Rayonier Advanced Materials Inc (RYAM) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Rayonier Advanced Materials Fourth Quarter and Full Year 2017 Earnings Conference Call.

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

It is now my pleasure to introduce your host, Mickey Walsh, Treasurer and Vice President of Investor Relations for Rayonier Advanced Materials.

Thank you, sir.

You may begin.

Thank you, and good morning, everyone.

Welcome again to Rayonier Advanced Materials Fourth Quarter and Full Year 2017 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 and Senior Vice President of Financial Strategy.

Our earnings release and presentation materials were issued this morning and are available on our website at rayonieram.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 security laws.

Our earnings release as well as our filings with the SEC list 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 2 of our presentation material.

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

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 the Pages 26 through 28 of our presentation.

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

Thank you, Mickey, and good morning, everyone.

I'm going to just start today's call with a brief overview of recent activities before turning the call over to Frank to review our financial results as well as our current outlook for the business.

After that, I'll provide a more thorough update on our strategic initiatives designed to grow the company.

This morning, we reported our fourth quarter and full year 2017 financial results, which were impacted by Hurricane Irma as well as an operational disruption at one of our largest customers this past October.

As a result, exclusive of the Tembec acquisition, we delivered full year 2017 adjusted EBITDA of $177 million and free cash flow of $96 million, in line with our previous guidance.

Despite these challenges, we were able to achieve our goal of delivering $30 million of cost improvements for the full year as part of our cost transformation pillar.

During the quarter, we also completed the acquisition of Tembec, which is a significant milestone in the more than 90 year history of Rayonier Advanced Materials.

Tembec brings a complementary portfolio of high-purity cellulose products, given their strength in ethers, which builds on our existing strength in acetates and other specialty market segments, creating a global leader of cellulose-based technologies.

As shown on Slide 4, this combination creates a broader and more diverse product offering, which will allow us to better serve our customers globally, while immediately rebalancing our portfolio across acetate, ethers, specialties, viscose and fluff products.

Combined, we'll have an attractive portfolio of products that is capable of serving a variety of end markets.

Additionally, Tembec's pulp and paper and forest products businesses will increase both our product and geographic diversity and provide greater scale to drive growth.

Beyond the improved scale and balance across our portfolio, we also see a substantial opportunity to grow the combined companies' EBITDA through the 4 pillars of strategic framework.

Specifically, we are targeting approximately $155 million of incremental EBITDA growth, focused in 4 areas.

The first is a combination of cost reductions in our core business and of substantial synergies as we integrate Tembec.

Second is market optimization, as we leverage our broader product offering and asset base.

Third is new product development, as we leverage 2 world-class R&D facilities.

And lastly, investments in our business through high returning capital projects, stock repurchases and attractive external growth opportunities as part of a disciplined and balanced capital allocation strategy.

I will outline these growth initiatives in more detail a bit later in the call.

Looking at the combined business on Slide 5. We exited 2017 with annualized pro forma revenues and adjusted EBITDA of $2.1 billion and $369 million, respectively.

Going forward, we will be reporting our business in 3 segments, which are high-purity cellulose, forest products and pulp and paper.

High-purity cellulose will comprise the majority of the company's EBITDA, which represented approximately 70% of the company's full year 2017 pro forma EBITDA.

Turning to Slide 6. You'll see that by adding Tembec's global manufacturing footprint, we not only enhance our competitiveness through increase geographic and currency diversification, but we also reduce our manufacturing risk, given our prior dependence on manufacturing facilities in the southeastern United States.

The acquisition will also expand our pipeline of innovative products through our R&D facilities in both the U.S. and France.

Overall, the combination of Rayonier Advanced Materials and Tembec creates a company with greater scale, a better balanced portfolio and significant opportunities for growth.

I would now like to briefly review each of our business segments before turning the call over to Frank.

As outlined on Slide 7, our largest segment is high-purity cellulose, which has 4 facilities with 6 manufacturing lines located in the U.S., Canada and France.

Five of these 6 lines are capable of producing the highest grade cellulose, known as cellulose specialties.

Rayonier Advanced Materials has been the market innovator and leader in this industry for 90 years.

With the addition of Tembec's leading position in ethers, we are now #1 or #2 manufacturer in every cellulose specialties end market which we serve, including acetates, ethers, MCC, tire cord, filtration, casings and nitrocellulose.

Additionally, this segment provides commodity viscose for the textiles market and fluff used in consumer application, which provides us with greater flexibility to service all of our end markets.

Combined, we will benefit from greater diversification in this segment, along with stronger fundamentals that ethers and our other niche products are currently experiencing.

We also believe we have many high return investment opportunities in this segment.

Turning to our forest product segment on Slide 8, we have 7 facilities in Canada with a capacity of 770 million board feet, which produce a range of commodity lumber products used primarily for the residential and commercial construction in the U.S. and Canada.

Sales are roughly split evenly between the U.S. and Canada with a current 20% duty applied to shipments into the United States.

Historically, these duties have been returned to the Canadian producers as part of a final settlement between the countries.

In addition to producing lumber, this segment also and importantly produces byproducts of chips, which are used as key raw materials for the pulping assets in Canada.

In fact, our lumber facilities have the capacity to supply all of the chip needs for our Canadian pulping assets.

With a stronger U.S. housing market outlook, we believe this business will remain stable and profitable.

Furthermore, we see significant opportunities to prudently invest in high return capital projects in this segment, as it is an integral part of the supply chain to our high-purity business.

From Slide 9, our pulp and paper segment comprises 4 facilities in 3 locations across Canada, which produce paperboard, high-yield pulp and newsprint.

Our paperboard facility has the capacity to produce 180,000 metric tons of lightweight paperboard used in a variety of applications, including greeting cards, lotto tickets and packaging for consumer goods.

Our paperboard business is a nice addition to the portfolio with stable demand and opportunities to drive long-term growth.

We also have 2 high-yield pulp facilities, one in Matane and the other in Temiscaming, Québec, with a total capacity of 570,000 metric tons.

Most of these facilities' sales are exported to Asia and Europe, primarily for the use in the packaging, paper and writing markets.

The Temiscaming mill also supplies about 60,000 metric tons of high-yield pulp to our adjacent paperboard facility.

Lastly, our newsprint mill in Kapuskasing, Ontario, is a low-cost facility with 205,000 metric tons of capacity that is well positioned to be a long-term provider in a declining newsprint market.

Overall, this more diverse product portfolio provides expanded opportunities to drive incremental growth and value for our shareholders.

With that, I'd like to turn the call over to Frank to discuss our financial results in more detail.

Thank you, Paul.

Starting from Slide 10, I'll now review our financial highlights for the full year 2017, which include the results of Tembec's operations for the approximately 6-week period following the closing of the transaction in November 2017.

Sales for the year came in at $961 million, up 11% compared to 2016, which was mostly attributable to the acquisition of Tembec.

Excluding the acquired Tembec revenue of $139 million, sales decreased by $47 million or 5% year-over-year.

As expected, this was driven by a 4% decline in CS prices and volumes.

Additionally, commodity sales volumes decreased 3%.

Volume declines in CS and commodity products were primarily due to the impacts of Hurricane Irma, a production disruption at a major customer and production issues.

These declines were partially offset by improved commodity sales prices due to stronger markets, which resulted in higher sales prices for both commodity viscose and absorbent materials.

For the full year 2017, operating income was $57 million, down $81 million compared to 2016.

Excluding the impact of the previously mentioned acquisition-related costs and inventory fair value write-up, full year 2017 adjusted operating income was $114 million, down $24 million from 2016.

As shown on Slide 11, our results for the full year 2017 reflect lower prices and volumes driven by the price and volume declines in CS and volume declines in commodity products, partially offset by higher commodity sales prices.

Meanwhile, costs impacted full year 2017 operating income by $17 million compared to 2016.

We captured approximately $30 million of cost improvements through the full year 2017, which is in line with the goal that we set out to achieve at the beginning of the year.

However, the savings we achieved from cost transformation were more than offset by costs incurred to achieve future savings from our strategic sourcing project, higher production expenses due to our sales mix, chemical prices and production issues, as well as investments that we made in customer product development.

Lastly, on Slide 11, our SG&A and other costs for the full year were flat to the prior year.

While Tembec operating income, excluding the write-up of inventory, provided a $26 million benefit for the approximately 6-week period in which we owned the business.

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

As shown on Slide 12, we generated $130 million of operating cash flow and $91 million of adjusted free cash flow through the full year 2017.

Our net debt at the end of the fourth quarter was $1.2 billion.

Meanwhile, our total liquidity stood at $312 million, including $96 million of cash and $216 million available under our revolving credit facility after taking into account outstanding letters of credit.

Following the acquisition of Tembec, we expect our run rate interest expense to be approximately $63 million with a median -- mid-term target leverage ratio of 2.5x net debt-to-EBITDA.

From Slide 13, we anticipate that our effective book tax rate will be approximately 25% to 30% over the next 3 years.

On a cash basis, we expect to pay approximately 10% over the same period as we will benefit from Canadian tax attributes, including net operating losses created by legacy Tembec.

Turning to Slide 14, I'd like to discuss our initial outlook for the full year of 2018.

We expect CS prices to decline 4% to 5%, primarily driven by reductions in acetate pricing, partially offset by price increases in ethers and other end markets.

We believe our 2018 acetate pricing is now consistent with our competition.

The price premium that we previously enjoyed has been compressed as our contracts approached expiration and our customers looked for competitive bids.

These negotiations, we were able to retain and extend contracts with 2 of our largest acetate customers through 2020 at these reset price levels.

Lastly, we expect that 2018 CS volumes will be similar to 2017 volumes.

Commodity pricing is expected to remain flat over the full year, while volumes for the full year are also expected to increase in 2018 as we increase our productivity.

Overall, profitability for the high-purity business is expected to be more back-half weighted due to all 4 facilities performing planned maintenance outages in the first half of 2018.

Pricing for forest products remains at record levels.

That said, our Canadian lumber business will be impacted by import duties on its sales into the U.S., which represents roughly half of its total sales.

As a result, we currently expect that these duties will reduce EBITDA by $25 million in 2018.

Historically, the collected duties have largely been returned to Canadian producers upon a final trade agreement.

In pulp and paper, we are expecting stable paperboard revenues with decreased profitability due to higher raw material costs as commodity pulp prices are at peak levels.

Conversely, our high-yield products are benefiting from these peak pricing conditions, which are driven by increased Chinese demand for high-yield pulp due to restrictions on imports of recycled fibers into China.

Pricing is forecasted to come off these peak levels in 2018.

Lastly, in newsprint, products reduced capacity is aiding prices.

However, continued declines in demand, combined with the potential for additional duties, could negatively impact profitability.

On the cost side of the equation, as we look to build upon our progress in 2017, we are reiterating our 2018 cost transformation target of $25 million.

Investments made in 2017 into our strategic sourcing project are expected to provide a material portion of cost savings in 2018.

Additionally, we are targeting $15 million of synergies from the integration of Tembec in 2018.

We expect that these total cost savings offset higher-than-usual increases to raw materials, primarily driven by chemicals and energy.

Specifically, caustic prices, which are our single largest chemical purchase, are expected to increase materially from 2017.

Energy prices will also be up year-over-year, but more weighted towards the first quarter.

In total, we saw raw material inflation of approximately 3% to 4% for the year.

Lastly, in 2018, we currently plan to spend approximately $150 million in capital expenditures across the business depending on our ability to evaluate and implement our strategic capital projects.

Approximately $105 million is related to custodial maintenance, with the remaining $45 million related to high-return strategic projects.

As a reminder, our planned maintenance outages for our high-purity facilities are all in the first half of the year.

As a result, we expect CapEx to be more weighted towards the front half of the year and profitability to be more weighted towards the back half of the year.

I'd now like to turn the call over to Paul.

Okay, thank you, Frank.

Look, the actions we've taken over the past 3 years to reduce costs and increase our financial flexibility positioned us well for the acquisition of Tembec.

The skills that we learned in the process gives us great confidence in our team's ability to drive additional value across a larger organization.

As I discussed in my opening remarks, we see the potential to drive $155 million of incremental EBITDA through the successful execution of our 4 strategic pillars of growth by the end of 2020, as outlined on Slide 15.

The largest component will be through cost transformation, where we will take our synergy goal from the integration of Tembec from $50 million to a $75 million target.

As outlined on Slide 16, we expect to achieve a majority of these synergies by leveraging the scale of the combined organization to drive incremental value through our supply chain.

We will also drive process improvements across the entire organization as we strive to deliver increased production yields as well as achieve operational and manufacturing efficiencies.

Additionally, we've identified overlap across our organizations in the form of systems and spending which we will eliminate, along with a focus on reducing general corporate overhead.

As can be seen on Slide 17, we expect to achieve $40 million of cost transformation in 2018, $25 million of which will come from our legacy program and $15 million from synergies.

In addition to our cost transformation program, we've outlined a plan to deliver $15 million of EBITDA growth by 2020 through market optimization pillar, as highlighted on Slide 18.

Our goal is to optimize our broader cellulose specialties product offering and global asset base, factoring in our customer needs and transportation efficiencies to drive higher value for our customers and for our company.

The third pillar of our strategy is new product innovation, which remains a key priority for the company.

Our focus is on making commercially-attractive products that can drive growth in our existing businesses as well as provide us entry into other attractive and faster growing segments.

We will also begin to leverage Tembec's world-class R&D facilities as we work to accelerate growth through innovation.

As can be seen on Slide 19, we are advancing projects with the strongest growth potential through our 6 stage gate process.

In late 2017, we commercialized OptiSilk, an innovation within our high-purity commodity products, which we expect to deliver $5 million of EBITDA in 2018.

Additionally, there are several other products which are nearing commercialization, including new Biofloc and Sapphire products, both of which focus on the high-viscosity ethers market.

Our pipeline of new product development remains deep with many products that are showing promise in the lab, which taken together, provide confidence in our goal of delivering $15 million of EBITDA growth by 2020.

Our fourth strategic pillar is focused on delivering a disciplined capital allocation strategy centered on maximizing our risk-adjusted return on capital as outlined on Slide 20.

Within this framework, our first priority is to delever our balance sheet in order to reach our target net leverage ratio of 2.5x EBITDA over time.

Beyond delevering, we will also allocate capital towards growth CapEx, acquisitions and other investments that complement our core business as well as return capital to shareholders through buybacks and dividends as appropriate.

As outlined on Slide 21, we are currently reviewing approximately $90 million of high-return capital projects, which are focused primarily on our high-purity and forest product segments.

We view these projects as relatively low risk with payback periods averaging less than 2 years.

As part of our evaluation process, we are focusing on those projects that have the strongest returns and that strengthen our position in our core markets.

Given the strong return potential that we see, investment in these projects is the first priority for our excess free cash flow, along with repaying debt.

As part of a disciplined and balanced capital allocation strategy, we remain committed to returning cast our shareholders through our current $0.07 per share quarterly dividend, which we review each quarter.

Additionally, our Board of Directors authorized a $100 million share buyback on January 29, as highlighted on Slide 22.

While we do not expect to immediately use this authorization, we believe this provides another option to maximize long-term shareholder value as we execute on disciplined and balanced capital allocation strategy.

To conclude, our acquisition of Tembec is a transformational event that will provide a significant opportunity to grow the earnings power and cash flow of the company.

Thank you again for your time this morning.

Operator, please go ahead and open up the call for questions.

(Operator Instructions) Our first question comes from the line of Steve Chercover with D.A. Davidson.

So I don't want to focus too much on acetates since it's now only 25% of the revenues, but I still have a couple.

So first, maybe you could just help us.

Beyond cigarette tow, what are the other applications for acetate?

So beyond cigarette tow, Steve -- again, good morning -- beyond cigarette tow, main application out there is a protective layering for LCD screens is probably the main other one.

There's other applications as well -- cellulose butyrates and for coatings as well as in some textiles, kind of high-end textiles additionally.

So you kind of answered the question as to why you had the premium.

Now the contracts through 2020, they will remain at the current price?

There is no negotiations for next 2 years?

So, look, we said, Steve, our -- those contracts give us a stable position going forward in the next handful of years.

And let me just say, look, we feel very positive about the CS business and where we are in the cycle.

In fact, I think we got more confidence now than we've had in the past 5 years.

And it's driven -- we talked about it there in the call -- is just, the ethers and our other non-acetate segments are achieving price increases, which is great, and we haven't had for some time.

And in some cases, well above inflation.

And additionally, these markets are growing at pretty reasonable levels.

And again, in acetate, what we basically did, we just made a decision to reset our prices to be very competitive in what I described in November, which is a very competitive market.

I think the difference we have, Steve, in this time around, which is different than in past 4 years, which is where our competitors continue to move prices down, and we either had to follow or create an increasing gap between us and the market or both.

And this year, we actually believe, we reset to the market.

And therefore, that reset is relatively stable.

But our competitors were relatively stable out there in the market as we looked at.

We were just higher to the market, and we came in with a real competitive price and stayed at a competitive price here we think going forward.

But again, just based on the contracts we have, we just feel like we're in a much different place than we have been in the past in our market.

And again, we would say we feel like the outlook is far more positive than we had in the past.

Yes, that's very encouraging.

And with respect to the margins, are the margins in ethers and other cellulose specialties similar to what you get in acetate?

Yes.

Yes, I'd say they're similar.

I think you got to look at it by product to product, customer to customer, they vary a bit.

But I think as you look at where we are sitting here in 2018, that these margins between ethers and acetates are pretty comparable.

Okay.

Knowing a little history of the Tembec mill in Kapuskasing, I think that mill was a preferred supplier to The New York Times.

Is that still the case?

So yes, that mill that you're referring to, that's actually in the newsprint segment.

So -- and the answer is, yes.

Originally it was built and constructed in a joint arrangement between Kimberly-Clark and New York Times.

But that's some time ago.

That facility, as said, is feeding into a declining newsprint market, but it's got an incredible low-cost position in the market.

So we think from that perspective, it's a good place to be if we're going to be in the newsprint market.

And I'd just add, the customer base is relatively broad, so it's not relying on one customer.

And of course, I was referring to newsprint, since New York Times.

And then I wanted an update, please, on the LignoTech JV.

And is that going to start contributing this year, even though I recognize it's below the line?

Yes, that should start contributing this year, Steve.

It's scheduled to be running mid-year.

So we should see that in the second half starting to come through.

Okay, great.

And then my last one, I'll get back in queue.

How much should we factor in for the Tembec corporate costs?

And is the elimination of the duplicate -- the duplication an obvious synergy?

Yes.

I think, Steve, if you look at it and you added the two companies together before, we've given you this perspective of roughly $75 million in synergies.

And we've given you a breakdown of where we think those synergies should come from on Page 16.

So you can see the SG&A and public company costs of roughly $15 million.

Some of those will come very quickly.

Obviously, we don't need 2 CEOs and CFOs and some of the senior management.

Others will come more over time through increasing efficiencies within the broader business standardizing processes and centralizing operations.

Our next question comes from the line of Chip Dillon with Vertical Research Partners.

First question is to do with helping us understand the paperboard business you acquired.

It seems to be sort of a hybrid grade, if I'm not mistaken.

Is it fair to say, you put 1/3 of the fiber in there from your high-yield area?

And then you buy, I guess, mostly NBSK or other lease pulps on the other layers?

And then that's the 2/3 that you have to buy -- pulp you have to buy.

And is most of that board sold in North America or is it sold elsewhere?

So first, you've got a good understanding of the product.

You're right.

It's a 3-layer multiply type of product.

And you are correct, the center layer is coming from our own operations, our high-yield operations right there in Temiscaming.

The markets for it, again, are into the lightweight packaging, lotto tickets, card stock, and it is feeding mainly into the regional area even.

It's North America, but even into the Greater Northeast, Great Lakes area.

Okay, that's right.

It was actually in the slide, I should have remembered that.

That's helpful.

And is it priced -- I guess, it's priced in between like the CUK grades and the SBS grades.

Is that kind of a fair guess?

Or is that barking at the wrong tree?

No.

In fact, Chip, on Page 24 of the materials, we put in some of the key indices that we look at there.

And the best [indice] for that is, really your SBS 16 point, your bristols, is where you'll typically see this product sold into.

Okay, that's clear.

And then last -- second question is, you mentioned a $155 million EBITDA goal -- improvement goal by 2020, and I just want to make sure I understand.

Should we base that off of the pro forma '17?

And I guess -- and should we -- I don't know, how should we think about the $40 million, really $65 million sort of, backtrack that you have in 2 of your businesses?

I guess, $40 million in -- from the price change in cellulose specialties and the $25 million in the tariffs.

Of course, I don't know, maybe you're assuming that those go away by then.

But could you just enlighten us as to how we should think about that, plus other cost issues that might be offsets?

Sure, I think that's fair.

And so the $155 million is the goal for incremental EBITDA.

When we say incremental EBITDA that's before a couple of things.

It's before, number one, any changes in our prices, positive or negative, right?

So as Paul pointed out, we've seen good pricing in the ethers market and he's commented on the acetate market as well.

So plus or minus will impact that number.

And then on the negative side, you've got -- on the tailwind side, you've got whatever cost inflation that you might have there to potentially impact that.

Those are the two biggest components.

So changes in our prices plus or minus could either increase or decrease that.

And then your inflation, obviously, will be a drag on that.

Okay, that's helpful.

And then just last question is, I noticed you appointed 2 new directors or nominated 2 new directors.

And I know one of the gentlemen is from one of your owner -- shareowners.

And then I think Ms. Dill, is she the communications, I guess, director, at Spectra.

Is that who that is?

Yes, so, Julie Dill, correct.

So let me just give you a little background.

First of all, obviously, we did add 2 new directors.

We put that out this morning.

We're a much bigger company now, as you're aware, $2.1 billion of operating -- and operating in regions that are new to us around the world.

And second, you should also be aware, we've got a director who is retiring.

So with Julie Dill, we're adding really a seasoned financial background person.

She's run a business for some time in Canada, and you're correct, with Spectra Energy, where they were recently acquired.

And so Julie stepped down and she -- her background at the time or her role at that time was the Head of Corporate Communications as well as Investor Relations.

So she had both at the point where they were acquired.

And then we're also bringing Matt Hepler on.

And you're correct, Matt is out of Marcato, which is a large investor in our stock.

But Matt brings some real good expertise as well and particularly, as we think about equity value per share.

And so we're glad to have Matt also on the board.

And we had lengthy discussions with Marcato, and we are absolutely aligned on our strategic direction with them.

So we thought it was real nice complement to have him and a great fit for Julie to come on our board.

Okay, that's very helpful.

And just the last question.

If you look at the slide that shows the year-over-year, I think it was the EBIT improvement, there's $26 million from Tembec.

Which obviously owned them half a quarter, and you certainly aren't expecting us to -- or you probably don't expect to see that $200 million annualized contribution off the bat for a lot of reasons.

But I would imagine a lot of that was influenced by the inventory adjustment, which I know was a pure accounting situation.

And you're, I believe, totally right to not charge yourself for the write-up.

But I was actually amazed by how much the write-up was.

Can you enlighten us on that?

Were there like low-cost LIFO layers that were written up?

Or were those inventories at a sort of average current cost?

I can't see that especially with the costs going up the way they are.

Yes.

So Chip, the write-up obviously, as you know, has to go -- when you acquire inventory, it has to be written up to fair market value, right?

And so the markets in forest products, high-yield and some of the other markets were exceptionally strong at the end of the year.

And we've seen near records in the lumber markets and some of the high-yield markets.

So that strong pricing relative to the costs those were on the books, when you write those up to the fair market value at the time of the acquisition, you see a big write-up there.

Well, I get that.

I guess, what I would say too is, lumber, you mentioned how strong pricing was.

It's only higher now and you mentioned pulp, how strong pricing was, it's only higher now.

So I just -- I would imagine that you have a head of steam at least there, coming into the first half and yet you seem to be a little more cautious about the outlook for the first half of the year.

So I just want to make sure I'm not missing something there.

Yes, so we'll have higher duties for the first half of the year on our lumber business than we had last year.

So you will see those duties hitting there.

You've also got some modest newsprint duties that have been put in place for the business.

And then obviously, we don't forecast necessarily commodity prices for the public.

So I think you've got to think through how long the pricing will stay at the levels they're currently at.

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

Just wanted to get a little bit more clarity on that $155 million of incremental EBITDA.

Clearly, you guys raised the synergy target $25 million.

Just wanted to get a sense for what else in there that is ultimately incremental to your past guidance?

Particularly on that investment M&A side, it seems like that -- I thought you guys have been guiding to $15 million of incremental EBITDA from accelerated CapEx.

And I wanted to get a sense for whether you raised that or whether there is M&A you have in mind.

Any additional color you can provide would be helpful.

Yes, John, I would not push that into the M&A category.

I think that's a perspective of -- if we take out a large chunk of some of these high return investments, we believe that we should be able to deliver roughly $25 million in incremental EBITDA.

And that $90 million is really the front-end of many projects that we are going to review as we move forward here.

But as we said, these projects are both strategically and financially compelling.

They're mostly in the CS and forest products business.

They are known technologies in many cases and lower risk with very, very good paybacks of less than 2 years in many cases.

Okay.

And then just with regards to the synergies, where did the incremental $25 million come from?

Yes, when we got in there and started looking, we saw -- and I think I referenced this on the last call without quantifying it -- we saw no downside to our initial estimates.

And in fact, only saw more opportunities the deeper we got into the acquisition.

So I would tell you it's relatively across the board, heavily weighted to the operational and manufacturing and supply chain areas.

Okay.

And then if you could talk about some of the maintenance you're doing, if you could provide any color as far as which mills that might be in, any additional details there would be great.

So -- and Frank, you can jump in.

Look, John, we're doing maintenance across the board in all our facilities.

But this year, we just happened to have all 4 of our CS facilities down in the first half of the year.

And we're doing routine maintenance, I don't think anything particularly large or in any way are unusual in that regard.

But all 4 of them are down in the first half of the year and all 4 are getting maintenance capital investment into them.

Yes, I think that's fair.

Okay.

And then also, as you think about the investments that you were just talking about that are going to contribute to EBITDA, particularly on the lumber side of things, how do you gauge essentially when you're going to take downtime for those, particularly concerning the markets are pretty strong right now.

You probably want to benefit from the higher pricing, but then on the other hand, you also want to start to get those mills up to par.

How are you thinking about timing for the downtime on those?

Yes.

And we'll do this obviously project-by-project, John.

A lot of those projects are relatively small in size.

They're also pretty standard off-the-shelf technology.

So a lot of them don't involve much downtime whatsoever or you could even put them in, in parallel and just move right to them.

So we're not seeing any major downtime as a result of them.

We're going to have some facilities down for a little bit of time.

Just to your point, we're going to be very careful about when we do it and how we do it to minimize that given the strong markets.

But again, we've got 7 different lumber facilities.

We're going to be looking at our projects that have really short-term paybacks with really well-known technologies.

So this is not something that's kind of way out in front.

This is stuff that we believe could have been done some time ago, and we're glad to have the opportunity to do that and bring these facilities more in line with where they should be operating.

So again, we think it's very encouraging and a great opportunity for us and the new company going forward.

(Operator Instructions) Our next question comes from the line of Dan Jacome with Sidoti.

Most of my questions have been answered.

I was just trying to figure out how you guys are thinking about the housing market over the next couple of years.

Can you give us your line of sight or -- if you have one?

And what sort of things are you looking at versus what we're hearing from the other forest product companies?

I mean, housing starts build your confidence.

Anything else that you guys are looking at that gives you confidence or maybe not for the next couple of years in housing?

That was my first question.

I am just curious.

Dan, we're looking at basically what most of the forecasters are looking at, which is stable moderate growth.

Nothing exceptional, but just consistently -- groups -- consistent growth over the next several years.

Would you label that as kind of mid-single-digit growth in housing starts or are you assuming something drastically different, internally?

No, all of our perspectives here, Dan, are, again, right in line with the market and everybody else (multiple speakers).

So we're pretty tight to that average.

We don't see anything different than that, which is, again, is modest growth, but continued growth.

And again, the backdrop to that is also a continued positive economy in both the U.S. and Canada.

Okay, fantastic.

And then just on the buyback, really interesting.

Can you give us a little flavor of how those discussions went about?

What was discussed?

Any incremental color just to help us understand it because, I mean, it looks pretty encouraging.

It's about 10% of your market cap right now.

So anything on that drivers (multiple speakers)?

Sure.

we've said before -- yes, we've said before, Dan, that we talk to our board, literally every board meeting on share repurchases and share buybacks and that type of thing.

And as you know, our business was in a declining profitability mode over the last several years as we've had some -- facing the significant declines in acetate prices in general.

I think with the new portfolio of businesses and the longer-term potential for cash flow, we're really looking at how do we allocate our capital in a balanced manner and a risk-adjusted manner across all of the opportunities we have.

So looking at the investments we have in the existing business that are high return opportunities, looking at external investments, looking at deleveraging.

And then finally, looking at the ability to return capital to shareholders at levels we think could be attractive from a -- relative to the other investment opportunities.

So as Paul pointed out, our goal is to get the leverage down into the mid-2s over time.

That will come through both investment in the company to drive higher EBITDA as well as some debt repayment.

But then after that, we're going to look very closely at return of capital and also measure those investments in the company relative to those returns of capital.

So in the intermediate term, I think we will be buying back stock.

In the near term, we'll probably be more focused on the investment.

But if the market dictates, we see market dislocation that makes our stock look attractive, we may very well buy back some shares in the nearer term.

Okay, great.

And then on ethers, just -- remind us again, what's like the normalized growth profile for that longer term that you guys are thinking about?

So what is it growing across the industry?

I'm sorry, what was the last part, Dan?

Industry-wide.

Sorry, industry-wide, what's happening with ethers?

Like what are the year-over-year increases or whatever?

Yes.

We've noted in here on Page 7 that the demand outlook, it's growing in that 3% to 5% range.

Some segments are growing above that, others are right at that 3%.

So it's a well above, kind of, a GDP -- global GDP-type norm.

Which is, again, part of the rationale that we said look, we want to grow that part of our portfolio and led us to the acquisition of Tembec, because they had a real nice position in it.

And so we're looking at that, and with that, there's some opportunity there.

And we talked about some of our new products that are focused in that area.

And they're really focused in some areas that can't be achieved currently with wood-based ethers, the products we make, and we think we got some technologies that really push up into getting share into the cotton linter part of the ether market.

So that's where we're very excited about.

So there's growth in the market overall and there's also some growth opportunities to kind of push into some part that's currently being provided by non-wood based competitive alternatives.

So we've got a couple of different aspects here that make us very excited about the ethers market.

Yes, that's interesting.

Those technologies, were they inherited from the Tembec portfolio?

Or is that something you had all along that I just missed?

Yes.

So Dan, both.

One is on our Sapphire platform.

And so we've been talking about that.

And that continues to move through the stage-gate process very nicely.

And others is coming in from -- actually 2 others coming in from Tembec and their R&D center.

So -- and of course, now when we combine those teams, they're rapidly exchanging ideas how to really optimize around this market segment.

These things always take some time.

Customers got to qualify them, customers got to work with them.

So it's not an overnight thing.

But it's a very encouraging thing for us again, not only because the segment itself is growing, but we think we've got some tools now in our kit that take us beyond what others could conventionally do in our space.

Very nice.

And then my last question, kind of a weird one.

Is there going to be a change in the way you guys report?

I'm just thinking about future press releases given you're going to be a significantly different company.

Is that going to change at all?

Sorry, if I missed any of that?

Could you clarify that (multiple speakers)?

Is there going to be a change in how you report for future press releases, like any segment breakdowns or anything?

Sure, sure.

The segments that we're going to report on are going to be our high-purity cellulose segment, which includes our cellulose specialties, viscose and commodity absorbent materials.

The second segment will be forest products and that will be our lumber business.

And the third segment will be pulp and paper and that will include high-yield pulp, paperboard and newsprint.

Three segments.

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

Just a question, Tembec had an agreement with the Québec government to accelerate some CapEx funding.

Is that in place for you guys?

And what's the state of that program?

Yes, it's in place.

We have been spending money against that program, and we'll continue to look at those projects and move forward with that program.

Okay.

So that $45 million of CapEx for high return, that's your net and you will be doing more projects under that?

That is a net number and that is just for 2018.

And if you remember that, that program was a 3-year program.

Okay.

And then just trying to understand the guidance on the softwood lumber duties at $25 million.

If I used your -- what you stated on volume, 665,000, and net it out, it sort of assumes that you're making an assumption that on lumber prices around $400 a thousand, where I've got random over $600 and I've got stud at $450.

Yes.

So Paul, I think, we put out our best estimate on that $25 million.

So we know that the pricing may change over time.

But as you know, if you look at our Page 24, what we've looked at last year was $465 roughly for random and $444.

And that's up to $534, but stud's down to more like $400.

Yes.

That was December.

We're quite a bit higher than that now.

Yes, right.

Okay.

So you based that basically off of last year's pricing deck?

Pretty much.

And it's going to be -- it'll be 21% or so of the whatever pricing deck that you use outlook-wise.

Okay.

And then just on the commodity cellulose, just wondering if there's a mix -- how we should think about that side of the business, mix change going forward, just to understand that Tembec produce quite a bit of viscose as well?

Yes, that's right, Paul.

So we guided in the past that our legacy RYAM mix would be more heavily weighted to viscose over fluff in this most recent 2017 period.

You're correct to say that, that Tembec is going to bring even more viscose into that mix.

And so, therefore, yes, we're going to move up even higher than that as a total percent, weighted towards viscose over fluff pulp.

Okay.

And then just lastly, just understanding the acetate pricing drop.

If our overall prices are going down 4% to 5%, and we've actually got growth in ethers and others, which Tembec had growth the year before, it sort of suggests that acetate prices were down in the 7%, 8% range.

Is that close to what we're seeing?

Yes, we haven't given that out, but I think you're doing math in the right area, which is clearly the acetate prices had to be dropping above that 4% to 5% range.

And I think -- and again, we just -- look, we said -- we've kind of talked about it, we kind of pulled of the Band Aid off and said, hey, let's just be market competitive here.

It's what our customers want.

It's good for the long term, let's move forward and let's try and reduce the conversation on it, and let's get healthy with this business and see if we can't show increases in gains and margins and profits in all our segments going forward.

I mean, that's our goal.

All right.

And then just lastly, annual EBITDA guidance which you've provided in the past, you're not providing here.

Are you going to provide it in the future?

No, we won't be providing annual EBITDA guidance.

I think, Paul, like what many of the competitors that have mixes that have very high commodity mixes in them, it's very volatile based on where pricing moves on a year-to-year basis.

What we've tried to do in this deck is to give you the things that we look at from pricing outlook for the commodity businesses back in the appendix.

And then give some pretty specific guidance on pricing, volumes, cost inflation, et cetera, for the CS business.

Our next question comes from the line of Roger Spitz with Bank of America Merrill Lynch.

This is Bill on for Roger.

I apologize if this was covered already, but would you be able to provide 2017 sales numbers ex Tembec?

Yes, I think that was in our script.

Hold on.

Let me just pull it up.

Where is it?

So total sales numbers would be $800 -- sorry, $961 million total, less $139 million for Tembec.

So what's that?

$822 million.

Our next question is a follow up question from John Babcock with Bank of America Merrill Lynch.

Just want to actually follow up from Paul's question and try to get a little bit more detail on the EBITDA side of things.

So you mentioned that 2017 pro forma EBITDA was around $369 million.

Is there anything as we are looking out to 2018 that we should be adding back?

Clearly, there was the hurricane impact on RYAM's side.

You also had the customer that experienced an outage there.

Is there anything else on the RYAM side?

And then also is there anything on the Tembec side that we should be thinking about adding back to?

Yes.

So what we've looked at is roughly a couple of things.

One is, we've said that volumes are going to be roughly flat with last year from a CS perspective and that pricing is down 4% to 5% from that perspective.

We've also said that duties are going to be $25 million and cost inflation is going to be a little bit higher than historically.

It's going to be 3% to 4%.

We've typically said 2% to 3%, but we have seen some escalation in commodity chemicals, caustic in particular.

Additionally, the very cold weather in the U.S. South has increased energy costs in the first quarter.

So you will see a little bit of that inflation coming through.

But those are the major areas and then we've got the synergies in our cost transformation, some new products/market optimization.

Paul mentioned the $5 million in OptiSilk that we've seen this year.

So those are the key drivers.

And then it really all depends on pricing for forest products, lumber, high-yield pulp and newsprint will be the big changes.

Okay.

But were there any onetime items though that happened last year that we should be aware of?

Or that you want to (multiple speakers)?

No.

Not really.

Okay.

So I covered most of them then with the hurricanes and customer outage, really?

Correct.

Okay.

I appreciate that.

And then lastly before I hand it over, just on the maintenance side of things.

Is there a way you'd have us quantify that impact?

Whether based on kind of past precedent or if there is a way, on a per ton basis, any way you could kind of give us some numbers around that would be useful?

Both we and Tembec have always taken maintenance outages, so these are typical to what you'd see in any year for us.

So you won't see a major delta.

What you'll see, though, is unfortunately, they will be more weighted in the first half of the year.

So depending on that and timing of customer orders, we think that will be 40% to 45% profitability in the first half and 55% to 60% of the profitability will be in the second half.

Mr. Boynton, we have no further questions at this time.

I would now like to turn the floor back to over to you for closing comments.

Great.

Thank you.

If there's no more questions, I just want to thank everybody for joining us today.

Obviously, we're very excited about the opportunities in front of us, and we look forward to delivering on our goals.

We'll continue to provide updates on our progress in a timely manner as we move forward.

So thanks, everybody.

Have a great day.

Appreciate your time this morning.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.