Q2 2019 Earnings Call
Good morning, welcome to the very nervous materials second quarter 2015 earnings conference call. During todays presentation, all parties will be in listen only mode. Following the presentation. The conference will be open for questions well construction to follow at that time as a reminder, this conference is being recorded.
I would now like to turn the conference over to your host maker Mr. Mr., Mickey Walsh, Treasurer, and Vice President of Investor Relations for Rayonier advanced materials. Thank you Mr. Waltz you may begin.
Thank you operator, and good morning, everyone. Welcome again to Rayonier advanced materials second quarter 2019 earnings conference call and webcast. Joining me on today's call are Paul Boynton, Our chairman President and Chief Executive Officer, Marcus Moulton, Our Chief Financial Officer, and senior Vice President of Finance and Frank Rippert out our senior Vice President of high purity and high yield cellulose business, though.
Our earnings release and presentation materials were issued last evening and are available on our website at Rainier a M dot com.
I'd like 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 FCC lists some of the factors, which may cause actual results to differ materially from the forward looking statements. We may make they are also referenced on slide two of our presentation material.
Today's presentation will also reference certain non-GAAP financial measures as noted on slide three of our presentation. We believe non-GAAP financial 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 15 through 20 of our presentation.
I'll now turn the call over to Paul.
Thank you Mickey and good morning, everyone.
First let me just recognize the changes we made to our senior leadership team in June .
And to introduce Marcus Mulder, who was promoted to chief financial Officer.
I've worked closely with markets since he joined the company two years ago through the Tim back acquisition.
Initially overseeing corporate development, which has been focused on our ongoing portfolio optimization review, including the recently announced sale of HMA Tan.
Not only does market spring, a 30 year career in finance and forest products, but he has a breadth of knowledge of our businesses strategies assets and financial drivers that make him ideally suited for the CFO role So welcome Marcus.
And as you know last quarter was shrink refer to his last earnings call as CFO .
In addition to leading our financing strategy group, which was pivotal to the company's successful cost transformation and subsequent acquisition and integration of Tim back.
Frank was a key part of our developing.
Our go to market strategy.
He is very purposely spent significant time over the past five years with our customers.
Developing those key relationships and as a result, I am excited about the experience and strength. He brings to his new role as senior Vice President of our high purity and high yield cellulose business.
Additionally, dr. buyers has begun in his new role as senior Vice President of research and development.
Aaron has a Phd in paper chemistry, and brings with him 35 years of cellulose technical expertise.
Which will bring focus an acceleration to our new product development and commercialization process.
With this new leadership structure, we believe we have the right people in the right position us to deliver more quickly on our growth objectives.
Now before we review our second quarter results, let me.
Comment on the progress of our strategic objectives.
In the context of a cyclical decline in commodity prices.
Driven by significant macro economic and trade issues.
Our priorities are clear.
First we've got to maximize free cash flow.
Second optimize our commercial strategy by securing contracts with key customers at margin enhancing prices.
Third focus our asset portfolio to reduce volatility and maximize returns.
And finally enhance our financial flexibility by negotiating an amendment to our credit facility.
We believe we have a good plan to manage through these more than challenging markets and emerge a stronger more resilient company.
Turning to second quarter results on slide four.
We deliver sequential growth in both our core high purity cellular segment and for the company as a whole.
In high purity cellulose, we demonstrated improved performance with higher sequential EBITDA.
As we reach them much more reliably and started to drive down hardwood costs as we rebuild inventories and took advantage of drier weather.
However, the benefits of improved operations and costs are being offset by severe price decline for commodity products.
Negatively impacting pricing for our high purity cellulose disco simplest products as well as for our lumber high yield pulp and paper products.
Year to date price declines have negatively impacted profitability by $85 million.
As we face these extremely challenging markets, we're taking immediate actions to preserve our cash flows.
Through working capital optimization and reductions in capital expenditures.
With his keen focus we generated $20 million of free cash flows for the quarter.
We are also taking additional measures to improve both profitability and cash flows which ill expand upon later.
In addition to managing through a significant decline in commodity prices, we remain focused on executing against our key strategic objectives.
To drive long term shareholder value.
Turning to slide five as part of our portfolio optimization initiative.
We announced last week, the sale of our mid teens facility.
Two strategic buyer Sappy limited.
For $175 million at very attractive valuations.
This transaction is a significant step towards me get mitigating volatility and focusing our business around our core high purity cellulose business.
It reduces our exposure to commodity pulp by half to 240000 metric tons.
Now. Please note that we will retain our ownership of our high yield pulp asset and this could mean qubec as integrated with the paperboard facility and co located with our high purity cellulose line.
The mid 10 transaction is anticipated to close in the fourth quarter.
Subject to customary closing conditions.
Next I want to provide you with an update on our go to market strategy.
As we announced in March.
The high purity cellular strategy is focused on realigning our assets.
And taking commercial actions.
To improve cellulose specialties pricing and margins.
Five months into the implementation of the strategy, we're pleased with our progress.
We started the asset realignment process into Miskin me.
With this facility slated to produce only commodity viscose.
And a regulated cellulose specialties product known as Michael Crystal in cellulose.
As of the second quarter more than half of the cellulose specialties volume that we plan to transfer out optimistic mean has been moved to other operating lines at more attractive margins.
Additionally, we have qualified new customers to accept to Miskin means discos product.
Therefore, diversifying its end market opportunities.
On the commercial front, we typically negotiate cellulose specialties pricing for the upcoming year in the third and fourth quarters.
However, we are already seeing good momentum from our early discussions.
Thus far we have signed two significant multiyear contracts with existing customers at improved pricing and margins over the life of those contracts.
We will provide a further update on 2020 price and volume estimates at the conclusion of our negotiations likely on our investor call in February .
Turning to our commodities as shown on slide six.
Key markets that were very robust in 2018 have rapidly deteriorated.
Including commodity viscose fluff and high yield pulp.
On the heels of the US China trade dispute as much of this business is dependent upon Chinese demand.
Additionally, wet weather, which reduced regional North American housing construction in the first half of the year, along with an oversupply of product.
Cause continued price pressure in the lumber markets has shown.
Lastly, a 15% reduction in North American newsprint demand.
Drove further declines in prices.
The rapid price decline across these commodity markets has put increased pressure on our financial results.
In response.
We are taking the actions to mitigate the impact of these declines including work on working capital management to improve cash flows reducing capital expenditures.
Curtailing underperforming assets and eliminating non essential spending.
Despite these efforts we will need to amend our current debt covenants in order to manage through these difficult global commodity markets and trade issues.
As laid out in detail on slide seven.
Our senior secured credit facility contains two financial maintenance covenants.
As of the end of the quarter, we are in compliance with both of these covenants.
And all debt agreements.
However, no near term recovery in sight, we expect we will be in breach of our covenants when we file our third quarter results.
Therefore, we have engaged in discussions with our lenders to negotiate an amendment to our loan agreement.
To allow us to navigate the weaker commodity markets.
Now as a reminder, our lenders are well known commercial banks and farm farm credit providers.
With whom we have worked with for many years as such we expect to complete this amendment in the third quarter.
We believe this amendment together with implementing the actions I just discussed.
Provide us with great confidence of managing through these challenging markets and trade uncertainty.
Now let me go ahead and turn over the call to markets for a more detailed review of the covenants as well of course our financials.
Thank you Paul.
Staying on slide seven I will start with a bit more detail on our covenants.
As a reminder, our key covenants are tied to our senior secured credit facility, which includes $599 million of term loans and a $250 million revolver.
Of which $50 million was funded at the end of the quarter.
These debt agreements are not set to mature until November 2022 for the revolver and $160 million of the term loans.
With the remaining $439 million of term loans due in 2024.
As of the end of the second quarter, we are in compliance with both of our financial maintenance covenants.
Net secured leverage is at 2.85 times compared to a covenant of less than three times, while interest coverage is at 3.79 times versus a covenant of greater than three times.
Note that in both cases covenant EBITDA adds back already ducs, certain noncash or onetime expenses, such as stock compensation and restructuring charges compared to our reported adjusted EBITDA.
Secured debt includes all of our outstanding debt, except for $496 million of senior notes, which mature in 2024.
Next I will provide an overview of the quarterly results focusing on net sales and EBITDA and an outlook for each of our business segments.
As outlined on slide eight high purity cellulose sales decreased by $16 million driven by a 1% decline in cellulose specialties sales price.
Due to Chinese tariffs sales mix and the sale of the resin business in 2018.
This was partially offset by 9% higher commodity volumes.
EBITDA for the segment was $34 million compared to $56 million in the quarter a year ago.
The decline was largely attributable to declines in CS sales price and mix as well as the continuing impact of higher hardwood costs in jesup.
And elevated maintenance costs.
These negatives were partially offset by cost improvements, notably from procurement activities and higher commodity production volumes compared to the prior year period.
For 2019, we expect CS prices to be down 1% to 2% from 2018, excluding the impact of Chinese tariffs as previously guided.
However volumes are expected to decline, 4% to 5% due to global economic weakness in acetate and automotive end markets.
Commodity products are also expected to experience continued price pressure as global trade disputes have significantly impacted pricing for these products.
With the majority of our planned maintenance outage complete other than Tartus, we anticipate improved production and wood costs in the back half of the year.
I should note to Miss coming had a minor reliability upset in the third quarter.
Overall, we now expect full year adjusted EBITDA for this segment to be in the range of $150 million to $160 million.
Turning to slide nine sales in our forest product segment declined by $16 million from the prior year period, largely driven by a 33% price decline for lumber products.
This was partially offset by an 18% increase in volumes due to increased productivity and inventory reductions.
EBITDA for this segment fell $32 million from the year ago quarter.
Driven by lower sales price higher transportation, and wood costs and the impact of a $5 million write down of inventories to market value.
In the quarter up $7 million of duties were also expense.
Since the start of the softwood lumber duties on shipments into the us in 2017.
A total of $48 million of duties have been paid.
Canadian producers have historically recovered all or a vast majority of these duties upon the resolution of these trade disputes.
Looking forward US housing starts and remodeling activity are the key drivers for lumber demand.
US housing starts have remained relatively stable on an annual basis, although poor weather has negatively impacted starts earlier this year.
With an unbundling of supply in tariffs for Canadian producers impacting current prices, we have seen a number of publicly announced curtailments in British Columbia.
As such we expect lumber prices to improve once the impact of these actions reach the market.
With lumber prices at current levels, we will also be curtailing production in the third quarter and absent any improvement in prices further reduction should be expected.
Turning to slide 10.
Paul pulp segment sales decreased $13 million, which drove EBITDA down by $15 million.
These results were driven by a 17% decline in prices for high yield pulp off historical highs due to softening demand from export markets.
The price decline was partially offset by a 2% increase in sales volumes as we focused on reducing inventories and improving cash flow.
Looking forward high yield pulp prices are expected to experience pricing pressure as weakness in the Chinese economy continues amidst trade disputes.
Prices are expected to bottom in the third quarter as prices near the cash costs of the highest cost producers.
Turning to our paper segment on slide 11 sales decreased $10 million, primarily due to a 17% decline in newsprint prices.
And a 15% decline in volumes due to the reliability issues and energy related curtailments.
EBITDA for the segment decreased by $4 million as lower sales were partially offset by the receipt of an OCC electrical credit associated with energy curtailment.
Looking forward paperboard prices are likely to remain under pressure due to increased supply from imports as global producers redirect volumes from weak markets principally China.
Meanwhile, newsprint demand continues to decline as industry production capacity remained stable, resulting in continued pricing pressure.
Turning to slide 12 on a consolidated basis first half operating income declined $139 million from the comparable prior year period.
We continue to make strides on our strategic pillars and remain focused on meeting our full year target.
However impacts from sales reliability and higher costs, which were mostly incurred in the first quarter, our overshadowing the benefits from our cost transformation actions.
A majority of the decline from prior year or $85 million was driven by sales price declines primarily from commodity markets.
Additionally volumes were impacted by operational issues, including the to Miss coming boiler hardwood shortages in jesup and lower newsprint production at campus spacing.
Which mostly occurred in the first quarter.
With these reliability issues, mostly behind US, we expect improved productivity and results in the back half of the year.
Higher costs also contributed to the decline driven by wood transportation and maintenance.
Wood costs continued to improve as we leverage inventory levels and take advantage of drier weather.
Maintenance costs should also improve with more reliable operations.
Turning to slide 13 sales for the quarter came in at $488 million down $54 million from the year ago quarter.
EBITDA for the second quarter was $29 million, a decrease of $77 million from prior year, primarily driven by lower commodity prices and higher costs.
Price alone represented $57 million of the decline from prior year.
With the current pricing challenges.
We are focused on enhancing cash flow, we generated $21 million of adjusted free cash flow in the quarter.
Adjusted net debt declined to $1.15 billion.
Total net leverage based on the last 12 months of EBITDA Rose to 5.2 times.
Cash on hand totaled $90 million.
Additionally, we expect to receive a substantial amount of net proceeds from the $175 million sale of maintain which is expected to close in the fourth quarter.
With that I'd now like to turn the call back over to Paul.
Hey, Thank you Marcus.
As you can see we are facing a number of significant market related headwinds.
Particularly in our commodity businesses.
In the context of this environment, we are diligently focused on Max maximizing our liquidity.
Running our business as efficiently as possible.
Generating free cash flow and ultimately, reducing our elevated leverage to sustainable levels.
While we expect to amend our debt covenants in the coming quarter, we continued to proactively evaluate other ways to improve our financial flexibility.
Certainly one of our strategic initiatives portfolio optimization.
Which has led to the sale of the Tam facility to a strategic buyer.
Not only narrows, our focus to our core HPC business and mitigate some commodity volatility. It also better positions us to reduce net debt and improved leverage ratios.
Additionally, we are fully focused on all of our controllable actions, including very actively managing working capital, reducing capital spending curtailing underperforming assets and eliminating non essential spending.
We are confident in our ability to manage through these difficult times and we know the company will be much stronger as a result.
Operator, please open up the call to questions.
Thank you feel like to ask a question at this time. Please press star one on your telephone keypad, a confirmation tone indicate your line is in the question queue. You May press star two if you'd like to remove your question from Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key and that is star one question at this time.
Our first question comes from the line of Chip Dillon with vertical research.
Yes, hi, thanks, Thanks, I was just asking in flip chip.
So my my first question is im trying to understand a little bit about the situation with the debt of the covenants. Firstly, if I recall the last time the discussion was that.
Yes, hi.
Sorry can you hear me.
Yes, I'll go ahead, okay, sorry I.
Then my against those.
No doubt sorry, yes on the question on side last quarter that was that we didn't catch that.
With that old debt, except for I think 505 medium.
No its AWS.
All of the covenants are and I think the slides luxury presenting now leasing around 90 medium.
The mid term loans Canadian term loans. So what are we missing here are the covenants actually based on the match that around 600 million less than the total.
Okay.
Well, we have added a salad is mackie speaking so yes, there's there's $496 million of senior notes that are not secured our covenants are based off of a senior secured leverage ratio.
That does include the term loans the revolver that we list there on the page as well as.
$90 million or so of.
What I'll call cogen debt or debt related to the Cogen facility in Canada as well as a few other small things such as capital leases.
Okay. So essentially the yet so these leased to two.
That has been 90 medium jets as we're trying to just think about okay. That's clear. Thank the secondary would be a little bit on that how.
Vic your covenants Luke event that you are sending them. Upon meal. You know you mentioned you will you know.
The net proceeds should be a very high amounts of these 175 million.
Essentially even though you will be in breach of that Goldman's by September 30 that won't happen until you filed the 10-Q I guess Saturday November so that's pretty much means there's a good chance you could be in compliance again.
You know with the covenants by the time a victory style, even though technically you have to show a breach is is that thinking correct.
So look let me know.
I think if I understand your question.
Well.
First of all as we indicated in the call that we certainly have discussions ongoing and have had in mind going with though the banks around our covenants and we will get the amendments that we need we feel confident that to continue running the business as we should.
The sale of the Tam, which we again, we think is a good sale for not only us but also our partner SAPIEN. This occasion is just helpful. I would think about it just helpful from a net debt and leverage perspective, So I would think about it in those terms so.
And you're right that we should see the benefit of that in the in the fourth quarter.
Well just to elaborate there will be the the idea is that when when we kind of do some back on the envelope math. It seems like you know given that you're getting a lot of proceeds.
You know you in the <unk> as of September Thirtyth, you may not be in compliance, but as of December 30, Onest you may be in compliance. So I know that that's on how will you know.
The covenants work PPR breaching them, reaching them first but obviously that would give US you had a lot to be weighed during negotiations. The fact that this a very temporary bridge.
So that's what I'm trying to understand based on your projections. Following the sale would you have not breached covenants or to put it simply if it was taking place as of September 30 sale will you have breached covenants as of the other thank you.
Yeah its market share.
So to your question, obviously, given the downturn in the commodity markets that we recovered in our call here.
You know certainly we can't predict how long that might last so.
This is all part of renegotiating a covenant package in the context of that runway of a downturn in the markets such that.
The Tan proceeds and our overall business plan will be part of that discussion.
Okay right.
It's really a function of that EBITDA against our covenant constraints right. So we talked about so we're going to obviously, that's the challenge and again, if you look at the cash inflows from the Mattel deal it's unrelated to that so.
Sure and it just wasn't looking obviously on cash flow or if he is there kind of indication I think you're still at year end working capital stimulate a use of cash in the first half how should we think about the use of working capital for the full year and how know kind of the capex, though you'd be paid down 10 million, but I would imagine given what's happening.
He could go much lower as you you know maintenance can be squeezed a little bit more.
Yes, I'll, let me take the second part of that and I'll ask Mark is on the on the first Mark just on on.
Our.
Capital investment right, we indicated that guided that will be down about $10 million from our original guidance. So taking off 10 of that how low can that go a lot of that was spent in the first part of the year in terms of either spent or committed so we only have a certain amount that we can pull that down for 2019, and because again all of our shutdowns maintenance have already occurred with the exception of one facility in Tartus in France. So that has yet to go so.
We have some levers we can pull there in the short term and we will do that and that's where you see that $10 million coming down, but again, we'll refocus that in light of where we are today as we look at 2020 planning.
Yeah and to your second part of your question on working capital.
We still remain focused on improving our cash conversion cycle. We've we've established targets for our finished products inventory across the business segments and there's still some further.
Work towards those targets what you should.
Make sure you incorporated in your modeling is obviously the seasonal build that'll started on our log inventories as you look out into the.
[noise] September to December timeframe.
Yes, thanks very much.
Well.
Our next questions are from the line of Roger Spitz with Bank of America.
Hi, Thank you very much and good morning, I'm just one clarification on my 10 I is the deals it sounds LTM on this slide and that 43 million is that.
I see.
LTM as of June Where's that LTM as of March.
Oh, that's LTM as of June correct.
Okay, you wouldn't have to have the first half 19 EBITDA by chance.
First half 19.
Sorry that now.
Now I'll ask another question and come back at the first half first half of.
No 18 right U.S.
1919.
Ticket around right now.
Okay Yep 18.
19.
Yes, Oh, yes, he million I'm, sorry, I'm, sorry, Oh, yes, sorry.
Hi, [laughter] I can you explain why you can drive down further on your revolver currently.
It looks like you have zero availability under.
To draw under the revolver, if I read the press release correctly, maybe I read it incorrectly.
Hey, Rogers Mackie again, I know you know we were at the end of the quarter. We were right at that 2.85 times. So we would be allowed to draw up to that three times at least at the end of the quarter.
So you do have some availability under the revolver right now.
Yeah as long as you're able to make the rep that you're less than three times at the point of the borrowing then yes, you're able to borrow.
Yes, that's right sort of okay. After you read the press release on <unk>.
Just coming back once on the Capex.
As as a general matter I do you have any.
Number figure in your mind for what is.
What we refer to as maintenance Capex and perhaps if it's a different number what a bare bones capex might look like on an annual basis not necessarily this year, but just as it has.
How you are configured today.
Yeah, it's it's markets so for for maintenance of business Capex.
You know steady state you should perhaps a work with a number in the $85 million to $90 million range.
And then obviously, we would modulate that based on the cash flow performance of each business such that.
You know just like in this example, we took it down 10 initially.
7%.
Based on what we were seeing.
And we continue to evaluate that.
So Edwin Roger as you know these are these are.
Large fixed assets that were running that they do take an unfortunate require lot of capital investment and we're very mindful of the fact that when you pull back capital you may introduce a reliability issues and you can see as we noted in the past at the expense of that as well. So it's a it's a fine balance, but we're going to be looking at everything we can to kind of taper that back down. This is mark has just indicated were the kind of a good run rate is for maintenance capital, but not everything needs to be done in the near term and so we'll look at pulling that back a bit and we'll give you better guidance for future periods somewhere that would be below that number that Marcus provide.
Sure and do you have a sense of how much of an 85 to 90 maintenance Capex would be my time that would maintain that would go away. Once you sell that not that it you can work with a range of three to 4 million.
Hi, and lastly can you if you havent discussed it a talk about that.
The next coming two three.
Interruption was that related to the boiler issues you had.
Spoken about in Q1 or was that a different issue.
No it's more general reliability across the complex given the integrated nature of that facility.
Thank you very much.
Our next questions are from Atlanta, Chicago with D.A. Davidson.
Good morning.
More safe so.
Not that great but.
Figure speech.
So starting with lumber in my opinion that was actually the biggest source of the shortfall.
And you know I can't imagine you operate at cash negative levels. If you didn't need the chips for your pulp and paper based operations. So can you operate them as one more like chipping facilities.
So.
So first of all you are right that was a big part of our negative keep in mind 5 million of that is guided was.
Related to if you want to see what kind of a mark to market inventory write down. If you. If you will so that was that was a chunk you get that back in the future at some point if these prices rise but.
So thats part of it.
Steve No look you don't want to operate a in negative environment like this and so as as communicated we are moving forward on and we'll be doing some curtailments of our facilities, where it makes sense.
Yes, we got to keep in mind, the equation as well as providing chips to our facilities, but we have different levers we can pull we can buy in from the outside.
We can run intermittently down for a while and then come back up to get the chip supply. So we'll be pulling all those levers to what does that make sense to run those lumber assets.
Well as I recall once upon a time in Qubec Yak if you had a paper mill you had to.
Produce lumber.
In order to get the chips I mean is that rules still in effect.
Yeah, if you think about it this way the the rights to harvest and the cut usually are connected with a lumber facility at least in our case. They are and so yes, you do need to get those chips you need to run those facilities now as you know we've got lots of facilities and we also buy chips from the outside from other partners and so we can again flex that run time, we can flex our purchasing increase that and take greater downtime at our facility based on what the local Doug chip supply is far different facility. So we will do those things, but you are correct that the lumber facilities are connected in with the with the harvest plans and so you have to keep all that in mind and make sure that all balances and we said that from the beginning is kind of the tricky part of the supply chain.
That we have in Canada is making all those connections from the fours to the lumber mills to our pumping assets.
Okay, I'm kind of spit balling this question, but.
When you consider that historically the Canadians have received.
The overwhelming majority of the duties as refunds can you somehow factor to that and you know get 80 cents on the dollar or something to that effect on the duties that you've paid.
Yes, it's a good spit ball, Steve I don't know if anybody out there that is willing to do that I haven't heard of anything like that from past experiences and Marcus has also nodding his head no. So.
But.
No. It's a good question, but I'm not aware of anything like that.
Okay, and switching to to Miss coming if half of the CS volume has been shifted elsewhere by definition, it's becoming more of a commodity mill did you actually decommission any of the capabilities. The way you did with the C line at Jessup.
No not so much that facility is just ideally suited to run.
A commodity viscose across it so.
More volume, we can put on there that is uniform commodity viscose, the higher efficiencies the better throughput the lower cost per tonne. So it is well set up to do that and that is again as we did all our analysis.
After the acquisition, we said you know what that's that's the model we should run there.
Outside of the micro Chris and I tell you is that we'll get we'll continue to keep there and so we'll we'll run it that way and you're right. It will become more of a commodity product into the high purity cellulose area.
But I was thinking of the extreme if it could be transitioned to a full blown commodity mill then it might also be considered non core if we are correct to assume that the true core business of brand your advanced especially cellulose.
Yeah, I see where you're going with that and I think you look that's that's an open thought again the equipment that's available and invested in that facility even prior to Ryan's ownership was in such a way that is better suited for commodities well. It's one of the struggles I think that that facility has had it. It does not have the equipment that are in or other three facilities that make it ideally suited for a high purity cellulose specialties.
So.
It's a good comment and it's not lost on us and that thought is certainly in front of us but right now the goal is to make sure that we're just lowering our cost of that facility and running commodities against it is the best thing we can do.
Got you. Okay final question, if I recall the cap newsprint mill was first quarter Alan on the North American cost curve. So could you confirm that and is it still the case.
Confirmed it is still the case, it's still a low cost asset newsprint world. It's a tough market we've talked about it it's got secular decline associated with it.
But overall, despite some operational issues that we've had it runs well and it's a low cost facility.
I mean, it's up there.
Geographically, but it should be one of the last of the mohicans.
Yes.
Yeah, It should be in the operating world continue to operate there should be a lot other facilities. If the market comes to ask the drop out and as we've seen they do you tend to get one or two shutdowns a year.
In the news print facilities, but there is.
I think probably approximately 30, plus newsprint facilities in North America that would come out.
It somewhat in that order.
All right. Thanks, a lot you get back to the covenant negotiations.
Thanks, Steve.
Hi, My questions are from the line of John Babcock with Bank of America.
Hi, good morning.
Just wanted to start out I, you know I guess, you talked about taking measures additional measures to reduce costs. I was wondering how much of that is focused on the cash flow side of the equation and then also how much of that is focused on you know also just generally like reducing costs across the rest of systems offset some of these earnings declines.
Recognizing there was overlap there too.
Yeah, again, just going back to the levers that we share to things that we can control that will be completely focused on right. Obviously, one is around working capital management. So that's of course that's receivables.
And our our payables and we'll have a lot of focus on that as we've already had focused on the inventories and we'll continue to maintain that maintain that.
Drawing down that capital spend that's certainly another one that certainly helps keep cash in the family.
Curtailing these underperforming assets right that that that stops the bleed mode. We will be focused on that and then we got a lot of things. We can pull on just on hey look what's critical spending at this point in time and whats not critical spending and so the whole team will be focused on making sure that every dollar goes out is really for serving our customers and producing the best highest quality park product possible. So I think those are the key levers we have John and we will be focused in on all of those and certainly some of those are again more onetime balance sheet opportunities than others or are just straight out improvements to the cash flow, yeah, and just to echo Paul's comments, obviously, the working capital piece is something we can directly influence has an immediate impact. So that's certainly a key lever.
But we will be focused on.
And is it is it possible to quantify the impact of.
Curtailing the facilities I don't know if you have any rough estimates at this point in time.
We we don't have anything dollar wise that were prepared to put out at this point in time John .
Okay.
And then the next question is just on the high purity and I was wondering if you could provide a bit more detail on what's driving your reduced volume forecast there.
And in the past you know just remembered hearing that you had pretty good visibility to volumes for the year and so really just want to get a sense for.
Why this may be a revision is so steep.
Yeah, John it's Frank.
You know, we typically do have very good visibility into it remember that yeah, we've moved.
Finally, a percent or so which is about 6000 tons on 600000 tons of CS volume. So we're not talking about huge shifts in volume here, but we continue to see I I'd point to to two factors one is.
Given some of the.
Trade issues in China.
We're seeing a lower demand from from domestic acetate customers being able to import into China.
And then secondly, the European automotive sector has backed up a bit here and weve seen that impact on the filtration and tire cord business. So we're not talking about huge volumes here to move at 1% or so and that's really what you're seeing and I think we've said before you know our contracts typically have some wiggle room, plus and minus two some base volumes and we're within those plus and minuses.
Okay.
And given that the declines it seems like are currently expected to steepen in the second half I mean is it reasonable to anticipate the volume declines will continue through the first half of 2020 at a similar level.
You know, it's hard to tell what's going to happen in 2020 were in they as you know we're in our negotiation period in the second half of the year, where we're setting both volumes and pricing for.
For our products as we go out there now I'll just reference you to our go to market strategy, which as you know we have said that we are going to look at becoming less dependent on acetate and exiting lower margin business in that world.
And focusing on higher margin business and higher growth areas in it. So you may see some modest.
Decline.
From that but the goal is to improve margins on gross overall gross margin as we do that so.
But again, it's too early to tell John where this all comes out as we go into those discussions.
As far as the wiggle room, though I mean that that kind of 4% to 5% I guess for the year, what looks like probably around 7% or so maybe for the back half of the year.
I mean is that when they make those adjustments how long do those adjustments typically last part.
You typically it you know it.
The adjustments don't last what I tell you as the year goes on.
We get more visibility into the order pattern. So typically we're 40 555 or 40 60, you know front had front front end back end from a volume perspective on Rcs business and so we're when we see those volumes coming out and they are lower in the first half we usually just that's usually just normal seasonal.
What we're seeing now though is actually some lower order volumes going in that roughly a one 1% worse than the last time, we came out.
And so that's what we are factoring into that guidance today.
In regards to you know the carryover, obviously, you know that the China trade issues.
And the weakness in the in the global GDP sector will impact how that.
Overall shapes up as we go into the back half of the year as we go into 2020.
Okay.
And then just one last clarification is showing us.
The volume impact was that spread across multiple sectors or was that more concentrated.
I would tell you it was in the automotive sector and this cigarette filter tow sector.
Hi, guys, so some more spread out.
Yes.
Okay.
And then the last question I had was primarily just on.
Lumber I'm in realizations, clearly came down pretty sharply there and it seems like you have more so than the benchmark.
Was there any impact to pricing from clearing out your inventories.
Yeah, I mean, I I would say that certainly we did move volume out as noted on the inventory side.
We took them within the range, obviously, we didnt have any fire sales or anything like that but you take the opportunity where you can and probably some of that I've heard on mix, so a little bit out there, but if you look at the where our sales was relative to the change in the market indices, you will see a point or two perhaps decline more than what the market was and I'd say, yes that was partly out of mix, partly out of moving that incremental volume out.
Okay. Thank you I'll turn it over.
Thanks.
Our next question definitely the Paretosh misra with Amber.
Thank you yeah is there any other assets in the portfolio there you're in active dialogue with other parties in terms of.
Selling it in Q3.
So you know we launched thanks for the question we launched this paradoxes you know.
Earlier, this year and talked about at the time. He said our goal is to.
How this process.
Evaluated our assets evaluated and any kind of.
Potential transactions out there announced by the end of Q2, obviously.
That slipped into Q2 Q3, and we had our recent announcement.
We are committed to closing this process by the end of this quarter. So we like to have whatever we can have if there's anything more be announced and if not we'll wrap it up so.
That's our plan at the current time is to go ahead and have this wrapped up.
This quarter and if theres anything else, we'll we'll announce that that time, but we have nothing the pre announcer were looking at all our commodity assets as you know.
Got it and then just in terms of closing the sale of the gain in Q4 is there any critical staff any kind of approval that you're waiting for any way you could expedited.
It's a it's market share it we just have customary closing conditions.
Everything that you would expect in a transaction like this.
Yeah, I don't I don't think there's any significant hurdles out their markets that youd say or unusual in any way right. So I think it's just the standard thing, but it still takes time as you know paradoxes. Just unfortunately these just have to go through.
And transfer all systems over and everything else and that just it just takes a little time.
Okay, and then just the last Ron how are you thinking about the operating cost structure in the second half of this year.
Mostly for the commodity part of the business I guess, how does the raw material inflation in the second half versus first half and any opportunities to cut cost in any of the segments. Thank you.
Yeah its Marcus.
As we alluded to in the call.
We see our reliability improving.
We mentioned the wood costs that are trending in the right direction.
Given what's happening in the economy were seeing chemical pricing in our favor as well.
So I think if you look at the key lever is it's it's running two to our operating rates.
Taking advantage of these chemical prices, where we can and wood costs that trend though.
Thanks, guys.
Well thank you.
Our next question from the line of Chip Dillon with vertical research.
Hi, guys sounds Arcana here again I have a couple of follow up questions. First one thing as you know we discussed about Oh lumber, especially number you know youre operating profitability does make Debbie.
Firstly can you let us know it seems to elevate it seems your elevated sales volumes were due to inventory sales you mentioned, how much was the difference between sales volumes and the production for both lumber and a high yield.
Okay.
Yes, I'd like to an inter quarter, we moved volume of about a 180 million feet.
As we disclosed.
And that was up from.
Around 150.
So we did move the higher volume as we mentioned to you to focus on our inventory reduction targets.
Yeah. When you know trying to think about the operating costs and I think and I'm, sorry, I think and especially I would say in how you will probably be a little bit more elevated than we would think on a unit cost basis, even if your volumes. It seems there's you know you're simply not producing 100 million board feet <unk> do unless I'm wrong. So I'm just trying to get an understanding how much are you producing oh gosh you are selling.
Yeah in Q2, we we produced across all or lumber Mills a 164.
Oh, there's a lot of 20.
20 Delta.
To what we sold.
No I understood.
Sorry on high yield pulp is your question, yes, what was the number for <unk>.
Yeah, we are.
We produced a 135.
Thousand tons versus the sales of 144000.
Okay, and just a little bit the you know broader picture you know you've got a number of questions about the sale of my time et cetera.
You know the fact of the matter is you are kind of in a difficult situation. As you said, you're trying to wrap up of the asset sale program, but.
On one hand, we have an enterprise value that I think we the preferreds as well right now, it's probably one to 1.3 medium and on the other hand, you sell one meal.
475.
It seems like if someone were to evaluate you on an asset basis, you know yours your enterprise value would be much higher your stuff would be much higher does the sale of you know.
Does it meet your workout.
At work kind of.
Inversion opportunity like a sale of the entire company makes sense, given where things are going.
Yeah look.
It's interesting question, but let me just answer from the perspective of the value of our facilities that I agree with your 100%. They are worth a lot more than what our share price is trading at right. Now I think it's again just keep in mind on the sale of the 10 to 175 million that is a high yield facility at this not to be compared really to our cellulose specialties type of assets, which would be much higher value in and each one of them on a per tonnage basis and.
So it's not quite to comparing if that's what you're trying to do there, but I think the overall message on terms of the value of the company absolutely it's much.
It's much greater than where our equity values certainly in its trading at at this point.
Yeah exactly that's the idea you sold four eggs and to get you know that you're not formulas that are much more volume on a per ton basis. So if it comes to you know I understand if all you have to do is amend the covenants and you know you continue operating you have a lot of we'd be dealing in Afghanistan hand, but if there was any bigger each with the lenders you know would that be an option to say hey, if we sell the company you're you know you're getting everything shareholders get those you get all your debt back and shareholders get a little more than the current stock price.
Yes Sal.
We you know, we're not going to speculate on whether or not.
Large transactions like that makes sense, that's something that the board discusses times time evaluating its value.
Okay perfect. Thank you very much.
All right. Thanks so.
As a reminder, you May press star one to ask a question. Our next question from the line of Daniel Jacome with Sidoti.
Hi, good morning, Thanks for that.
Time it just a two quick questions can you talk a little bit more about these incremental real reliability issues, you thought and that's coming I'm. Just wondering if you could quantify if there was any it's material or the last days of production and then if maybe you could isolate like where it was kinda like on the equipment chain with it a chip or digester a boiler that was my first question.
Yeah, It's mark as you know it.
It didn't take the mill down it it just reduce the operating performance of the facility.
So you are looking directionally.
Two and a half to $3 million of impact.
Okay. That's very helpful. So you'd have to take it down you just had kind of some fixed cost de leverage and margin I know my salary for a short time it sounds like.
Yeah, again, I imagine when Mark just got the earlier question on the stand are we kind of indicated that it's it's just broad reliability challenges at that facility.
We're we're trying to get him back to.
Much higher performance level.
So there are there across the board a bit so we'll continue to work on the reliability. There we've got incremental teams up helping the local team on these issues and so we just thought we should noted and Mark just put it out there that's in the range of $3 million.
Type of issue for the third quarter, so not anywhere close to the earlier issue that we had in the first quarter, but we thought in the in the best interest. The disclosure. We just let you know that it's still continues to be challenging for us.
For sure I appreciate that and then that brings me to my second question I think.
On the same mill for May 2020, you're expecting some sort of closure to out where at least receipt of some finishing equipment that you needed to have that fully where you guys wants. It is there any update there or is it just kind of like that's still the expected date and it would just be a wait and see.
Thanks.
Yeah, I think you're referring to you know the challenges we have with the the number 10 boiler that we talked about in the first quarter and Ah, Yes, we've got our schedule.
Annual maintenance downtime for May of 2020.
And at that time, if if needed we will well dressed season, we're prepared to address any bigger issues with that boiler then but even at this point in time, we're saying you know what the overall its operating on that boiler with the changes we've already made a much improved way. So we'll assess that at that point in time, but we've already had when it had ordered equipment have a standing by if we do not make any change either at that time or before that time.
Okay terrific. Thanks for the detail is it good luck with the rest of the quarter.
Thanks, Dan.
Yeah, right, we probably have time for one more.
Boston or one more.
Person.
Our next questions are from the line of Paul Quinn with RBC.
Yeah. Thanks, guys good morning.
Good morning <unk>.
Eric You mentioned, a two significant multiyear contracts are signed just wondering if those are on the specialty side and if you could give additional color on on the magnitude of the increase.
Yeah. So.
I will tell you that the.
They are on the specialty side, we don't want to get into the the contract terms at this point, Paul but I would tell you that we were pleased with the outcome of those contracts both on a price and volume perspective.
All right, that's all and best of luck.
Thanks, Paul.
Oh, we've now reached the end of a question and answer session I would like to turn the floor back to Paul Boynton for closing comments.
Yeah. Thanks, everybody for your time today, we appreciate the audience and so we'll be in touch as we move forward.
[noise] [noise] concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
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