Rayonier Advanced Materials Inc (RYAM) 2018 Q1 法說會逐字稿

Good morning, and welcome to Rayonier Advanced Materials First Quarter 2018 Earnings Conference 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.

Mr. Walsh, you may begin.

Thank you, operator, and good morning, everyone.

Welcome again to Rayonier Advanced Materials First Quarter 2018 Earnings Conference 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 Finance and Strategy.

Our earnings release and presentation materials were issued last evening 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 securities laws.

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

Today's presentation will also reference certain non-GAAP financial measures, as noted on Slide 3 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 Slide 16 through 19 of our presentation.

I'll now turn the call over to Paul.

Thank you, Mickey, and good morning, everyone.

I'm going to start the call today with the highlights of the quarter, before turning it over to Frank to review our financial results.

I will then conclude with an update on our strategy to drive growth and value for the company.

As summarized on Page 4, for the first quarter, we reported EBITDA of $86 million on $522 million of revenue; an EPS of $0.38 per share, a 153% increase from the prior year.

Our first full quarter of operations following the acquisition of Tembec clearly demonstrate the accretive benefits of the enhanced scale and diversity of our combined business, as the strength in our commodity segments offset largely temporary challenges in our high-purity cellulose segment.

High-yield pulp contributed significantly to the bottom line, while lumber delivered solid results despite the tariffs on sales into the United States.

These positive market dynamics offset lower high-purity sales volumes resulting from unplanned shutdowns at our Jesup facility to repair our chlorine dioxide generator and at our Tartas, France facility due to issues with the sulfur burner.

Additionally, our first quarter financials were weakened by an unexpected spike in natural gas distribution costs during the unusually cold January.

While we are disappointed with these production issues, I'm confident that they are behind us.

Looking forward, we expect the robust pricing and profitability in our high-yield pulp and lumber businesses to remain at elevated levels through the near term.

Additionally, the integration of Tembec's operations is proceeding in line with our expectations, as we delivered $7 million of savings during the quarter and anticipate that these results will accelerate through the year as we work to reach our $40 million target.

Overall, I remain confident in our ability to execute on our strategic plan for the year.

The second quarter is already off to a solid start as we can see the results of our efforts to improve and drive incremental value for our shareholders.

I will discuss some of these details after Frank reviews our financial results.

Now let me turn the call over to Frank for further discussion.

Thank you, Paul.

I'll start by reviewing the quarterly results and outlook for each of our business segments.

As outlined on Slide 5, our largest segment is high-purity cellulose, where sales declined by $19 million, as price increases were offset by a 12% decline in sales volumes.

The lower sales volumes were largely driven by the production issues that Paul referenced in our Jesup and Tartas facilities, both of which have been addressed.

EBITDA for the high-purity segment was $54 million, which compares to $77 million in the year ago quarter.

The decline was largely attributable to our decreased sales volumes, combined with increased raw material costs.

As Paul discussed, costs were impacted by a spike in distribution costs for natural gas.

The combination of our production issues and the spike in energy prices negatively impacted first quarter EBITDA by $15 million.

Increased prices in chemical input costs also contributed significantly to the decline.

Looking forward, cellulose specialty prices are anticipated to decline 4% to 5% in 2018, with flat to slightly lower sales volumes.

That said, we expect profitability to improve over the balance of the year, given that our significant production issues have been resolved, energy prices have returned to normal levels and the second-half strength we typically see in customer shipments.

A portion of this order seasonality is driven by lighter shipments as well as our annual maintenance outages, which are performed in the first half of the year, including outages in the second quarter at Jesup, Tartas and Temiscaming.

Overall, we expect higher profitability through the balance of the year.

Turning to Slide 6. Sales in our forest products segment rose approximately 19%, largely driven by a 30% price increase for lumber products.

EBITDA grew 50% to $12 million as compared to the year-ago quarter.

This improvement was driven by the higher sales price, offset by $7 million of duties paid for lumber sold into the U.S.

Looking forward to the second quarter, these strong lumber prices are expected to be consistent with first quarter levels due to solid demand and duties imposed on Canadian lumber imports to the U.S. It's important to reiterate that duties impact roughly 50% of segment sales, which we expect will reduce EBITDA by approximately $30 million during 2018, with no impact on sales volumes.

Turning to Slide 7. The pulp segment had a strong quarter as sales increased 33%, which drove EBITDA higher by 243% to $24 million.

These results were driven by a 36% increase in prices for high-yield pulp, given strong demand from export markets which were modestly offset by higher costs and currency.

Looking forward, high-yield pulp prices remain at historically high levels due to increased demand from board and paper producers, combined with reduced supply of imported recycled fiber into China.

Demand and prices are expected to remain relatively strong into the second quarter before moderating in the second half of the year.

Turning to our paper segment on Slide 8. Sales increased [6%], primarily due to increased prices and higher newsprint volumes.

That said, EBITDA for this segment decreased by $2 million to $10 million due to higher raw material pulp costs in paperboard, higher transportation costs and approximately $1 million of duties paid for newsprint sales into the U.S.

Looking forward, we expect paperboard prices to remain stable or improve slightly, which will be more than offset by increased pulp prices.

Overall, we anticipate that higher pulp prices will benefit our pulp segment more than they impact raw material costs in paperboard, as pulp sales volumes are significantly greater than paperboard purchases of pulp.

In newsprint, prices have increased since duties were imposed.

However, we expect profitability to remain relatively stable as the team is actively rebalancing our geographic sales mix to effectively mitigate the impact of the duties on EBITDA.

Turning to Slide 9. On a consolidated basis, sales for the quarter came in at $522 million.

On a comparable basis with Tembec, sales increased 4%, primarily driven by higher prices in high-yield pulp and lumber.

For the first quarter of 2018, EBITDA was $86 million, a decrease of $4 million from prior year, including a negative impact of $6 million attributable to changes in currency.

Importantly, we captured approximately $7 million of cost improvements through the end of the first quarter, which is in line with the $40 million 2018 goal that we set out to achieve at the end of 2017.

First quarter cost savings are roughly evenly split between legacy RYAM transformation goals and synergies.

Cash flow continues to be a high priority for the organization.

As shown on Slide 10, we generated $33 million of operating cash flow and $13 million of adjusted free cash flow in the first quarter of 2018.

Free cash flow was negatively impacted by an increase in working capital, primarily driven by a $32 million seasonal increase in raw materials in the forest products segment, as logging in certain areas of Canada must be done when the ground is frozen to allow for access to the forest.

Net debt at the end of the first quarter was $1.15 billion.

Meanwhile, our total liquidity stood at $306 million, including $89 million of cash and $217 million available under our revolving credit facility after taking into account outstanding letters of credit.

Interest expense for the first quarter of 2018 was $15 million, which represents an increase of $6 million from the year ago quarter, driven by higher debt balances and interest rates associated with our financing of the acquisition of Tembec.

Importantly, this is in line with the full year run rate of $63 million in interest expense that we discussed last quarter.

We continue to operate towards a target leverage ratio of 2.5x net debt-to-EBITDA, and we evaluate capital allocation decisions on a disciplined and balanced basis.

With that, I'd like to turn the call back over to Paul.

Thank you, Frank.

Turning to Slide 11.

Our first quarter results demonstrate the benefits scale and diversification has resulting from our acquisition of Tembec.

Importantly, the integration is proceeding in line with our expectations, and we remain confident in our goal of delivering $75 million of synergies and a total of $155 million of incremental EBITDA growth by the end of 2020 through the 4 pillars of our strategic framework.

Turning to Slide 12.

The first pillar is our cost transformation where we have identified $100 million of incremental EBITDA growth through a combination of $25 million of incremental cost reductions in our legacy business and $75 million of synergies from the integration of Tembec.

We expect to achieve a majority of these synergies by better leveraging the scale of the combined organization to drive value through our supply chain.

We 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 have 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.

With $7 million achieved in the quarter and detailed plans in place to capture a total of $40 million in 2018, we remain confident in our $100 million 3-year cost transformation goal.

Our second pillar is market optimization, where we have outlined a plan to deliver [$50 million] of EBITDA growth, as we work to optimize our broader cellulose specialties product offering in global asset base, factoring in our customer needs and transportation efficiencies to drive higher value for our customers and our company.

Here's an area where clearly greater scale and diversification allow us to deliver incremental value for shareholders.

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

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

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

Today, we are excited to announce that in the first quarter, several key customers qualified Biofloc XV20, a new ether product targeted at replacing cotton linter, which expands our ability to capture value in existing markets.

These developments provide us confidence in our goal of delivering $50 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 13.

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 to complement our core business as well as return capital to shareholders through buybacks and dividends as appropriate.

In regards to strategic capital projects, we have now approved $75 million of net spend on the $90 million of potential projects that we had identified at the time of our fourth quarter call.

These projects, which are primarily focused on our high purity and forest products segments, will be completed over the next 3 years and have an average payback less than 2 years.

That said, and as part of our disciplined and balanced capital allocation strategy, we will also remain committed to returning cash to shareholders through our current $0.07 per share quarterly dividend, and we'll be opportunistic with our $100 million stock repurchase authorization.

Now of note, the $3 million of equity purchased in the first quarter, it was part of our regular stock compensation plan and not part of the new authorization.

To conclude, the integration of Tembec is proceeding well.

The scale and diversification from the acquisition is providing solid financial benefit, and we remain confident in our goal of delivering upon a significant [$155] million of EBITDA growth by 2020.

Thank you again for your time this morning.

And operator, if you will please open up the call to questions.

(Operator Instructions) Our first question is from Paul Quinn with RBC Capital Markets.

Just -- I guess a question just on specialty cellulose.

It looks like in the quarter, you got one-timers of $15 million that should come back to you in Q2.

And it sounds like the favorable mix in Q2 that, I guess, decreasing mix is going to be more than offset by the increased volumes of when you don't have the production issues, so the balance should be stronger going forward?

So yes, Paul, obviously, we stubbed our toe here in the first quarter on some operational issues.

Again, we strongly believe those are behind us.

And with that, we're going to see better quarters following for the balance of the year, so yes.

Okay.

And how big was the chemical cost increase in the quarter, quarter-over-quarter?

The chemical cost was roughly $6 million increase quarter-over-quarter.

Actually, year -- quarter '17 over quarter '18.

Okay, year-over-year.

Yes.

And then you outlined that $30 million in duties you expect on the [lumber] side.

What do you expect for newsprint in 2018 here?

It's hard to say exactly.

Right now, the team is prepared to move most of our volume to export markets.

And we think we can do that, as I noted, without a lot of costs or any implications to our EBITDA.

But what we're currently seeing is our U.S. customers have been willing to pay our current price levels.

And so again, it all depends on that timing of if they get to a point where they can get alternative supply, we'll move quickly to the export markets.

So Paul, it's hard to put a number on it.

So from a EBITDA perspective though, we think it's going to remain relatively consistent whether in one or the other.

So I can't tell you exactly [on] where the tariffs is going to be.

Okay.

And then there's a lot of targets and moving parts out here with all the -- your cost transformation, optimization [in production], et cetera.

The $7 million in savings you got is of the $40 million target.

So I'm confused by the $50 million target on, I guess, what is this -- Slide 12 here in 2018, where is the $50 million, what's the extra $10 million?

Slide 12.

So the extra $10 million comes in, in new products and investments.

And there could be some in market optimization as well.

Right.

And Paul, if you remember on the last call, and I think we mentioned it here on this call that OptiSilk alone, we said is worth $5 million in 2018.

So that's part of that extra $10 million that you're asking about.

Okay.

And then just lastly, you guided flat for lumber, and we've seen prices up.

Is that just your cautious nature?

Yes.

We're watching and listening to what everybody else is saying in the market when it comes to the analysts.

And a lot of them say, hey, look, at some point here, we're going to see a little bit of retraction as BC wood starts flowing, and they get out of their constraints of transportation and should bring things back down a bit.

So again, we're calling it flat.

It could be up.

We're already up from the first quarter into this quarter, but we do expect some kind of retreat back in the back half of the year.

Our next question is from John Babcock with Bank of America.

Just want to ask about the integration and kind of the progress you're seeing there.

I was wondering if you could kind of talk about what's gone well and what maybe could have been done better during the quarter.

And obviously, I realize you had the production issues.

If you could provide any details on that as well, that would be helpful.

So John, I'll turn it over.

Frank is leading the effort for the team, and I'll turn it over to him and see if he wants to make some comments.

Yes.

So in regards to integration, things have gone well as planned.

We have seen, as I said on the last call, we still haven't seen any negative surprises on the integration front.

We're on target to hit our integration synergy objectives for this year.

We're in the process of bringing together the '19 and '20 plans to hit the total $75 million.

But we feel very good about those numbers that we've put out there based on what we've seen to date.

So no issues whatsoever.

I think, culturally, the 2 companies have embraced the combination as well as the targets and goals we've set out for the companies.

So in general, we feel really good about the integration and how it's progressed to date.

Paul, do you want to comment on the -- any of the disruption?

Yes.

So again, a comment.

Two facilities we struggled with in the first quarter, as mentioned.

One was our chlorine dioxide generator in Jesup, and we ended up just actually changing out equipment there to put this issue behind us once and for all.

And so therefore, we feel very good about that.

And the other one is a heat exchanger in Tartas, France.

And so again, we have a immediate workaround on that issue, and we'll be replacing the equipment as well there here in the near-term future.

So again, both of them again are unfortunate and have operated very consistently well for a long time but have come up here in the recent months.

And the teams have struggled with them getting back up and going.

We ended up just actually replacing out the equipment or plan to replace that equipment in the case of France and in the very near period and putting these issues behind us.

So again, our confidence is high, but unfortunately, they cost us, as noted, about $8 million in the first quarter.

Okay.

And then just to clarify on the kind of EBITDA opportunity here.

I mean, how much EBITDA should we think about for 2018?

Is it that $50 million?

Or because of the costs to achieve some of this, it could be a fair bit lower?

So there'll be some costs to achieve.

I think we've said could be up to 1x the synergies from that perspective.

To date, it's been roughly $1 million of costs to achieve synergies so far.

So it's been a fraction of what we've saved.

Our synergies are $7 million split roughly evenly between new synergies and legacy transformation.

So we've been running below that.

But there will be some costs as we move forward to achieve.

So I think modeling something close to 1x over the entire program is fair.

Okay.

And then last question before I turn it over.

Just on the pulp markets, if you could talk about what you're seeing there, inventory levels and just general supply, demand.

And also, what's kind of driving your expectations around that for the rest of the year?

John, sorry, is your reference to the high-purity business?

Yes -- no, actually, the commodity pulp, the high-yield pulp.

Yes.

Look, the -- obviously, we've been pleased with where those markets are at year-to-date.

They are holding up very nicely.

Most analysts [have out there] that they're going to ease off in the back half of the year.

So we continue to believe that, that will be the case as well.

But having said that, we've got, again, really a strong order book.

We say in the near term, it's going to hold where they are now, and we still anticipate though there's some easing off in the back half of the year.

Beyond that, most of the analysts again from '19 through 2021 keep that commodity high yield up there at elevated levels, elevated pricing levels.

So we're optimistic on what that business can bring to us in the near term.

Our next question is from Chip Dillon with Vertical Research.

Yes.

I had a just a real quick housekeeping question.

We add up the volumes and the prices on like Slide 5, for example, that deals with specialty cellulose.

We're coming up quite short.

Like, for example, in that slide, if you just add the 2 grades and you add -- multiply them by the price, you're getting $251 million, and yet you're showing $282 million.

And I just didn't know why there would be such a gap there.

So we also have lignin and chemical sales in that segment.

Okay, that's very helpful.

And the only other one where I saw, I guess in the pulp segment, it looks like if you did the same thing, you would get closer to $78 million versus $85 million.

Was there anything else in there we should be aware of?

Yes.

What you've got in there is some intercompany sales to our other business.

I got you.

So these prices and sales volumes are to third parties?

Yes, that is correct.

Okay, okay.

That's helpful.

And then if you -- one other just thing to clean up is, you mentioned the pulp integration.

In the paperboard, you're buying a lot of the high -- I'm sorry, the high-yield pulp that you produce.

How much do you sell and how much do you buy just so -- annually?

We buy approximately 60,000 tons of our internal pulp, and then we purchase externally -- and that's in the Temiscaming mill.

And then we purchase in Temiscaming roughly another 2x that, so 120,000 tons within the Temiscaming mill.

Matane is all externally sourced.

Okay.

And so the way to think about it company wide is that it looks like that you're actually buying 120,000 tons on the outside.

And how much are you selling to third parties of pulp?

Of pulp?

Roughly 510,000 tons.

So we -- yes, we make about 570,000, and we consume about 60,000.

And so the way to think about it is you're selling on the open market somewhere around 390,000, and you're -- I'm sorry, you're selling around 510,000.

You're consuming 60,000.

And then about 120,000 of that 510,000 is offset by purchases.

So your net exposure is around 390,000, so that makes sense.

And then...

The pulp and paper is in the high-yield market.

Yes.

Yes, yes.

Got you on that.

And I also wanted to know, I know you're missing the lumber duties when (inaudible) we're going to be about $30 million this year.

And I think last call, it was $25 million.

Is that just to reflect the higher prices?

And then also -- so that's all that it is here?

Okay, that's very helpful.

And then when we look at the volumes for specialties, I think last call, you said it would be more flattish.

Now you're saying flat to down.

Was there anything that changed?

Is there a certain subarea of specialties that changed?

I think the biggest issue was 2 things: one, the production disruptions; and 2, just some timing sales patterns that we're seeing.

But I think, overall, nothing material.

So they will be down slightly.

But again, when we're not producing what we intended in the first quarter, it's hard to sell that.

Okay.

And then just real quickly, the $3 million in other operating income, if there's a benefit, what was that from?

Just other operating income expense net.

You know what, Chip, I may have to circle back on that to you.

We'll catch up on that later.

Thank you.

Thank you.

Our next question is from Roger Spitz with Bank of America.

I think you mentioned that in Q2 '18, there will be turnarounds at Jesup, Tartas and Temiscaming, if I heard correctly.

What would be the EBITDA impact of those turnarounds in Q2?

Yes.

It should be relatively modest.

I mean, we see some of it every year.

We'd never disclosed exactly how much it is in any given quarter, but we'll see that going forward.

Again, the best I can direct you to is, when you want to think about our earnings for the year, think about roughly 45% of our EBITDA in the first half and roughly 55% in the second half, and that will give you a sense, and that's inclusive of those turnarounds.

Got it.

And within paper, I don't know if you'd be willing to do this.

I was curious if either you have some sense of the sort of sales and perhaps even EBITDA between paperboard and newsprint.

Roger, we don't have it broken down that way at this point in time.

So we do give you actual sales prices and volumes within that, but we don't have the EBITDA broken or split out between the 2. But you can see on Page 8, you have volumes and price.

Okay.

And for Q4 of '17, just because you've [started to break it out] differently here, the -- you gave paper and -- pulp and paper sales of $65.4 million and EBITDA of $8.1 million.

If you disclose the sales, but I was wondering what is the split of that between the pulp and paper in Q4 '17, if you happen to have it to hand?

I don't have that at hand.

Okay.

And lastly, do you have the cumulative cash you paid on lumber duties you've paid?

And is there -- depending on how negotiations go, any chance of getting that back?

Well, it's $7 million for the first quarter, so that's where we're coming up with roughly the $30 million for the year because pricing escalated through the quarter.

In regards to getting it back, all we can say is that, historically, over the last 2 disputes, when an agreement was reached, the negotiation and settlements included a return of those duties that were paid.

I believe 2 settlements ago, it was 100%.

The last settlement, it was roughly 80%.

So we would anticipate or would hope that we will get some back.

But those disputes have taken 3 to 5 years to come to fruition.

So right now, we're just running the business.

Profitability is very good, given the price increases even with the duties.

So we feel relatively comfortable in our position.

And if we got the money back, that would obviously be a positive benefit at the end of the negotiations.

Our next question is from Steve Chercover with D. A. Davidson.

So the first question, given the operational issues at Jesup and Tartas, were you able to pull any of your maintenance forward into Q1?

So we had to keep with our standard longer shutdown timing as it was originally planned because it's really hard to move those type of larger vents around, Steve.

But of course, any time we go down somewhat unexpectedly, we take advantage of the time in every way possible.

So we move up smaller half-day, 1-day projects that we had on the calendar and try to put those into that event so that we can avoid them later on in the year.

But they are on the fringe, on the margin, and nothing substantial like you're hopeful that you can pull the whole shutdown forward, and the answer is no.

So despite the fact that the bulk of maintenance at the specialty mills occurs this quarter, we should still think of the EBITDA, I guess, being up in the vicinity of $15 million at minimum because of the nonrecurring?

Yes.

It probably would be -- that's probably a fair way to look at it and then back off a little bit from the -- from some of the shutdown issues.

But it's not -- they're not huge dollars.

Great, okay.

And then in specialty cellulose, was your pricing hit by mix at all?

Or is the $13.75 that you realized in Q1 a decent run rate for the year?

I would say that the mix did impact it.

Two things impacted it.

Obviously, in the first quarter, every year, we have a little bit of volume that ships in 2017 or the year prior, and then hits as revenue in 2018, so that tends to come through at last year's prices.

And then there was a little bit of mix associated with it as well.

So we would anticipate for the year, we would be down 4% to 5% as we said before from last year.

From the full year average last year?

Correct.

Okay.

And then can you help us think about how the seasonality impacts your northern mills, newsprint, paperboard, BCTMP?

I mean, I -- very minimum, I would think the energy use comes way down.

Yes.

I would say, Steve, just from a market standpoint, you don't see a lot of seasonality outside of lumber.

Of course, you get a building season that tends to take product obviously more readily in the warmer months.

The biggest impact that you see and we noted it, Frank commented on that, is just on working capital, right?

So if there's a seasonality impact, I'd say that's the main area.

And then outside of that, certainly, then lumber flowing in the warmer construction months obviously more readily than not.

Yes.

Steve, we have seen over the last year or 2, though -- and you're right, typically, energy would be lower in the winter because of the heating season in Toronto during the summer, but we've also seen with some of these extreme colds pulling some very higher energy costs in the first quarter.

So it's not as clear that it's lower, higher from that perspective.

The energy really depends on extremes more than it does general temperature patterns.

Yes, well, I'm surprised speaking of energy that there was such a spike down in the south.

I mean, is it coming to you via pipeline or via some other transportation mechanism?

Yes.

So it comes via pipeline, and the entire south got hit with extremely cold weather as you might know in the month of January, late December and for the first half of or most of the month of January, which caused the prices to increase materially in the Georgia region and along some of the southeast coast.

Again, and Steve, it wasn't the molecule itself.

It was truly distribution costs and getting it to us.

So demand went way up for the molecules moving through those lines.

And you probably heard others report on the same here on this with regard to their operations in the southeast.

So I guess that's what I'm trying to understand.

So is the distribution -- it's not the cost per BTU or however they measure it, it's the cost of getting the molecule to the facility.

Think about it as the local cost of that energy is I think the easiest way to say it because there's supply-demand issue in that localized region which then drives up the price.

Okay.

And then a number of my questions have been answered.

But with respect to the lumber file, we certainly hope you get those duties back, and the precedents are in your favor.

Is there any update you can provide with respect to negotiations between Canada and the States?

I have no updates, Steve.

And quite honestly, I think there's been very little activity.

As I know, both governments are working on other issues, namely NAFTA.

Okay.

And just to reaffirm, you're being fairly conservative in terms of both your BCTMP and your lumber pricing [deep] to kind of call them flat for Q2, even though we appreciate you're not being promotional.

You're probably not going to stay at current levels, but the Q2 average so far is higher than Q1.

Yes, that's correct, Steve.

And it moved up.

I think lumber moved up again last week in some of the indices as well as we've seen a little moderation in the pulp side, but kind of flat.

Our next question is from Dan Jacome with Sidoti & Company.

Just a couple of questions.

So first, on the operational equipment issues.

I think you mentioned the chlorine and the sulfur.

So I'm not too surprised about the natural gas price elevation.

A couple of my companies have mentioned that.

But just on the equipment, I mean, I'm trying to understand if anything from that was related to the Tembec integration, which I guess I'm trying to ask is would these equipment issues have happened if Tembec did not exist and you did not acquire those operations?

Yes, completely independent.

Nothing to do with that.

The heat exchanger and the sulfur burner in the Tartas, France facility has operated incredibly well for decades.

So while we had a failure at one point in time, we don't know, but we wrestled with it for a while, and then made a decision to go ahead and just replace the exchanger in total and put a brand new one in it.

And very similarly, the chlorine generator in -- chlorine dioxide generator in Jesup, but nothing to do with the acquisition or integration.

Okay.

So I mean that is encouraging definitely, but -- and you had no visibility into these 2 issues when you last talked to us in February?

Some of these, we mentioned that we had some challenges in the end of -- in the fourth quarter of 2017, so some of that was related to these.

And again, since that time, we've made the decision to go ahead and actually replace them out.

Okay, fair enough.

And then lastly, on the debt reduction plans, I think you mentioned 2.5x leverage ratio goal.

Over time, if I got you correctly, can you refine that a little bit further, if possible?

And then if you cannot, maybe you could supply us with this answer, what in a best case scenario would be the time it would take to maybe get to pre-Tembec leverage, if possible?

Okay.

So pre-Tembec leverage was closer to 2x, so I don't think we'd go down to that level at this point.

So I think we're more around the 2.5x focus.

The leverage will be driven by 3 things.

One is going to be reduction of debt.

And to date, we've basically paid back minimum amounts of debt actually what was due.

Two is high-return projects would drive your EBITDA because if we can raise the EBITDA up, obviously, we will drive our leverage down as well.

So between the combination of those 2 items and the strength of our overall markets, we'd anticipate driving that leverage down to 2.5x relatively quickly.

But we haven't given a specific time frame out on that.

So again, we've got a couple of programs out there, Tarif L being one in Québec, where it is very advantageous from a return perspective to make those investments quickly, and we intend to do that.

Those should benefit us from EBITDA.

We'll also pay down some debt.

And as I said, we're very focused on having a balanced capital allocation program.

So to the extent that it makes sense for us to repurchase some shares, we'll also look at that over time.

We'd expect that to be a little bit later, but we will be very opportunistic if we see opportunities to go in the market and buy back stock.

We have a follow-up question from Paul Quinn with RBC Capital Markets.

Just 3 easy clarifications.

One, the 60,000 tons at Temiscaming that's transferring internally, is that at market price or cost?

We do it at market price.

We set that quarterly.

So we try to set that on a market price basis.

Yes, Frank, I don't know if it's quarterly or maybe an annual, but it's set at market at a time of budget, and we leave it there, and we adjust it later.

Okay.

And then I understand there's $7 million on lumber deposits in Q1.

What did Tembec deposit in 2017?

I suspect it's somewhere around $15 million.

And are you eligible for that if the deposits are returned?

Yes.

So Paul, the number is $11 million.

I don't know if you heard that.

$11 million?

Okay.

And generally pretty decent cash flow in the quarter.

It looks like a lot of it was hidden behind the working capital build.

I got that at $32 million.

Is that right?

The working capital just on the lumber alone was $32 million.

That tends to go up a lot in the first quarter, as they need to basically harvest most of the lumber in northern Canada while the ground is frozen, so they can get transportation in and out of the forest.

So it's a little bit higher than that.

But that $30 million to $35 million is probably a good basis.

Okay.

And then how do you -- the liquidation of that working capital build, how do you see that coming out over the next couple quarters?

I'd say it would liquidate in the next 2 quarters roughly on the lumber side.

(Operator Instructions) We have a follow-up question from John Babcock with Bank of America.

Just hopefully a couple of easy ones here.

Just back to that EBITDA comment earlier, adding back to onetime items I guess would be around kind of [$50 million].

And then you mentioned that there would be some shutdown issues that might mitigate that -- well, not issues, I guess, but essentially like some of the downtime you have.

Is there anything else that we should be taking into account as we're kind of modeling out from 1Q to 2Q?

I think that will give you a rough estimate.

Again, we don't give quarterly estimates so -- quarterly guidance for the business.

But I think on the high-purity side, that's a reasonable way to think about it.

Okay.

And then on the high-purity cellulose segment, I was just wondering if you could talk about acetate demand there.

I mean we're hearing just generally a sign that particularly cigarette demand seems to be weakening, and wondering if that -- how that impacts you, I guess, quarter-to-quarter, but then also how you're thinking about it on an annual basis now.

Yes.

I don't think our perspective has changed since we talked about this at our February call, which again we said, look, globally, we anticipate that it's flat to down to where China would be a little bit higher than the balance of the rest of the world.

So -- or the rest of the world would be 2% to 3% down in some range with China flat to maybe even up a little bit.

So I don't think that perspective has changed at all, John.

And listening to some of the others, I'm kind of on a customer side present, it sounds like they're calling it flat for the year-over-year as well in terms of their demand.

So I don't think it's inconsistent from what we hear them seeing, so -- or what they are seeing.

So that's kind of where we are now.

And I don't think anything has changed.

If we get more information, new information, we'll be sure to share it with you.

We also have a follow-up question from Chip Dillon with Vertical Research.

Just a quick one.

You mentioned I know some downtime maintenance, downtime I believe for the rest of the year.

And I think you mentioned it was mostly in the second quarter, at least to the big mills.

Could you just clarify that, just so we can get a bigger feel for how that's going to impact you throughout the year?

So we take down in the second quarter Jesup, Tartas and Temiscaming.

So those 3 mills come down.

Fernandina was in the first quarter.

Yes, that's right.

And then a positive note on that.

Jesup is just coming out of theirs now and is coming up real well.

So that's great, maybe even slightly better than planned.

So I think that's good.

But -- and then going forward, Chip, we will look at -- and this is how kind of legacy companies had it on the schedule.

We're going to relook at that and see if we can balance those out a little bit so that you don't have all 4 in the first half or 3 in this case in one single quarter.

We'd rather kind of space them out a little bit just from a resource allocation standpoint in terms of people and capital, so -- but that's the way they fell this year.

And would you expect the lack of the 2 issues, the $15 million, the weather, the nat gas distribution issue, would the impact of that not happening in the second quarter, would that benefit of not having to repeat that offset the higher maintenance of having 3 mills out?

Or will it be -- in other words, will it be a wash?

Or I mean you did mention you expect income to gradually rise.

So how should we think about that $15 million?

And the incremental impact of having 3 versus 1 mill down in the second quarter?

We would anticipate that a meaningful portion of that $15 million should be -- fall to the bottom line.

It will be offset modestly by some of these shutdowns, et cetera, but it's going to be -- it should be nowhere near that $15 million.

It'd be a fraction of it.

Ladies and gentlemen, we have reached the end of our question-and-answer session.

I would like to turn the call back over to Paul for closing remarks.

Okay.

Well, thanks, everybody, for your time this morning.

If there's no more questions, we'll go ahead and wrap it up.

And look, we're very excited about the opportunities in front of us, and we look forward to delivering on our goals, and we look forward to providing you with updates in a timely manner as we move forward.

So we'll talk to you next time through.

And again, thanks for your time this morning.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time, and thank you for your participation.