Rayonier Advanced Materials Inc. (RYAM) Q3 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Rayonier Advanced Materials Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Mickey Walsh, Treasurer and Vice President of Investor Relations for Rayonier Advanced Materials. Mr. Walsh, you may now begin.

Thank you, Operator, and good morning, everyone. Welcome again to Rayonier Advanced Materials Third Quarter 2018 Earnings Conference Call and webcast. Joining me on today's call are Paul Boynton, our Chairman, President and Chief Executive Officer; and Frank Ruperto, our Chief Financial Officer and Senior Vice President of Finance and Strategy. Our earnings release and presentation materials were issued the 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 provision 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 Slide 16 through 21 of our presentation. Now I'll turn the call over to Paul.

Thank you, Mickey, and good morning, everyone. I'm going to start the call today with the highlights of the quarter, before turning the call over to Frank to review our financial results. I will then conclude with an update on our strategy to drive growth for the company and value for our shareholders. As summarized on Page 4. For the 2018 third quarter, we delivered adjusted EBITDA of $99 million on revenues of $544 million, driven by a continued strength in pulp, combined with strong execution on our strategic pillars, demonstrating the benefits of the improved diversity and scale that we achieved through the acquisition of Tembec. Today, our business is more balanced, and therefore better able to withstand more volatile market conditions, like we've recently experienced in the lumber business and with the recently imposed Chinese tariffs. In addition to the improved balance of our business, we also have a significant opportunity to deliver EBITDA growth through the successful execution of our strategic pillars. Along those lines, a key highlight of the quarter was the significant progress that we achieved integrating Tembec's operations, as we delivered $19 million of incremental cost savings and synergies in the third quarter, bringing the year-to-date total to $38 million. Given our continued success, we have raised our cost transformation target from $40 million of incremental EBITDA by year-end 2018 to $50 million, which also demonstrates confidence in our ability to achieve our goal of delivering $155 million of incremental EBITDA by the end of 2020. Our strong execution resulted in another quarter of solid free cash flow generation. We have delivered $97 million of year-to-date adjusted free cash flow, which represents an attractive free cash yield on equity based on our current share price. Importantly, we will continue to maintain a balanced and diversified capital allocation strategy. Year-to-date, we have reduced our total debt by $34 million, as we target leverage of 2.5x net debt-to-EBITDA. We have invested $30 million into strategic capital projects, which will provide incremental earnings power to the business. And we've returned $39 million of capital to shareholders through dividends and stock buybacks, including $50 million of share repurchases against our $100 million total share repurchase authorization. We remain confident in our ability to deliver on our strategic plan, and we are optimistic and the prospects for our business given our strong position in high-purity cellulose, a positive outlook in the pulp markets and significant cash generation. Given this confidence and our currently depressed stock price, we also plan to aggressively explore additional share repurchases. Now let me turn the call over to Frank for a further discussion of our third quarter financial results.

Thank you, Paul. I'll start by reviewing the quarterly results and outlook for each of our business segments. Comparisons to the third quarter of 2017 will be on a combined basis. All comparisons will be to the prior-year comparable period unless noted otherwise. As outlined on Slide 5, our largest segment, high-purity cellulose, saw sales declined by $26 million to $308 million from the year-ago quarter on a combined basis. The lower sales were largely driven by a 6% decline in CS volumes, primarily as the result of lower than anticipated customer demand in the acetate market and a 5% decline in commodity volumes due to lower production. CS prices declined in line with expectations at 5%, while commodity prices increased 2%. Adjusted EBITDA for the high-purity segment was $63 million, representing a 13% increase sequentially from the second quarter results and a $16 million decrease from the prior-year period. The year-over-year decline was primarily driven by lower cellulose specialty sales prices and volumes, combined with the impact of the sale of our resins business. Year-over-year EBITDA was also impacted by higher wood costs due to inclement weather and higher chemicals costs. Importantly, we were able to offset the higher input cost through increased productivity, as well as transformation and synergy statements. I would also note that our lignin Florida joint venture began production. We realized a $2 million operating loss in the third quarter, which we expect to continue until production fully ramps up. Looking forward, we expect fourth quarter adjusted EBITDA to be modestly below third quarter, driven by impacts from higher wood costs, tariffs on Chinese sales from the U.S. and the sale of our resins business. CS prices are expected to decline approximately 3% to 4% for the full year 2018, which remains in line with our expectations, while CS volumes are expected to decline 3% to 4%, primarily as a result of lower than anticipated customer demand in the acetate market, primarily as a result of tariffs on domestic producers. While trade tensions between the U.S. and China continued to dominate headlines, we estimate the impact of tariffs on our cellulose specialty sales to only be approximately $2 million for 2018. Turning to Slide 6. Forest products, which represented only 8% of the quarter's EBITDA, saw sales declined $13 million to $86 million in the third quarter of 2018, largely driven by a 18% decline in volumes. Volumes were primarily impacted by softer market conditions. Combined with downtime taken to implement capital projects, we expect to deliver incremental EBITDA in 2019. This drove a 17% decline in EBITDA to $10 million as compared to the year-ago quarter. Third quarter EBITDA was impacted by $6 million of duties paid for lumber sold into the United States. Looking forward to the fourth quarter, we expect lumber prices to remain depressed in the near-term before strengthening, driven by the current level of U.S. housing starts and strong GDP growth in the U.S. With the recent decrease in prices, we now expect lumber duties to reduce EBITDA by roughly $25 million during full year 2018. Overall, we estimate breakeven or at worst, a modest EBITDA loss for the fourth quarter. That said, we expect our continued capital investments and cost reduction actions to drive incremental EBITDA benefits for this business in 2019. Turning to Slide 7. The Pulp segment had another strong quarter, as sales increased $9 million to $89 million, which drove EBITDA higher by 50% to $27 million year-over-year. These results were driven by a solid production and a 17% increase in prices for high yield pulp, given export demand, which remains strong. Looking forward, we expect constructive market dynamics from global demand for pulp remained strong. China continues to limit recycled pulp from entering the country, and there are no significant enough supply additions coming online in the pulp markets until 2020 or 2021. Given this, we expect prices to remain near historically high levels through the fourth quarter. Turning to our Paper segment on Slide 8. Sales decreased $3 million to $78 million, primarily due to a 21% decline in newsprint volumes, partially offset by stronger prices from newsprint. The volume decline in the quarter is driven by increased downtime in order to support provincial energy curtailment requirements. This volume decline had minimal impact on segment profitability. In paperboard, prices were relatively stable as volumes declined modestly. Overall, EBITDA increased $10 million versus the year-ago quarter, assisted by the reversal of $5 million of previously expensed duties in the quarter and higher newsprint prices. Looking to the fourth quarter, we expect newsprint prices to adjust downward given the reversal in newsprint duties, with minimal impact to baseline profitability. We also expect volumes to recover from third quarter levels given the energy curtailment downtime taken, which is not expected to repeat in the fourth quarter. In paperboard, we expect prices to remain relatively stable, as margins continue to be impact high pulp prices. Importantly, our customers are becoming increasingly concerned about the supply of paperboard from China due to U.S. tariffs on Chinese goods, which have the potential to create incremental opportunities for our Canadian operations to serve the U.S. market. This further demonstrate the benefits of our free scale and the diversity of our portfolio achieved through the acquisition of Tembec. Turning to Slide 9. On a consolidated basis, sales for the quarter came in at $544 million. Sales decreased 5% from the third quarter of 2017, primarily driven by the expected decline in CS pricing, combined with lower CS and lumber volumes, partially offset by strong prices in high-yield pulp, lumber and newsprint. Third quarter 2018 adjusted EBITDA was $99 million, down 3% from the $102 million achieved on a combined basis in the year-ago quarter. Corporate expenses increased $4 million to $21 million from the prior-year quarter, driven by increased expense for disposed operations and variable based compensation, partially offset by lower costs from synergies. Cash flow continues to be a high priority for the organization. As shown on Slide 10, we generated $160 million of operating cash flow and $97 million of adjusted free cash flow through the first 9 months of 2018. Year-to-date capital expenditures were $93 million, including $30 million of strategic capital. For the full year, we now expect capital expenditures to be modestly below our $150 million guidance due to the timing of spend. We also generated an additional $16 million of cash with the sale of our resins business. The sale allowed us to divest the non-core petroleum-based chemical asset, while providing our stockholders with the fair value and incremental cash to be redeployed through our capital allocation framework. As you can see, free cash flow allocation for the first 9 months was balanced across strategic capital investments, debt repayments and return of capital to shareholders. Turning to our balance sheet. Net debt at the end of the third quarter was $1.1 billion. Meanwhile, our total liquidity stood at $322 million, including $106 million of cash and $216 million available under our revolving credit facility after taking into account outstanding letters of credit. Interest expense for the third quarter of 2018 was $15 million and in line with the full year run rate of $60 million. With our solid EBITDA performance, our net debt to last 12 months EBITDA announced advance at 2.8x. We continued to operate towards a target net leverage ratio of 2.5x, and we will evaluate capital allocation decisions on a disciplined and balanced basis. With that, I'd like to turn the call back over to Paul.

Okay. Thank you, Frank. Over the past month or so, we have seen our stock price decline by approximately 40% despite no public announcements from the company. As such, we believe the drop in share prices seemingly driven by a combination of external factors, including our potential exposure to retaliatory tariffs or other adverse trade policy on our exports to China from the U.S. and the rapid decline in lumber prices. I thought it will be helpful if I provide you our perspective on these two issues relative to our company. As noted on Slide 11, China has imposed a 5% tariff on high-purity cellulose products from the U.S. For the company, sales in 2018 comprised about $220 million of annual revenue. $60 million of these sales are from commodity viscose and fluff pulps, both of which we don't expect to see any significant impact from the tariffs. For fluff pulp, the vast majority of this volume is produced in the U.S. Southeast and the market for them remains very firm. As such, we are seeing the tariffs being absorbed into the price, and therefore, the burden being transferred. For viscose pulp, a 17% tariff has been in place for years now without negative consequences for the market of these products. In sum, we don't expect to see any significant impact on commodity sales from the 5% tariffs. The balance of our high-purity cellulose revenue, $160 million, is driven mainly by sales of acetate pulp, where we've been the clear quality and technical leader in China for 30 years. As such, we expect to work with our customers to ensure that they have a continuous supply of our product. We are currently absorbing the 5% tariff, equating to about $2 million per quarter. And while we supply these products from our U.S. operations, we are working with our customers to reposition production of these products outside the U.S., if necessary. The second area of potential impact on our stock is from the recent rapid decline of lumber prices. First, keep in perspective that lumber EBITDA was approximately 8% of our third quarter results, a relatively small part of our portfolio. Second, while we recognize the price levels reached an unsustainable peak in the second quarter, we believe that roughly 50% price drop over the past five months is a significant overcorrection, given the solid level of housing starts and a strong U.S. GDP. And even at current low prices, this segment should deliver breakeven or at worst, a modest EBITDA loss. And we see enhanced EBITDA beginning in 2019, due to our current cost improvement efforts and capital investments from these assets, which will further improve our competitive position and profitability. Absent the return of more reasonable lumber prices, we are able to curtail production across the asset base to reduce any negative contributions, while maintaining quality chips supply to our pulp facilities. And lastly, keep in mind that we paid so far a total of $26 million of lumber duties on sales into the United States, which we expect to be returned upon the resolution of the dispute. Turning to Slide 12. Our results since the acquisition of Tembec demonstrate the benefits of our integrated portfolio and the earnings potential of the company. Additionally, we continue to make solid progress against our integration plan, and as such, remain confident in our goal of delivering $75 million of synergies and a total of $155 million of incremental EBITDA growth by the end of 2020 through our four pillars of strategic growth. Turning to Slide 13. We have captured $40 million of our identified $155 million of incremental EBITDA growth. $19 million of these savings are categorized as synergies captured through various activities, including the elimination of duplicate corporate positions, enhanced procurement practices and streamlined manufacturing processes across our cellulose specialties operations. Another $19 million of our savings comes from our legacy cost transformation actions. Overall, our traction through the first 9 months gives us great confidence to raise our total cost transformation target of $40 million by year-end 2018 to $50 million. It also demonstrates that we're well on track to capture our 3-year strategic improvement goal of $155 million. Lastly, turning to Slide 14. We remain committed to a disciplined and balanced capital allocation strategy, centered on maximizing our risk-adjusted return on capital. Our business is performing well. The integration of Tembec is proceeding as planned. We maintain a leading position in high-purity cellulose. And we have a positive outlook on the pulp markets. Given the decline in our share price, we believe our stock is significantly undervalued based on the earnings potential of the portfolio and as we achieve the benefits from our strategic pillars. As a result, we plan to aggressively explore additional share repurchases in the fourth quarter. Thank you again for your time this morning. And operator, if you would please open up the call to questions.

[Operator Instructions]. Our first question comes from the line of Paretosh Misra with Berenberg.

A couple of questions. One, in the commodity cellulose business, your guidance for the year, down 2%. So that imply 4Q should be quite a bit higher. Is that right? Am I looking at it on an apples-to-apples basis?

Yes. Yes. I think you're looking at the right guidance on our commodity HBC business, it should be slightly down on volume, as we've noted, about the 2% level.

Okay. And then last year, again, in the commodity cellulose product business, your average price went down in the fourth quarter. Should we expect something similar this year? I mean was there kind of seasonality or mix effect that might happen again this year? Or was that just market pricing that went down in fourth quarter last year?

I think that's probably just a bit of mix related noise that you're seeing in there, and I don't think we should build that into any model.

Got it. And lastly, just again on the cellulose business. What kind of visibility on 2019 do you have for any part of that business, either in terms of the pricing of volume that you're seeing in the market?

Yes. We typically we'll do this time as well give you full guidance on the year in our February call when we do the kind of year-end results, we'll give kind of a full perspective of 2019 at that time. But I can say, look, we've mentioned this in the past. We think that the pricing on acetate is coming to a more stable area, so we're pleased to see that. We see that, overall, that the volumes and other pricing opportunity in - the other segments have an opportunity to increase slightly. So overall, we feel positive about the business going into the new year. But let me give you the details of that when we get on to our February call.

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

Did you repurchase bonds in the past quarter? And if so, what was the principal amount?

No, we did not repurchase bonds in the last quarter.

Got it. And what is your Q4 pulp EBITDA expectation? I mean, you talked about pricing being flat. Should we think about that EBITDA being flattish for the past couple of quarters as well?

You're talking about the high yield pulp segment, Roger?

Correct, correct.

Yes, I think yes, we see pricing being relatively stable in the fourth quarter, so I think it will be right around where we're at. I don't see any material changes, plus or minus.

Perfect. And lastly, can you provide any further granularity in how each of acetate and integrate CS pricing and volume played out in addition to what you've said on the prepared remarks?

No. We don't typically break that down for you at all, Roger. Again, you can see the numbers in aggregate there. Then we talked about a bit results of our quarter when it comes to the cellulose specialty area being hampered a bit on the acetate side of sales. And as noted in the comments there by Frank, that driven really by a domestic U.S. producer of acetate, too, and their sales to China had been somewhat dampened because of the dispute between the 2 countries, and so we felt the ramifications of that. But beyond that, I don't have anything else to add.

Our next question comes from the line of Steve Chercover with D. A. Davidson.

First of all, corporate expense has really spiked in Q3, and I'm just wondering if you could explain what happened there.

Well, maybe the best way, Steve, is to bridge you from the $11 million number that we had to the 20 - in the Q2 to the $26 million number. And think about our corporate expenses this way. On average, they're roughly $14 million to $15 million a quarter. Now there are a number of things that impact that plus and minus over that timeframe. So if I start with the $11 million in Q2, first of all, we had the $4 million of severance expense associated with restructuring the administrative functions of the company. Then we've also had FX remeasurement, spent mostly in the pension plans, which were a negative $3 million variance to the prior quarter. We also had an insurance pickup in Q2 of $2 million, so that would have lowered that expense which we did not get, so that's another $2 million variance. And then we had a $2 million variance for disposed ops accruals. And then finally, we had slightly higher incentive comp on certain of the long-term plans, a small portion of which are variable in nature. So the high stock price at the end of Q3 caused those expenses to be slightly higher.

So if you take that $11 million, you add that all back and you get roughly to your $26 million. But the way to think about broadly is, we had some benefits in the first quarter and second quarter, so we were below typically where we would see. Some of those went the opposite direction this quarter, so we are above. And we had one-time, the severance expense on the administrative functions to get there. But roughly speaking, $14 million to $15 million. And you'll see there's a lot of things that will cause variability, plus a minus on that number from a quarter-to-quarter basis.

But $14 million to $15 million is the quarterly run rate we should kind of model?

Right. And unfortunately, they seldom be $14 million to $15 million because there are these different things that will impact us and others which not are necessarily under our control from a quarter-to-quarter basis.

Okay. So switching gears a bit. At the end of Q2, if my memory serves, you expected a 45%, 55% ratio for EBITDA?

Correct.

First half, second half. It doesn't appear that that's going to transpire So is it base to lumber and duties that has changed? Or what's surprise?

Yes, so to take you back, 45%, 55% in the high-purity cellulose segment. So that is the only segment we gave that guidance for. And 3 - and 3 things have impacted that. One is wood prices were - are higher than we had envisioned at that time. 2 is we have the tariffs, and 3 is we have resin, the sale of resin, so we won't be getting the fourth quarter EBITDA from that sale of resin. So we'll be modestly below this quarter's EBITDA in the high-purity segment. So instead of 45%, 55%, it will be slightly below that, maybe a 47%, 53% or something in that ballpark.

So that resin business that you sold was reported in the high-purity cellulose?

Correct.

Okay. I wasn't aware of that. Are there any other gems that you have like that even though we don't know about that business?

No. And again, that's a small number. That is - typically, have done $3 million to $4 million a year in EBITDA, so it's relatively small business within there.

And the spiked? Sorry, go ahead.

The second half of the year is going to be stronger than the first half that we guided on this is the factors that Frank listed out here, tariffs, would cost, the rest of the business deal. Our guidance of that 45%, 55% it just shifted a little bit and call it about 53%.

And the spike in wood costed, I mean would you attribute that specifically to the hurricanes? Was there any hurricane impact whatsoever? I don't think Jesup or up beach were in the past, but maybe there was an impact from saturation of wood baskets?

I would call it more broadly than that. I wouldn't specifically say that the hurricane that came through recently. But just the weather patterns that we've had here in the U.S. Southeast since late spring, a really wet summer just slowly accumulated and restricted some of the harvesting and therefore have driven up that would cost beyond what we just anticipated. And now we are seeing that kind of come through in the third quarter.

Okay. And I have one other question and I'll turn it over. And you kind of touched on it, but it was about the capabilities of Tartas and Temiscaming. If, in fact, these duties persist for a long time or they're perpetual, can you get qualified to do acetate at those two other facilities if it makes sense?

The short answer to this, certainly, we believe so. Steve, as you know, we've got a great relationship in China. We've had our teams working together for 30 years. We've got technical experts on the ground there and often in and out there. So we know their processes well. We know our processes well. We've got a set of customers that are completely aligned with us in terms of, let's try to make something happen and in case we need to, and so we're working with them on both east, two operations outside the U.S., Temiscaming in Canada and Tartas, France, on products that they can also use in their portfolio. So we're working on that now. We hope to be successful. But again, it's a contingency plan that we hope we don't have go to unless it's really, really necessary.

Yes. These tariffs are a little bit beyond both your pay grade and your customers pay grade, so they would understand if ultimately you'd decided to switch supply.

Look, they are again a good loyal set of customers and we're working with them closely and they are incredibly cooperative on this. They've got their full engagement to make whatever we need to make happen. And you're right, all these tariffs are beyond our control, so we can only do what we can control, and we'll be prepared for whatever happens.

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

Just a question on the tariffs impact. Was there any duties paid in Q3?

No, it didn't kick into September 24, I think. So basically, no, Paul.

Okay, okay. And then I'm quite confused on the commodity side, the viscose and fluff, just volumes. So you've guided the 2% down, and I suspect that is a year-over-year comparison. And I see that you did 307,000 tons in 2017 to be able to hit that 2% down, you're going to have to do, it sort of implies 113,000 tons in Q4, which is up a huge amount from the 70,000 tons you did in Q3. So what am I getting wrong here?

I was going to say, that's really the math that you're working on.

So the math is right then?

Based on what we see, yes.

Okay. So like one of the things I think I missed in the quarter because I thought your volumes would be higher on the commodity products side was with this decline in sales specialty volumes, I thought you'd be able to produce a little bit more on the commodity side. Should I have that assumption going forward, or are they both independent?

Yes. I think what you've seen in the first couple of quarters, Paul, is we talked about some production issues we had in the first quarter, so production issues typically will impact our commodity volumes. So you saw a little slower commodity volume sales at that point, which you've seen it starts to pick up.

Okay. And just the 21% drop in newsprint volume, I think you made the comment that a downtime, you took the downtime to meet some Ontario energy requirements. But there wasn't an impact on EBITDA? I'm just trying to understand that.

Yes, Paul. Go ahead.

Okay?

Yes, Frank, go ahead.

Paul, when you look at the teams of it, we have to work very closely to manage the energy consumption of that facility. And so we will take energy down time to deal with energy curtailment and the like. And when we do that, we typically don't have a negative variance or material negative variance from an EBITDA perspective.

So are you [indiscernible] for taking down time?

Yes. I mean it's the use of energy and when they get peak demands and there's an opportunity for us to help out the province in that way, so we'll slow down our consumption, and therefore, there's a benefit for us to do that, obviously.

Okay. And then just turning on the lumber side. I appreciate that, that's not a big business for you. But we've seen a number of curtailments BC just wondering if you've seen anything around your mills in Ontario and Québec.

Yes. We've just seen small a little bit, obviously not a significant amount. We've slowed some sales down based on the market a bit ourselves. Also, we had some capital projects going in, so we took full advantage of the fact that the market wasn't as robust and worked on the capital projects, so we had again a drawdown on our sales for the quarter as a result. But no, Paul, I wouldn't say we haven't seen anything significant part on the eastern part of the country.

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

I just actually tag along from some of the commentary. How much advance notice DA have to adjust your energy usage at the facility?

Well, it's typically, John, a very quick response that we have to make, right? So you're looking at, based on what we think could be rather low peak days in the afternoon, and we may get a call and say, look, guys, we need some support, and this is a new large user in Ontario gets is in the same type of program. So we have responded within a very short amount of time, less than a few hours.

So do you keep inventories on hand to compensate for that?

Yes. I mean these are quick downtimes and wrap again, I these it could be less than 24 hours and then we're back up.

Okay. And then just on the inflation side of things. What are your expectations heading into 4Q there? And then also, what are you thinking as far as 2019? And how that would compare to 2018 as a whole?

Yes. Inflation in terms of commodities were quite high this year. I won't put wood in the inflation, even though costs were up in the third quarter, that was more a weather-driven event, but our chemicals, specifically caustic, were up materially this year versus last year. We would believe that overall inflation would be modestly lower than it was this year just because we saw such an uptick in some of the key commodities. But again, wood is off in the wildcard and it's our biggest input globally across the business, so that could change things. But generally speaking, we've said before 2.5% to 3%, and I think that's - at this early stage that's about as good as we can call it.

Okay. Is there a way to put a dollar figure on what inflation is so far this year?

I don't have that in front of me, so let's look into that and get back.

Okay. Sounds good. And then a follow-up on forest products. How much of the decline in volumes was from the downtime there?

The decline in volumes through the downtime, I'm not sure we've broken it out exactly that way, so but I think it's a considerable amount of the downtime.

Okay. And then also, just on the temp segment, it seems like you're expecting breakeven profitability or maybe a modest loss there. What are your underlying assumptions around that, particularly on pricing?

So John, the assumption basically is it you look at the comment, over 50% drop from our peak earlier this year, and so we're looking at - if we were operating at last week's level of pricing, which is obviously very low, going through the quarter without a lot of change there, that we wouldn't have this kind of breakeven or modest loss in this business. Obviously, we've had some, I think more positive messages out there in lumber that the thought is we've reached the bottom here we should start seeing a little bit of rebound and that would be a benefit to us obviously and the incremental, the plus to the EBITDA comment that we made.

Okay. So a kind of flat, flattish to maybe slightly up a little bit from here would be reasonable?

Yes. That's what we have in there now. If it does better than that, obviously, [indiscernible].

Okay. And then just last question before I turn it over. Just how should we think about the earnings impact from capital improvements in 3Q? And then also, is any of that carrying over into 4Q? So in other words, are you still in a cusp of completing these capital improvements, or were they completed during the quarter?

We've got capital improvements going on throughout the year. So I think we reported something similar on the order of magnitude of $30 million in strategic projects and another $65 million or so in maintenance. We've said before, $145 million to $150 million in capital. I don't think we'll spend all of that this year and book it as capital, so we'll probably be modestly below that, but you'll continue to see capital projects through this year. And in fact, we've got a number of investment capital projects, strategic projects with quick returns forecast for this year as well. So I think that, that rough level of capital expenditures in the $140-ish million range is probably still reasonable going forward.

I'm sorry, I was actually I'm referring just to the forest products segment there.

Sorry about that. Yes. The forest products segment is roughly - of our strategic capital, they're roughly weighted equally into high-purity cellulose and into our forest products roughly, and we will continue to see spending in that forest products both this year and next year.

And John, you'll see the full benefit - a lot of these capital projects and as you builds your model have gone late this year. So you're not going to see a significant amount of benefit in the fourth quarter in the forest products here, but they are going and they're are coming up to speed, so you will see the benefit in 2019. And you should see it accumulate then into 2020 and beyond. So again, we're just getting them in and rolling here on the back half of the year should be again, you'll see the benefit of that in 2019 going forward.

[Operator Instructions]. Our next question comes from the line of Chip Dillon with Vertical Research.

This is Salvator Tiano sitting in for Chip Dillon. So my first question is a little bit again on the corporate expense, that you provided a very detailed bridge, of noise there. But the medium severance payment, if I understand correctly from your tables, you adjusted on the EPS line? And I'm trying to understand if you can give us a little bit more details as why these are considered one-time nonrecurring item that we should exclude from EPS. And is it related with the Tembec acquisition? Because I would assume some of these initiatives would have happen essentially closer to a year ago when the transaction I think closed almost exactly to the day 12 months rather than a year later. So that's my first question.

Okay. So there was some, last year, really associated with the CEO and the CFO of Tembec, so the senior leadership. What we had to do this year is we had to go through an analysis of their organization relative to our organization. We are very centralized on the G&A line. Tembec tended to be very decentralized, so we went through a project where we identified the jobs and what we could relocate down to a central office and then identify the consolidation and mostly in finance IT and HR. And at the end of that, in August, we made a decision around what that the organization would look like, and we communicated that the organization. So that is really behind us that G&A organization within those 3 functions. So that's why that is - that's why we see it through the coming quarter and we don't see any further reorganization in this general and administrative functions.

That makes sense. And what is kind of a quarterly or yearly benefit, I guess, on the SG&A I would assume from these initiatives starting in Q4? And how should we think that will be split between segments and corporate and allocated expense?

So a lot of this, you will see in corporate, most of it will be in corporate. These - you won't see a lot of it in Q4, importantly, because, as we move forward in Q4, these jobs will be rolling off, so it's not like the jobs were eliminated immediately. They will be eliminated through the quarter and actually through the first quarter of next year, and that you'll the full benefits of that. The run rate benefit of that is roughly $5 million a year.

Perfect. And just to switch a little bit gears on the loans. I know again you don't provide, especially in high purity cellulose detailed guidance until Q4 results. But I'd say the change in guidance specifically Q2 versus Q3 I think commodity products now you expect to manage 2% from flat and say 1% to 2% decline in lower, I guess, volume change in the cellulose subspecialties. And given that this is essentially one quarter remaining, trying to understand what that means for full year 2019. Is it - I would assume we don't take a 2% decline in commodity products for 4Q - stemming from 4Q alone as extrapolating it for an entire year. But how should we think about the effect for 2019? And out of this 2% decline versus your guidance volumes, how much did you experience and we already saw in Q3 versus what you expect in Q4?

So I just want to make sure - let me answer the question as I heard that, Sal, and you may ask for further clarification. First of all, don't - we're not trying to find anything on 2019 with our guidance for the fourth quarter. The commodity volume, again down 2%. This is a very small percent if you back into what that volume is. It's not a lot of tons we're talking about, but we're going to be slightly below where we were 2017, so we came out with that guidance. To be honest with you, it can be caught up on the water even an ocean freight at year-end, and so it's going to be a very negligible amount. So I wouldn't try and read a lot how this is projected into 2019. It's more a bit of a comment on perhaps how we ran earlier in the year in terms of commodities than it is anything else in that regard. So I wouldn't read into that. Second of all, just again back on the cellulose subspecialties side of the high-purity business. It is very focused commodity declined a bit - or sorry, it's focused on a volume decline from the prior year to a relatively few amount of customers, and principally, as we talked about, we have a particular customer that also sells into China as we do directly and they are experiencing a little bit of the push back on volume and that's really what's translated into our heightened decrease in to our expectations for the balance of the year and nothing more than that.

Perfect. And just last question on the high-yield pulp actually. You talked in detail about the effect of tariffs and the volume issues in the high-purity cellulose. But as we think about that segment, can you tell us a little bit more about what percent that goes into China? What effect you may have seen from potential tariffs on your net backs? And a little bit, can you comment on the benchmarks over there? Because we did see I think a sequential decline in Q3 in your realizations and you expect stable pricing. But when I look a little bit on Chinese benchmarks for chemical teams like it's been drifting lower in the past few months, a little bit more than we've seen so far. So what can you - what information can you provide on that?

I just make a few comments do not ask Frank to make a comment. These high-yield Paul producers are Canadian producers so they're not caught up in the U.S. China dispute. So there's no tariff issues related to that. So 1, that's not again to the question. When you ask the markets for these products, it's mainly by Europe, China, Korea, the part of the top 3 regions or countries that we sell to with high-yield pulp. So again, no tariffs, those are the top countries. Frank, anything else you'd...

Yes. And I think that's fair. And we said roughly stable pricing. Remember that these benchmarks have been selling potential dips going forward since the beginning of the year. And since those haven't happened, they just continue to adjust outward their forecasts from that perspective. So there is some thoughts that there could be a modest dip. We haven't necessarily seen it at this point. And remember, we're well through Q4 from a shipment perspective in high yield. So a lot of the dips in the future won't impact Q4 if they, in fact, transpire, which we continue to see some strength in our most markets.

There are no further questions in the queue. I'd like to hand the call back to Mr. Boynton for closing comments.

Okay. Well, thank you, everyone. Thanks for joining us today. Look, we're pleased with the steady progress that we're making on our strategic initiatives, and we remain committed to driving incremental value for our shareholders. So we look forward to updating you on our progress in a timely manner as we move forward, and we'll talk to you soon. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.