Rayonier Advanced Materials Inc (RYAM) 2019 Q2 法說會逐字稿

Good morning, and welcome to the Rayonier Advanced Materials Second Quarter 2019 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 Second Quarter 2019 Earnings Conference Call and Webcast.

Joining me on today's call are Paul Boynton, our Chairman, President and Chief Executive Officer; Marcus Moeltner, our Chief Financial Officer and Senior Vice President of Finance; and Frank Ruperto, our Senior Vice President of High Purity & High Yield Cellulose Businesses.

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 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 15 through 20 of our presentation.

I'll now turn the call over to Paul.

Thank you, Mickey, and good morning, everyone.

First, let me just recognize the changes we made to our senior leadership team in June and introduce Marcus Moeltner, who was promoted to Chief Financial Officer.

I have worked closely with Marcus since he joined the company 2 years ago through the Tembec acquisition, initially overseeing corporate development, which has been focused on our ongoing portfolio optimization review, including the recently announced sale of Matane.

Not only does Marcus bring a 30-year career in finance and forest products, but he has a breadth of knowledge of our businesses, strategies, assets and financial drivers that make him ideally suited for the CFO role.

So welcome, Marcus.

And as you know, last quarter was Frank Ruperto's last earnings call as CFO.

In addition to leading our finance and strategy group, which was pivotal to the company's successful cost transformation and subsequent acquisition and integration of Tembec, Frank was a key part of our developing our go-to-market strategy.

He has very purposefully spent significant time over the past 5 years with our customers developing those key relationships.

And as a result, I'm excited about the experience and strength he brings to his new role as Senior Vice President of our High Purity and High Yield Cellulose Business.

Additionally, Dr. Erin Byers has begun his new role as Senior Vice President of Research and Development.

Erin has a PhD in paper chemistry and brings with him 35 years of cellulose technical expertise, which will bring focus and acceleration to our new product development and commercialization process.

With this new leadership structure, we believe we have the right people in the right positions to deliver more quickly on our growth objectives.

Now before we review our second quarter results, let me comment on the progress of our strategic objectives in the context of a cyclical decline in commodity prices driven by significant macroeconomic and trade issues.

Our priorities are clear: first, we got to maximize free cash flow; second, optimize our commercial strategy by securing contracts with key customers at margin-enhancing prices; third, focus our asset portfolio to reduce volatility and maximize returns; and finally, enhance our financial flexibility by negotiating an amendment to our credit facility.

We believe we have a good plan to manage through these more-than-challenging markets and emerge a stronger, more resilient company.

Turning to the second quarter results on Slide 4. We delivered sequential growth in both our core High Purity Cellulose segment and for the company as a whole.

In High Purity Cellulose, we demonstrated improved performance with higher sequential EBITDA as we ran much more reliably and started to drive down hardwood costs as we rebuilt inventories and took advantage of drier weather.

However, the benefits of improved operations and costs are being offset by severe price decline for commodity products, negatively impacting pricing for our High Purity Cellulose viscose and fluff products as well as for our lumber, high-yield pulp and paper products.

Year-to-date, price declines have negatively impacted profitability by $85 million.

As we face these extremely challenging markets, we're taking immediate actions to preserve our cash flows through working capital optimization and reductions in capital expenditures.

With this keen focus, we generated $20 million of free cash flows for the quarter.

We are also taking additional measures to improve both profitability and cash flows, which I'll expand upon later.

In addition to managing through significant decline in commodity prices, we remain focused on executing against our key strategic objectives to drive long-term shareholder value.

Turning to Slide 5. As part of our portfolio optimization initiative, we announced last week the sale of our Matane facility to strategic buyer, Sappi Limited, for $175 million, a very attractive valuation.

This transaction is a significant step towards mitigating volatility and focusing our business around our core High Purity Cellulose business.

It reduces our exposure to commodity pulp by half to 240,000 metric tons.

Now please note that we will retain our ownership of our high-yield pulp asset in Temiscaming, Quebec as it's integrated with the paperboard facility and co-located with our High Purity Cellulose line.

The Matane transaction is anticipated to close in the fourth quarter, subject to customary closing conditions.

Next, I want to provide you with an update on our go-to-market strategy.

As we announced in March, the High Purity Cellulose strategy is focused on realigning our assets and taking commercial actions to improve cellulose specialties pricing and margins.

5 months into the implementation of this strategy, we're pleased with our progress.

We started the asset realignment process in Temiscaming with this facility slated to produce only commodity viscose and a regulated cellulose specialties product known as microcrystalline cellulose.

As of the second quarter, more than half of the cellulose specialties volume that we planned to transfer out of Temiscaming has been moved to other operating lines at more attractive margins.

Additionally, we have qualified new customers to accept Temiscaming's viscose product, therefore diversifying its end market opportunities.

On the commercial front, we typically negotiate cellulose specialties pricing for the upcoming year in the third and fourth quarters.

However, we're already seeing good momentum from our early discussions.

Thus far, we have signed 2 significant multiyear contracts with existing customers at improved pricing and margins over the life of those contracts.

We will provide a further update on 2020 price and volume estimates at the conclusion of our negotiations likely on our investor call in February.

Turning to our commodities as shown on Slide 6. Key markets that were very robust in 2018 have rapidly deteriorated, including commodity viscose, fluff and high-yield pulp, on the heels of the U.S.-China trade dispute as much of this business is dependent upon Chinese demand.

Additionally, wet weather, which reduced regional North American housing construction in the first half of the year, along with an oversupply of product, caused continued price pressure in the lumber markets as shown.

Lastly, a 15% reduction in North American newsprint demand drove further declines in prices.

The rapid price decline across these commodity markets has put increased pressure on our financial results.

In response, we are taking the actions to mitigate the impact of these declines, including working capital management, to improve cash flows, reducing capital expenditures, curtailing underperforming assets and eliminating nonessential spending.

Despite these efforts, we will need to amend our current debt covenants in order to manage through these difficult global commodity markets and trade issues.

As laid out in detail on Slide 7, our senior secured credit facility contains 2 financial maintenance covenants.

As of the end of the quarter, we're in compliance with both of these covenants and all debt agreements.

However, with no near-term recovery in sight, we expect we will be in breach of our covenants when we file our third quarter results.

Therefore, we have engaged in discussions with our lenders to negotiate an amendment to our loan agreement to allow us to navigate the weaker commodity markets.

Now as a reminder, our lenders are well-known commercial banks and farm credit providers with whom we have worked for many years.

As such, we expect to complete this amendment in the third quarter.

We believe this amendment, together with implementing the actions I just discussed, provide us with great confidence of managing through these challenging markets and trade uncertainty.

Now let me go ahead and turn over the call to Marcus for a more detailed review of the covenants as well, of course, our financials.

Thank you, Paul.

Staying on Slide 7, I will start with a bit more detail on our covenants.

As a reminder, our key covenants are tied to our senior secured credit facility, which includes $599 million of term loans and a $250 million revolver, of which $50 million was funded at the end of the quarter.

These debt agreements are not set to mature until November 2022 for the revolver and $160 million of the term loans with the remaining $439 million of term loans due in 2024.

As of the end of the second quarter, we are in compliance with both of our financial maintenance covenants.

Net secured leverage is at 2.85x, compared to a covenant of less than 3x while interest coverage is at 3.79x versus a covenant of greater than 3x.

Note that in both cases, covenant EBITDA adds back or deducts certain noncash or onetime expenses such as stock compensation and restructuring charges compared to our reported adjusted EBITDA.

Secured debt includes all of our outstanding debt except for $496 million of senior notes, which mature in 2024.

Next, I will provide an overview of the quarterly results focusing on net sales and EBITDA and an outlook for each of our business segments.

As outlined on Slide 8, High Purity Cellulose sales decreased by $16 million driven by a 1% decline in cellulose specialties sales price due to Chinese tariffs, sales mix and the sale of the resin business in 2018.

This was partially offset by 9% higher commodity volumes.

EBITDA for the segment was $34 million compared to $56 million in the quarter a year ago.

The decline was largely attributable to declines in CS sales price and mix as well as the continuing impact of higher hardwood costs in Jesup and elevated maintenance costs.

These negatives were partially offset by cost improvements notably from procurement activities and higher commodity production volumes compared to the prior year period.

For 2019, we expect CS prices to be down 1% to 2% from 2018 excluding the impact of Chinese tariffs, as previously guided.

However, volumes are expected to decline 4% to 5% due to global economic weakness in acetate and automotive end markets.

Commodity products are also expected to experience continued price pressure as global trade disputes have significantly impacted pricing for these products.

With the majority of our planned maintenance outage complete, other than Tartas, we anticipate improved production and wood costs in the back half of the year.

I should note Temiscaming had a minor reliability upset in the third quarter.

Overall, we now expect full year adjusted EBITDA for the segment to be in the range of $150 million to $160 million.

Turning to Slide 9. Sales in our Forest Products segment declined by $16 million from the prior year period largely driven by a 33% price decline for lumber products.

This was partially offset by an 18% increase in volumes due to increased productivity and inventory reductions.

EBITDA for this segment fell $32 million from the year-ago quarter driven by lower sales price, higher transportation and wood costs and the impact of a $5 million write-down of inventories to market value.

In the quarter, $7 million of duties were also expensed.

Since the start of the softwood lumber duties on shipments into the U.S. in 2017, a total of $48 million of duties have been paid.

Canadian producers have historically recovered all or a vast majority of these duties upon the resolution of these trade disputes.

Looking forward.

U.S. housing starts and remodeling activity are the key drivers for lumber demand.

U.S. housing starts have remained relatively stable on an annual basis, although poor weather has negatively impacted starts earlier this year.

With an abundance of supply and tariffs for Canadian producers impacting current prices, we have seen a number of publicly announced curtailments in British Columbia.

As such, we expect lumber prices to improve once the impact of these actions reach the market.

With lumber prices at current levels, we will also be curtailing production in the third quarter.

And absent any improvement in prices, further reductions should be expected.

Turning to Slide 10.

Pulp segment sales decreased $13 million, which drove EBITDA down by $15 million.

These results were driven by a 17% decline in prices for high-yield pulp, off historical highs due to softening demand from export markets.

The price decline was partially offset by a 2% increase in sales volumes as we focused on reducing inventories and improving cash flow.

Looking forward, high-yield pulp prices are expected to experience pricing pressure as weakness in the Chinese economy continues amidst trade disputes.

Prices are expected to bottom in the third quarter as prices near the cash costs of the highest-cost producers.

Turning to our Paper segment on Slide 11.

Sales decreased $10 million, primarily due to a 17% decline in newsprint prices and a 15% decline in volumes due to reliability issues and energy-related curtailments.

EBITDA for the segment decreased by $4 million, as lower sales were partially offset by the receipt of an electrical credit associated with energy curtailment.

Looking forward, paperboard prices are likely to remain under pressure due to increased supply from imports, as global producers redirect volumes from weak markets, principally China.

Meanwhile, newsprint demand continues to decline as industry production capacity remains stable, resulting on continued pricing pressure.

Turning to Slide 12.

On a consolidated basis, first half operating income declined $139 million from the comparable prior year period.

We continue to make strides on our strategic pillars and remain focused on meeting our full year target.

However, impacts from sales, reliability and higher costs, which were mostly incurred in the first quarter, are overshadowing the benefits from our cost transformation actions.

A majority of the decline from prior year or $85 million was driven by sales price declines primarily from commodity markets.

Additionally, volumes were impacted by operational issues including the Temiscaming boiler, hardwood shortages in Jesup and lower newsprint production at Kapuskasing, which mostly occurred in the first quarter.

With these reliability issues mostly behind us, we expect improved productivity and results in the back half of the year.

Higher costs also contributed to the decline, driven by wood, transportation and maintenance.

Wood costs continue to improve as we leverage inventory levels and take advantage of drier weather.

Maintenance costs should also improve with more reliable operations.

Turning to Slide 13.

Sales for the quarter came in at $488 million, down $54 million from the year-ago quarter.

EBITDA for the second quarter was $29 million, a decrease of $77 million from prior year, primarily driven by lower commodity prices and higher costs.

Price alone represented $57 million of the decline from prior year.

With the current pricing challenges, we are focused on enhancing cash flow.

We generated $21 million of adjusted free cash flow in the quarter.

Adjusted net debt declined to $1.15 billion.

And total net leverage based on the last 12 months of EBITDA rose to 5.2x.

Cash on hand totaled $90 million.

Additionally, we expect to receive a substantial amount of net proceeds from the $175 million sale of Matane, which is expected to close in the fourth quarter.

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

Thank you, Marcus.

As you can see, we are facing a number of significant market-related headwinds, particularly in our commodity businesses.

In the context of this environment, we are diligently focused on maximizing our liquidity, running our business as efficiently as possible, generating free cash flow and ultimately reducing our elevated leverage to sustainable levels.

While we expect to amend our debt covenants in the coming quarter, we continue to proactively evaluate other ways to improve our financial flexibility.

Certainly, one of our strategic initiatives, portfolio optimization, which has led to the sale of the Matane facility to a strategic buyer, not only narrows our focus to our core HPC business and mitigates some commodity volatility; it also better positions us to reduce net debt and improve leverage ratios.

Additionally, we are fully focused on all of our controllable actions, including very actively managing working capital, reducing capital spending, curtailing underperforming assets, and eliminating nonessential spending.

We are confident in our ability to manage through these difficult times.

And we know the company will be much stronger as a result.

Operator, please open up the call to questions.

(Operator Instructions) Our first question is coming from the line of Chip Dylan with Vertical Research.

This is Salvator Tiano, speaking for Chip.

So my first question is I'm trying to understand a little bit about (inaudible) with the debt and the covenants.

Firstly, as I recall, last time, the discussion was that -- sorry, can you hear me?

Yes, Sal, go ahead.

On the covenant side, last quarter, we discussed that all debt except for, I think, $505 million in notes, was part of the covenants.

And I think the slides, what you're presenting now is missing around $90 million in term loans, Canadian term loans.

So what are we missing here?

Are the covenants actually based on less debt, around $6 million less debt, than the total?

Sal, this is Mickey speaking.

So yes, there's $496 million of senior notes that are not secured are covenant, are based off of a senior secured leverage ratio.

That does include the term loans, the revolver that we listed there on the page as well as $90 million or so of what I'll call cogen debt or debt related to the cogen facility in Canada as well as a few other small things, such as capital leases.

So essentially, yes.

So it is these 2 types of debt plus the $90 million as we're trying to think about?

Okay, that's clear.

The second would be a little bit on how your covenants look, given that you're selling the Matane mill.

You mentioned that net proceeds should be a very high amount of this $175 million.

Essentially, even though you'll be in breach of the covenants by September 30, that won't happen until you file the 10-Q, I guess, early November.

So that pretty much means there's a good chance you could be in compliance with the covenants by the time the Q is filed, even though technically you have to show a breach?

Is that thinking correct?

So look, Sal, I think if I understand your question well -- first of all, as we indicated in the call, we certainly have discussions ongoing and have had them ongoing with the banks around our covenants.

And we'll get the amendments that we need.

We feel confident in that to continue running the business as we should.

The sale of Matane, which again we think is a good sale for not only us but also our partner, Sappi, in this occasion, is just helpful -- I would think about it, just helpful from a net debt and a leverage perspective.

So I would think about it in those terms.

And you're right, we should see the benefit of that in the fourth quarter.

Well, just elaborate though?

Because the idea is that when we kind of do some back-of-the-envelope math, it seems that, given that you're getting a lot of proceeds, as of September 30 you may not be compliance.

But as of December 31 you may be in compliance.

So I know that that's not how the covenants work.

If you are breaching them, you are breaching them first.

But obviously, that could give us [easily] a lot of leeway through negotiations, the fact that this is a very temporary breach.

So that's what I'm trying to understand, basically your projections following the sale.

Would you have not breached the covenants?

Or to put it simply, if it was taking place as of September 30th, the sale, will you have breached covenants as of the end of 3Q?

Yes, it's Marcus here.

So to your question, obviously, given the downturn in the commodity markets that we covered in our call here, certainly, we can't predict how long that might last.

So this is all part of renegotiating a covenant package in the context of that runway of a downturn in the markets, such that Matane proceeds and our overall business plan will be part of that discussion.

Right.

So it's really a function of that EBITDA against our covenant constraints, right, that we talked about.

So obviously, that's the challenge.

And again, if you look at the cash inflows from the Matane deal, it's unrelated to that.

Sure.

And just (inaudible) on cash flow, is there kind of indication -- I think you're still -- your net working capital still a use of cash in the first half?

How should we think about the working capital for the full year?

And how low can the CapEx go?

You did take it down $10 million.

But I would imagine, given what's happening, it could go much lower, as maintenance can be squeezed a little bit more?

Yes, Sal, let me take the second part of that.

And I'll ask Marcus on the first part.

Just on our capital investment, we indicated and guided that we'll be down about $10 million from our original guidance, so taking off $10 million of that.

How low can they go?

A lot of that was spent in the first part of the year in terms of either spent or committed.

So we only have a certain amount that we can pull that down for 2019.

Because again, all of our shutdowns maintenance have already occurred, with the exception of one facility, Tartas in France.

So that is yet to go.

So we have some leverage we can pull there in the short term, and we will do that.

And that's where you see that $10 million coming down.

But again, we'll refocus that in light of where we are today as we look at 2020 planning.

Yes.

And to your second part of your question, on working capital -- we still remain focused on improving our cash conversion cycle.

We've established targets for our finished products inventory across the business segments.

And there's still some further work towards those targets.

What you should make sure you incorporate in your modeling is obviously the seasonal build that'll start on our log inventories as you look out into the September-to-December time frame.

Our next questions are from the line of Roger Spitz with Bank of America.

Just one clarification on Matane.

It says LTM on the slide.

And that $43 million, is that LTM as of June?

Or is that LTM as of March?

That's LTM as of June, correct.

You wouldn't happen to have the first half '19 EBITDA by chance?

First half '19?

(inaudible).

And I'll ask another question, and you can come back.

The first half of '18, right, you asked?

'19, '19.

To get the run rate.

Okay, yes, 18.

'19.

Oh, $18 million, I'm sorry.

Can you explain why you can't draw down further on your revolver currently?

It looks like you have 0 availability under -- to draw under the revolver if I read the press release correctly.

Maybe I read it incorrectly.

It's Mickey again.

No, we -- at the end of the quarter, we were right at that 2.85x.

So we'd be allowed to draw up to that 3x at least at the end of the quarter.

So you do have some availability under the revolver right now?

Yes.

As long as you're able to make the refs that you're less than 3x at the point of the borrowing, then yes, you're able to borrow.

That's what I. -- okay, I'll have to reread the press release.

Just coming back once on the CapEx.

As a general matter, do you have a number -- figure in your mind for what we refer to as maintenance CapEx and, perhaps if it's a different number, what a bare-bones CapEx might look like on an annual basis not necessarily this year, but just how you're configured today?

It's Marcus.

So for maintenance of business CapEx, steady state, you should perhaps work with a number in the $85 million to $90 million range.

And then obviously, we would modulate that based on the cash flow performance of each business such that -- just like in this example, we took it down 10 initially, about 7%, based on what we were seeing.

And we continue to evaluate that.

So Roger, as you know, these are a large fixed asset that we're running, that do take and unfortunately require a lot of capital investment.

And we're very mindful of the fact that when you pull back capital, you may introduce reliability issues and you can see, as we've noted in the past, the expense of that as well.

So it's a fine balance, but we're going to be looking at everything we can to kind of taper that back down, as Marcus just indicated, where the kind of a good run rate is for maintenance capital.

But not everything needs to be done in the near term.

So we'll look at pulling that back a bit, and we'll give you better guidance for future periods, somewhere that would be below that number that Marcus provided.

Sure.

And do you have a sense of how much of the $85 million to $90 million maintenance CapEx would be Matane that would go away once you sell that mill?

You can work with a range of $3 million to $4 million.

And lastly, can you, if you haven't discussed it, talk about the Temiscaming Q3 interruption?

Was that related to the boiler issues you had spoken about in Q1?

Or was that a different issue?

No, it's more general reliability across the complex given the integrated nature of that facility.

Our next question is from the line of Steven Chercover with D.A. Davidson.

So it's not that great, but -- figure of speech.

So starting with lumber.

In my opinion, that was actually the biggest source of the shortfall.

And I can't imagine you'd operate at cash-negative levels if you didn't need the chips for your pulp- and paper-based operations.

So can you operate them as more like chipping facilities?

So first of all, you're right, that was a big part of our negative.

Keep in mind, $5 million of that as guided was related to, if you will, almost to kind of a mark-to-market inventory write-down, if you will.

So that was a chunk.

You get that back in the future at some point if these prices rise, but -- so that's part of it.

Steve, no, look, you don't want to operate in a negative environment like this.

And so as communicated, we are moving forward, and we'll be doing some curtailments of our facilities where it makes sense.

Yes, we got to keep in mind the equation as well as providing chips to our facilities, but we have different levers we can pull.

We can buy them from the outside.

We can run intermittently, down for a while and then come back up to get the chip supply.

So we'll be pulling all those levers to what it does to make sense to run those lumber assets.

Well, as I recall, once upon a time in Quebec, you had a paper mill.

You had to produce lumber in order to get the chips.

I mean is that rule still in effect?

Yes.

Think about it this way: The rights to harvest and to cut usually are connected with a lumber facility.

At least in our case, they are.

And so yes, you do need to get those chips.

You need to run those facilities.

Now as you know, we've got lots of facilities, and we also buy chips from the outside from other partners.

And so we can again flex that runtime.

We can flex our purchasing, increase that and take greater downtime at our facility based on what the local chip supply is for our different facilities.

So we will do those things.

But you are correct that the lumber facilities are connected in with the harvest plant.

And so you have to keep all that in mind and make sure that all balances.

And we said that from the beginning as kind of the tricky part of the supply chain that we have in Canada is making all those connections from the forests to the lumber mills to our pulping assets.

And I'm kind of spitballing this question.

But when you consider that historically the Canadians have received the overwhelming majority of the duties as refunds, can you somehow factor that and get $0.80 on the dollar or something to that effect on the duty that you've paid?

It's a good spitball, Steve.

I don't know if anybody out there would -- is willing to do that.

So I haven't heard of anything like that from past experiences.

And Marcus is also nodding his head, no.

So no.

it's a good question, but no, I'm not aware of anything like that.

Okay.

Then switching to Temiscaming.

If half of the CS volume has been shifted elsewhere, by definition, it's becoming more of a commodity mill.

Did you actually decommission any of the capabilities the way you did with the C-line at Jesup?

No, not so much.

That facility is just ideally suited to run a commodity viscose across it.

So the more volume we can put on there that is uniform commodity viscose, the higher efficiencies, the better throughput, the lower cost per ton.

So it is well set up to do that.

And again, as we did all our analysis after the acquisition, we said, you know what, that's the model we should run there outside of the microcrystalline cellulose that we'll continue to keep there.

And so we'll run it that way.

And you're right, it will become more of a commodity product into the High Purity Cellulose area.

But I was thinking at the extreme, if it could be transitioned to a full-blown commodity mill, then it might also be considered noncore, if we are correct to assume the true core business of Rayonier Advanced, in specialty cellulose?

Yes, I see where you're going with that.

And I think that's an open thought.

Again, the equipment that's available and invested in that facility, even prior to RYAM's ownership, was in such a way that is better suited for commodities.

That's one of the struggles, I think, that that facility has had.

It does not have the equipment that are in our other 3 facilities that make it ideally suited for a High Purity Cellulose specialty.

So it's a good comment, and it's not lost on us.

And that thought is certainly in front of us.

But right now, the goal is to make sure that we're just lowering our costs in that facility.

And running commodities against it is the best thing we can do.

Final question -- if I recall, the Kap newsprint mill was first quartile on the North American cost curve.

So could you confirm that?

And is it still the case?

Confirmed, it is still the case.

It's still a low-cost asset in the newsprint world.

It's a tough market, and we've talked about it.

It's got secular decline associated with it.

But overall, despite some operational issues that we've had, it runs well.

And it's a low-cost facility.

I mean it's up there geographically, but it should be one of the last of the Mohicans then?

Yes.

Yes, it should, in the operating world, continue to operate.

There should be a lot of other facilities, if the market comes to that, that drop out.

And as we've seen, they do tend to get one or two shutdowns a year in the newsprint facilities.

But there's, I think, probably approximately 30-plus newsprint facilities in North America that would come out somewhat in that order.

Our next questions are from the line of John Babcock with Bank of America.

Just want to start out -- I guess you talked about taking additional measures to reduce cost.

I was wondering how much of that is focused on the cash flow side of the equation, and then also how much of that is focused on also just generally like reducing costs across the [rest of system tops] at some of these earnings declines?

Recognizing there are (inaudible) out there, too?

Yes.

Again, just going back to the levers that we shared of things that we can control that we'd be completely focused on -- obviously, one is around working capital management.

So of course, that's receivables and our payables.

And we'll have a lot of focus on that, as we've already had focus on the inventories and will continue to maintain that.

Drawing down that capital spend -- that's certainly another one that certainly helps keep cash in the family, curtailing these underperforming assets.

That stops the bleed, and we will be focused on that.

And then, we've got a lot of things we can pull on just on, hey, look, what's critical spending at this point in time, and what's not critical spending?

And so the whole team will be focused on making sure that every dollar that goes out is really for serving our customers and producing the best, highest-quality product possible.

So those are the key levers we have, John.

And we'll be focused in on all of those.

And certainly, some of those are, again, more one-time balance sheet opportunities, and others are just straight-out improvements for the cash flow.

Yes.

And just to echo Paul's comments, obviously a working capital piece is something we can directly influence and has an immediate impact.

So that's certainly a key lever that we will be focused on.

And is it possible to quantify the impact of curtailing the facilities?

I don't know if you have any rough estimates at this point in time?

We don't have anything dollar wise that we're prepared to put out at this point in time, John.

And then, the next question is just on High Purity.

I was wondering if you could provide a bit more detail on what's driving your reduced volume forecast there.

And in the past, I just remembered hearing that you had pretty good visibility to volumes for the year.

So really just want to get a sense for why this [mini revision] is so steep.

Yes, John, it's Frank.

We typically do have very good visibility into it.

Remember that we've moved roughly a percent or so, which is about 6,000 tons on 600,000 tons of CS volume.

So we're not talking about huge shifts in volume here.

But we continue to see -- I'd point to 2 factors.

One is, given some of the trade issues in China, we're seeing lower demand from domestic acetate customers being able to import into China.

And then, secondly, the European automotive sector has backed up a bit here.

And we've seen that impact the filtration and tire cord business.

So we're not talking about huge volumes here to move it 1% or so.

And that's really what you're seeing.

And I think we've said before, our contracts typically have some wiggle room plus and minus to some base volumes.

And we're within those plus and minuses.

And given that the declines, it seems, are clearly expected to steepen in the second half, is it reasonable to anticipate that volume declines will continue through the first half of 2020 at the similar level?

It's hard to tell what's going to happen in 2020.

As you know, we're in our negotiation period in the second half of the year, where we're setting both volumes and pricing for our products as we go out there.

Now, I'll just reference you to our go-to-market strategy, which is we have said that we are going to look at becoming less dependent on acetate and exiting lower-margin business in that world, and focusing on higher-margin business and higher-growth areas in it.

So you may see some modest decline from that.

But the goal is to improve margins, overall gross margin, as we do that.

But again, it's too early to tell, John, where this all comes out as we go into those discussions.

As far the wiggle room, though, that kind of 4% to 5%, I guess, for the year, what looks like probably around 7% or so maybe for the back half of the year -- I mean, when they make those adjustments, how long do those adjustments typically last for?

Typically, the adjustments don't last.

What I'd tell you is, as the year goes on, we get more visibility into the order pattern.

So typically, we're 45-55 or 40-60 front end-back end from a volume perspective on our CS business.

And so when we see those volumes coming out, and they're lower in the first half, that's usually just normal seasonal.

What we're seeing now, though, is actually some lower order volumes going in of that roughly 1% worse than the last time we came out.

And so that's what we're factoring into that guidance today.

In regards to the carryover -- obviously, the China trade issues and the weakness in the global GDP sector will impact how that overall shapes up as we go into the back half of the year, as we go into 2020.

And then, just one last clarification issue on this.

The volume impact, was that spread across multiple sectors, or was that more concentrated?

I would tell you it was in the automotive sector and in the cigarette filter tow sector.

So more spread out?

Yes.

And then, the last question I had was primarily just on lumber.

I mean realizations clearly came down pretty sharply there.

And it seems like even more so than the benchmark.

Was there any impact to pricing from clearing out your inventories?

Yes.

I mean I would say that certainly we did move volume out, as noted, on the inventory side.

We took them within the range.

Obviously, we didn't have any fire sales or anything like that.

But you take the opportunity where you can.

And probably some of that [hurt on mix] a little bit out there.

But if you look at where our sales was relative to the change in the market indices, you will see a point or two perhaps decline more than what the market was.

And I'd say yes, that was partly out of mix and partly out of moving that incremental volume out.

Our next questions are from the line of Paretosh Misra with Berenberg.

Is there any other asset in the portfolio where you are in active dialogue with other parties in terms of selling in Q3?

Thanks for the question.

We launched this, Paretosh, as you know, earlier this year and talked about it at the time.

We said our goal is to have this process evaluated, or our assets evaluated and any kind of potential transactions out there announced by the end of Q2.

Obviously, that slipped into Q3, and we had our recent announcement.

We are committed to closing this process by the end of this quarter.

So we'd like to have whatever we can have, if there's anything more, be announced.

And if not, we'll wrap it up.

So that's our plan at the current time is to go ahead and have this wrapped up this quarter.

And if there's anything else, we'll announce it at that time.

But we have nothing to preannounce.

We're looking at all our commodity assets, as you know.

And then, just in terms of closing the sale of Matane in Q4, is there any critical step, any kind of approval that you're waiting for, any way you could expedite it?

It's Marcus here.

We just have customary closing conditions, everything that you would expect in a transaction like this.

Yes, I don't think there's any significant hurdles out there, Marcus, that you'd say are unusual in any way, right?

So I think it's just the [standard thing].

But it still takes time, Paretosh.

Just unfortunately, these just have to go through and transfer all systems over and everything else.

And that just takes a little bit of a time.

And then, just the last one -- how are you thinking about the operating cost structure in the second half of this year, mostly for the commodity part of the business?

Like how is the raw material inflation in the second quarter versus first half?

And any opportunities to cut costs in any of the segments?

Yes, it's Marcus.

As we alluded to in the call, we see our reliability improving.

We mentioned the wood costs that are trending in the right direction.

Given what's happening in the economy, we're seeing chemical pricing in our favor as well.

So I think if you look at the key levers, it's running to our operating rates, taking advantage of these chemical prices where we can and the wood costs that trend down.

Our next questions are from the line of Chip Dylan with Vertical Research.

Salvator Tiano here again.

Have a couple of follow-up questions.

First one is we discussed about the pulp and lumber, especially lumber -- you're operating prospectively this negative.

Firstly, can you let us know -- since your elevated sales volumes were Q3 inventory sales you mentioned, how much was the difference between the sales volumes and the productions for both lumber and high-yield pulp?

In our quarter, we moved volume of about 180 million feet, as we disclosed.

And that was up from around 150 million.

So we did move the higher volume, as we mentioned to you, to focus on our inventory reduction targets.

Yes.

Just when -- we're trying to think about the operating costs -- and I think in especially out in [high-yield pulp] a bit more elevated than we would think on a unit cost basis given your volumes, it seems you're simply not producing 100 million board feet in Q2, unless I'm wrong.

So I'm just trying to get an understanding how much are you producing versus how much you're selling.

Yes, in Q2, we produced, across all our lumber mills, 164 million feet.

So there's about a 20 delta to what we sold.

(inaudible) sorry, on high-yield pulp is your question?

Yes.

What was this number for pulp?

Yes, we produced 135,000 tons versus the sales of 144,000.

And just broader picture, you got a number of questions about the sale of Matane, et cetera.

The fact of the matter is you are kind of in a difficult situation.

You said you're trying to wrap up the asset sale program.

But on one hand, we have an enterprise value that I think we prefer to -- well, right now it's probably $1 billion to $1.3 billion.

And on the other hand, you sell one mill for $175 million.

But it seems like if someone were to evaluate you on an asset basis, your enterprise value would be much higher, your sales would be much higher.

Does the sale -- does (inaudible) work out, kind of conversion opportunity, like a sale of the [tire] company make sense, given where things are going?

Look, it's interesting question, but let me just answer from the perspective of the volume of our facilities.

And I agree with you 100% -- they're worth a lot more than what our share price is trading at right now.

Again, just keep in mind on the sale of Matane, at $175 million -- that is a high-yield facility.

It's not to be compared, really, to our cellulose specialties type of assets, which would be much higher value in each one of them on a per-tonnage basis.

So it's not quite to compare it, if that's what you're trying to do there.

But I think the overall message in terms of the value of the company -- absolutely, it's much greater than where our equity value certainly is trading at at this point.

Yes, exactly.

That's the idea.

You sold for x. And yet, you know that you have 4 mills that are much more valuable on a per-ton basis.

So if it comes to -- I understand that all you have to do is amend the covenants.

And you continue operating, you have a lot of liquidity (inaudible) cash on hand.

But if there's any bigger issue with the lenders, will that be an option so say, hey, if we sell the company, you're getting everything shareholders get also?

You get all your debt back, and shareholders get a lot more than the current stock price?

Yes, Sal, we're not going to speculate on whether or not large transactions like that make sense.

That's something that the board discusses time to time in valuating its value.

(Operator Instructions) Our next questions are from the line of Daniel Jacome with Sidoti.

Just two quick questions.

Can you talk a little bit more about these incremental reliability issues you saw at Temiscaming?

Just wondering if you could quantify if there was any material [the lost] days of production; and then maybe is it isolated, like where it was kind of on the equipment chain?

Was it a chipper, digester, a boiler?

That was my first question.

Yes, it's Marcus.

It didn't take the mill down; it just reduced the operating performance of the facility.

So if you're looking directionally, call it $2.5 million to $3 million of impact.

So you didn't have to take it down, you just had kind of some fixed cost deleverage, and margins kind of went sour for a short time, it sounds like?

Yes.

Again, when Marcus got the earlier question on this, Dan, we kind of indicated that it's just broad reliability challenges at that facility.

We're trying to get them back to a much higher performance level.

So they're across the board a bit.

So we'll continue to work on the reliability there.

We've got incremental teams up helping the local team on these issues.

And so we just thought we should note it.

And Marcus put it out there.

That's in the range of $3 million type of issue for the third quarter, so not anywhere close to the earlier issue that we had in the first quarter.

But we thought, in the best interests of disclosure, we'd just let you know that it still continues to be challenging for us.

And then, that brings me to my second question.

I think on the same mill for May 2020, you're expecting some sort of closure, too, or at least receipt of some finishing equipment that you needed, to have that fully where you guys wanted it.

Is there an update there?

Or is it just kind of like that's still the expected date, and it would just be wait and see?

Yes.

I think you're referring to the challenge we had with the number 10 boiler that we talked about in the first quarter.

And yes, we've got our scheduled annual maintenance downtime for May of 2020.

And at that time, if needed, we'll address these.

And we're prepared to address any bigger issues with that boiler then.

But even at this point in time, we're saying, you know what?

Overall, it's operating on that boiler with the changes we've already made in much improved way.

So we'll assess that at that point in time.

But we've already went ahead and ordered the equipment and have it standing by if we do need to make any change either at that time or before that time.

Thanks for the details, and good luck with the rest of the third quarter.

And operator, we probably have time for one more question, or one more person.

Certainly.

Our next questions are from the line of Paul Quinn with RBC.

I heard you mentioned 2 significant multiyear contracts signed.

Just wondering if those were on the specialty side and if you could give additional color on the magnitude of the increase.

Yes.

So I will tell you that they are on the specialty side.

We don't want to get into the contract terms at this point, Paul.

But I would tell you that we were pleased with the outcome of those contracts both on a price and volume perspective.

We've now reached the end of our question-and-answer session.

I'd like to turn the floor back to Paul Boynton for closing comments.

Yes.

Thanks, everybody for your time today.

We appreciate the audience.

And we'll be in touch as we move forward.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

And thank you for your participation.