Rayonier Advanced Materials Inc (RYAM) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Rayonier Advanced Materials' Second Quarter 2017 Earnings Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Mickey Walsh, Treasurer and Vice President of Investor Relations for Rayonier Advanced Materials.

Thank you.

You may begin.

Thank you, Audrey, and good morning, everyone.

This is Mickey Walsh.

Welcome to Rayonier Advanced Materials 2017 Second Quarter Earnings Call and Webcast.

Joining me on today's call are Paul Boynton, our Chairman, President and Chief Executive Officer; and Frank Ruperto, our Chief Financial Officer.

Our earnings release and presentation materials were issued yesterday afternoon and are available on our website at www.rayonieram.com.

I would 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 SEC with some of the factors which may cause actual results to differ materially from the forward-looking statements we may make.

There are also reference on Slide 2 of our presentation material.

Today's presentation will also reference certain non-GAAP financial measures, as noted on Slide 3 of our presentation material.

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 Pages 13 through 17 of our presentation material.

At this time, I would like to turn the call over to Paul for his opening remarks.

Thanks, Mickey, and good morning, everyone.

Yes, I'll start today's call highlighting some of the achievements of the quarter, before turning it over to Frank to review our financial results.

Afterwards, I'm going to provide of update of our strategic initiatives.

Yesterday afternoon, we reported second quarter earnings that keep us on track to meet the high-end of our full year guidance.

While the second quarter results reflect a lower value cellulose specialties sales mix, our remaining contracted cellulose specialties volumes for the second half of the year will be weighted towards higher-valued products, which will drive higher profitability.

Continued progress on our cost transformation initiative has us on target to deliver $30 million of cost improvements, as we announced at the beginning of the year.

This steady progress on cash generation provides us flexibility to increase our investments into our strategic pillars for continued growth well into the future.

These investments will improve our cost structure, create new products and provide better service to our customers across our markets.

Additionally, we are pleased with the progress we have made toward closing the Tembec acquisition.

To date, we have received Tembec shareholder approval and antitrust clearances from the United States and Germany.

Remaining regulatory clearances are in process in Canada and China as well as certain other conditions necessary to close.

Later I'll provide a more detailed update on our strategy and on the acquisition of Tembec.

But first, let me turn it over to Frank for a review of our financials.

Thank you, Paul.

Let's look at Slide 4 to review our financial highlights for the second quarter.

Sales for the quarter totaled $201 million, 6% below second quarter 2016.

The decrease was primarily driven by a 7% decline in CS prices.

Sales for the 6 months were $403 million, 7% below the prior year period, driven by 6% lower prices on CS due to a lower mix of high-value CS products.

As a reminder, based on our contractually committed CS volumes, we previously announced that we expected full year 2017 CS prices to be down 3% to 4% from 2016 and that expectation continues.

With sales in the second half more weighted towards higher priced than higher profitability products.

Given CS prices were down 6% in the first 6 months, we expect to see moderate price declines in the second half compared to the prior year, as our mix of higher priced CS increases.

Operating income for second quarter 2017 was $13 million.

Pro forma for $8 million of acquisition-related expenses, operating income for the quarter was $21 million compared to $39 million in the second quarter of 2016.

Year-to-date, operating income was $39 million for 2017, while pro forma operating income was $47 million for the first 6 months.

Our quarter and year-to-date variance analysis for pro forma operating income and the relevant price and volume statistics are provided on Slides 5 and 6.

As shown on Slide 5, drivers for the second quarter and year-to-date variances were similar.

Price declines lowered second quarter operating income by $8 million and year-to-date operating income by $14 million compared to the same prior year periods.

Volumes and sales mix impacted results in incremental $3 million and $6 million to the second quarter and year-to-date 2017, respectively, from the comparable prior year periods.

As you can see, on Slide 6, for the 6-month period, CS volumes were down 2,000 tons and commodity volumes decreased 17,000 tons from the prior-year period.

The decrease in commodity tons is primarily due to a greater mix of viscose products, which yield lower volumes than other commodity products, but are sold at higher prices and generate a higher profitability.

For the full year, as we optimize our mix within commodities and between CS products to achieve the highest profitability, we expect flat volumes in both CS and commodity products.

Back on Page 5. Cost impacted the quarter by $5 million compared to the prior year, while year-to-date costs were $1 million favorable compared to the prior year.

While our cost transformation initiative continued to yield positive results in the quarter, these results were offset by professional costs incurred for a company-wide strategic sourcing project, investments in customer product development, higher production cost due to commodity sales mix, inflation, particularly in chemical prices and higher depreciation cost.

Cost savings for the quarter were realized across the organization, but most notably in chemical usage, procurement and wood optimization.

As shown on Slide 7, we've captured approximately $15 million of cost improvements for -- through the first 6 months of 2017, bringing our total cost transformation savings to approximately $100 million.

As we look to the back half of the year, we expect to gain additional savings of an incremental $15 million, putting us on track for $30 million in savings in 2017.

SG&A and other costs for the quarter and year-to-date periods were unfavorable by $2 million and $4 million, respectively, due to increased noncash stock compensation and investments related to new product development.

As we increase the scale, expertise and depth of our research and development team.

We expect second half pro forma operating income to improve significantly from the first half, as the mix of cellulose specialties sales reflect the higher percentage of higher value products, lower cost and no planned maintenance outages.

As a result, we are reiterating our pro forma EBITDA guidance for the full year at the high end of $190 million to $200 million.

We also remain focused on driving cash flow throughout the organization.

As shown on Slide 9, we generated $87 million of operating cash flow and $56 million of adjusted free cash flow through the first 6 months.

As a result, net debt was reduced by $45 million to $421 million.

With a focus on cost and cash generation, we remain on track to deliver $90 million to $100 million of adjusted free cash flow in 2017.

Given our solid cash flow, we're well positioned to make incremental investments to grow our business.

At this point, let me turn the call back over to Paul.

Thanks, Frank.

The group reshaping our business through our 4 strategic pillars that include lowering our cost position; engineering and development new products; optimizing our market approach; and making value accretive acquisitions.

First, our successful cost reduction programs continued to produce solid financial results.

With $100 million of cost transformation savings since the beginning of 2015, we are not only proud of our accomplishments but we're also remain very confident in meeting our $140 million goal by the end of 2019.

In new products, as noted, we are stepping up our investments and are actively testing new product concepts with the greatest commercial opportunity.

In market optimization, we're working with existing and potentially new customers to allow us to better utilize our assets, to maximize profitability from product mix and service offerings.

And finally, on the acquisition front.

We are making meaningful progress in 2 areas: First, LignoTech Florida.

The construction of LignoTech Florida plant remains on track and will enable the JV to begin commercial operations in mid-2018.

We have now favorably financed $60 million for the construction of the facility, which will further enhance our returns on the investment.

This important project helps diversify our business and lowers the overall cost structure of our Fernandina facility.

Second, the Tembec acquisition.

The Tembec acquisition is progressing well.

We have spent significant time with the Tembec team performing integration planning.

Based on these discussions, our perspective is that the value of the Tembec combination has increased.

As such, last week we were able to improve the total value of our offer for Tembec by approximately 8% on an enterprise basis or approximately 17% to Tembec shareholders, while still maintaining significant value creation opportunities for the Rayonier Advanced Material stockholders.

Again, the benefits of the acquisition are highlighted on Slide 10.

The acquisition of Tembec will drive growth for the organization to enhance scale and geographic diversification by balancing our geographic footprint of our assets, diversifying our currency mix and creating a broader platform for growth.

We will have a leading position in the high-purity cellulose space with enhanced R&D capabilities and versatile manufacturing assets, which will allow us to offer customers exceptional product [breadth], technical service and enhanced value.

The diversified product mix, cash flows and customer base will create a more robust business portfolio with integrated and complementary assets.

The enhanced scale will also bring new opportunities to leverage cost savings across the larger combined company.

We will apply the same skills, learnings and knowledge developed from our cost transformation initiative, which as Frank mentioned, yielded a $100 million of savings to date across the broader organization.

And as such, we've identified at least $50 million in annual synergies to be achieved over the next 3 years.

With a wider set of opportunities, a stronger balance sheet and solid cash flows, we have the ability to accelerate capital projects across a larger platform.

Thus driving incremental growth and value of an additional $15 million of EBITDA.

And with complementary R&D capabilities in U.S. and France and even a larger and more flexible asset base, we will be able to accelerate new product innovation.

To date, we receive positive acceptance of the transaction.

95% of the Tembec shareholder vote was in favor of it.

Additionally, we've obtained clearance from U.S. and Germany antitrust regulators, the remaining steps in the acquisition process include additional regulatory clearances as noted on Page 11.

We are diligently working through this process and expect to be finalized in the fourth quarter.

We will continue to update you as we clear these milestones.

We appreciate Tembec's management and shareholder support of the transaction and we're very excited about our future.

We look forward to working with Tembec's exceptional management team and employees to realize the abundant opportunities the combination will bring to stockholders and to other stakeholders of both companies.

So with that, I'd like to open up the call for questions.

(Operator Instructions) Our first question comes from the line of Roger Spitz with Bank of America Merrill Lynch.

The press release reads to me that you expect an (inaudible) product -- the press release...

Are you on mute, Roger?

No, I'm not on mute.

So operator let's go to the next question.

Can you hear me?

Our next question comes from the line of John Babcock with Bank of America Merrill Lynch.

Just -- I just wanted to start out on the guidance.

I mean, it looks like you guys are maintaining the EBITDA and the free cash flow guidance.

(technical difficulty)

Yes, Audrey, maybe we're having a little bit of technical difficulties.

We can maybe pause admitted here to see if we can compile that or correct that.

Otherwise, of course, we're always available to take questions afterwards as well.

I think everyone's got my number listed on the top of the press release.

So ladies and gentlemen, unfortunately our Q&A session has to end here.

But as our speakers have said, we will be able to continue it afterwards after the call.

So with that, I will turn it back to you...

Audrey?

Yes?

Audrey, if we have the ability, we can try a different phone.

If we'd like to try to correct that.

Okay, let's try to correct that.

Folks we're going to take a quick intermission here, please stand-by.

(Break)

Ladies and gentlemen, thank you for standing by.

We will now resume our question-and-answer session.

So with that, John Babcock, Bank of America Merrill Lynch.

Can you guys hear me?

John, yes we can, I think.

All right, great.

And I guess, just starting out with the guidance.

I was wondering you provided the adjusted EBITDA and adjusted free cash flow guidance, and it looks like that's maintained.

Net income guidance came down.

Can you provide some color on what's driving that.

And also just to clarify, is that adjusted net income?

Yes, it's predominantly transaction costs, which we would pro forma out at the end of the year.

So the cost associated with the Tembec transaction.

Got you.

Okay, cool.

And then another part of the guidance.

You're talking about how you expect a greater mix of the higher values cellulose specialties products in the second half of the year.

Is that more kind of acetate other high-value products, how should we kind of take a read into that?

Yes, so John, it's just the way unfortunately for the quarter the way the sales mix fell into the second quarter.

We service our customers, but as we know, almost all of our volume is contracted out there for the year.

And so we're just seeing some lower value mix come through in the second quarter and the higher value, which could include acetate, ethers and others coming through in the back half of the year more strongly than in the second quarter.

And I would just add, John, that we'll also see stronger CS volumes in the second half of the year than in the first half of the year.

Okay.

And just to kind of clarify, of the products you sell, what are some of those lower-value products and what are some of the higher-value products that you offer?

So we don't really put them out there because they do vary by customer and by segment, John.

So it's just a variety, they just happen to kind of pile into the quarter here.

Again, that's why we don't provide quarterly guidance.

And I know that we just kind of maintain to that yearly guidance, because we know what's in the mix for the full year.

So it's just a kind of a blend of lower-value products coming through the mix right now.

Okay.

And then just if you could provide a little more color on the higher production expenses during the quarter.

It sounds like chemicals were part of that.

Was that mostly caustic soda?

And then if there is any way you could quantify the impact of those -- of that on the quarter and then also the impact of some of the other items in there as well?

Yes, I'll try to give you the best I can for the quarter.

So John, if you're looking at our variance analysis on Page 5, what we're really looking at is we've got most of the cost transformation in there and that's being offset by chemicals for the most part that's about a 1/3 of it.

And then there is also some maintenance and then we've got the strategic investment piece of it that we talked about, which is really the strategic sourcing project which should add benefits both this year and then significant benefits next year.

And so that's an investment that we're making this year as well as some R&D and innovation work that we're doing.

Okay.

Did you incur cost in the first 2 quarters related to the cost transformation efforts?

And if so, how much?

We did in the second quarter.

Did we in the first quarter?

Yes.

Yes, it's about $1.5 million to $2 million.

In aggregate to the 6 months?

Yes.

And then the last question before I turn it over.

Last Friday, I believe it was the FDA, essentially there was some news that the FDA was essentially thinking about reducing the impact of nicotine in cigarettes, and wanted to get your thoughts on the potential impact of that.

I mean the way I read it, it could either be positive or negative.

It seems like the timeline is likely to be quite extended here potentially couple of years maybe even a decade.

But if we could get your initial thoughts that will be very helpful?

Yes, I think, John, Paul again.

This is -- yes, they put that out there first of all, I think as you recognized.

They didn't put out specifics other than they're going to be looking at it and it could take a long time.

Whether it's positive or negative?

I think we have to keep in perspective here, this is for the U.S. and the U.S. is about 5% of the total global consumption of tow.

And for Rayonier Advanced Materials, we're probably even on the lower side of that 5%.

So, whether it's positive or negative, we don't know but what we do know is it's quite insignificant in terms of our total mix and our total business.

Okay.

What percent is China, to be curious?

China is into the high 30s, in that range, 35% to 40%, John.

Can't give you an exact number but it'd be in that area.

And are there any other major regions we should take note of?

I'd have to go back and look at it specifically.

But obviously there is -- it's probably fairly well distributed from there on out.

Our next question now goes back to Roger Spitz with Bank of America Merrill Lynch.

Can you say, are there any parts of that Tembec portfolio that might be less core than others?

Or do you frankly just [slide the scale] on diversity all parts of the Tembec business bring and there is no thought at this juncture of doing anything along those lines?

Yes, I will let Frank add on to this.

Obviously, we were very positive about the value they bring in their cellulose specialties area, which is a real strength in ethers, which is a very small part of our portfolio.

So we really like that, including their R&D knowledge in that area.

We think it's just a great compliment.

I mean clearly -- there's a couple of parts of their business that are more challenging than others.

And I certainly wouldn't call them core, I just think we're just going focus in on them and see how we can help improve those assets and continue to strengthen them and turn them into positives.

Yes, I would just add that, as we -- as any company with a large portfolio of assets will always have to look at the assets that are there.

Tembec has done some portfolio rationalization of their own.

We're not contemplating any of that at this point, but we've always got to look at the broader portfolio.

And are there -- given that you're in Florida, Georgia area or in Canada, given the softwood lumber, are there things you can do somehow with your wood basket versus there wood basket to provide value there, given the situation?

Yes, I don't think relative to softwood lumber agreement that there is anything there that you'd say we could leverage in, in an any way, Rogers.

So no.

I would say no.

Okay.

And lastly, you gave us the M&A cost for this quarter.

How should we think about this fiscal quarter ending September and perhaps into Q4, how much cost might you have recognizing you're (inaudible) it back.

Yes, there's about $4 million over the balance and then there could be some other fees, success-based fees on top of that.

So I'll call it somewhere in the order of roughly $10 million potentially over the next 2 quarters.

Our next question comes from the line of Steve Chercover with D.A. Davidson.

(technical difficulty)

Our next question goes to Chip Dillon with Vertical Research Partners.

This is Salvator Tiano filling in for Chip.

So couple of quick ones.

Firstly, on the back end -- the back half strength that you expect in the specialty cellulose prices due to mix.

Based on what you see right now actually, is this expectation, is it based -- do you have clear visibility that this will actually take place and we're going to see a 3% to 4% year-on-year decline or is this contingent on what your current backlog and sales are, let's say, right now in July, extrapolating during the year.

So how firm is that expectation?

So the expectation is firm, as we've noted.

I'm glad you asked the clarifying question.

That most of our volume -- almost all of it is contractually committed at the beginning of the year.

So we know both volume and price fairly closely at the beginning of the year.

The variance we may get is a little bit of sales timing right at the very end of the year, which we talk about it annually.

And so that's kind of where we'll see a little bit of variance, but we know the second half is going to be loaded, because we've already got -- loaded with the higher value because we already have those contractual commitment.

Okay, that's great.

And a little bit about the Celanese and Blackstone joint venture, obviously Celanese is not a client direct anymore.

But I think one of the JVs they have in China, it's a top 3 customer.

So based on what's going on right now, how do you -- do you see and do you expect any changes from this client.

And how do you see the market changing based on this consolidation?

Yes, so as far as our business, yes, we've got a very strong position selling into China, which is -- part of that position is owned by Celanese and we don't see any change in that regard.

With regard to how we see this changing market obviously our customers are under a lot of pressure.

And seeing moves like this, I think only strengthens the customer base, which I think we view as a positive.

So again, we're positive to see that development.

We think it's healthy for the industry and so therefore healthy for us.

Okay.

Great.

And one last thing, just -- because I noticed from the previous question asked, I think your guidance for net income was $41 million to $48 million last quarter.

So I think we're talking like a $9 million, $10 million at the midpoint decrease.

And you said that's primarily transaction costs, so we had $8 million in such a ...

It's almost all transaction cost.

Yes, so I think Q2 was $8 million and you said you expect another $10 million.

So that would make...

Yes, we're tax affecting that and our guidance takes into account the fees that are not contingent based.

So the incremental $4 million.

So if you think about it what we've got baked into the guidance is $12 million, tax affected to $8 million.

And then the incremental that gets you to that higher number because it's contingency based.

We have not included that in the guidance as of yet.

Okay.

So if it happens, we should expect net income below the guidance, but it's not really any deviation in operating performance.

Perfect.

That is absolutely, correct.

(Operator Instructions) Our next question comes back to Steve Chercover with D.A. Davidson.

First of all, could you talk a little bit about the swing from fluff to commodity viscose?

Is that market tightening or is there something else that's driving it, like maybe cotton prices are appreciating?

Yes, so let's talk about it.

So viscose -- first of all, we've talked about and guided that we're going to do a greater volume this year of viscose than we did in the prior year.

So we're shifting our mix over to more viscose, more heavily weighted towards the viscose than the fluff area.

Of course viscose pricing is up quite a bit and the index is above last year and in the 7% to 8% kind of range, as we're looking at it now on viscose pricing.

So we -- the move that we're making is absolutely in line with what we should do in terms of profitability.

What we see out there in viscose a bit is that, yes, there is some tightening on the availability of cotton and therefore cotton lint and that we are seeing not only play there but probably more specifically we see that playing in the ethers market area, Steve, where we're seeing and we see some of our competitors commenting on a more robust growth environment in the ethers market due to primarily, not only demand for it, but also the restriction of the availability of cotton lint.

So it's having an impact in a couple of areas here.

So again both of which happened to be positive.

And I'd just add, Steve, that fluff pricing has been strong as well.

So we're -- the fluff business is better than last year.

Sure.

Yes, which is terrific.

Okay, and then on the Tembec deal.

Since the transaction was announced the loonie or Canadian dollar has gone up by about $0.06, which I think would negate about CAD 42 million of EBITDA.

Are there any offsets, I mean, clearly lumber has gotten stronger and I think pulp, all grades of pulp's is -- have exceeded expectations.

So any offsets from the commodity front that would offset the loonie?

Yes well, I think you have seen some of the strengthening there.

And I don't really want to get too deep into the Tembec results.

I think they've done that earlier last week.

But do you have some seen -- some strengthening in their markets.

And as we look at it, there is also -- the math says that what you sell into those other markets doesn't -- just passes through without any change, any offset.

But I think, as you know, and we've talked a long time as well, you also will see, we believe, pricing in other areas of their business potentially get better, because the loonie is not the only currency in our competitive world that has ties to the oil prices.

So we would expect the cost and other competitors to go up as well.

And therefore, look for some offset of those in the future.

Okay, final one and I hope it's not too arcane.

But Q2 started on March 26 then ended on the 24th so it was a 90-day quarter.

Do have any quarters that are several days or even a week longer or shorter than other ones.

I mean -- and does it make a difference?

Because obviously in containerboard, the actual shipping days can be real needle movers.

Yes, the fourth quarter is longer quarter and it does have a little bit of an impact on that and that's one of the reasons why profitability will be higher in the second half.

But that's a small component of it.

The big component is really going to be the mix back to the higher price in CS volumes.

And I think you kind of addressed this.

But if you had better kind of near-term visibility on mix, you would incorporate that into the guidance for a quarter.

If you knew that it was going to be substantially stronger in second half?

Right, and that is what we have Incorporated in this.

So obviously we have had a weaker second quarter driven by mix and we expect that to come back in the second half.

But was that second quarter -- did it play out on a mix front, as you expected?

You don't really always see it that way and that's one of the reasons why we don't give quarterly guidance, Steve.

So we try to keep the yearly guidance, because we know what those contractually committed volumes are going to be.

But it is impacted by customer order patterns, maintenance outages and other things, as we look through the year.

So we try to stay away from the quarterly guidance.

Our next question comes from the line of Paul Quinn with RBC Capital Markets.

Just back to the mix issue with disappointing mix in Q2, but you realized that you're going to make it up for the balance of the year.

It doesn't look like, when I look back at your historical results, there is any kind of seasonality your business is that a fair assessment.

It just seems to -- that mix seems to move around quarter-over-quarter?

Yes, it can move around from quarter-to-quarter.

We've typically seen a little bit better back half of the year than front half of the year though, I think if you go back historically over time.

Obviously we talked at the beginning of this year that we have broadened out the mix a little bit on the CS side, so we do have some -- a little bit more of the low value CS product in there.

But now, this was -- we'll get it back.

But the -- to your point, it's probably a little bigger than what you would typically see from a customer order pattern, but I don't think there is anything to that.

Okay.

And then just -- I recognize that you guys produce ethers and sell into that market as well, but the combination with Tembec is going to give you a lot more ethers production.

And you've described it as more -- as robust growth in the marketplace.

Just wondering, which end yeasts buckets are growing faster than other ones, if you broke it down between, I guess, paints, food, pharma and other?

Yes, actually, the positive news there we're seeing good growth across all of those.

We're probably particularly strong in terms of -- if you just looked at our mix alone, although it's not very large, with a focus in on food and pharma, Paul.

And we see that market doing well, particularly pharma.

And with that, I'd -- and again, we don't know much on the Tembec side, but from what we can see, they're probably got larger positions in the industrial construction side of things and a lot of that is probably going into European and plastering, construction and that's also doing very well as well right now.

So I think you see it across the board, which is a positive and as we watch our peers report out there, those are the kind of comments that we're hearing about, whether it's the customers report or actual peers report, it's a kind of across the board.

Okay.

And then just lastly, just on the commodity products side.

Yes, I understand that the guidance for an increased mix in viscose in 2017, but at least my read on pricing through viscose pulp is that it's moved down into the sort of a $800 range, quite a ways down from where it was at the end of '16, probably when you gave the guidance for the increased mix.

And fluff, obviously, we've seen a number of price increases there and they seem to be holding.

You're still expecting to produce more viscose than fluff in '17?

And if you get a material change in price, do you have the ability to switch back and forth?

First of all, we do have ability to just switch back and forth.

As we look at the pricing levels today, it still supports our plan for 2017 to have a greater mix of viscose pulp.

And yes, it did go down a bit at the beginning here, the first 2 quarters of viscose prices, but we now have seen those kind of lift back up.

They are up off of the bottom here, another maybe 4% to 5%, since they bottomed out.

So again, moving back in the right direction.

Also, yes, we're very comfortable with where our mix is.

We have said that we want to keep a foothold in both markets.

So we can also continue to move back and forth.

And so we have got contracted volumes in both the viscose area as well as the fluff area, but we're also keeping a good part of that uncontracted, so that we can move things around as we can optimize on where the markets are sitting.

But today the markets would say to us that we should run a greater percentage of viscose pulp through our facilities.

Okay.

And then just lastly on the Tembec deal, it looks like you have made great progress on the regulatory front getting through the U.S. hurdle.

With the 2 remaining sort of government hurdles being China and Canada, what's the expected timing of those?

Is Canada supposed to be a longer than China?

Or -- and is there any possibility for a Q3 close?

Or is this definitely a Q4?

Yes, I think we could see those hurdles come through factually fairly quickly.

We don't know for sure, because we don't control that process.

But I would say we're leaning on a Q4 closing.

It could, but I doubt, move into the Q3.

So right now we're anticipating in Q4.

Our next question comes from the line of John Babcock with Bank of America Merrill Lynch.

Just a quick follow-up on kind of some of the last questions that were asked.

With regards to dissolving pulp prices, I think they averaged around $875 a ton, at least based on the data that we have during the second quarter.

Fluff pulp prices are obviously a fair bit above that, I believe $1,100 a ton from the last kind of I looked.

Given kind of that discrepancy, are there essentially discounts or what makes the commodity viscose market more favorable relative to fluff pulp?

Yes, John, I'm not too sure the number exactly you're looking at but -- by your reference there, I think you're looking at stated list prices for fluff pulp and it sounds like more of a net price for viscose pulp.

So I think yes, there's some significant discounts being offered in the fluff world across the board.

So that net price will be well below the number you just stated.

And so, again -- and of course that's what we live with is the net.

And when we look at the net, again, the viscose price is -- and our production cost make it more profitable for us to pursue the viscose market.

How much further would the commodity viscose prices have to fall till you decide to switch over to fluff pulp?

Yes, John, I don't think that's a number -- obviously, we're committed to looking at that all the time.

And we feel that our current mix is where we need to be.

And if they -- if it moves in a direction that we change, we'll report out that we're going to change our mix back to more fluff.

Okay.

I got it.

You gave it a try.

So you have got to give it a try.

And then the next question just on M&A.

Obviously, we've seen the announcement of the Tembec deal.

How are you kind of thinking about M&A going forward?

Or you guys essentially going to take a pause, as you digest that?

Yes, I think that's fair, John.

I think what we've said before is we found an opportunity that we think is very value enhancing.

We put some leverage on our balance sheet to do that.

We want to make sure that we integrated appropriately.

Drive all the value and delever the business back somewhere into the 2x debt-to-EBITDA range.

And then we can think about what's the next move to add to this and go back through that cycle.

I think it's relatively common in companies in the paper first product pulp specialty world to take that kind of -- increase the leverage a little bit, get the value out of the acquisition, pay down your debt and then think about the next one.

There are no further questions.

That does conclude our question-and-answer session.

At this time, I will now turn it back to your CEO, Paul Boynton for closing comments.

Yes, thanks.

Well again, if there is no more questions at the time, I just want to say thanks for joining us today.

We look forward to updating you on our progress in a timely manner as we move forward.

Appreciate it.

Have a good day.

This concludes today's conference.

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