Rayonier Advanced Materials Inc (RYAM) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Rayonier Advanced Materials Second Quarter 2018 Earnings Conference Call.

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

I'd 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, and good morning, everyone.

Welcome again to Rayonier Advanced Materials' Second Quarter 2018 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 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 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.

We believe non-GAAP financial measures provide useful information for management and investors.

But non-GAAP measures should not be considered an alternative to GAAP measures.

A reconciliation of these measures to their most directly comparable GAAP financial measures are included on Slides 20 through 23 of our presentation.

I'll now turn the call over to Paul.

Hey, 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 for the company and value for our shareholders.

As summarized on Page 4, for the second quarter 2018, we reported a 23% increase in EBITDA to $106 million on a 4% increase in revenues to $542 million as compared to the prior year's second quarter.

Our strong performance was largely driven by robust demand and pricing for high-yield pulp and lumber, combined with improved productivity in our High Purity Cellulose segment.

In the quarter, we also successfully executed our regular planned maintenance shutdowns for 3 of our 4 cellulose specialty facilities while also producing improved results from the prior quarter.

As we discussed on the first quarter call, our management team's focus is on delivering consistent execution at our facilities.

And I'm pleased with our results through this heavy maintenance quarter.

As a reminder and as is typical, we expect EBITDA for our High Purity Cellulose business to be weighted towards the back half of the year.

Overall, our results this quarter clearly demonstrate the earnings potential and diversity of our combined business as well as the earnings accretion that we envisioned when we acquired Tembec.

Importantly, the integration of Tembec's operations continue to proceed in line with our expectations as we delivered $11 million of incremental cost savings and synergy in the quarter, bringing the year-to-date savings to $18 million.

We now estimate that we're on track to exceed $40 million of incremental EBITDA in 2018 from our Cost Transformation pillar plus deliver an additional $10 million of EBITDA from our other strategic pillars, which I will discuss later in more detail.

Throughout the past 6 months, we have demonstrated our commitment to a balanced and diversified capital allocation strategy.

We have reduced our total debt by $12 million as we target our leverage at 2.5x net debt-to-EBITDA.

We have invested $23 million in strategic capital projects, which will provide incremental earnings power to the business.

And we've returned $29 million of capital to shareholders through dividends and stock buybacks, including $11 million of share repurchases.

Looking forward, I remain confident in our ability to deliver on our plan for the year.

And as Frank will discuss in more detail, our second quarter results were very strong and the third quarter is off to a great start.

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.

Comparisons for the second quarter of 2017 period will be on a combined basis as set forth on Page 19 of the presentation materials.

As outlined on Slide 5, our largest segment, High Purity Cellulose, saw sales decline by $18 million to $285 million from the year-ago quarter on a combined basis.

The lower sales were largely driven by a 5% decline in CS volumes and a 6% decline in commodity volumes as sales timing negatively impacted the quarter.

CS prices declined 3% compared to the full year expectation of 4% to 5% while commodity prices increased 2%, driven by solid pricing in fluff.

Adjusted EBITDA for the high-purity segment was $56 million, representing an $11 million decrease from the prior year period.

The declines were primarily driven by our year-over-year price reductions and the timing of sales while cost improvements in the segment helped minimize the impact of higher raw material prices.

Looking forward, we expect CS prices to decline approximately 4% in 2018, which is at the low end of our original forecast, reflecting a better mix of CS sales while volumes are expected to decline 2% from 2017.

Commodity volumes are expected to be comparable to the prior year period.

Additionally, we expect normal seasonality this year with the first half of 2018 expected to represent roughly 45% of full year EBITDA and the second half representing roughly 55%.

As a reminder, this seasonality is largely driven by typically stronger customer shipments in the second half, combined with the effect from our annual maintenance outages in the first half, which as Paul mentioned were all successfully completed by July 4.

Given trade discussions between the U.S. and China making recent headlines, I will remind you that of our more than $2 billion in total annual sales, approximately $170 million is produced in the U.S. and sold to China that is not currently subject to duty.

All of these sales are in our High Purity Cellulose segment, primarily in our CS products with some in commodity fluff.

We have long-term relationships with our customers and have engaged in an open dialogue to explore avenues to mitigate the impacts of any potential duty.

Turning to Slide 6. Sales in our Forest Products segment rose $13 million to $97 million in the second quarter of 2018, largely driven by a 31% price increase for lumber products.

This drove a 50% increase in EBITDA to $18 million as compared to the year-ago quarter.

The improvement in the second quarter was partially offset by $5 million of duties paid for lumber sold into the U.S. and by approximately $2 million due to increased wood and transportation costs and currency.

Additionally, volumes were impacted primarily due to unplanned downtime at one of our facilities.

Looking forward to the third quarter, we expect volumes to be more in line with the normalized levels and the strong pricing environment for lumber to decline from the recent peaks in the second quarter.

However, the long-term outlook for volumes, pricing and profitability remain favorable as solid demand from the U.S. housing market is expected to continue.

As we discussed on the first quarter call, duties impact roughly 50% of our segment sales, which we expect will reduce EBITDA by roughly $30 million during 2018 with no impact expected on sales volumes.

Additionally, we plan to implement high-return investment projects during the second half of the year in the Forest Products segment that we anticipate to deliver benefits in 2019 and beyond.

Turning to Slide 7. The Pulp segment had another strong quarter as sales increased $18 million to $91 million, which drove EBITDA higher by 145% to $27 million.

These results were driven by a 29% increase in prices for high-yield pulp due to strong export demand.

Additionally, China continues to limit recycled materials from entering the country, which is positively impacting the demand for commodity pulp grades.

This dynamic, along with lingering supply constraints in the industry, have been key drivers for the strength in commodity pulp markets.

Looking forward, we expect strong demand from Europe and Asia to continue and no significant supply additions coming online in the pulp markets in the near future.

With these strong supply-demand dynamics, we expect prices to remain near historically high levels through the third quarter but may moderate by year-end.

Turning to our Paper segment on Slide 8. Sales increased $8 million to $84 million, primarily due to a 35% increase in newsprint prices, combined with higher newsprint volumes, while paperboard prices were up slightly as volumes declined modestly.

EBITDA was $13 million versus the year-ago quarter as price increases were offset by $8 million of duties in newsprint and higher external pulp cost in paperboard.

In the third quarter, we expect continued elevated pricing, driven by the newsprint duties and expect profitability to remain relatively flat.

However, additional supply or reduced demand resulting from the U.S. tariffs could negatively impact newsprint results.

In paperboard, we expect prices to remain relatively stable as profits continue to be impacted by high pulp prices.

Overall, we anticipate higher prices in our Pulp segment to more than offset raw material price increases in paperboard.

Turning to Slide 9. On a consolidated basis, sales for the quarter came in at $542 million.

On a combined basis with Tembec, sales increased 4% from the second quarter of 2017, primarily driven by higher prices in high-yield pulp and lumber.

Second quarter 2018 adjusted EBITDA was $106 million, up 23% from the $86 million achieved on a combined basis in the year-ago quarter.

Importantly, we have captured $18 million of cost improvements through the second quarter and remain on track to exceed our $40 million full year 2018 target.

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

As shown on Slide 10, we generated $89 million of operating cash flow and $48 million of adjusted free cash flow from the first 6 months of 2018.

Free cash flow was negatively impacted by $67 million of incremental working capital.

Inventory increased by $25 million, primarily due to higher finished goods in High Purity Cellulose and paperboard.

Accrued maintenance costs related to spending on our planned outages negatively impacted working capital by $24 million while customer rebates earned from the prior sales impacted working capital by an additional $20 million through the first 6 months.

We invested $23 million into strategic capital projects in the first half of the year, which we will drive incremental future growth.

We also paid down $12 million of debt year-to-date and we returned $29 million of capital to shareholders through dividends and stock repurchases, including open market stock repurchases of $11 million on our $100 million total buyback authorization.

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

Meanwhile, our total liquidity stood at $297 million, including $80 million of cash and $217 million available under our revolving credit facility after taking into account outstanding letters of credit.

Interest expense for the second 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.

As such, interest expense continues to be in line with the full year run rate of $63 million in interest expense that we have discussed over the last 2 quarters.

Our net debt to last 12 months' EBITDA now stands at 2.9x, driven primarily by strong commodity EBITDA performance.

We continue to operate towards a target net leverage ratio of 2.5x.

And we will evaluate capital allocation decisions on a disciplined and balanced basis.

As you can see, free cash flow allocation for the first 6 months was balanced across strategic capital investments, debt repayments and return of capital to shareholders.

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

Okay, thank you, Frank.

Turning to Slide 11.

Our second quarter results demonstrate the benefits of our expanded and innovative portfolio and the earnings potential of the company resulting from our acquisition of Tembec.

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 our 4 pillars of our strategic growth plan.

Turning to Slide 12.

The first pillar is Cost Transformation, where we have captured $18 million of our identified $100 million of incremental EBITDA growth.

$11 million of these savings are categorized as synergies, captured through various activities, including the elimination of duplicate corporate positions, enhanced procurement practices and streamlined manufacturing across our cellulose specialties operations.

The remaining $7 million of savings comes from our legacy cost actions.

Overall, our traction through the first 6 months gives us confidence that we will exceed our goal of achieving total cost savings of $40 million in 2018.

And we're well on track to capture our 3-year cost improvement goal of $100 million.

In addition, our global integration team has developed plans to accelerate synergy benefits.

As shown on Slide 13, we are now increasing the 2019 synergy estimate by an additional $10 million from the original $30 million goal.

We have also continued to make progress on our other strategic pillars, having captured $2 million of benefits in new products and $1 million from investments.

Our early capital investments are beginning to produce results.

And we expect the majority of the benefit to come in 2019 and beyond.

Year-to-date, we have targeted approximately $65 million of net capital for investment in more than 40 high-return capital projects to be deployed through 2020 with an average payback period of less than 2 years.

As shown on Slide 14, these projects are focused in on our High Purity Cellulose and Forest Products segments.

For example, projects include investments in new digesters in our High Purity Cellulose business that will increase the capacity of our commodity viscose business and reduce our annual maintenance costs while other projects will leverage our knowledge across the manufacturing platform as we invest into assets to capture incremental energy value from our operations.

In Forest Products, we will investment in technology to make our sawmills more cost-competitive and more reliable.

Projects such as the latest scanning technology to allow the sawmills to better optimize the value of a log by cutting the highest grade lumber achievable.

Overall, improvements in our lumber operations will ensure a strong profit base across varying market conditions and stability in our critical chip supply for our High Purity Cellulose segment in Canada.

As these capital projects proceed, we will provide updates on our progress versus our $25 million incremental EBITDA goal.

Year-to-date, we have invested approximately $23 million in gross strategic capital.

Much of this capital has been deployed towards these high-return, quick-payback projects that I just discussed.

However, one project that we've been working for the past couple of years, LignoTech Florida, commenced operations in June.

Turning to Slide 15.

LignoTech Florida is a strategic investment in a joint venture to manufacture lignin at our Fernandina Beach facility.

Lignin is a natural-based product used in construction, agricultural and industrial applications.

We invested approximately $23 million of strategic capital over the past 18 months with the final $12 million in 2018.

In late June, the JV officially completed the construction phase on time and under budget.

Our JV will have the ability to initially produce 100,000 tons, air-dried metric tons, of lignin with production ramping up over the next 36 months or as market conditions require.

While the global lignin market has been under some pressure recently, the North American market remain solid.

As we look forward, a second phase is envisioned for 2020 or 2021, which if implemented, will further increase the production capabilities by an additional 50,000 tons.

This investment was important for our business, not only because it will deliver strong returns of our capital in the high-teens, but it also makes our Fernandina Beach cellulose specialties plant a more reliable facility by giving us the flexibility of using the lignin as energy or as a base raw material for the JV.

Turning to Slide 16.

We remain committed to a disciplined and balanced capital allocation strategy centered on maximizing our risk-adjusted return on capital.

Within this framework, we target deleveraging our balance sheet in order to reach a net leverage ratio of 2.5x EBITDA over time.

By delevering, we will allocate capital towards growth-oriented capital expenditures, acquisitions and other investments that complement our core business as well as return capital to shareholders through buybacks and dividends as appropriate.

During the second quarter, we bought back $11 million of stock as part of $100 million stock repurchase authorization.

We believe our stock remains undervalued based on the earnings potential of the portfolio as we achieve benefits from our strategic pillars.

As a result, we expect to continue to return capital to shareholders through stock repurchases and regular dividends.

To conclude, our business is performing well and the integration of Tembec is proceeding as planned.

The scale and diversification from the acquisition is providing solid financial benefits.

We expect the pricing and profitability in our high-yield pulp and lumber businesses to remain at elevated levels relative to historical trends through the third quarter and that our high-purity business will produce stronger results in the second half of the year as typical.

Lastly, we remain confident in our goal of delivering $155 million of EBITDA growth by 2020 and are committed to a disciplined and balanced capital allocation strategy.

Thank you again for your time this morning.

And operator, if you don't mind, please open up the call to questions.

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

So first of all, it’s not your core business, but if I'm not mistaken, the Department of Commerce revised the duties on newsprint to 0 last night.

So can you confirm that?

And if that's the case, how much of a refund do you expect and when?

So Steve, yesterday, yes, the U.S. Department of Commerce made a final determination on duties on newsprint and uncoated groundwood imports into the U.S. and with it, revised the ADD down to 0, the antidumping duties, and the CVDs, the countervailing duties, for us anyway, for 8.5%, so a substantial change.

Obviously, that goes into effect.

And we obviously just got this last night and we'll have to work through the details with our customers and what that means in terms of timing.

But overall, it's a positive message.

Keep in mind though that in a separate process, the ITC, the International Trade, has taken a look at this as well.

And they've got their hearing on it in September.

And so they'll take a look to see if any of these imports harm the U.S. industry.

And if they decide that -- the ITC decides that no injury took place, then the duties entirely will be rescinded.

So we're at 8.5% now, which again, I think, is a good positive movement.

But we still would like to see it obviously go to 0 because we don't think there's been any injury.

In terms of what has been built up so far, I don't know if I have the exact numbers.

Frank, have you got that?

It's roughly $3 million to $4 million.

And remember, we still have that one duty in place.

So we paid $5 million in duties.

And the one piece remains in place, the 8% that you referenced.

Okay, very good.

Thank you.

So hopefully that helps you, Steve.

Yes.

Well, that's good.

And then secondly, we know that you've endured some inflation on freight and chemicals in 2018.

No guarantees that it will subside next year.

But do you think that the cost cuts that you've achieved so far plus the benefits of your CapEx might mitigate most of the inflation in 2019, in other words, keeping your cost structure kind of flat?

Yes, I think that, that's the goal here is to generate cost transformation savings to do that.

I think we've been relatively successful in the first half of the year in mitigating that with at least on the chemical and the wood inflation pieces of that.

So I think in '19...

Okay.

Sorry, go ahead, Paul.

No, I was just going to say is we guided there in '19.

We now expect $40 million in synergies there for 2019.

And across that base, that's a pretty good chunk against that inflationary effect.

Yes, absolutely.

Okay.

And then last question and I'll turn it over, lumber has been on a tear for the ages and there was nice tailwinds, obviously.

But I don't think reasonable people expect that to last.

But there's a little lumber company here on the West Coast that has a program called Black at the Bottom.

And I'm just wondering, is that something that you could kind of replicate for your East Coast mills?

Or alternatively, if lumber really got ugly, can you kind of have an alternative with chip mills so that you'd have your chip supply even if you didn't want really want to be producing lumber?

No, I'm not overly familiar with the details of the program you're referencing there, Steve.

But look, the way we think about it, 2 things.

One, as you know, we're making some investment in our lumber facilities in Ontario and Québec.

We think we've got a great opportunity to put some return capital in there to make them more profitable over varying market conditions.

So one, that's important to us as we plan to run those.

But two, it's important because, as you know, it's part of our integrated supply chain into our High Purity Cellulose facility in Québec.

So it's important on both sides of the equation.

So our goal is to make sure that we've got mills that we can run at any market conditions.

And so that's what we're working towards.

And fortunately, we've got some real, nice opportunities with some short-term paybacks to make that happen.

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

I just want to follow up actually on the commentary on the trade tensions here.

I think you mentioned essentially that there was about $100 million of sales that's exposed to China.

I was just wondering if that's kind of your direct exposure.

And was also wondering if you could kind of provide additional color if that is just your direct exposure, what exposure you may have indirectly through customers that may potentially sell to China.

And separately also if there is a product that you buy that may be exposed to that, any commentary there would be great.

So on the last part of your question, not a lot coming into us that creates an exposure directly or indirectly.

The guidance we put out there just to help clarify our position within China is we said, "Look, we've got about $170 million of revenue from the U.S. to China that is not subject currently to any kind of duties." And so if you look at our $2.1 billion, $2.2 billion in revenues, that's about 8% of our total sales that is not currently subject to any kind of duties into China.

And the main point we're trying to get across there is, look, we've had dialogue with all of our customers in China and working with them.

And we're all well prepared to have dialogue if anything comes our way.

And we'll look at both short-term as well as long-term potential mitigation actions if duties go into play.

So again, we're just trying to frame it to you that again it's about 8% of our total sales that aren't currently subject to any kind of duties from the U.S. into China.

Okay.

And do you have any sense for how much of your customers' products has that sort of exposure?

So clearly, you guys produce a fair bit of asset, and I was just wondering, particularly on that front, whether or not they do sell much into that market?

No, I think there's a little exposure there, but it's relatively small, maybe very small.

Okay, that's helpful.

And then separately, with regards to the synergies that were pulled forward from 2019 into -- 2020 into 2019, could you talk about the areas that, that's coming from?

Yes, it's across all areas.

And John, I think, as we said before, we have a process that's multifunctional across the business.

And what they do is they identify opportunities on a project-by-project basis.

And as we get to the middle of the year, we start to identify the 2019 opportunities.

And as a result of that, we just see areas where we -- across the board where we can act more quickly than we thought we could have before.

And so I would say it's still in line with the rough parameters that we gave for breakdown at the time of acquisition, which was more heavily weighted to supply chain and operational and manufacturing opportunities.

Okay.

And then next before I turn it over, just on the unplanned downtime in Forest Products, if you could elaborate a little bit more than that.

And then also I was just wondering really, I mean, you did have a little bit of a downtime in the first quarter from the CS mills.

And I just want to get a sense for whether you believe there's any need to invest capital to potentially improve the reliability of the mills.

Well, certainly again to your last point, we're investing capital to improve reliability across the board.

That's part of our set of initiatives here.

Yes, we had some downtime at one lumber facility in Ontario.

And basically, it was related to safety.

Our safety practices aren't where they should be.

And we actually just shut the facility down until we were comfortable that we were operating that facility safely.

If you look at where we're going to be for the year though, John, into lumber volume, again we expect our volumes to return to a near historical-type levels.

I think we got in the last page of your appendix there that last year, we did 336 million board feet.

And it should be coming close to that on the balance of this year as we look at the year.

So it will pick back up here.

But it was just a very deliberate, very purposeful downtime to get our safety where it needs to be.

Our next question comes from the line of Dan Jacome with Sidoti & Company.

A couple questions on capacity.

So congrats on getting the lignin facility up and running.

Once it's up and running fully, what is your best estimate for how much of the North American lignin market in terms of capacity are you going to control?

That was my first one.

A difficult question for -- as you know, in our partnership that we have, we're at 45% and our partner is at 55%.

And they are on the sales and marketing arm of this relationship.

So I'd let you take a look at some of the things that they put out there in terms of that discussion.

Obviously, this is a meaningful amount of volume coming into the market.

But this market has really -- North American market for lignin, has been undersupplied.

So we think this is a great opportunity.

And as we said, we're going to layer this in over the next few years.

So again, we think it's going to be well matched as it comes out here.

I can't give you the exact percent, anything off at this point in time.

But again, I think they have that in some of their data recordings if you take a look at what they have disclosed in the past.

Okay.

Yes, I think it's going to be pretty material.

Second question, just on paperboard, my access to RISI is quite limited these days.

What's the expectation for incremental paperboard capacity in North America in the next 2 years?

There is -- just to be clear, where we compete in paperboard is on the coated Bristol side for the most part.

So that's a smaller, thinner paperboard that you see that we're currently the only 3-ply manufacturer in the U.S. There is some capacity coming on in Maine over the next several quarters.

But again, in the markets that we play in, we don't see significantly more capacity than that coming online.

Okay.

Do you know what the capacity is in terms of percentage of overall market?

Is it low single digits, high single digits, anything?

I don't have that off on top of my head.

But we'll get that number out.

Okay, I'll follow up with you, guys.

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

Regarding the $100 million sales to China, I didn't catch that.

Is that just your U.S. sales to China?

Or is that your total company sales to China?

And can you break that down a little bit by product line?

Yes.

So it's $170 million, Roger, in total revenue, going from -- and that is from U.S. to China.

So that's not our total sales to China.

That is U.S. to China that isn't currently under any kind of duty.

So if you remember, viscose pulp already is under duty of about 17% out of the U.S. So this is just volume that we've got that is out there that we said they could be part of a potential exposure, if you will.

Most of that is cellulose specialties, a minority of that is absorbent material or fluff pulp.

Got it.

And is there any thoughts of changing some of your legacy acetate CS capacity to ether in sort of the mid-term?

Or do you have more than enough ether capacity headroom at Temiscaming and Tartas that it doesn't even make sense to start thinking about that along these lines?

Well, look, we've got -- and you're right.

We've got 4 different facilities, 6 different lines that can make high-purity cellulose specialty-type product.

They are a fairly flexible assets.

So we've got the ability to move things back and forth.

And really, that's a key part of our market optimization effort now is to go ahead and see if we can move things around that makes more sense financially for logistics or just have a running product across those.

So we've got a lot of that capability right now, Roger, to move things around.

But as we look at the opportunities in ethers and the growth there, we feel pretty good that we've got the capability of growing with that market going forward.

Okay.

And lastly, with lumber prices coming down, what do you see driving that down?

Yes.

I think you know what, on our customer side, certainly we had -- well, we had prices go up to well above any kind of historical point.

So as we looked at it and most people thought about it, it's just like, "That's not a sustainable level." So I think we all assumed it's got to come back down.

And it should come down actually for the health of all of us.

And it is retreating.

And part of that is this time of year, when we use to run the sawmills back in legacy Rayonier, we saw this, this time of year.

We think it should stabilize out there in the coming near term.

And stabilization will be at levels well above the prior year levels.

Yes.

Additionally, Roger, I think there was some transportation and other constraints on some of the Western producers in the first half of the year, which tightened up the supply a little bit.

And keep in mind, it's a speculative nature, right?

So we had housing starts in June that were announced well below the prior announcement period.

And I think that gave everybody the pause, right?

Customers are saying, "I'm just going to wait to see where this settles out versus kind of building inventory at a higher price level." And I think once that kind of calms down here a little bit and they feel that pricing is more stable, I think you're going to see the return of orders and the prices again at more stable levels, but albeit lower than what we've had before.

Right.

I mean, I think the random really went up much more than stud if looking at sort of like some of the publications.

And I think part of that was ascribed to fires in BC, where there's, I guess, more random than stud.

Is my thinking correct?

And if so, are we starting to see some loosening up there and that might have been part of what's going on here?

Yes.

I think -- and again, it's not an exact science.

But I think your intuition is right that random lengths was certainly -- you get a lot more of that volume out of the BC area of Canada, which has been naturally furnished to be able to make that more readily than you do in Eastern Canada.

And I think that tightness certainly that we saw on BC helped drive random lengths up more.

And I think you're seeing -- again, as that kind of transportation issues have flowed out here and has become a little bit more normalized, you're seeing availability of wood out there.

And you see that random lengths coming back down.

So I think that is a part of the equation that we're seeing.

But again, I think we just had runups that were not sustainable.

And I think we're seeing that now kind of ease back off to what we would think are more reasonable levels but still well above where they were a year ago.

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

I had a question, just a little housekeeping question, just might help us in the future.

If you look at the Slide 5 and Slide 20, there's -- obviously, Slide 20 gives a very specific DD&A number for let's just take the high alpha business -- the high alpha cellulose, HPC business, High Purity Cellulose.

And there, it's saying $26 million of depreciation and amortization.

And yet when I look at Slide 5, the distance between operating income and adjusted EBITDA is $28 million.

So I was wondering, why is there that $2 million variation?

And that occurs in other segments, too.

It just would be helpful to know that.

That's typically FX moments, Chip.

Okay, all right.

And then the second question is when you look at the earnings release, I think it's at least Page 7 on the one I have, there's a pretty sizable item called interest income and other that was $7 million that -- it looks pretty obvious you included in EBITDA.

Just wanted some help on knowing what that $7 million was.

Yes.

So there's a number -- where's the $7 million, interest income and other expenses?

Yes.

Other expenses, yes.

Chip, I don't believe we include interest income and other expenses into EBITDA.

Yes, I can tell you what the number is.

It's basically interest income on our cash and then we have some FX on our intercompany debt.

Okay.

And how should we think about that going forward?

Should it stay at that level?

Or will it kind of bounce around?

Chip, there's also the bargain gain on the purchase.

That's in there, too.

So that number will bounce around a little bit from quarter-to-quarter based on what happens on FX, what happens on some of the accounting pieces.

And it's hard because obviously we describe the FX, the gain on the FX -- the gain on the bargain purchases because new things came to us during the quarter as we adjust that.

And we'll be adjusting that through the 1-year period from the time of it.

So that number will move around a little bit, depending on mostly those two factors.

Okay.

And then you might have told us this.

But when we look at the Paper segment, how much -- I mean, I guess, the duties we assume that, you had been paying about $2.5 million a quarter and that pretty much goes away now?

We paid $5 million, $1 million in the first quarter and $4 million in the second quarter.

That was on a combined 28% rate.

We will continue to pay an 8% rate because only part of the duties went away with the last ruling.

So that's roughly 2/3 or so, maybe a little bit more than 2/3, and that will go away.

Got you.

So basically, if we use the second quarter run rate, which I can't think of a reason why we wouldn't, then that's going to help you to the tune of $3 million a quarter going forward, all things being equal?

Yes, that's a good estimate.

Okay.

And I think you might have addressed this.

Did you effectively raise the synergy target from Tembec from $65 million to $75 million?

In other words, you're going to get the extra $10 million in '19, but you still expect to get what you have gotten in '20?

No, we slid forward, so we have not moved the overall number.

So if you remember on the first -- on the year-end call, we had raised that number up, I believe, from $50 million to $75 million.

Now we're just shifting some of that into 2019.

So we're still looking at $75 million total there.

Our next question comes from the line of Paretosh Misra with Berenberg.

I've got a couple of questions.

First, a follow-up on cost inflation.

How quickly do market prices for caustic would flow through your P&L?

That is, do you buy everything on spot?

Or are there some longer-term contracts in place?

Yes.

So we've got longer-term contracts in place.

But they typically are as a percent of some market index.

So what we see and see on the market is pretty immediate.

It's not maybe in the month.

But it may be that following month.

So it's pretty real term in terms of the movement in caustic and most of our chemicals for that matter.

Understood.

Then next would be noticing that the cotton prices in China have been quite strong.

Can you talk about what impact that might have on your business?

And does it make your cellulose-based products maybe more competitive or maybe not so much?

Yes.

So it's certainly -- and it has ramifications in different ways.

But certainly, as the demand as well as the price for cotton fiber increases, that only helps us as well because we provide, as you noted there, an alternative when you're thinking about our viscose pulp product going into rayon, which is obviously going into that Asian market as well.

So it is a benefit of [that] lifting up that we will kind of get swept into that.

And keep in mind, we're a very small amount volume-wise relative to the broader cotton market.

And last one for me is question on your share buyback.

How many shares were repurchased?

Or what was the average price?

Sure.

The average price was $17.75.

And we repurchased roughly 650,000 shares.

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

I jumped on late, so I might have missed some of this.

But I'm just looking for some color around what's happening in the CS markets and also specifically what's happening in viscose, what that looks like over the next 6 to 12 months.

Yes.

So we didn't really provide and we haven't really commented too much on it either, Paul.

So you didn't miss anything in this area.

I'll start with viscose.

It's staying relatively steady, if you will, in terms of just what we see out there in the market.

We don't see a lot of moment up or down in terms of pricing.

Now keep in mind, when you look at our specific volume in the back half of the year and the commodity, if you remember we had all our shutdowns in the first half of the year, we don't have them.

So you're going to see our volume pick up pretty substantially in these commodity parts of the High Purity Cellulose business.

And again, we guided that volume year-to-year is going to be roughly flat.

So you're going to see a pickup quite a bit there.

On the cellulose specialties side, again we said last time that, that market -- and again, it's been relatively steady.

But we said our volume is going to be down 2% for the year.

And last time, I think we said slightly down.

And again, 2% on 700,000-plus tons, you're talking 14,000, 15,000 tons here.

And that's just -- we're just watching customer order patterns.

Most our customers are saying, look, year-to-year, they're right on track.

But we see a little bit of a retreat, I guess, if you look at their order patterns, particularly or specifically in the acetate area.

So we're just watching that carefully.

And we're reflecting that into our full year guidance.

Hopefully, customers come back and say, "Look, we're going to order what we said we were originally going to order." But right now, we're just taking that on out and just calling it a 2% down.

Overall, we were...

Sorry, overall?

Yes.

No, just overall though, just as we've said in prior quarters, the markets are what we've communicated in the past, which we continue to see some nice growth opportunities in most to all the segments, whether it's ethers or the high-purity segments.

And we're seeing acetate, as we've talked about, kind of flat to slightly declining in terms of overall market segment.

Okay.

So that 2% loss in acetate, that 14,000 or 15,000 tons, you can't really switch it over to ethers?

Or what -- has the growth in the ethers slowed a bit?

Or we just don't know how the customer for that in 2018?

Well, Paul, as you know, most of the business in this area is contracted for the year.

And we go off the guidance of what the customer says they're going to do for the year.

So we're pretty consistent to that.

It's just that we're watching the order patterns for the first half of the year and we're saying, "You know what, based on what we see," and again it's primarily in the acetate area, that we are saying, "Let's just go ahead and communicate that, that may flow out of the year and we may not get that." But nothing else has changed in the other segments that we serve.

So there's nothing in there that we're communicating in the other segments.

They're doing well.

And we're glad they're doing well.

And in fact, most of our customers in the ethers area, if you look at maybe the top 5 or 6 of the global ethers producers, all have capacity expansions.

I'd say the vast majority have capacity expansion plans out there.

So again, that gives us good encouragement that, that market is going to continue to grow.

And we've communicated that's in the 3% to 5% area.

And we hope to participate in that growth.

Okay.

And then if you could just remind me that Tarif L program in Québec.

Has that got a lifespan to it, i.e., does money have to be invested over a certain period of time to get access to that 40% rebate?

Yes, the money needs to be invested by 2020.

By 2020, gives you lots of time.

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

I just want to follow up actually quickly from Paul's question there.

What do you believe is causing the retreat in acetate more recently?

And is this something that kind of started earlier in the year?

Or is this something that has shown up more recently?

No.

Again, the communication we hopefully get across here is that our customers are saying, look, their volumes are going to be what they originally communicated to us at the beginning of the year, which we guided to you, which is roughly flat year-over-year.

In the first quarter, we said maybe based on what we're watching order patterns here, it's slightly down.

And we said now we're going to call it 2% down.

Again, all these customers are still saying on an aggregate that they expect their business to be what they originally stated at the beginning of the year.

I think we're taking a little more conservative approach and saying we're going to call it down slightly.

And that's where we have that 2% on our total High Purity Cellulose specialties and just saying most of that is most of that is in the acetate area.

Okay.

And there was a color on it, John, and that...

Okay.

And then lastly, are you able to -- were you able to repurchase shares in July as well?

Or were you out of the market at that point?

We were out of the market in July.

We have reached the end of our question-and-answer session.

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

Well, thank you.

If there's no more questions at this time, I'd like to thank everybody for joining us today.

Again, we're excited about the opportunities to create value for our shareholders, and we look forward to updating you on our progress as we move forward.

Have a good day.

This concludes today's teleconference.

You may disconnect your lines at this time.

And thank you for your participation.