides a long term future for the King school than Ashdown Mills.
Turning to the strategic review of personal care working together with our advisors, we will evaluate a range of value, creating alternatives, including a potential sale of the business. We're approaching this process one open mind to all opportunities and strategic alternatives.
However that can be no assurance that the review will result in a change for in a specific outcome.
We're embarking on this review now because of the significant progress we made over the last years to improve the position.
The business in addition to scale up of new customers and the sales pipeline gives us confidence in the prospects of the business. We're realizing the benefits about margin improvement plan, which has resulted in several initiatives, including the consolidation of our north American manufacturing footprint.
We also streamlined expenses and simplified operating structure for increased productivity.
And we have generated supply chain efficiencies.
I'm very pleased the results our investments are driving and remain confident in the long term prospects for the business.
Ultimately the review is meant to build on this positive momentum and our ongoing commitment to profitable growth and maximizing the value of our assets.
To conclude we believe we have set the stage so don't talk to being a strong position.
10, you bring on a clip pasta sustainable long term growth.
I'm encouraged by the tangible progress we've made in the quarter and executing on our strategic priorities.
Focused on supporting our employees customers and communities and on being good stewards of all capital.
Thank you for your time and support and I'll turn the call back to Nick for questions Nick.
Thank you John So both John and the yell will be available for questions I'd ask our participants to ask only two questions at a time and return to the queue for follow ups as we want to get as many people as possible.
Maybe you can open up the lines for questions.
Thanks, and again, if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one.
Good question.
Well take our first question from Anthony Engineering, which city.
Hi, good morning.
Hey, good morning, and good morning, John with regards to the containerboard conversion you talked about some of the preparatory work you've already completed on the machinery side I'm. Just wondering if it's possible to see whether you've had initial conversations made with independent converters or potential partners and would you consider you know either buying.
We're building some box plants of your own over the next few years in anticipation of Kingsport.
Anthony Thanks for the question. So, yes, we've had conversations but as customers not as potential acquisitions with converters and yes, we certainly had conversations in terms of partnering generally.
If I'm being truthful.
I actually believe we can find a market for the 600000 tons without needing to.
I have box plants, I think it's quite likely however, as we grow.
And we think around on next conversion.
We'll have to think about whether that's appropriate.
But at the moment I believe pretty strongly actually the that independent convert a you know who can find a really powerful partner who's really lined up behind them from a containerboard standpoint, I think we bring something very interesting there.
In allowing them to be competitive in this market. So.
I think for now I don't see box loans or certainly not in the short term and maybe not even in the medium term.
Okay. That's very helpful. And then outside of Kingsport, you identified Hawesville, Marlboro and I think cash down as well as candidates for conversion into containerboard down. The road. Just wondering if you could say anything more about those three mills from a cost and location perspective what might.
<unk> you know the most attractive or might make the most sense for next stage conversion and then from a timeframe perspective is this.
You know next three to five years and makes five to 10 years or any any further thoughts there oh, okay. I mean, I don't think there's a specific order Anthony I I think the way. We see this is really around you know the demand for uncoated freesheet and obviously, we're quite happy to manufacture uncoated freesheet.
If you take a look at the capacity, we're taking out on our expectation of forward sales. There is a level of decline that will come into that marketplace. We imagine.
Oh, we're planning for if you like that what kind of drive some of that timing and probably will drive location post.
Making the full softwood conversion in Ashdown of course, we have you know we have enabled if you like.
The the Ashdown conversion of the minute Mulberries focused on light weight. So we'd have to think rather carefully about where we place that lightweight, but what weve before we think about mol Bravo and of course, you know hawesville will be a very competitive mills. So.
We wouldn't be doing anything that isn't at least kind of talk towards all in terms of the cost position.
All the studies, we've done said all these facilities all one.
Very convertible to containerboard from a technical standpoint, I've got people in the business.
Done it before.
And to all of them, we'll be very cost competitive. So I think if you look at that timing.
You know is this a 10 year journey to the potential.
You know to 2 million tons or more the answers I think it could well be.
So I hope you.
And we are going to take our next question Mark Connelly with Stephens.
Thank you just to follow up on that a little bit did you consider a virgin minor conversion wasn't recycled economics, just you know overwhelmingly compelling you know on paper they almost always our and aside from the proximity issue at King's Port were there other key factors that made it clear winner.
The others was it a close rates.
I would say that's interesting question <unk> I would say it was a relatively close right, but the winner emerged early on.
A couple couple of reasons, obviously, it's a great paper machine you know one of the newest around so we felt that was helpful.
It certainly has some backend challenge is a fine paper mill in times of Ah you know it requires ships. For example, so you know we just felt it was a very obvious choice and then when you look at its proximity to market and what it can reach.
That's why we settled and then also when we look to paper decline on the grades where that decline was really relatively intense.
We felt kings vote was the place to do is because it was it was really making a lot of cut size and we can do some of that elsewhere. So to give you. An example of how a I'll give you a bit of granularity if you think about thinking when.
You know mulberries, making cut size, but it's actually making cut size for export obviously the margins are that are not not attractive. So you know we can we can shop, the kingsport mill and if we need to we can make cut size the domestic purposes him over which actually enhances the mold or mix. So that's the kind of way we thought about it if that helps probably touch anything else.
Hi, there okay.
That's helpful and did you consider Bergen at all.
That's something we.
No no that was that was never going to be on the cards because it because of the back end of the mill.
Okay, and just one last question investors have underestimated the growth of fluff market for it for years.
We need.
He's containerboard Ashdown inevitable or you love you know continued to outperform expectations would that be of potential alternative well it wouldn't be on either all the thinking would be we'd still be a major fluff pulp producer to the sort of volumes, we probably have what would what would give would be our.
Southern softwood production as we still that if you like into containerboard. So there might be a slight to kind of fluff pulp, but it's not an either or Troy smoke.
And we'll take our next question, Brian Choir with Goldman Sachs.
Hey, good morning, Thanks for Oh, the news this morning, I can get an active morning first off.
Just on on the.
The strategic view and the mill conversion I guess just wanted to get a sense of how intertwined that you are $350 million is a lot as.
Capital to lay out for a company your size so.
Should we be thinking about it being a little bit contingent upon a successful outcome in the personal care, we'd be process and as you actually get further into the process. If it becomes obvious that there is more assets in your portfolio that makes sense.
To be lumped into the including into this because if we eat prices would you be open to that or is it you know always going to be really gets to a personal care process.
Well, sorry, there's a lot of meat to that question.
Me so to answer the first part of the question.
I think sort of what you're asking is the conversion contingent on receiving some funds from somewhere the answer is no.
Because I think with the 200 million, what we're doing on cost saving at all actually our ability to generate.
And level of cash even in these conditions.
And the fact that we had $906 million of liquidity, it's not conditional so it's going to happen.
To your question about assets.
We're all was.
Aware of the fact that may be evaluating opportunities to shareholders.
The better owners with some of these assets might appear we always have an open minds of that so I I would never close that dual.
Okay, and just on that the concept of more mills.
Being converted I know in the past John you said.
You don't really want to be a one mill system and that's the case with fluff.
Yeah, I should think about kingsport in a 2023 sort of timeline is is there enough time and optionality for Ashdown to joining union.
And then give you a sister mill.
That's a great question. So I think over time, we're going to see.
Move along that timeline, we've given you up excuse me not the timeline, but sort of the assets that we've given you. So if you look at slide 17 in the deck.
Kinda tells you where our opportunities though.
Obviously over time, we'll build that business what it is contingent on though of course is you know where we find ourselves in uncoated freesheet in the volumes available to us three to three or four years time.
As you can tell by all planning and the capacity with taking out in our own supply chain, we have a pretty definite view that.
Demand has not recovered to sort of pre pandemic levels now waters made us think that is our experience through the o. eight or nine recession, where if you recall market was down 13% to 15%, even though it leveled off it never came back.
So that's off premise why we can be confident enough taking this level of capacity out, but how that plays out in terms of decline old stabilization over the next few years, we'll determine some of the timing around the conversions.
To help.
Our next question.
Quinn with RBC capital markets.
Yeah, Thanks, very much money.
Well when they take a look at yeah. The amount of downtime that you took in Q2 and annualize that you're at like 1.2 million tons and you're taking a 721 would basically.
It's about 60% of the annualized downtime. So is that suggesting you know and and rough numbers import you expect 40% of the demand come back.
I can't do your math, but I I would say the level of demand decline we've experienced in the height of coated we would expect half of that decline to come back that's pretty much all the mass work.
So we've reduced inventory and the in the quarter also right.
Right, Okay, and then just on additional conversions I mean, you stated that.
Kingsport, and Nash downturn or not condition on the sale of personal care. If he sold personal care would that free up the up as on Hawesville Barbara.
I think these are all economic choices based on market demand pool.
So if you believe that.
The earnings potential offset against the capital offsets against what you're running currently in those mills is really compelling on the right economic decision. Obviously, that's a decision we would make if you didn't feel that we just we would keep running making decent margins as we currently are in those mills.
And look to the level of declined to a sort of dictate some about timing I'm you know you've seen us do this many times, but.
If if we see market decline and.
Downtime sort of starts to seep into the system.
That's the point, we have to think about you know during the next thing I'm learning really going to get visibility on that quite frankly is as the world returns to.
Whatever we consider to be normal.
At whatever talking about happens to be.
And if you think about whether on you know if you think about potential proceeds if you look at and those wise you know you've seen our approach has been to invest in the business to make sure. We have them a strong balance sheet and then think about you know returning to shareholders. So I think if we.
If we get some proceeds will will think around those issues then.
Too early to tell his point.
Okay.
Sure.
The TD securities.
Thanks, Good morning couple of questions.
With respect to the personal care strategic view.
It sounds like you're focused on sale and the business can you speak too.
Or any other potential outcomes through that review.
Yes offers don't meet your herbalife.
Nick gave you a pretty clear disclaimer. The fact that we weren't prepared to discuss that at this point drilling. So if you don't mind I I want to discuss it.
Okay.
On on 2021, Capex, given that you're gonna be spending pretty aggressively on the re purpose and can you give us an initial view on what those numbers might look like well. So what we normally do it is we will we give you sort of full clarity on that in a quarter for running school because obviously, we also have to.
Think about building a budget for 21, which you know where we have not yet begun to do so if you don't mind, but we will absolutely committed to give you. The clarity then because if you if you think about.
As a rough number for now just to help.
It's probably about 50 50, all kingsport.
You know between 21 and 22, so we'd spend off the money in 21 off the money in 22 rough and ready okay.
And then you just think about sort of the regular capex that we put into the business, which obviously in the new world. We've suppressed specifically to make sure we generate cash I.
I think that would give you a rough enough idea of what sort of 21 would look like but I wouldn't want to make myself, a hostage and fortune until we put the budget together okay.
And we'll take our next question.
Since then with Keybanc.
[noise] John Daniel Nick Good morning, Thanks for taking my question Patricia.
Good morning, John.
You see you talked about being a preferred supplier to the independent converter market as part of the Kingsport announcement, and so roughly speaking I think to convert or markets about three to three and a half million tons in North America, you're talking about call it almost 20% of that with the Kingsport.
Versions, that's that's a that would be a big.
Slug of tons going into that market under the presumption that you won't be able to export those times given the location of the Mel and the fact that <unk> the papers recycled not craft.
Can you just talk about how you intend to find the home for that many times presuming, it's all done mastec.
I don't see its recycled are you planning to go directly to Sun and buyers rather than just exclusively targeting independent just any additional thoughts as where exactly you intact.
Obviously, I I've I I'm, not going to kind of declare my.
Market and sales and.
Because obviously there sort of competitive elements to think about however, I do think one of the things we will struggle with is the definition of Watson independent converter.
Very often.
Definition is anyone who has no interest in any type of containerboard mill.
As you know there are some very large independents actually who may own a small mill and bye.
Hundreds of thousands of tons more than that mill can actually produce for them, but they're not considered independent. So when you do that math, we see a larger opportunity perhaps than you know that definition of independent would give you.
And undoubtedly a number of them have already reached out to us and to your question. We have talked to a number of end users to be honest until we have announced as we now have that was always kind of a glimpse into our eye on a glint in there I what my what am I.
Anticipating is over the next year or so oh or 18 months, perhaps you know actually we confirmed that up because now you know.
We were going to do this yeah, we've already placed the order for some machinery. So I think that will develop over the next 18 months.
I appreciate that China, just in terms of the cost of conversion. It's about 540 Bucks a time there have been some high profile high profile conversions Don.
Below 400, so I'm just.
I understand a little better why such a high costs in conversion and I know each conversion is different but any any thoughts there as it is impossible to do it for less than 540.
Background, there would be helpful. But they said if we come in at about 300 million, obviously, that's about 500 Bucks ago.
We pulled out a list of some other.
Conversions so.
Yeah. These raw numbers, but we think green Bay is that about 667.
He rebels at about 667, but of course that is white talk Kraft liner.
Pratt WAPA, Canada.
We think it was about 688, so you know we don't feel versus <unk>.
I I think a good comparative for us is probably pratchett wapakoneta.
And you know to my mind, we look pretty competitive so of course, that's a greenfield or brownfield. So that differential I think is understandable that are fine organization.
So I I don't feel where miles off against comparative conversions or even new models if that helps.
<unk>.
Next question from George Staphos, Thank listening.
Hi, everyone. Good morning, Joe Shake My question, how you doing good luck with the the process here <unk>.
First question kind of a couple of parts to it on Ashton now recognizing you're already.
In the process, that's converting Ashdown two to Paul when you look at the fluff markets you look at profitability overall, and Paul wasn't North American producers, it's not been.
Tremendous over the last couple of years, because the commodity markets.
Really driven by hardwood to China really depressed pricing ultimately when you look at it. So why are you still optimistic that this will be a high returning project what kind of mixed the anticipated ashdown between fluff and softwood and does it require the containerboard line to be viable longer term. My second question is.
Just as you look at the other conversion candidates in your and your and your fleet do you anticipate those only being version or would you consider doing a recycled line and have fiber flexibility that you wouldn't necessarily have kingsport. After the recent you mentioned to your other question. Thank you.
Let me see like house of both of those and remember them bugs. So I I think on on on Ash town.
The pulp cycle, which I guess is really the major part of your question.
I think it's absolutely right that this has been.
A long or.
Time, when you know pulp prices have not been.
You know have not moved as one might have anticipated and you know whether or not the premium for fluff pulp is realizable given the number of people who can swing from softwood pulp. If you do that the arbitrage are being into fluff pulp us is being into southern softwood, you're going to sell fluff pulp and you might get a little bit silly around what you're expecting to get for it.
I think that will shift over time and the reason I think it'll shift over time is what's really driving those products.
Is the end use now the baby business stable growing in the developing world, but stable to declining in the in the developed world, but you know the adult incontinence business as a ton of runway. So I still thing, we will see a world where that pricing will move back.
Again, you know if I can we make decisions based on economics. If you know we all successful I believe we will be with Kings Gordon our entry into containerboard and we then feel.
Right Economic decision is then too you know.
Put a containerboard machine into Ashdown, we'll do that that would reduce slightly obviously, all pulp output not dramatically, but slightly up we made that choice. If we think it's the right choice to make on the other mills.
We have a reasonably okay, obviously, what I'm fantastic fiber basket. Some kraft liner so would we wanted to give ourselves the flexibility of of a test liner.
I mean, as well who knows but at the minute, we're really focused on Kraft liner.
If that answers the question.
It does Sean do you have a view on the mix ultimately softwood versus a fluff ashdown. Thank you again.
Oh, yeah yeah.
I know please.
The the mill will be capable of doing around 600000 ton of fluff.
And the rest in softwood Bill.
But the the fluff machines actually fixable to move from from Slough to bail. If we if the market they did better to sell bill So a lot the flexibility nationally.
[laughter].
Next question Steve cover.
Davidson.
Thanks, Good morning, everyone.
Just a quick [laughter] as if we haven't talked about kingsport enough, but what happens to the craft line since it's gonna be recycled mill.
Just sits idle.
You mean, the back end of the mill.
I guess I always thought I always thought the pulp moves the front end with no but.
Yes, I mean, I was going at the backend for which my apologies yeah, I mean that would be idled. Obviously, so anything that is unique to the crop process would be idled.
Okay. Thanks, and then on wage subsidies.
How much did you get who is it's from and how is it allocated across two business segments forgive me if I Miss that.
You're talking about the Canadian subsidiary, the 25 million.
Yeah, well I guess that you just answered to the questions I guess it did you can't really it's I find it all three [laughter] not.
Very well that [laughter] walked out we are guiding or maybe you could you could take us through just the detail about 25 million.
Yeah about.
11 million dollar was.
In the fall business, a 13 million dollar was in the paper business and just 1 million dollar I was actually in the corporate segment, it's all coming from as as John mentioned from the coverage and wage subsidy linked to the a club in 19 situation.
That's by headcount as to where it fits in the business if that helps.
Our next question Mark Wilde with bank of Montreal.
Good.
Morning, John Good morning, Danielle.
Good morning, good morning.
Tom I wondered if you could help us with at $200 million of cost savings just breaking that out getting a sense of how much of that stems from just a mill closures mill downsizing versus other elements.
So it's about a third I think on the mill closure side.
A third on sort of future manufacturing.
Efficiencies and reductions.
Across the rest of the network and about a third in terms of you know central roles.
Okay and.
John just on Kingsport or the timing. It seems like you know 28 to 31 months is a pretty long time line for something that you've been studying for a long time, particularly when you've got at a mill in place already can you just address that issue.
Sure. So I've, obviously told the troops that's too long.
So I would but actually a lot of its driven by machine manufacturer and timing Mark So.
I think we're a little conservative that we said at the latest so if I could bring that forward three to six months I would.
I am encouraging the troops so to do.
<unk>.
Question for Mark.
Seaport global.
Thank you maybe just following up a bit on Mark's question first off is that it's the paper machine ordered or when when is that part of the process get into play at King's part.
About two months within the next eight weeks for the paper machine itself, we voted most of the backend, but we we have yet to what are the machine.
Okay, Great and then I completely understand that the rate of decline in uncoated freesheet is gonna be a a huge factor and how you think about and the timing of any additional moves but I'm would you also want to see how kingsport plays out on before you would embark on next steps or is that not necessary.
Okay.
I think it in a perfect world that make sense, we don't live in a perfect world, but obviously, yes, I'd want to be very confident the you know we have a business and it's a viable business I'm convinced we will.
But you know that timing the world might not allow us that luxury <unk>. So we'll have to see.
And again, if he would like to ask a question. Please press star one.
Well take our next question Adam Josephson with Keybanc.
Thanks, very much for taking my follow ups, John just in terms of the the assumptions underlying your entry into containerboard you talked about that the market, having your thinking the markets a 2% grower yes.
North America has the world's highest prices.
There's a lot of capacity, that's been announced others of Spanish company that announced last just last week that its entering the market. So.
Thinking about the price.
How are you thinking about.
The supply demand dynamics in this market over the next couple of years given your view of what the growth rate will be given the supply that's been announced and given that the U.S.. Obviously has the world's highest prices by a pretty comfortable margin.
Sure, So I, saying, what we're doing.
He is unique.
In terms of was starting with test lined out we're going to build great relationships with those independent converters. They all to some extent screaming for somebody to really support them.
Against the big piece as they see them of the integrated models. So I think that gives us a great entry point.
I do believe very strongly that we'll be able to make up they will be able to make a great product from what we're going to sell that gives them opportunities in that marketplace because in the end.
If you really think about it there's no such thing has a containable market. There's a box market that served by the consumable business. We've set ourselves up I think very competitively to do that for that for those independence.
You know, obviously personally I've operated in a containerboard and corrugated market that was way more competitive.
In Europe, less consolidated and you know I think we're ready to do so we've done lots of sensitivity analysis around pricing.
And it's you know it's it's a it's a very attractive project at a range or pricing.
Sure not understood interest Wanda recycled versus Virgin dynamics in the markets, obviously recycled it's been growing at a much faster rate in the U.S. in recent years and much of the new capacity that's been coming in is recycled Europe is much more recycled in the U.S. as but any thoughts of <unk>.
The extent to which you expect future growth in this market to be recycled versus craft and how that's informing your decision up of which machines to convert.
I think so I don't actually no I mean, you're quite right. It's almost a mirror image right between Europe and.
The U.S. in terms of Kraft liner buses test Linus or 80, rough and ready 80 20.
I think there's an opportunity here for test liner, but you know across <unk> always has its place so I'm I'm not sure there's a massive swing involved.
And we'll take our next question, Steve Chercover D.A. Davidson.
Thanks, a quick follow up are you going to establish a recycling that work for kings core or how do you intend anticipate getting right. So that's great question. So we've obviously done the work we believe.
We don't need to put assets in place.
But when we look at it we're very confident you know when they're a number of metropolitan areas.
Confident we can find sufficient material. So we've done that what I was reading that work a few weeks ago. So we consider ourselves to being very good shape and you know, let's not forget I have people in this business is done this before so I think we're in good shape, though.
Okay, Thanks to stay safe.
Thank you. Thank you.
Well take our next question from Brian Maguire with Goldman Sachs.
<unk>.
Yeah. Thanks for taking my Philips just a couple at the end here any sense, but the cash cost would be needed to achieve that $200 million cost savings and targeting.
You mean in terms of restructuring cost.
Yeah, exactly a year media and the cash outflow, we're still calculating some of that <unk>.
That 200 million is largely people. Unfortunately, these things have to be done.
So.
You know depending on kind of where they're located.
We'll give you that number one we have about number but we're just just working out the detail of it now.
I think it kind of a dollar spent for a dollar its annual savings probably.
I would think better than that and that that's going to be.
I would be significantly better than that.
Okay, and then any any sense, what your operating rate would be in uncoated freesheet.
Next year once the a the mills are close number at the new normal level of demand.
Oh, absolutely I mean, the in the Ninetys if no.
I mean pretty much running full.
Well take our next question.
Meanwhile, the party Squishy thing.
Good morning quick one brief where you didn't you know in terms of de Canadian emergency wage subsidies would you expect to qualify again, we're kind of little payments in Q3 here.
We should we should qualify but they've changed their program significantly for the months to come and our view is gonna be or are we look for a number for us.
If memory serves me well this is 1.2 times the decline.
In sales in your kids in operation and we're actually running quite well and CAD, though right now so we should get something but it's going to be a fraction of what we've got a in the first of all months.
Great. Thank you.
Well take our next question Mark Wilde with bank of Montreal.
Thanks, John I have two follow ups. The first one is just some clarity for people because I I think that when you talked about ordering a paper machine for Kingsport, what you're really meant I assume is just the equipment to modify the existing machine as Iraq.
What is what does that approximate cost in the Grand scheme of things.
We will.
What we're looking it up as we speak.
Oh hundred 40 million, but a 140 million <unk>.
Okay. Just one other related question if somebody came into you like next week and so do we have other ideas for Kingsport, we might be interested and just buying the mill from you.
How much money are you on the hook for already with the equipment suppliers that would just be gone. So it's kinda breakup fee as it were.
If they come to me I'd tell them Mark.
Could you give us some sense of what that might be what you're already on the hook for.
I don't think I want to do that thank you.
Thank you.
This concludes todays call. Thank you for your participation you may now disconnect.
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