Q2 2023 Rayonier Advanced Materials Inc Earnings Call
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Good morning, and welcome to the Orion second quarter 2020 earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation. The conference will be open for questions with instructions to follow.
As a reminder, this conference is being recorded I would now I would now like to turn the call over to your host Mr. Mickey Walsh Treasurer, and Vice President of Investor Relations. Thank you. Mr. Walsh you may begin thank.
Thank you and good morning, welcome again to Ryan second quarter 2023 earnings Conference call and webcast. Joining me on today's call are to Lyle Bloomquist, our president and Chief Executive Officer, and Marcus Molnar, Our Chief Financial Officer, and senior Vice President of Finance.
Our earnings release and presentation materials were issued last evening and are available on our website at <unk> Dot com.
To remind you that in today's 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 SEC, but some of the factors, which may cause actual results to differ materially from the forward looking statements. We may make they're also referenced in slide two of our presentation.
Materials.
Today's presentation will also reference certain non-GAAP financial measures as noted on slide three of our presentation. We believe non-GAAP measures provide useful information for management and investors, but non-GAAP measures should not be considered an alternative to GAAP measures.
A reconciliation of these measures to their most directly comparable GAAP financial measures are included on slides 17 through 26 of our presentation I'll now turn the call over to Doyle. Thank you Mickey and good morning.
I will start this call with a review of the quarter before turning the call to Marcus to provide additional details on each of the business segments as well as an update on our capital structure and liquidity.
After marches update I will provide an update on our key 2023 initiatives and guidance before opening up the call to questions.
Let's now turn to slide four to review our performance in the second quarter of 2023.
EBITDA declined $7 million compared to the prior year with a total of $27 million generated in the quarter.
Results were below our expectations, mainly due to the stocking of certain cellulose specialities and paperboard market sectors.
I'm, calling declines in commodity prices in particular for fiscal some paper poll.
As we experienced softness in our business.
We increased our focus on generating positive free cash flow.
Adjusted free cash flow generation was $16 million in the second quarter.
Driven primarily by an impressive $55 million of working capital benefits.
As I mentioned the challenges we experienced our high purity cellulose segment were primarily due to the declining commodity prices and lower cellulose specialty volumes.
However, it's worth highlighting that despite these challenges prices for our cellulose specialty products remained strong with an increase of 13% compared to the prior year period.
Paperboard segment declined $4 million with the higher prices, helping us set the impact of the lower sales volumes.
High yield pulp EBITDA increased $1 million, driven by higher realized prices and improved sales volumes over prior year.
Corporate expenses improved by $4 million attributed to lower variable.
Stock based compensation and severance costs.
Considering the lower than expected EBITDA results.
A weak outlook for commodity prices to just stocking in certain cellulose specialty in paperboard and markets. We are updating our adjusted EBITDA guidance to $185 million to $200 million.
It's important to emphasize that most of our cellulose specialty markets remain stable and ratable, excluding or acetate non construction ethers Nitro cellulose spun just another specialties.
Our ability to participate all the cellulose specialty markets, whether it be acetate ethers and others see yes. That's provided a strong sales foundation that we can rely on.
Despite the lower EBITDA guidance, we are committed to enhancing efficiency and financial resilience.
As such we are raising our adjusted free cash flow to $55 million to $70 million due to better than expected working capital monetization.
Reduced interest expense and lower cap ex expenditures.
Now I'd like to turn the meeting over to Marcus to take us through the financial details for the quarter.
Thank you Bill I'll just.
Starting with our H B C segment on slide five sales for the quarter decreased by $2 million or 1% to 300 million as a result of a 4% decrease in sales prices. The decrease was primarily driven by weakening commodity markets, while our CS products experienced a 13% increase in price.
As a result of contract negotiations.
Sales volumes increased by 4% to 214000 metric tons.
Due to a higher mix of commodity sales.
Commodity sales volumes increased 72% from prior year.
Well see us volumes declined 27%.
Result of Destocking for certain products, including construction ethers M C C and filtration products.
Sales for the quarter included 22 million of Biomaterials sales, primarily from Green energy and weakness.
EBITDA for the segment declined 8 million to $28 million.
The impact of higher sales volumes was more than offset by the weaker sales mix and higher labor and maintenance expenses.
Turning to slide six paperboard segment sales decreased by $15 million driven.
Driven by a 27% decrease in sales volumes as a result of lower productivity and significant customer destocking.
Sales prices were up 4% supported by continued demand for sustainable packaging.
EBITDA for the segment declined 4 million to 10 million as higher sales prices.
Were more than offset by lower sales volumes.
Turning to the high yield pulp segment on slide seven sales improved by 4 million from prior year, reflecting a 5% increase in external sales prices.
And 9% higher sales volumes due to stronger demand increased productivity and improved logistics.
EBITDA for the segment was 1 million as compared to breakeven in the prior year.
Turning to slide eight on a consolidated basis, we had an operating loss for the quarter of 7 million.
Sales price improvements across C S paperboard in high yield pulp.
Were more than offset by $16 billion of unfavorable mix and H P C and lower paperboard volumes.
Costs increased $16 million, driven primarily by inflation on labor and maintenance costs.
SG&A and other costs improved 7 million due to lower variable stock compensation and severance costs.
Turning to slide nine net debt declined to 682 million a reduction of $82 million from the same period in 2022, reflecting our unwavering focus on overall debt reduction.
As part of the recent refinancing of our 2024 senior unsecured notes, we demonstrated this commitment by reducing our debt balance by an additional $68 million.
As we continue to repay debt, we are still preserving strong liquidity.
Liquidity ended the quarter at $272 million.
Including $157 million of cash.
On a pro forma basis post refi the companys liquidity is $187 million net of $85 million allocated to support the refi activities.
We remain dedicated to ensuring our assets operate efficiently and effectively.
Allowing us to deliver consistent and concern.
Sustainable results, while continuing to deliver positive reoccurring free cash flow.
As such we are reducing our outlook for maintenance capex to approximately $95 million from our previous guidance of $100 million to $105 million.
And working with each of our plants. We believe this is a level that will deliver our desired production and sales targets.
Additionally, we have reduced our strategic capital spend there's $30 million net of financing.
These investments are discretionary and are targeted towards high return projects that deliver immediate and incremental benefits to our business.
Net leverage ended the second quarter at three four times slightly above our expectations.
Reflecting the lower EBITDA, partially offset by the lower net debt.
Turning to slide 10.
I am pleased to have the refinancing completed.
We secured a $250 million term loan with a four year maturity the.
The interest rate is based on sulfur plus 8% with a 3% sulfur floor.
Despite the higher interest rate.
We managed to partially offset the higher cost by reducing the overall sizing by $68 million.
The loan was issued with a 3% discount at origination and is callable after one year with a 3% premium.
And after two years with a 1% premium.
Importantly, the loan facility provides operational flexibility to support our strategic objectives.
Company will continue to be balanced from a capital allocation perspective focused on debt repayment.
And working towards our two and a half net leverage target while also pursuing investments in our biomaterials business with that I'd like to turn the call back over to Doyle.
Thank you Marcus.
Now, let's shift our focus to slide 11, where I'll update you on our 2023 initiatives.
We are forecasting approximately $45 million of negative impact.
Due to declining commodity prices for viscose fluff paper pulp and high yield pulp.
Additionally, the lower than expected sales orders due to destocking and construction ethers, MCC filtration and paperboard market sectors have impacted results by approximately $15 million.
Well, we see it.
Inflation, some key raw material inputs we.
We continue to experience high prices in order to place dairy pressures for some key raw materials.
Excluding wood caustic soda labor and MRO supplies.
In response, our management team is proactively reducing our expenses in the second half by nearly $40 million to largely mitigate these impacts.
These mitigation actions include reducing contractor services, reducing overtime and a hiring freeze lower wood cost you can frame purchase prices and improved productivity and higher power sales prices.
Consequently, he can provide an update to a 2023 EBITDA guidance of $185 million to $200 million.
We will exceed both prior year results and our current fixed charges.
Despite the lower EBITDA outlook, we are raising our guidance for our 2023 free cash flow up to $55 million to $70 million.
To date, we have generated $52 million of free cash flow, primarily from the monetization of working capital.
We expect that this will be partially reverse in the back half of the year as we rebuild the depleted inventories at jesup into two basic meeting following their annual shutdowns.
Also we reduced our forecast for total capex spending for the year to $125 million.
So there's $30 million of strategic Capex, which remains discretionary.
Flexibility is key right now and we will dial back to the strategic capital Accordingly, if needed.
We are maintaining our focus on capturing high value for our specialty products, particularly in our cellulose specialties segment.
Notably our cellulose specialty prices have increased by 13% compared to the prior year period attributed to the successful contract negotiations for 2023.
Moving forward, we will continue to prioritize the value of our cellulose specialties, ensuring a strategic approach to optimize profitability across the cycle.
Finally in response to the severe pricing volatility affecting our commodity products.
She is a review of strategic options for viscose and paper pulp businesses.
Our cellulose specialties, some fluff businesses, our core businesses and paperboard is a solid EBITDA contributor. It provides very promising long term growth potential.
In aggregate these businesses will deliver nearly $300 million of EBITDA in 2023.
Exclusive of corporate overhead.
This is a strong performance given today's challenging environment.
Conversely, the viscose and paper pulp businesses will subtract an estimated $50 million of EBITDA due to the current low sales prices with both of these losses concentrated in the North American sulfate mills.
We've historically used the production and sale of commodity products to maintain high utilization rates at our six high purity production lines to maximize fixed cost absorption.
However, the production sales of commodity products have masks, the strength and profitability of our cellulose specialties segment.
Times like these only provide marginal financial benefit.
Consequently, it's tied to reconsider our strategy. So over the course of the next couple of months with a review of our options to mitigate most of these commodity losses in 2024.
Potentially but to all of our core business is significantly greater than the market gives us credit for and so the strategic review, we'll look to optimize our asset base to reduce cost and minimize exposure to these commodity businesses.
To ensure the long term success and sustainable growth of our overall enterprise.
Now, let's shift our attention to slide 12, where I will review our progress against our 2023 guidance for EBITDA and free cash flow.
The waterfall chart reinforces our commitment to achieving free cash flow within the $55 million to $70 million range.
With EBITDA expected to be $185 million to $200 million for the year.
We're also projecting lower cash outflows to more than offset the lower EBITDA, including interest expense capex and other liabilities, while increasing working capital monetization targets to achieve our goal.
With the refinancing complete we have a clear line of sight to $65 million of cash interest for the year.
This fixed charge is likely to increase next year to about $70 million as we realize the full impact of the higher interest rates.
Maintenance Capex remains at $90 million on a normalized basis, but we are now removed most of the catch up capital in 'twenty. Two 'twenty three that's we can sustain our current operating levels without the need for the additional capital spend.
With $86 million of working capital benefits captured through the first six months, we expect to retain majority of those benefits with a 55 million target for the year.
Lastly, we are engaged in ongoing discussions with our government partners in France regarding the deferred energy liabilities for which we expect modest positive outcomes.
As previously discussed our free cash flow will be strategically allocated to either repay debt or invest in attractive strategic projects.
On slide 13, we delve deeper into the expected performance of each of our businesses in the second half of 2023.
Specialty prices are expected to finish the year at a high single digit percentage increase compared to 2022.
However, we anticipate a decrease in sales volumes for cellulose specialties compared to the prior year driven by weakened demand and significant customer destocking.
Market demand for our commodity products is expected to remain resilient.
Albeit at lower prices than those observed in the first half of the year.
Notably fluff prices have declined compared to 2022 levels.
Mining with industry forecasts and physical spaces are expected to reach a bottom in Q3, followed by a slight uptick in Q4.
While certain input costs are moderating it is important to note that most of these costs continue to remain at elevated levels.
As part of our ongoing growth strategy, we are actually pursuing strategic investments and our biomaterials business.
Citing progress is being made with the bio ethanol plant into artist.
And we were pleased to report that it remains on track for production commencement in early 'twenty 'twenty four.
The second generation ethanol produced at this facility is projected to provide isn't it that EBITDA benefit of $8 million to $10 million annually.
Further bolstering our position as we forge ahead with our long term vision of sustainable and profitable growth.
We're excited about our biomaterials business plan.
Over the next three to five years. The first phase of this plan is expected to yield an additional $100 million in revenue and about $42 million of EBITDA annually.
We expect that most of these projects come with low cost financing does make them extremely attractive investments.
We are also working on the second and third phases of this business plan that would create further sustainable growth.
In paperboard prices are expected to moderate slightly over the balance of the year, but remained elevated as compared to 2022 levels.
Sales volumes are expected to improve in the second half of the year as Destocking eases as.
As evidenced we did see orders.
Pick up in July raw material prices are expected to reduce further as pulp markets decline.
In high yield pulp prices are expected to be impacted by both the global economic slowdown and new capacity coming into the market.
As a result of these factors sales volumes will decline in Q3, as we take necessary downtime in July and August in response to prevailing market conditions.
We're continuing to operate one of our two high yield pulp lines to supply pulp and paperboard operations.
Corporate expenses are expected to be higher than in 2022.
Primarily driven by expenses associated with the ERP implementation in the absence of foreign exchange benefits.
Yep positively impacted in 2022 specifically in the third quarter of last year that are not expected to repeat this year.
As already noted we are reducing our capex guidance to $125 million net of financing of which $95 million will be earmarked as maintenance capex and the remainder strategic capex.
We have raised the investment hurdles for new strategic capital projects to help mitigate the impact of higher interest rates projects now need to generate at least a 30% return on equity and have a two year or less payback period.
Turning to slide 14, we depict the progression of our EBITDA margin growth and net leverage declined.
Throughout the year, we anticipate our margins to remain within the 10% to 11% range, which as noted is a weighted average of the strong margins. We enjoy in the cellulose specialties that paperboard segments and the negative Marty margins expected in the viscose and the other commodity businesses.
Net leverage is expected to increase to three eight times for the full year at the midpoint of the lower EBITDA guidance. However, we remain committed to drive toward our target net leverage ratio of 2.5 times over the next three to five years.
I'm confident that the second half of 2023 results will be stronger than the first half.
Paperboard sales volumes are showing signs of normalizing and I believe that our businesses that are more GDP sensitive will pick up in the second half.
Three of the four scheduled plant outages are now behind us, including the outcome of our two largest facilities. Thus, we will see improved productivity and lower spending.
And we will execute on the nearly $40 million in expense reductions in the $10 million to $15 million of Capex curtailments.
Now I'd like to direct your attention to slide 15 of the presentation materials.
We have an exciting announcement to share with you.
Of course, we invite you to attend our Investor day on Tuesday October 10th 2023 at the New York Stock Exchange.
To secure your tenants highly R. S V P through the email address provided.
As of date draws near.
We'll provide you with a more comprehensive details about the event.
We're looking forward to this occasion as it will be a fantastic opportunity to connect discuss our strategic vision and explore future growth plans, including details about our biomaterials business plan.
We continue.
Your continued support and.
Engagement means a lot to us and we are eager to share our insights and progress at our upcoming investors day.
With that operator, please open the call to questions.
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One moment, please while we poll for questions.
Thank you. Our first question is from George Staphos with Bank of America. Please proceed with your question.
Thanks, So much hi, Ron good morning, Thanks for the details.
Just a few questions I just want to make sure Marcus so the annualized interest expense on a cash basis. You said is $70 million given the refinancing did I hear that right and would there be any additional noncash that we should be mindful of as we frame our P&L estimates for next year.
Sure.
So George good morning.
The 65 is reflective of this years estimate yeah.
And reflects the timing of when we did the refi in and the cash we were carrying on a more normalized basis. You should you should model just over $70 million.
Okay Kash.
And and cashes at book or is there a little bit of uptick. Additionally for book.
Yeah, maybe four or five.
Okay.
Got it Okay secondly, so.
Just to put a finer point on that.
70 million plus on cash plus four or five that are noncash.
Correct.
Okay.
For that on the cost reduction activities the back half of the year.
One of the elements was productivity.
You know.
Or said differently, how pressure tested how confident are you that youre going to get all of that cost reduction activity to your credit.
To the bottom line in the second half of the year.
Hey, Good morning, George this is a while.
Aren't until I I'm pretty I'm I'm.
I'm very confident that we're going to to get the $40 million mm.
The first comment I would make is a $40 million is conservative we think there's some upside to it.
So I kept a little bit in my back pocket just to make sure that we get to the $40 million.
Right.
I would say that you know a lot of that $40 million, a roughly 60% of it is I would call recurring.
In other words, the savings will survive 23, and will be able to look to 'twenty four to continue to see some of these savings.
As you know some of it's tied to productivity and I would say that productivity is it's not so much tied to how much production volume that we generate it's.
More around improved material usage variances I'm for example, you know a better you would yield.
Things like a better caustic usage per ton and so forth and this is really being driven by a lot of activity at our plants to improve the efficiency and effectiveness of our of our operations.
We're beginning to see and enjoy some of those benefits from you know earlier activity this year.
The other 40% you know in terms of other Oh, the 40 million.
They're not just one time events I mean, there deferrals and I would suggest that you.
You know the deferrals or we can defer for the medium term without any significant risk.
Although there's a what do you mean by the Dol rule.
Alright.
I was just going to say with respect to the you know the 40% of the 40 million is kind of deferrals are taken taken spending for example in contractor services or engineering surfaces things around head count trees, alpha producing and strictly managing or over time and putting it.
A freeze on hiring.
All those things I think you know can be deferred for for the medium term, but there is an opportunity cost for doing that.
An example would be you know engineering services, all those savings as I had mentioned earlier in terms of material usage.
Improvements we've seen.
It's being driven by the spending we've had on engineering services to improve do you play in operation. So.
I prefer not to to defer those for more than just the medium term.
Certainly, we can but theres a cost to it.
Sure and I guess at some point also you got to watch that because you can wind up with operational.
Considerations and what you wind up having to take more and.
Unplanned.
Downtime, but we'll see how that plays out.
And.
George just to address that.
We were very mindful not to impact.
Hum our maintenance spending.
No we want to maintain the level of of productivity and reliability that we have spent a lot of money on the last couple of years.
To continue forward with that.
So.
The spending that the spending savings that we're noting here very little of it.
Oh by walking through the list right now almost none of it.
As it relates relates to there are focused on maintaining reliability.
Okay.
Thanks, a lot my my last one and I'll turn it over.
And I think it's not October yet or November , but you know how should we think about the CS pricing outlook for 'twenty four.
In light of the volume so far in 'twenty, three and what's been happening on commodity pricing. So you've had the 13% increase year on year, it's going to come off a bit in the back half, but it'll be high single digits. What's the outlook for 24, given the demand outlook and what you're seeing in commodity and can you talk about you know what kind of paper.
Ford volume increase you're seeing year on year.
In the third quarter.
Thank you so much.
Okay. So to answer your first question with respect to our pricing for her C. S. In 'twenty 'twenty four relative to now.
And are there any pressures that you would expect from the fact that the commodity prices have declined significantly as they have.
To answer that question is that when it comes to our CS business.
We.
We put a priority on the value of that business versus the volume.
We will continue to have that focus going forward.
Hmm.
You know what the whole idea that you know commodity business is putting a drag on our ability to raise prices next year I would say that's not the case I would suggest that much of our business that we have out there are products that our customers see the value in what we're willing to compensate us for the for the value that we do.
Provide.
I would say that you know the last thing I wanted to be doing is chasing a market where the demand is limited by why by lowering prices just makes no sense to do that why would anybody.
Lower pricing to get nothing for it.
So we continue to continue to focus on making sure at the end of the day that.
We.
We maintain the pricing and the value that we have in our products although.
If there is competitive activity out there that threatens our share we will defend it.
And that needs to be clear that I'm at the other day.
We were very jealous about the share that we have and we will defend it.
Paperboard year on year.
Paperboard, yes, I'm sorry, yes.
Hum on paperboard with respect to our you know a pricing we're.
We're seeing our pricing relatively stable from what we saw in the second quarter of this year going into and we expand we forecast going into the second half of this year.
Well, you're not really seeing a lot of pressure there.
Given that much of our business on a contract basis I think it's too early for me to tell you our forecast what do you think it's going to happen in 'twenty four but again, we think that there's a significant demand growth there.
And we think that at least through 'twenty four debt supply will be constrained enough for us to to realize additional value and in 2024.
So that's that's our expectation alright.
Alright. Thank you so much I'll turn it over guys. Thanks for your thoughtful answers.
Thank you. Our next question is from Paul Quinn with RBC capital markets. Please proceed with your question.
Yeah, Thanks, very much guys.
And just at the beginning of the year, we had a capex budget of $1 40 to 145 with a $15 million to $20 million of Capex catch up capex in it.
It looks.
What's happened to that catch up amounts.
Analogy and you know how.
How do you how do you figure you're still going to maintain the reliability, but the reduced maintenance expense.
Well or Paul.
Well, let me start off by saying good morning, Paul.
Well.
The.
And so as I was mentioned, but George we're not we're not reducing our maintenance expense right. So we can continue to invest and make sure that facilities are are properly maintained going forward to maintain the current level of productivity.
The capital that we were planning to spend that we're pulling back now is to further advance the productivity.
Hum going into our 2024.
But the fact the matter is is that you know what demand is soft at least for our high value products and frankly, I don't need that additional capacity right now.
So oh why spend the money, so, let's splits wait and see and rail capacity.
Through improved reliability when when the time is time is needed.
So that is the that is the focus that we have on that.
Okay, and then Tim you know the confidence that you've got on that Hey, we're going through a destocking phase as opposed to.
A drop in demand or consumption.
And you are there.
It's destocking, that's going to bounce back in let's say 'twenty four 'twenty five.
I got some confidence and a number of our sectors. There's some areas that we're still I would suggest.
Are relying upon what our customers are telling us.
For I'll start with our paperboard paper.
Paperboard, where actually we have seen.
A fairly significant increase and I would say back to normal levels in terms of sales volumes in July .
Oh, I would expect it to them that will continue going forward.
With respect to the Destocking in some other areas like you.
If you take high yield high yield pulp.
Pulp or the mechanical pulp business were seeing prices beginning to increase and that would suggest that we've kind of we've hit bottom and demand supply is back in balance and prices are starting to move.
Starting to reflect that we're also seeing that in our paper pulp business, we're starting to see that rebound a little bit and and started hitting in the right direction again for the same reasons.
Tire cord and our CS business is also showing signs of increased activity as the Oems and the auto industry are beginning to poll increased their demand pull for our products. So I'd say that that's again another nice green shoot is suggesting that we're getting to the end of destocking.
Construction ethers I would say you know a lot of that is both destocking as well as a decrease in market demand its tied to higher interest rates, we're seeing around the world.
And it's had a dramatic impact on construction activity in.
In our case principally in Europe .
And were seeing we were forecasting that we will see some sequential improvement in Q4.
Not necessarily in Q3.
And again to be fully transparent we have yet to see much of an improvement yet in an increased pull in demand for our construction ethers, but again, we're relying on our customers and having them give us some of their forecast of what they think is going to happen through the rest of the year.
So oh and then the the other businesses, particularly around our C. S businesses, whether it's acetate or the non construction ethers and and things like Nitro cellulose and so forth the demand for those products have been stable.
And we've mentioned this number of times in the past it roughly you know 60 to two thirds or 60% to two thirds of our CS business or I guess, it's our overall business is recession resistant and I would say that that's we're hanging in there. That's that's that's holding true.
Okay. Thanks for that and it sounded like you're you've taken downtime in July at one of the lines in domestically and in high yield pulp and expect to continue that through August I'm just wondering.
Why only the two months in and why bring it back it's Oh.
Yeah, just to confirm that yes, we did take it down it was due to market conditions I think we mentioned that in the last analyst call that a.
So you got to a certain point, we would make that call in and takes it takes some capacity out.
And as mentioned we did keep one line opened so that we could.
Provided the feedstock into our paperboard business.
He kept it down for you know four to six weeks and then you know we started to see an improvement in pricing.
And and therefore feel that it's an appropriate time to bring the plant back up and well bring it back up later this month.
But again, we reserve the right.
If we see if we see any kind of degradation in pricing gamble.
Again consider whether we need to adopt to.
That line or not.
So again, it's being driven by the market and get our activity there is being driven by the market conditions.
Okay and last one for me just on the strategic alternatives I suspect that doesn't mean sale of assets and the like what's the idea with specifically with viscose just didn't move the production of that from from an existing facility to a different line or what we know.
Yeah, it's not really it's not shuffling about the deck chairs so to speak that's not what we're suggesting here.
Let's see you know the typical options you would look at when you're doing a strategic review of our businesses and I won't go through all the different options were looking at I will say that we've been looking at this for a few months already.
So we're well down the path.
You got some more work to do.
On that but I would say that you know.
We're looking at all the different potential strategic options that somebody would typically think of.
And we'll be prepared in a couple of months probably by the November analyst call to give you more clarity on exactly what we wanted to do.
Alright, that's all I had best of luck. Thanks.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad a confirmation Tom on the Kate Your line is all my questions.
Our next question is from Andy Barnes with Stifel. Please proceed with your question.
Hi, good morning, and congrats on getting that refi completed in this environment.
Maybe first to talk about the commodities the commodity business and H P C.
Historically, whereas pricing bottomed out in that business or if.
If you don't have like a good number like how close are we to the bottom in your opinion and then kind of tied into that also at current pricing was that part of your business EBITDA positive in the second quarter.
Those are great questions.
Hum Thanks for joining us by the way Sandy appreciate it I'm.
I'd say with respect to you know the paper pulp business and our high yield pulp business, we're seeing the bottom now.
Historically, maybe the prices were lower than in the past, but because of the inflation that the world has seen over the past.
Past 12 to 18 months that that floor has increased.
I think what we're seeing now is it has reached bottom.
And we're starting to see the prices move up.
With with respect to viscose I would say.
I would say, it's roughly the same.
We're we've been fairly steady and stable on viscose pricing, although we've seen a little bit of a deterioration just you.
You know.
20 Bucks a month kind of deterioration. So I would suggest we're very close to the bottom there as well.
I think we're seeing the bottom on all of our commodity commodity businesses.
In the past you know you comment about whether or not in Q2, and Q1 or the first half of the year, whether it was our commodity business, what I would again defined as our viscose.
And our paper pulp businesses, where the positive EBITDA in the in the first half of the year.
I would say that they were marginal in and probably close.
Close to close to zero, if not negative in the first half, but I would suggest in the second half will be.
Significantly.
Weaker.
Okay.
And then on the cellulose specialty Saudi business.
Talk a little bit about destocking, and how you're kind of cautiously optimistic into the second half of the year when you've gone through these destocking trends in the past and I realize this environment slot seems a lot tougher for Chem companies this year.
How long has the destocking tended to be like how many quarters or so I mean, I think at some point customers must work through their inventories and start to you know.
Stabilize and rebuild their inventories so like maybe on a historical perspective, how long is this destocking period lasted four.
Well Fannie let me just state that but we're going through right now in terms of Destocking is unprecedented.
And I think if you were you know.
Listen to other other analysts calls from our from our customers. They would say the same thing absolutely you know, particularly in our CS business.
You know what your DAU in Eastman.
Ashland, They all talk about the fact that you know they were down 20, 30%.
Their sales volumes in their construction related activity and in fact, you know some of them would note that they've actually shut down lines. As a result of that I I I think what we're going through right. Now is unprecedented it's obviously being driven by the logistics constraints of bottlenecks that we went through last.
Year.
And everybody shifted too just in case buying activity too and now we're going back to just in time ordering.
Activity and so what we're going through is something that I've never never experienced and I don't think this business has ever experienced before.
But as I said earlier when I was you know answering Paul's question.
We're starting to see some green shoots we are starting to see pull we're starting to see demand pull in some activity that.
This suggests that we're getting to the end if not at the end and some of these some of these activities.
And some of the softness though that we expect to continue is because they actually get really more not to just stocking, but more to just suppressed market demand because of.
A lower economic activity.
Okay. Thanks, and last one for me on the cost reduction actions that you've mentioned and you kind of walk through some of the different specifics maybe in total how much of it would you say.
Is being implemented.
At the corporate level that will reduce we should see in corporate expenses come down.
Okay, Let me see if I can answer that question specifically corporate.
Sorry, just give me a second so I can be able to have shrunk the he would be a reasonable number here.
It looks like and this includes some activity that isn't specific to them a plant.
For example, caustic pricing that was.
Lower caustic pricing that has been negotiated by the corporate sourcing team.
And lower freight rates, which will which will apply across all the mills if I add those two up it's roughly a million and a half.
And then other corporate expenses, we're seeing roughly a 4 million. So a total of about five and a half million or roughly 13% of the total.
Okay.
Great. Thank you and good luck with everything.
Thank you.
Thank you. Our next question is from Dmitry Silverstein with water Tower Research. Please proceed with your question.
Good morning, gentlemen, thank you for taking my call.
To follow up on a couple of questions that were previously asked just to make sure that I understand what you're telling.
So if you look at the declines that you had in volumes in Europe .
Cellulose specialty business you talked about Destocking can you talked about market weakness, particularly in the construction segment.
But you also talked about sort of your strategy off of.
Taking a more keeping price versus versus keeping volumes. So so playing the volume price a buffer.
If you have to take a look at sort of those three components, particularly.
In light of your.
Your peers in the industry are cooperating the same businesses.
How much.
The slowdown in volumes that you've seen is is would you say is due to destocking.
Market weakness versus your strategy of keeping pricing about protecting your market share, but certainly not going after new market share.
Okay.
Let me see if I get a pack a question a little bit and certainly if I don't answer. It completely then you know ask for clarification.
Terrific Asian.
I'm going to start with you know the last part of your question. There about you know if we lost any volume due to us holding holding prices and maintaining value for CS business.
I would say that we have lost some some volume, but I'd say, it's largely immaterial so far.
We havent yet responded in pricing to to.
That that set of action by one of our competitors.
The belief being debt. It is it's been so far been immaterial, but again I would go back to the back to an earlier point I made which is.
We were going to protect our share there is that it should be clear.
And and.
And.
Frankly, you know going after share in such a market today, where you've got no market growth.
Just seems silly to me.
I, it's something they don't completely Capri, Andrew understand why someone who would do that because we're going to we're going to respond.
And in protect that share, but to date and what we expect going forward is that we don't have to we don't expect that we're gonna have to protect share.
Hum.
And.
And we have locked.
And an immaterial amount of shares so far so that's the first part of your question. The second part of the question is how much of this is due to just stocking two versus call.
Call It a general market activity, the lower economic activity because of higher interest rates and so forth I would say that you know.
60% has been due to just general market.
D P.
Activity.
And the other 40% and so far has been tied to destocking.
Okay.
So the good uncle bumper okay.
Thanks for that second question I guess I have is on the Capex reduction.
I think you've sort of addressed the fact that we're pushing out in terms of capex is discretionary spending.
In terms of improving productivity and improving production throughput, but not necessarily or not at all I would hope.
Made it to your biomaterials capex.
Put you were investing to grow that part of the business, but I understand your comments correctly I just want to make sure I.
I got that right, Yeah, Dmitry I think yeah, Dmitry I think you did understand that correctly I mean, we can remain committed to our biomaterials strategy.
As I mentioned earlier, the you know the EBITA margin improvement the growth potential the stability.
And the low volatility that that will provide going forward I think it will be well received.
Alright.
Our shareholders.
The reduction that you're seeing.
It was really due to us increasing the investment hurdle.
For that too for this is discretionary strategic capital investments.
The $5 million is this actually the inverse the potential projects that fell out they can't meet that 30% of our OE or and a two year or less payback period. So.
Those just get pushed back on the shelf and one day I'll probably pick those back up when capital.
Capital is more available.
Got it got it okay, great and then just to clarify in your previous comment when you talked about the EBITA of your commodity business system in the first half of the year. You said it was kind of close to zero or maybe a little negative but did I hear you right you expect it to get weaker second half of the year.
Yeah.
And you know again quite frankly that was that was.
A big guess on my part I am I would say that you know, we're going to lose $50 million and EBITDA. That's our estimate right now I'm on the viscose in paper pulp in 2023, and all of that's being driven by prices.
And the reason why I bifurcated.
Bifurcated the two as our pricing in the first half was significantly higher than what we're expecting in the second half of the year, because pricing, particularly with or.
High yield pulp in our paperboard business sort of falling off pretty dramatically in the April may timeframe.
But yeah, so I would expect that our pricing Oh the.
The results for those businesses will be significantly worse than they were in the first half because of the deterioration in pricing we started experiencing starting in April .
Got it got it Okay. That's helpful. And then last question typically.
And a slowing economic environment.
You would see.
Decline in a lot of the commodity prices that you guys use as raw material inputs. So what is your outlook for sort of raw materials I know some of your markets or some of your raw materials are all about.
Well and that's.
One of the questions. We could continue to Russell with almost every day I'm here is to understand where our cost inputs are going.
In the near and medium term I.
I guess the best place to start is that none.
<unk> of our largest input price input.
Inputs their prices on those are continuing to be elevated for some of the reasons I didn't think you youre alluding to.
With respect to wood I mean, one of the.
We live off of a residual wood.
And a number of our facilities.
When the lumber activity because of housing starts at all all the all that.
It goes down the supply of residual would also goes down and therefore, the price of those residuals.
Well it goes up and we were particularly experiencing that in Canada.
And to a lesser extent in in France.
Here in the states, we are seeing prices come down, but it's on wood, but its still.
Elevated significantly higher than we had before you went into the pandemic. We do expect that those prices will continue to moderate over over the short to medium term so going into 'twenty four and so forth we expected that the.
Those prices will continue to to decline, but with respect to you know, France and in Canada.
Price for wood, there is really relying on what.
It happens with the the housing market and in the lumber market.
And so.
You know with a higher interest rate environment, and so forth are thinking isn't that we're just gonna have to play and to live a live with higher hardwood prices in those two businesses. The other big spend we have is with caustic soda.
And caustic soda pricing in Europe is returned back down so I would stay you know normalized levels.
But here in the states they tend to be they tend to have stayed elevated.
And.
And we expect or hope that those prices will moderate over time, and we're seeing some moderation it it tends to be relatively slow moderation quarter to quarter.
But we're still very elevated there and.
I would hope that you know as.
Demand softens and supply increases, which we do expect in 'twenty four with the news Gentex operations coming out in the Gulf.
That supply or pricing for caustic soda as should should improve in 2024.
Okay. So if I'm hearing you say.
I'm sorry go ahead.
Maybe just add to allow the other areas.
Where you're seeing reductions as isn't container rates.
Yeah, that's right for Ocean freight so that element certainly I think there's.
There is no reference points to it that has reduced and continue to use to reduce.
Okay, I will see somebody that needs to yep.
In the second half of the year got it so if I kind of put it altogether what I'm hearing is you're.
Input pricing is probably going to sort of stayed flattish maybe trump bounce slightly but one should not be looking for significant raw material relief to help I can help you out on the margins would that be sort of the correct takeaway.
Yeah, Dmitry I would say that that's a correct and certainly I think that's the position that we have here at the company is that we're not counting on.
Our raw material prices to save the day, we're looking at are being much more proactive and.
More strategic things like I'm, finding ways to bring balance to the supply demand equation too.
To improve give us better pricing power looking at ways to.
To reduce our exposure to a very volatile parts of our business. Unlike the viscose and paper pulp businesses.
Eliminate that that volatility and concern both of the areas that we feel that we can control and that we can get after the things that are more.
You know exogenous like input prices, we just assume that that we'll do we'll live with what's what we have and we will figure out how to how to mitigate that.
Gotcha, Okay. Thank you very much that's all the questions I had.
Yeah.
Thank you there are no further questions at this time I would like to hand, the floor back over to adopt the Lyle bloomquist for any closing remarks.
Well. Thank you all for joining US today, we believe that we continue to make significant strides toward achieving our financial and strategic objectives.
I'm incredibly proud of the collective efforts of our team and I'm very confident that we will continue to enhance the profitability of all sleep look working to reduce our debt and our leverage.
I look forward to going into more detail at our Investor day on October 10th So I hope that those on the call will have the opportunity to join us at that time.
In the meantime, if you've got any further questions that you want addressed our lines are always open so feel free to reach out to us with any questions. If you require further information.
Have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.