Rayonier Advanced Materials Inc. (RYAM) Q2 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Rayonier Advanced Materials Second Quarter 2016 Analyst Teleconference. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mickey Walsh. Thank you. You may now begin. Mickey Walsh - Vice President-Investor Relations & Treasurer: Thank you, Rob, and good morning. This is Mickey Walsh, Treasurer and Vice President of Investor Relations. Welcome to Rayonier Advanced Materials 2016 second quarter earnings call and webcast. Joining me on today's call are Paul Boynton, our Chairman, President and Chief Executive Officer; and Frank Ruperto, our Chief Financial Officer. Our earnings release and presentation materials were issued yesterday afternoon and are available on our website at rayonieram.com. I would like to remind you that in today's presentation we will include forward-looking statements made pursuant to the Safe Harbor provisions of federal securities laws. Our earnings release as well as our filings with the SEC 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 three of our presentation material. Today's presentation will also reference certain non-GAAP financial measures as noted on slide two of our presentation material. We believe non-GAAP financial measures provide useful information for management and investors. But non-GAAP measures should not be considered an alternative to GAAP measures. A reconciliation of these measures to their most directly comparable GAAP financial measures are included on pages 16 through 19 of our presentation. At this time, I would like to turn the call over to Paul for his opening remarks. Paul G. Boynton - Chairman, President & Chief Executive Officer: Thanks, Mickey. Good morning, everyone. I'll start today's call highlighting some of the achievements of the quarter before turning it over to Frank to review our financial results. Yesterday afternoon, we reported solid second quarter earnings that put us on track to meet or beat the high end of our previous full-year guidance. We've made substantial progress on our Transformation Initiative which continues to deliver lower costs, higher productivity and enhanced profitability. I'm proud of the engagement, focus and energy that our employees have demonstrated in regards to this initiative. Their efforts will allow us to improve our cost structure and position us well for the future in the cellulose specialties market. I'll comment later on the markets and key initiatives to drive stockholder value. And with that, let me turn the call over to Frank for a review of our financials and more details on our transformation cost initiatives. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Thank you, Paul. Let's look at slide four to review our financial highlights for the second quarter. Sales for the quarter totaled $214 million, 3% below second quarter 2015. The decrease was primarily driven by 5% lower CS or cellulose specialty prices which were partially offset by modestly higher CS volumes. Sales for the first six months were $431 million, 2% below the prior-year period. The decrease was driven by 6% lower prices on CS offset by higher commodity volumes. CS volumes were flat for the six-month period. For the year, CS prices are expected to be 6% to 7% below 2015 levels. Operating income for second quarter 2016 was $39 million, $31 million greater than second quarter 2015 operating income of $8 million and $5 million greater than second quarter 2015 pro forma results of $34 million. Year-to-date operating income was $70 million for 2016, $37 million greater than 2015 year-to-date operating income and $11 million above year-to-date 2015 pro forma operating income. Prior-year pro forma adjustments primarily relate to the second quarter asset impairment from our Jesup plant realignment. Our quarter and year-to-date variance analyses for pro forma operating income and the relevant price and volume statistics are provided on slides five and six. As shown on page five, drivers for the second quarter and year-to-date variances were similar. Decreases in CS prices lowered second quarter operating income by $10 million and year-to-date operating income by $22 million compared to the same prior-year periods, respectively. Volumes and sales mix contributed an incremental $2 million and $4 million of operating income to the second quarter and year-to-date 2016, respectively, from the comparable prior-year periods. As you can see on slide six, CS sales volumes for the second quarter increased 2,000 tons to 113,000 tons while commodity volumes were flat at 55,000 tons to the prior-year period. For the six-month period, CS volumes were flat and commodity volumes increased 17,000 tons from the prior-year period. The increase in commodity tons is primarily due to improved production efficiencies as a result of our Transformation Initiative. As a reminder, we expect full-year 2016 CS volumes to be down 4% to 5% from 2015. Given CS volumes were flat for the first half of the year, we expect to see the impact of this previously forecasted volume decline in the second half. For clarity, as you look forward, please note that results for the third quarter of 2015 were exceptionally strong. As such and in line with our full-year guidance, we anticipate lower comparable results in the third quarter of 2016 from the previous-year period. Back on page five, costs for the quarter and year-to-date periods were favorable $12 million and $24 million, respectively. Lower costs driven primarily through our cost improvement initiatives and assisted by favorable costs in some of our key chemicals and transportation prices. We estimated that we realized approximately $5 million to date from these tailwinds. SG&AQ and other costs for the quarter in year-to-date periods were favorable $1 million and $5 million, respectively. As previously announced and as depicted on page seven in 2015, we began a four-year plan to achieve $125 million to $140 million of cost improvement from our 2014 cost base. In 2015, we captured $35 million of these cost improvements. In 2016, we plan to realize another $25 million to $40 million. Through the first six months of 2016, we have captured approximately $23 million of this year's target, bringing our 18-month total savings to approximately $58 million. We now anticipate that we will realize 2016 savings at the high end of our $25 million to $40 million range, providing strong momentum going into 2017. As a result of solid progress on our transformation initiatives, we have accelerated $5 million of our anticipated savings into 2017 from 2018. Savings for the quarter from our Transformation Initiative were derived across all functions of the organization including manufacturing, supply chain and corporate. We were able to drive lower energy costs coming out of the Jesup outage by optimizing our energy profile, including maximizing the impact of our new highly efficient natural gas power boilers. We have continued our intense focus on chemical usage including increasing recapture of certain chemicals. In wood procurement, we continue to realign and optimize our chip facilities, refine our procurement procedures and improve our wood yield to maximize savings. At corporate, we have focused on implementing lean processes to reduce costs and partnering with product and service suppliers that can provide high-quality services in a more cost-effective manner. Returning to page four, reported net income for the quarter of $19 million compared to breakeven profitability in the prior-year period. For the six-month period, net income was $40 million, up $30 million from the prior-year period. Pro forma for one-time adjustments primarily related to the asset write-down in 2015 and a gain on the extinguishment of that in 2016, net income increased $3 million and $8 million from the prior-year quarter and year-to-date periods, respectively. Pro forma EBITDA for the quarter and year-to-date were $58 million and $121 million, respectively. EBITDA results were positively impacted by the factors previously discussed under operating income. We anticipate net income, operating profit and EBITDA to be lower in the second half of 2016 due primarily to the previously discussed lower annual CS volumes and the timing of Fernandina Beach plant's scheduled extended maintenance outage. Given the solid results to date, we are raising our guidance for 2016 pro forma EBITDA from $185 million to $200 million to $195 million to $205 million as shown on slide eight. In addition to cost improvements, we remain focused on driving cash flow throughout the organization. As shown on slide nine, we generated $151 million of operating cash flow and $113 million of adjusted free cash flow. While free cash flow for the first six months of the year has been very strong, driven by solid EBITDA results and positive working capital benefits, free cash flow for the remainder of the year will be impacted by higher capital expenditures, the Fernandina maintenance outage and the timing of certain cash flows, including the collection of receivables impacted by the timing of shipments as well as a $10 million voluntary contribution we made last week to our defined benefit pension plan. Like many companies, low returns and interest rates as well as other factors have negatively impacted our pension funding status and we are proactively addressing the issue. As a result of improved cash performance in the first half, we are raising the annual adjusted free cash flow guidance for 2016 to $100 million to $105 million from $85 million to $95 million previously. Solid EBITDA and free cash flow reduced net debt by $200 million over the past 12 months. We ended the quarter with $402 million of liquidity, including $166 million of cash and $236 million available under our revolving credit facility after taking into account outstanding letters of credit. Subsequent to the end of the quarter, we made a $20 million principal payment on our term loan as well as the previously mentioned voluntary pension contribution. Our capital allocation strategies remain as previously communicated. Our first goal is to preserve and improve our financial flexibility by reducing our net debt. Next, we will invest in our business through prudent capital expenditures to maintain and upgrade our facilities, drive our innovation platform and fund investment in adjacent businesses, as exemplified by the lignin joint venture. We expect to spend approximately $90 million of capital expenditures in 2016 inclusive of our initial required investment in the lignin JV. As a reminder of our JV initiative, a summary slide has been included on slide 13. As recently announced, permits should be complete in the back half of this year and construction would commence immediately thereafter, pending approval from both companies. We believe that reducing our debt to increase our financial flexibility, investing in our existing assets and finding growth through innovation and complementary opportunities is the prudent course and provides the best long-term returns for our stockholders. At this point, let me turn the call back over to Paul. Paul G. Boynton - Chairman, President & Chief Executive Officer: Thanks, Frank. Let me first make some comments regarding market conditions, as noted on slide 10. As we looks at markets for our cellulose specialties business, we see little change in the acetate segment as we believe fundamental tow demand is relatively flat. However, continued destocking of Chinese tow inventories is having a substantial adverse impact on our non-Chinese customers, again in 2016, that is largely factored into our annual guidance. Separately, while we've noted that non-acetate demand growth has slowed over the past several years, we now see signs of more robust demand growth, with capacity expansions underway in ethers and engine filtration segments as well as increased demand for tire cord. On the supply side, continued excess capacity together with the relative strength of the U.S. dollar has allowed our competitors to be more aggressive in the market. These supply and demand dynamics have had a negative impact on our performance for the past several years. However, with the potential of destocking coming to an end, ethers, tire cord and filtration demand increasing, and casings and other CS markets relatively stable, our markets may be more balanced in the future. The benefits of these improved market dynamics could still be offset though by a supply imbalance and currency headwinds. As we previously stated, we expect acetate prices to be down approximately 2% in 2017 based upon contractual terms with the majority of our acetate customers. Discussions for uncommitted volumes will be ongoing with customers in the back half of the year as customary. We plan to provide full 2017 volume and price guidance in our February call as usual after all negotiations have concluded. In our commodity business for the second half of the year, we expect some improvement in commodity viscose markets while absorbent materials may see increased pressure as incremental capacity comes online. Our operations have the flexibility to produce either commodity viscose or absorbent materials. As such, we're able to flex our production to optimize results. As we previously discussed, our value proposition to customers is based on our ability to deliver quality, consistency and security of supply. In order to maintain our competitive advantage, we need to continuously improve our cost structure and create innovative products that further enhance value to our customers. Therefore, we've decided that we've made meeting these objectives not only our two key priorities but also an essential part of our culture that perpetually shapes how we approach our business. Within our continuous improvement platform, our Transformation Initiative is in focus on substantially lowering our costs. We're investing heavily in our employees to enhance their skills and capabilities, providing them with the knowledge and/or support to systematically drive costs out of the business. We're leveraging the tools of lean manufacturing and six sigma to create a culture and mindset where quality and cost improvement become the way we approach every aspect of our business. We will support these skills with capital investment when it makes sense to do so in order to reach our goals. Our innovation initiative is progressing well in both structure and results. We continue to add resources to the effort, which will allow us to broaden our scope of vision, evaluate more opportunities and move those ideas with merit more quickly through our stage-gate process. The dialogue, product sampling, trials and innovation partnership efforts with our customers has increased dramatically over the past year. The key areas of focus in our innovation pipeline include building on four platforms for growth as outlined on slide 12. First, next-generation cellulose fibers which expand on our existing cellulose specialty offerings in new and creative ways. Second, co-products that provide unique properties for customers and utilize all of our process streams such as in our lignin joint venture. Third, advanced materials from renewables which will leverage our existing knowledge of cellulose chemistry. And finally, cellulose processing technologies that draw on our process knowledge. We remain focused and committed on driving higher value, lower cost and more diverse cellulose-based products. The meaningful progress we've made on the initiatives of cost reduction and innovation to date allow us to also explore opportunities to grow and diversify our business in adjacent areas. Combined, these efforts will position us to drive stockholder value. Now I'd like to open up the call for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question is from the line of Chip Dillon with Vertical Research. Please proceed with your questions.

Hi. Good morning, gentlemen. Paul G. Boynton - Chairman, President & Chief Executive Officer: Hey. Good morning, Chip. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Good morning, Chip.

Hi. First question is on the Fernandina downtime. Can you just review for us what the timing of that is? Does it all fall on a particular quarter in the second half and what you think the burden of that will be, assuming, let's say, you didn't have that downtime? Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Yeah. Chip, we said, first of all, it spans the third and the fourth quarter. It's about a 30-day outage. So it's about half and half in those two quarters. We said in the last call that last year we had a 13-day outage. That was about a $2 million type of outage. This is a little bit more than twice as long as that outage. So it would be $4 million to $5 million from an operating impact.

Okay, $4 million to $5 million. And that straddles both quarters. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Correct.

Okay, got you. And then because you're doing this outage, I think you said you don't have to do it again for 18 months. Is that right? Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: That is correct.

Okay. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: So there...

And then looking - Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: ...one in 2017.

Got you. And then looking at the cost savings program, so let's say you get to the high end of this year, which would be – we would I think in another $17 million in the second half to get to the $75 million. And I just want to make sure I read the chart correctly. You're saying $95 million to $110 million. I don't know if that – is that the cumulative amount that you should have by the end of 2017, which would suggest you'd get another $20 million to – I guess it would be $35 million in 2017? Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Yeah. So if you look at page seven, Chip, of the slides; this kind of lays out how we see this rolling out. So you'll see we got $35 million in 2015. We're assuming $40 million in 2016 and then we're assuming – right now, targeting $35 million in 2017. Just to draw your attention to it, last quarter we had $30 million in 2017 and $35 million in 2018. So we're feeling stronger about the pace of the cost savings that are going through and actually shifted $5 million of that back into 2017.

Okay. And just so I understand this, if you look at like this year, you're saying you got $13 million in the first quarter and $10 million is implied in the second quarter. Would this extra $35 million in 2017, would that be sort of an incremental on top of what we've seen or shall I look at it as like about a $10 million per quarter run rate versus what the costs were in 2014? Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: These are incremental cost savings on top of what we would've accomplished in 2016. Paul G. Boynton - Chairman, President & Chief Executive Officer: And Chip, obviously, it doesn't weigh in there anything with inflation and movement and prices in that regard. So it's just pure saving efforts so on behalf of the team.

Okay, got you. And the last question I had was in terms of the – just you mentioned that a majority of your acetate volumes for next year had been contracted already and on the price basis, I guess down about 2%. I guess two questions. Does that assume the overall volumes are flat next year in acetate, up or down? And could you give us a feel for the majority? Is it sort of just over half or is it well over half? Paul G. Boynton - Chairman, President & Chief Executive Officer: So Chip, it doesn't assume anything in there. So it is just a majority. I don't think we're going to provide any further color on that. It's the majority and volumes and prices have yet to be firmed up across the board that are uncommitted at this time.

Okay. Well, when you say it's a majority, is that compared to the volumes this year or a majority of what you expect to eventually sell next year? Paul G. Boynton - Chairman, President & Chief Executive Officer: No, I think it's fair to say it's compared to the volumes this year on our acetate market.

Okay, got you. Helpful, thank you.

Our next question is from the line of Roger Spitz with Bank of America Merrill Lynch. Please proceed with your question.

Thank you and good morning, all. Can you give a sense of when you expect the acetate destocking by your customers to be finished? Is that a year away or sooner or longer? Do you have a sense of that? Paul G. Boynton - Chairman, President & Chief Executive Officer: Yeah, sure. This is Paul. We said even last year, 2015, that we were told to expect it would flush through in 2015 and clearly that didn't happen. As we came into this year, we heard that the sentiment was that largely globally, outside of China, the destocking had occurred. But still we thought through 2016 the Chinese destocking could continue. So our anticipation and thought at this point based on what we have heard, that it should be flushed through in 2016.

Okay. And in terms of your CS volumes, the second volume is down, I guess, 8% year-on-year from the second half of 2015. And for the first half of this year, you're flat in volumes from the first half of last year. I'm presuming that's destocking. But why were we flat the first half of this year year-over-year but we're going to be down 8% the second half of this year versus the second half of last year? What's going on with that dynamic? Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Yeah. So just to put it in perspective, the two things I would point out are we're down year-over-year. We're not forecasting, if you do the math, down at the midpoint. We're not forecasting being down second half over first half of this year. So volumes will be relatively consistent. If you go back and look at our third quarter last year, we had an exceptionally strong quarter and we pointed that out at the time with shipments of 133,000 tons of CS, which is considerably higher than any of the quarters we had throughout the rest of that year. And so we'll be comping that third year quarter. And I think there could be timing of shipments and other things that could impact this year's shipments. But really that is probably the big driver, the strength of that third quarter last year relative to this year.

Okay. The last thing I have is, can you talk a little bit more about the lignin JV with Borregaard in terms of what your cash investment might be and the timing of that? For instance, I don't know – you were talking a little bit – maybe debt financing. Should we think about like $15 million (25:29) outflow if it's 80% debt financed and you've got your equity investment of 45%, or should we be thinking about a different number? And when might the outflow be if you decide at the end of this year to proceed with the investment? Paul G. Boynton - Chairman, President & Chief Executive Officer: Yeah. Roger, let me start with that and I'll turn it over to Frank. And just as a reminder about the JV and how it's structured, and of course it's detailed on page 13 of the slides. The JV, which we're calling LignoTech Florida, is a $135 million investment over two phases. Phase one is $110 million and it should produce about 100,000 tons of lignin. Phase two then is $25 million and adds about 50,000 tons more lignin. We're a 45% owner. Our partner, Borregaard, is a 55% owner. We've completed all the engineering. We're currently waiting for permits, primarily two permits, a building and an environmental permit. We expect to have those complete in the back half of this year. And with those complete, we'll commence significantly on the project. We think the project will be about 18 months to complete. So most of the spending you'll see, Roger, is in 2017 and 2018. With that, we're looking at all options for financing. So we haven't discussed or disclosed what that's going to be. But we're exploring all those options at this time. And Frank, I don't know if you'd add more color to that. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: No. We've got some small CapEx this year relative to the overall capital that's needed for the project, which is included in the $90 million CapEx figure. And then obviously, we're working on all financing avenues and we'll sort that out and tell the market as we get to the end of those options. Paul G. Boynton - Chairman, President & Chief Executive Officer: And so when we get all that financing in place and how we're going to proceed with this, when we get the permits, then of course it goes before our board and Borregaard's board for final approval, which we expect again in the back half of this year.

All right. Thank you very much for that. Paul G. Boynton - Chairman, President & Chief Executive Officer: Sure. Thanks, Roger.

Our next question is from the line of Bill Hoffman with RBC Capital Markets. Please proceed with your questions.

Yeah. Thanks and good morning. Paul G. Boynton - Chairman, President & Chief Executive Officer: Good morning, Bill.

I wonder if you could talk a little bit more about the pricing. In your release, you said average pricing right now is down 4% year-to-date. But you're still expecting the 5% to 7% decline for the year. Does that mean you're expecting some incremental pricing weakness in the second half of the year? Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Yeah. I don't think we said price is down 4% this year. Price is down roughly 7% this year. But typically, we'll have a little bit lower price decrease in the first half and a little bit higher in the second half, only because of some sales that tend to shift into – a modest amount of sales that'll shift into the front end of the half versus those that fall out of the back end of the half. So I would say that the pricing guidance – I think we're right in line with that overall pricing guidance.

Okay. And then second question. You talk about some of this non-contracted business for next year. I wonder, is that percentage still about the same? I think it was running at 15% sort of non-contracted or something like that, on the specialty? Paul G. Boynton - Chairman, President & Chief Executive Officer: Yeah. Bill, I don't think we've got that number out there as far as any kind of percentage or anything like that. Again, the majority of our businesses is contracted. And again, we are working as typical on the back half of this year on both volumes and prices. And so nothing out of the ordinary in that regard. But I don't think we have any percent out. And I'm trying to think back, of what that may be referring to. But I - Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Yeah. All of our CS volume is typically contracted at the end of the year, Bill. We obviously have contracts that come up every year. As you know, the big three, our three largest customers are contracted much longer term. But we'll be going through the normal negotiations, contracting both for our customers and those in the market looking for CS volumes.

Okay, thanks. And then the other thing that we're hearing in the tow market is just because of some of the softness that was probably more than expected by some of the downstream customers, it sounds like there's some competitive pricing activity going on out there. Can you give any color on what you're seeing in the spot markets for the second half of the year here of this year? Paul G. Boynton - Chairman, President & Chief Executive Officer: Yeah, I'm sure those comments are directly related to our customers' business and specifically acetate tow. And so I can't add anymore color than what they have already provided out there for you. In our regard again, and we see it directly as well, we see the destocking happening on our customers' behalf. But we've largely factored that into our plans for the year. So I think two different issues there as we look at it.

Okay. And then finally, just as you look into next year, I assume that you've got a downtime outage planned for Jesup in 2017? Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Yes.

And is that typically for - Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: And that'll be consistent with what we do every year. So it should be consistent with what happened this year. Paul G. Boynton - Chairman, President & Chief Executive Officer: And that should be in the second quarter there, Bill.

Right, okay, great. Thank you very much. Paul G. Boynton - Chairman, President & Chief Executive Officer: Sure.

Our next question is from the line of Paul Quinn with RBC Capital Markets. Please proceed with your questions.

Yeah, thanks. Morning, guys. Paul G. Boynton - Chairman, President & Chief Executive Officer: Morning, Paul. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Morning, Paul.

Paul, you referenced growth in ethers, engine filtration and tire cord. Just wondering if you could quantify that growth and then maybe reference what you're producing. And I know you guys are vast majority acetate. But what percentage have you got in ethers and what percentage have you got in other products? Paul G. Boynton - Chairman, President & Chief Executive Officer: Well, Paul, as you know, both of those segments are smaller segments for us. So these are high single digit, maybe low double digit type segments. High single digit, but we haven't put that kind of guidance out there for a while. But it's still very consistent with what we have discussed in the past. But again, we're encouraged because we are seeing some expansion in some of these key areas, again, with some customers in the engine filtration area as well as in the high-end ethers area, which is where we tend to focus more of our product portfolio is in that high end. And so we've got several customers out there with plans to grow, again, which is not something we've been able to share with you until this point in time, which is again great for us to see and we're encouraged for our customers.

So is that a priority for you guys to grow into some of these other non-acetate areas? And if so, are you going to improve your guidance going forward as to what percentage you're doing in those areas? Paul G. Boynton - Chairman, President & Chief Executive Officer: Yeah. And again, it hasn't changed much. We certainly got a lot of focus on it, a lot of dialogue. We've got some new products out there that we're working with these customers in the ethers and tire cord and other areas. So yeah, but we have always said that we're not going to push it in there. We're going to come in with some value, with some differentiation that allows us to have a meaningful dialogue with our customers and give them something in terms of value that they don't have today. So with that, it just takes a little bit of time. And at some point, Paul, if we get some meaningful change out there in those segments; we'll give you some updated percentages to help your guidance.

Okay, sure enough. And then maybe just turning back to acetate. You're suggesting a flat outlook and then I'm looking at the publicly traded acetate tow producers that are suggesting that operating rates are down in the 80% level and pricing could be down 10% to 20%. So is there a suggestion or is it your acknowledgment that acetate tow pricing is not going to affect acetate pulp pricing? Paul G. Boynton - Chairman, President & Chief Executive Officer: No, what we're saying is we believe from what we've heard – and of course if we get anything different, we will update you as well – that the fundamental market consumption is roughly flat. And we've said this for some time now. I think you're seeing with our customers, which is what we see, the ill effects of destocking and mainly now still working through China that's pushing back on their business in terms of volume and – we listen to the calls as well – it sounds like in terms of price as well. And again, they have said it's a different equation between what they're working on and what our business is in terms of pulp going into the market and pricing for our product.

Okay. And then just your main customer was reporting last week that demand outside China continues to decline at 1% to 2%. But they weren't quite sure what the heck was going on in China. It seems pretty consistent with just about everybody I talked to. Can you help us understand what do you think is happening in the Chinese cigarette market right now? Paul G. Boynton - Chairman, President & Chief Executive Officer: Yeah. Again, I think we share the same – the cloud a little bit. The reporting information is not great. So we have to go on what customers in China are telling us. And we believe, as we stated before and this is not new information, that there's certainly a correction out there in terms of the destocking. We think also some of the new Chinese regulations have suppressed demand here. But we had heard that once these are put in place and destocking is through, that they believe their market will be slightly positive going forward. So we're operating with that framework, that mindset. And if that changes, we'll obviously update you.

Okay. Thanks for the color. Great job on the costs. Paul G. Boynton - Chairman, President & Chief Executive Officer: Great. Thanks, Paul. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Thank you.

Thank you. Our next question is from the line of Steve Chercover with D.A. Davidson. Please proceed with your questions. Steven Pierre Chercover - D. A. Davidson & Co.: Thanks. Good morning, everyone. Paul G. Boynton - Chairman, President & Chief Executive Officer: Morning, Steve. Steven Pierre Chercover - D. A. Davidson & Co.: First question. Why are you spending capital associated with the lignin JV when you actually haven't come to a go or no-go decision? Are there benefits to your operation regardless? Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Steve, we're anticipating spending capital associated with the JV in the back half of the year. And most of that capital would be spent after the announcement. But what we look at here is we've got to get some work going early on on the infrastructure and other things that we need to do to move the project forward when we get the green light to move forward. So we're just anticipating that and putting that into our guidance. Steven Pierre Chercover - D. A. Davidson & Co.: So I guess we could say there's a pretty high probability that both you and Borregaard will move forward with this provided you get the permits that you're seeking. Paul G. Boynton - Chairman, President & Chief Executive Officer: Yeah, I think that's a fair assessment. We put out an announcement not too long ago that kind of said, look, we're at a point where we're just waiting for the final permitting to come through. And once that comes through and our board likes the returns that we think we can get out of it and similarly the Borregaard, that we'll move forward with the project. So yeah, so I think we're positive on the project at this point in time. But obviously, there's still final reviews by our board and we have to get the permitting in place. Steven Pierre Chercover - D. A. Davidson & Co.: Okay. Thanks, Paul. And then your projections must also incorporate a view on fluff pulp prices. So can you share with us your expectations even if it's just on a percentage change basis? Paul G. Boynton - Chairman, President & Chief Executive Officer: Yeah. We're just saying looking at the back half of this year we're seeing some incremental pressure as new capacity comes online. We think, therefore, we're indicating that pricing could be down slightly in the back half of the year and what the magnitude of that is. I don't know if it's 1% or 2%. But it's in that range somewhere there. It could be a bit more, but it's not a huge amount. And again, the key, Steve, is that we can flex between commodity viscose and fluff. And so if we see the fluff pricing get too negative for us, we'll make sure we pursue greater viscose in the coming period. So we can move back and forth. But yeah, we just see the pressure on some of this incremental capacity coming out there. And it's in line with what we expected at the beginning of the year. It's not really different from that, but we just are updating you on our perspective for the balance of the year. Steven Pierre Chercover - D. A. Davidson & Co.: Thanks. And I guess this is kind of an add-on to Paul Quinn's question, which is do you believe that you're actually gaining share in ethers or the high-strength viscose market? Paul G. Boynton - Chairman, President & Chief Executive Officer: I think we have been holding our share across the board fairly consistently, maybe even improved it over the last couple of years. But it's hard to say because there's been so much dynamics around this. Particularly in the acetate with the destocking, it's hard to tell. And ethers in particular, again, we think we're – ethers and other segments, I think we're holding our own, but it's hard to say exactly. As you know, there's not a lot of public information out there. So we just do our best estimate to say where the market's at. But I don't see a significant change, either a plus or minus. Steven Pierre Chercover - D. A. Davidson & Co.: Okay. And final question. I believe that you've said in the past that both ethers and high-strength viscose have relatively similar margins to acetate. So is that still the case? Paul G. Boynton - Chairman, President & Chief Executive Officer: We haven't updated that at all, Steve, in recent times. We've certainly seen some pricing pressures in the ethers and other segments more dramatically even than acetate. So I don't know if they're just developing a little bit of gap there or not. But I don't know if we have any guidance to provide for you at this point in time. But in the past, you're right, we've always said kind of in the high-end areas of these other segments, they were fairly consistent with acetate. Whether there's a separation there or not, I'm not too sure because our pricing has come down quite a bit across the board. So I really don't have guidance to provide you in that regard. Steven Pierre Chercover - D. A. Davidson & Co.: Okay. Thanks, Paul.

Thank you. Our next question is coming from the line of John Babcock with Bank of America Merrill Lynch. Please proceed with your questions. John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Hey. Good morning, everyone. Just a quick follow-up from some of the questions earlier on volumes. I think you were talking a little bit earlier how most of the volume decline this year will be driven by – it sounds like 3Q essentially. And when I look back at 3Q 2014, it looks like that was 129,000 metric tons. Last year, it was 133,000 metric tons. Just want to get a sense for, if it is declining, what's kind of falling off there and just generally why that is declining relative to last year. I know you mentioned it was a strong quarter. But any color you can provide there would be helpful. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: John, I think it's consistent with the 4% to 5% guidance we gave out at the very beginning of the year in regards to our volume outlook for this year. As you know, predominantly all our CS volumes are typically contracted by the end of the year. And so we're able to give out pretty good guidance in regards to that issue when we get to our February call. And so we're just seeing that the first half was pretty consistent with last year. And last year, we had a very strong third quarter. So that decrease from destocking and other things needs to come into the year at some point. And we're just going to see it happen in the second half versus the first half. John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.: And as far as the commodity volume, both when you talked a little bit about what happened there, (41:14) - Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Sorry, John, you're coming in very weak right now. John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Sorry. Does that help? Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Yeah, that's great. John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Yeah. I just wanted to follow up on the commodity side of things there. Clearly, the volumes were down a little bit from 1Q. Is there anything we should kind of take note of there or is this kind of more just some sort of seasonality that's going on? Any color there would be great. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Yeah. I wouldn't take anything from it. I think our commodity volumes will be strong. I think we gave out guidance before around the 250,000-plus ton range, depending on mix, between fluff and viscose. So I wouldn't take anything from the first half. John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Okay. And then next is kind of on pension. I think you guys gave a voluntary contribution of around $10 million this quarter. If you could just provide a sense for – and maybe the filings that come out soon will have a little more color here. But just a sense for how the funding status is now relative to where you started the year. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Yeah. From a IRS basis after this contribution, we're very well funded currently, but close to the 100% level, I believe. Is that accurate? That's accurate. So close to the 100% level. Obviously, we've got to watch three things as it goes to funding. One is the returns that we get in the market. And obviously, last year was a poor return year for everyone. This year is getting better, but it's still below benchmarks for most people. Second is discount rates. And as the Treasuries have dropped and other things, we've seen some pressure on discount rates which can increase funding. And thirdly is the potential adoption of the new mortality tables by the IRS. And that could happen as early as 2018, potentially 2017, but I don't think people think that will happen, so probably 2018. So we'll have to keep a look on those things. But right now, again it was a voluntary contribution. It wasn't a mandatory contribution. So I think that puts us in a relatively good state. But we'll have to continue to monitor those three other issues in the future to see if that impacts our funding status. John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Okay, appreciate that. And then the last question I have here is just on debt. It looked like debt pay-down was around $3 million for the quarter. So generally I think that was a little bit below what we were expecting. Are you guys essentially trying to build some sort of cash balance ahead of this lignin joint venture or is there any reason I guess to think that debt pay-down will be a little bit slower in the second half of the year? And that's pretty much all I have for you. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Okay. We paid $20 million after the quarter ended, John, so that was one big chunk. We paid the $10 million pension. We do have some of the funding for Borregaard on the balance sheet, the lignin joint venture on the balance sheet. But I think you'll continue to see us look at ways to either reduce debt or put cash on the balance sheet for future investment in the business, which we think could drive good returns and longer-term growth. John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Okay, thanks. And the pay-down was on the term one (44:22), I'm guessing. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: It was, yes. John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Okay. All right, thanks, guys. Paul G. Boynton - Chairman, President & Chief Executive Officer: Thanks, John.

Our next question is from the line of Chip Dillon with Vertical Research. Please proceed with your questions.

Yes, hi there. I have a follow-up. I noticed that you all did a phenomenal job on the working capital, and I just wanted to get your comments on this. It looks like if you look to the middle of last year, that your payables, and I know you don't break them all down until we get the Q, but the all-in payables were up $26 million. So obviously, you were stretching your suppliers, I guess, a little bit, and that the current assets all-in were down $54 million. And I just didn't know if you had any comments on what created that. That basically was an $80 million cash inflow over 12 months if you just do the comparisons and a couple dollars a share. And I didn't know how long that was sustainable, to see your net working capital down here around $43 million. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Yeah. Good observation, Chip. A couple of things. One is, and I looked at it more from the end of last year to this year, which was roughly a cash-positive $60 million when you look at the change in current assets and liabilities. And what you're going to see is when you look at our cash flow guidance, it's roughly equal to or slightly less than our first half cash flow, so for the full year. So some of that was just some early payments and some other things that were timing on the working capital side. So we would expect a little bit of that to go out at the end of this year based on timing. So we'll reverse some of that. It's very hard to talk about working capital in small increments because it just depends on what day you get paid things or need to pay certain obligations. So you'll see a decrease in that in the second half by a bit. Additionally, you'll see significantly more CapEx. We spent $38 million this first half and we're going to spend $52 million or forecast to spend $52 million in the second half. So you'll see a little bit more cash outflow in the second half than you did in the first half – than you saw a gain in the first half.

Got you. That's helpful. And when you think about that $60 million reduction, I guess you're saying this will maybe end up maybe being $45 million or $50 million. So that's probably about half of your free cash flow this year. And do you see more ability to kind of get year-end working capital – let's say it ends up this year down $40 million or $50 million. That would make it $50 million or so million or $60 million. Do you think that's a steady state level? Do you think it comes up or it could come down further? Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Chip, as part of our Transformation Initiative, I know we talk a lot about the cost component of that. But we are very focused on driving cash flow, incremental cash flow as well. So as we have discussions on contracts either with customers or suppliers, that's one aspect of the discussions that we have with those individuals. And we look for opportunities to improve the cash flow through better working capital terms. So we'll continue to focus on doing that. Whether or not it'll give us more cash flows next year is hard to say. But it probably won't be anywhere close to the numbers that you saw this year as we had a lot of positive cash flow adjustments going through the first half of this year.

Got you. And the last thing is if you guys go ahead with the joint venture; I guess with a 45% position, that would enable you to keep it off balance sheet. But I guess depending on how the venture itself is leveraged, that would impact how much capital we would see going from your company to the joint venture. And I guess your half of the cost is around $60 million or $65 million. What would be sort of a guess for next year if you guys go forward with both CapEx on what we see on a consolidated basis? And then how much cash would you have to invest in the joint venture on top of that? Paul G. Boynton - Chairman, President & Chief Executive Officer: So Chip, let me answer just in terms of ongoing CapEx. And as we guided this year, we're about $90 million. We think a steady state future for us is in that $50 million to $60 million in terms of funding our ongoing business and being a quality, consistent supplier. With regard to the JV opportunity, we have yet to decide how we're going to fund that. And that's what we referenced earlier. So all those decisions are before us and to be approved by our board. And so we're looking at all options, whether it's financing or putting capital in directly. But all those things are out in front of us. Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Yeah. And Chip, the $135 million that you referenced and our share of that, the first component of that's $110 million. So that incremental spend won't come for several years after the JV gets going. So I think in the near term or the intermediate term more about the $110 million than the $135 million.

And you would be 45% of that? Frank A. Ruperto - Chief Financial Officer & SVP-Finance and Strategy: Roughly. Paul G. Boynton - Chairman, President & Chief Executive Officer: Roughly.

Okay, thank you.

Thank you. Thank you. I will now turn the floor to Paul Boynton for additional remarks. Paul G. Boynton - Chairman, President & Chief Executive Officer: Yeah, thank you. Well, if there's no more questions, I'd like to thank everybody for joining us today. And let me say I'm extremely impressed with our team's ability to drive results on two critical initiatives within our control. We're well on our way in improving our business through cost and aggressive debt reduction to achieve an appropriate capital structure, positioning us well as a long-term market leader. And I'm confident in our ability to develop opportunities through growth and innovation that allow our customers to win in their markets and for us to create value for our stockholders. We look forward to updating you on our progress in a timely manner as we move forward. And I thank you for your time this morning.

Thank you. This concludes today's teleconference. Thank you for your participation and you may now disconnect your lines at this time.