Rayonier Advanced Materials Inc. (RYAM) Q1 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the Rayonier Advanced Materials First Quarter 2019 Earnings Conference Call. During today’s presentation all parties will be in listen-only mode. [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. Thank you. Mr. Walsh. You may begin.

Thank you, operator, and good morning, everyone. Welcome again to Rayonier Advanced Materials first quarter 2019 earnings conference call and webcast. Joining me on today's call are Paul Boynton, our Chairman, President and Chief Executive Officer; and Frank Ruperto, our Chief Financial Officer and Senior Vice President of Finance and Strategy. Our earnings release and presentation materials were issued last evening and are available on our website at rayonieram.com. I'd like to remind you that in today's presentation, we will include forward-looking statements made pursuant to the Safe Harbor provisions of federal securities laws. Our earnings release as well as our filings with the SEC 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 15 through 18 of our presentation. I'll now turn the call over to Paul.

Hi. Thank you, Mickey, and good morning, everyone. I'm going to start today by addressing the key issues impacting our quarterly results as well as our initiatives to mitigate them before turning the call over to Frank to review our financial results. I will then return to discuss our strategy to drive growth and value for the Company. Look, first quarter results were disappointing and driven primarily by two key events. First, we had unplanned downtime due to boiler reliability in our high-purity cellulose plant in Temiscaming, Canada. This is a relatively new boiler constructed and brought online in 2015 by a global leader in industrial boiler design, which has been running well until this past quarter. However, due to some unique features of this design coupled with certain maintenance practices that were initiated during Tembec ownership, the economizer section of the boiler failed, idling operations and causing us to lose about 25 days of operations in the quarter in Temiscaming, costing us $10 million of EBITDA, primarily in higher fixed costs and lower energy sales. The economizer allows the plant to maximize steam production to run our mill and drive turbine generator to produce electricity. Our team has studied the issues impacting the boiler and has put in place a solution as part of a broader permanent plan to optimize reliability. The solution should allow the mill to run at budgeted levels, until we install new components which have been ordered during our planned outage in May of 2020. The second key issue is hardwood costs and availability in the U.S. southeast, affecting our Jesup, Georgia plant. We experienced restricted supply for hardwood due to abnormally high and prolonged rainfall that began in late last summer and continued throughout most of the first quarter. These wet conditions made it difficult and more costly for our suppliers to get into the forest and harvest hardwood. Historically, we have successfully employed a hardwood sourcing strategy using satellite shipping facilities throughout the region to leverage our wood inventory levels and maintain lower and more stable hardwood costs. Now despite benefiting from the strategy for over a decade, we were unable to fully mitigate the impact of sustained wet weather. Ultimately, with severely depleted hardwood inventory levels, we were forced to take production downtime at Jesup during the quarter. As a point of reference, we are aware of six other pulp mills in the U.S. South that were also forced to take downtime due to the inability to procure hardwood. As a result, the impact of higher wood costs and lower loss production cost us $11 million of EBITDA in the quarter. Since the end of the quarter, we have already rebuilt our hardwood inventories by more than 100,000 tons, a level that we believe allows us to lower hardwood costs throughout the remainder of the year. Now on top of these two operational and raw material issues in High Purity Cellulose, we experienced a $14 million decline in EBITDA due to lower cellulose specialty sales price, including $3 million from tariffs. Despite the 7% year-over-year price decline in the quarter due to the tariffs as well as higher priced 2017 shipments recognized in the first quarter of 2018 and sales mix, we still expect full-year cellulose specialty sales volume and price to remain stable versus 2018 levels, with approximately a 1% to 2% decline for 2019 excluding the impact of any Chinese tariffs. Therefore, prices are expected to be relatively flat to last year's comparable periods for the remainder of the year, again excluding the impact of any Chinese tariffs. Lastly, market pricing for our commodity segments, including lumber, pulp and paper, negatively impacted results for the period. Given the pricing declines and logistic issues in Canada, we took market downtime in our forest products and pulp businesses to help manage inventory levels and mitigate costs. We also continue to find ways to reduce costs and improve our competitive position in these markets. The financial performance in the first quarter does not reflect on the earnings potential of our High Purity Cellulose segment, and I am confident in our team's ability to get us back on track. While the first quarter issues significantly impact our previous guidance, which no longer can be relied upon, the specific actions we are taking to restore our operational reliability and cost structure are expected to improve our financial performance through the remainder of the year. Now with that, let me turn the call back over to Frank.

Thank you, Paul. I'll start by reviewing the quarterly results focusing on net sales and EBITDA and an outlook for each of our business segments. As outlined on Slide 5, high-purity cellulose sales increased by $4 million, driven by higher commodity volumes and a 5 % increase to commodity prices. EBITDA for the segment was $25 million compared to $54 million in the year ago quarter. The decline was largely attributable to the operational issues that Paul discussed in Temiscaming and Jesup and the impact from CS sales price due to tariffs, timing, and mix. These negatives were partially offset by improvements in energy and chemicals as well as sales volumes compared to the prior year period. While commodity prices are benefiting from an improvement in mix towards more viscose volume. For the full year, the operational issues of the first quarter negatively impact our previous high-purity cellulose guidance, which should no longer be relied upon. However, we expect to see significant improvement in our cost and overall financial position through the remainder of the year. Subject to changes in commodity prices and tariffs, we anticipate sequential improvement in this segment building through the year, ultimately returning EBITDA margins to the high-teens during the back half of the year. Turning to Slide 6, sales in our Forest Products segment declined by $24 million from the prior year period, largely driven by a 19% price decline for lumber products and a 10% decline in volume, primarily related to weaker markets. EBITDA for this segment fell $15 million from the year ago quarter, driven by the lower sales price partially offset by the corresponding lower duties paid for lumber sold into the U.S. In the quarter, $5 million of duties were expensed. Since the start of the softwood lumber duties on shipments into the U.S. in 2017, $42 million of duties have been paid. Canadian producers have historically recovered all or a vast majority of these duties upon the settlement of these trade disputes. Looking forward, the lumber prices are expected to remain depressed in the second quarter. However, recent industry curtailments in British Columbia may result in improved pricing in the near-term. Although housing starts have been below expectations for the first quarter, the more stable longer-term outlook for U.S. housing should benefit lumber prices. Turning to Slide 7, Pulp segment sales decreased $15 million, which negatively impacted EBITDA by $12 million. These results were driven by a 10% decline in prices for high yield pulp off of historical highs due to the softening demand from export markets and an 11% decline in volumes due to the corresponding market downtime taken in Temiscaming in the quarter. Looking forward, high yield pulp prices are anticipated to remain at historically attractive levels for the next several years as supply and demand dynamics remain positive, given the lack of new capacity expected to come online before 2021. Turning to our Paper segment on Slide 8. Sales decreased $6 million, primarily due to a 27% decline in newsprint volumes and a 5% decline in paperboard price, partially offset by 12% higher newsprint prices and increased paper board volumes. EBITDA for the segment decreased by $5 million, primarily due to production issues at our Kapuskasing newsprint plant as well as lower sales and logistics constraints in Canada. Looking forward, paperboard prices are likely to experience continued pressure from increased competition, including imports into the U.S., while newsprint prices are expected to decline due to demand weakness until capacity exits the North American market. Turning to Slide 9. On a consolidated basis, sales for the quarter came in at $483 million, down $39 million from the year ago quarter. EBITDA for the first quarter was $20 million, a decrease of $66 million from prior year. The major drivers of the decline in operating income were the previously-discussed variances at high-purity cellulose. As shown on Slide 10, we used $27 million of cash from operations, including $37 million in increased working capital driven by the seasonal wood harvest in Canada. We also invested $31 million in capital expenditures, including approximately $4 million of strategic capital and returned $15 million of capital to stockholders through $9 million of dividends and $6 million of stock repurchases. I should note that these stock repurchases were part of our ordinary course repurchases related to our long-term stock incentive program and not under $100 million open market repurchase program. We borrowed $33 million to fund operations and ended the quarter with adjusted net debt of $1.16 billion and net leverage of 3.9 times net debt to EBITDA on a last 12-months basis. Turning to Slide 11. We continue to maintain a disciplined capital allocation strategy. Given the recent increase in net leverage, our near-term focus will be more weighted towards debt reduction. With that, I'd now like to turn the call back over to Paul.

Thank you, Frank. Turning to Slide 12. While first quarter results were disappointing, they are not reflective of the earnings potential of the Company. I am confident that we have the right solutions and strategies to put these issues behind us, so that we can get back to focusing on our long-term strategy to drive growth and stockholder value. As we outlined at our March 7 Investor Day, our strategy is focused on four key components. First, our go-to-market strategy revolves around realigning assets to the market needs, including reducing cellulose specialties capacity and improving cellulose specialties price and margins to drive long-term EBITDA growth. Second, we will continue to focus on generating value from our four strategic pillars of cost transformation, market optimization, new products and investments. Combined with the go-to-market strategy, these initiatives are designed to achieve long-term EBITDA growth in the high-purity cellulose segment of mid-to-high single digits. In addition and thirdly, we are in the midst of evaluating strategic alternatives for certain commodity assets. We are nearing the end of our market test on these assets and we expect a conclusion by the end of the second quarter. Lastly, we remain disciplined in our approach to capital allocation to generate and grow value for our stockholders. To conclude, we fully understand and are disappointed in the first quarter operational and raw material input cost issues in our high purity business and have implemented plans to address them. We remain committed to executing on our strategy to drive growth and stockholder value to realize the full earnings potential of this business. Thank you again for your time this morning. Operator, if you would please open the call to questions.

[Operator Instructions] Our first question comes from the line of Kurt Yinger with D.A. Davidson. Please proceed with your question.

Yes. Thanks and good morning, everyone.

Good morning, Kurt.

So just starting off on the full-year guide for cellulose specialties pricing. You talked about a nice pickup over the remainder of the year and you mentioned mix, but I believe that acetate and ethers are kind of at parity now. So could you kind of help us understand what that positive mix impact would be?

Yes. So, a couple of things Kurt. One is, we obviously sell more than acetate and ether, so there's other products that are in the mix as well. But what you saw in the first quarter was a couple of things. One is, in the first quarter of 2018, we had some significant shipments that landed in the first – from 2017 landed into 2018, which was roughly $7 million worth of incremental profit. And if you remember, we took a big price decrease in acetate between 2017 and 2018. So if you go forward and look at a pricing deck for the remainder of the year before the impact of Chinese tariffs, those prices will be relatively flat to last year's prices which will take that 7% decline in the first quarter and ramp that down back to our 1% to 2% down for the year guidance.

Okay. Thanks. That's helpful. And then, just on the Temiscaming issues and the hardwood fiber costs, I mean how should we kind of be looking at that potentially trickling over into the second quarter? Is there any way to kind of size those headwinds, I mean, relative to maybe what was experienced in the first quarter?

Yes, Kurt. Let me start with hardwood costs. We talked about this pressure we've seen from hardwood cost and obviously accumulated more than we had anticipated in the first quarter here. And we've noted that our inventories now at hardwood are back to where we've targeted, so we're comfortable with our inventories. However, it will take a little time now, but we've got the inventories in place, prices are still elevated and it'll take time through the balance of the year now to unwind the higher prices and get them back to where we had originally planned. So, I would expect the second quarter to be elevated in hardwood costs. And then, starting to move down in the third quarter through the balance of the year. With regard to the Temiscaming boiler issue, yes, very unfortunate. We ended up wrapping up a solution in early April with that. And so, we had a little bit of spillover on the production issues coming into April. And so, we'll see a little bit of elevated costs, but not like we had in the first quarter by any means. And otherwise, that should be behind us.

Okay. And then just lastly, how much of the year-over-year decline in volumes in the Paper business were kind of attributable to operational or production issues or is it just weaker demand?

I think it's a mix of three things, Kurt. What we saw is some weakness in demand in some of these businesses in the Paper segment in particular, and increased competition from Europe and from the U.S. And so, there was a bit of that on the demand side and the competition side. Secondly, obviously, there was a lower production in those businesses, but that probably didn't impact the overall sales piece of the volume equation as much as significant logistics issues in Canada. So, many companies that operate in Canada in the first quarter had logistics issues as demand weakened globally in some of these core businesses or core Canadian businesses. You saw impacts on warehousing and shipping that just slowed down getting product out to the market. So, it's a little bit of A Tale of Two Cities.

Good comments, Frank. And just can I add to it more and just to clarify that Frank talked about the increased competition in the U.S. and that's really related – on the paperboard side more than anything. And we did have a bit of a spillover on newsprint in terms of operations. We had to take a provincial mandatory curtailment, energy curtailment at the end of December there. That kind of spilled over into the new year. And so, that affected a little bit of our shipments as well, but I agree with Frank, largely driven by logistics issues in the first quarter.

Great. Thanks. I'll turn it over.

Our next question comes from the line of John Babcock with Bank of America Merrill Lynch. Please proceed with your question.

Good morning. I just want to follow up on some of the production issues in high-purity cellulose. It doesn't look like Rayonier is providing guidance for the segment at this point or really any detailed color there? And so, I just want to get a sense for whether there's just too much uncertainty with some of the solutions that you're using until you get the new parts in 2020 or any other color you can provide around that.

I'll let Frank jump into this as well, John. Good morning. First of all, probably that you said we're not providing guidance, but we did try to kind of guide you towards the back half of the year in the high teens on margins. However, here's the situation one, Temiscaming I would not put into the equation other than maybe a little bit of spillover into the second quarter. We should be running at plan for the balance of the year. You always have the potential for another upset, but we think we've got a solution in place that will take us through May of 2020. Probably, the bigger issue is on the cost side and the hardwood costs I was just mentioning to Kurt. And that's a harder one for us to gauge on how that winds down through the balance of the year. They are still elevated. We've got inventories we want. We'll be able to push back in the market here in the coming months. We don't think that push back and decline in prices will really start taking effect into the third quarter. And so, it's hard to estimate that slope of decline on the hardwood cost as we go through the back half of the year. And again, it's always a function of how the weather does and everything else. But it's our plan and we should be able to do it, but it's always just again subject to future weather conditions. Frank, anything you would add

Yes, I’d just add a couple of things John. One is, one of the issues and why we're looking at a ramp-up are two-fold. One is, as Paul pointed out, how quickly the hardwood normalizes and how that comes down over the course of the next three quarters. So directionally, we know that or we feel that getting to that high-teens multiple with sequential, high teens EBITDA margin with sequential improvement feels right. The other thing I'd reference in regards to the second quarter is we have shutdowns in Jesup and Temiscaming. And the Jesup shutdown is completed. It's behind us and we're back up and running with really no material or large variances coming out of that shutdown. The Temiscaming shutdown is a little bit later in the quarter, in June. And so we'll have to do that, but typically we have slightly elevated costs in the quarter or in the first half of the year due to those shutdowns. That's why we typically have two things that we've talked about historically. One is the second half is typically stronger than the first half for two reasons. One is the shutdowns being behind us and two is we tend to have higher volumes and better mix in the second half historically over the last several years and we would anticipate that to be the case as well this year.

Okay. Thanks for that. And then, also if you could provide some details just on the new parts for Temiscaming, how much that's going to cost? And also is there any benefit that you're going to get from insurance here or is that this is all essentially going to be a direct hit trend?

Yes. So again, that planned expenditure will be in 2020. It will be capitalized. Actually, it'll be capitalized over the year, but so John no and we don't expect anything out of insurance on it, but we would again that would be put in place. The components are already on the order, should be here in a few months, we'll have them standing by, but again the plan is to put them into May 2020 and it's going to be in the $3 million range, but that will all be capitalized.

Okay. And also, just a little bit of clarity with that outage. Was there any impact to mix on the cellulose specialties and commodity products mix?

Yes. So, we noted and we've guided now just – because most of that hit on the commodity side. And that was viscose pulp product at Temiscaming. And as you may have noted, we have guided out there originally that we would be north of 75,000 tons. And now, we think it will probably be slightly below 75,000 tons, so that's where the hit will come in as on the commodity side.

Did this happen at the end of March?

We saw signs of it starting in as early as February and we kind of ran in, fits and starts through the course all the way through early April when we finally put the solution in place. So, we kind of limped along. And again, it's one of those, it's hard to gauge. You're kind of back up and running again, then you take it back down to fix another one. And as we're working on and we noted it was around the design of this boiler was a key part of this, and we're making design modifications as we continue to work on it. And it took us unfortunately a little bit long to figure out what the right design modification we need to put in place to give us a solution that takes us to May of 2020. And that solution finally winning again into effect early April.

Okay. And then just last question before I turn it over. If you could just talk about – just that to the Kapuskasin, I can't pronounce that, but that production issue can you just provide a little more detail around that and also the impact of downtime in pulp and other…

Yes. John's referencing the comment made around newsprint in Kapuskasing, Ontario. This is our newsprint facility up there. We had to take a mandatory curtailment of energy. Again, that's outside of our control. Ontario government asked us to take down the facility because it's a user of power and they needed that power. So we took it down under their request and very end of the year and then had to bring it back online in very cold conditions which created a little bit difficult to startup, which as you can imagine up there, it's 30, 40 below Fahrenheit. It's not an easy start back up and we wouldn't normally plan to take it down at that time. So, it was outside external issues that came in and just gave us a slow start. And so, that was part of the volume issue. But as Frank noted, the other part was certainly around an issue that we and all Canadians shared, which is getting just our product to warehouses and out to customers. So it's just a lot of the logistics issues in Canada through the first quarter.

And then the downtime in pulp?

Yes. The market downtime in pulp was in the Temiscaming facility. And it was done because to help reduce inventory levels, as we saw some cooling in the export markets in those pulp areas. So, it will have a modest impact on the cost side of the equation. It likely won't have a material impact or a large impact on the sell side. I think the market conditions will dictate what happens on the sell side in the pulp business.

Thank you.

Thanks, John.

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

Great. Thanks. My question is on the cellulose market on the commodities side? What are you seeing there in fluff and viscose and what are your expectations for the second quarter and maybe for the rest of the year for pricing?

We haven't really put that out there at all, Paretosh. It's in terms of pricing levels on both fluff as well as viscose, but we do see some pressure in those markets as we go forward. I don't think we have guidance necessarily out in the market. And I can look at Frank and he can now tell me if that's different, but probably a bigger part of that is around the mix. You'll see probably some elevated pricing as a result of the larger amount of viscose product going to market. As we said, again, we guided out there originally to north of 75,000 tons incremental over 2018. It will be probably likely slightly below that. So that will probably drive the bigger change that you'll see over – year-over-year on price, as we move to more viscose in that mix. Frank, any other color...

I think that's accurate.

Got it. And then – sorry, go ahead.

Go ahead, Paretosh.

No, just actually different topic on. In the Paper business, I think it sounds like you're saying cost in Paper business should go down going forward. Did I hear that right?

Well, we won't have the same operational issues in newsprint. We don't anticipate those based on the start-up, which obviously impact the cost side of that equation, but we haven't given specific guidance on the paper cost piece.

Understood. Thanks.

And Paretosh, I would just add to that. The costs in these facilities are generally driven by the reliability of the production in the facilities. So if we run well, the costs look better.

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

Hi, this is Salvator Tiano filling in for Chip. How are you?

Hey, good morning.

Good.

Good morning. So my first question is a little bit broad based, but this is – since you bought Tembec last year also you had issues, some reliability issues I think with Tartas. You've spoken about how the mill in France will also see for at least one year perhaps two or three elevated wood chip costs. And it seems like – and you have both Temiscaming now and Kapuskasing. So are all these issues that are coming online like the energy curtailments periodically I guess with the newsprint mill, the wood chips, the different maintenance approach and the unique design of the boiler, are you aware about all these issues when you acquired Tartas or Tembec or did you discover them gradually as they essentially came up? And secondly, also in Jesup I think, you also had in 1Q of 2018 some issues. Does this mean that your $100 million maintenance CapEx has perhaps to be adjusted higher to prevent these things going forward?

Well, it's certainly the $100 million of maintenance CapEx that we have in place certainly has to be prioritized appropriately and we are prioritizing around these reliability issues. As you've noted, we've got four large facilities now that produce high-purity cellulose, Tartas, France and Temiscaming and Jesup and Fernandina, in Georgia and Florida. And they are very complex, very large fixed asset facilities, by and large they do run fairly reliably but there are indications when they do go down, it does create obviously as we noted here an issue. We are still discovering some things, but we believe that overall through the acquisition that these facilities – these issues are being addressed and that will be able to run more reliably as we go forward. But this was just one which just happened to discover, Salvator, that on the Temiscaming issue that we were not aware of. And it's not a normal due diligence type of thing that you would find in the process. These are – this is a relatively new boiler as noted five years old, ran well and never had an issue until again this time and we opened it up and we saw the issues and we solved the maintenance procedures. So, we have to correct those. And you noted the last year, one in Tartas, there was a sulfur burn. That's been running just fine for 40 years straight. And unfortunately, it failed right after our acquisition. So yes, there's always unfortunately a little bit of one-offs. We're trying to plan that into our budgeting process. But the bigger thing is that we prioritize our capital to get these facilities running more reliably going forward.

Yes. And I'd just add to that Paul. And I think you referenced this. These are large fixed cost assets and they have very high operating leverage. Hence, the cost benefits, when they're running well. We also have significant concentration on certain key inputs like wood and caustic. And so, as a result, quarterly financial performance can be volatile in nature, but these mills also have the ability in certain years to make up some of the shorter-term issues. In this last quarter, Temiscaming and Jesup hardwood, just the order of magnitude of those issues are unlikely to be made up through the rest of the year.

Okay. That makes sense. Just to clarify a little bit on Temiscaming. Is there a – I think the $10 million impact that you said, was it almost exclusively from the higher cost of goods sold due to lower production or was there any material expense also you incurred during the quarter to – for this – from this issue? And you didn't know that the issue was fixed in early April, but just I guess given your – still very good commodity products volumes in 1Q, I imagine you sold down a lot of your inventories. So as we think about 2Q cost of goods sold and unit costs, how much of an impact should the elevated unit cost of Temiscaming have? And I'm not talking again about the fact that the line came online in early April, I'm talking just about how the cost of goods sold will flow in the second quarter.

Yes, Salvator, I think good question. So the vast preponderance of the expense on the Temiscaming boiler was related to the lack of production. There was probably $1 million to $2 million in maintenance expense because we fixed it on the run. We don't capitalize those fixes, as we look at that. So that's a key part. But we will have some higher cost in Q2 because of the shutdown we referenced earlier, but most of the costs that goes into inventory would have hit in Q1 as we took that hit. So really what you're going to see is more the normalized shutdown quarter type of costs, not necessarily a very large spillover, although Paul did reference, we did go a little bit into April with these – with the issues.

Okay. That makes sense. Just a little bit to clarify on a couple of the other segments. Firstly, on pulp and I know in the slides, you mentioned – you talk about the Bleached Eucalyptus Kraft benchmark, but you have the asterisk that probably BCTMP is more appropriate grade – comparable grade for what do you make. There was a noticeable decline in your realizations. And I think BCTMP price, especially when you look abroad in China, they started declining in early-2018, kind of in line with what you're realizing. I think your highest quarter was 2Q 2018, but they kind of flatten at the end of 2018. I don't think there was any material decline in 1Q, so how did we end up with this lower realization? Is it perhaps not – even though that's the product you make, it's not the best to track pricing, or is it the nature of your contracts, any discounts that you had to give in addition to list pricing or any I guess any long-term contracts that protected you from further declines? How should we – what explains the steep decline in 1Q?

Yes. I think and I'll have to double check my numbers here, Salvator. I think you saw out there in the industry about a 10% decline sequentially and we experienced basically that same impact. If you referenced in our materials on Slide 20, you'll see that noted there. And so going forward, we talked about, look, I think most of the industry has these products priced in a pretty stable environment going out with increasing through the back half of the year. And we fully align with that in our expectation. So I think if you look at it – we can always talk offline and look at the indices out there, but I think we were right in line with the indices.

Okay. That makes sense. And just – I think a couple of – last question. So firstly on newsprint, it was mentioned that obviously prices will decline unless there's capacity leaving. How – what's the kind of the effect of – I think it's White Birch that restarted temporarily newsprint mill and it closed it just a few months later. Essentially, is that going to help, or they barely produced any commercial newsprint, so it didn't really – their exit doesn't affect the supply and demand balance?

Yes. I think the latter, right. I think it came on for a short period and came back out as it should have. So I think right now, we're in a position where – and again, we've got a very low cost facility in Kapuskasing there that we would expect through the course of the year. That you'd see some announced closures, as prices continue to decline, which is kind of a trend if you look over the last couple of decades, this is what happens, prices start to weaken, someone falls out, they stabilize, maybe go up a little bit until the next – until the market and demand pushes against that. And then it happens again, repeats itself. So that's kind of where we are right now. We're going to see a little bit price decline until the next player decides to go ahead in North America and shut up shop.

Okay. Just one last thing – last question before I turn it over. I think obviously fluff pulp prices have been going down. And viscose, we personally – the price is not as clear obviously for a commodity viscose. But I think prices, from what I understand, have been also trending lower. And actually the automotive products, your realization was pretty strong. Was it mainly an effect of mix? And based on what you realized in Q1, is it safe to assume that prices can only go down from that level?

Yes. So Salvator, good observation. So we did have mix going so more viscose in the quarter, as we sold down some of the inventories from the previous year. So we had a higher price realization due to that mix. You did see prices moderating through the first quarter, we’ve seen with this moderation in some of those areas more recently.

Great. Thank you very much.

Yes. Thank you. Nice questions.

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

Thank you. Good morning.

Good morning, Roger.

On Forest Products, would you be willing to provide any view of whether 2019 EBITDA would be around the flattish area, or somewhat positive or negative?

Look, we kind of – we've talked in the last calls. I'm just trying to think of what we got out there, Roger, in terms of our pricing. As you can see, we took a quarter here of negative $3 million EBITDA. And we said – and we expect that Q2 pricing will be somewhat similar. So as we look at the balance of the year, outside of improving our pricing, you can kind of go ahead and project that on now. But overall, I think again, we're sitting slightly below where we would call break-even, again without the duties being returned. And so, I think if you kind of look out of that year, I think that's a pretty good benchmark to kind of approximate where we could be the year. Most folks have lumber prices going up in the back half of the year. And of course, then that would put us on a far more positive position going forward.

Yes. And I think on the last call Roger, we put out some directional guidance on under more normal operations. Under normal operations of those mills are break-even as in the – in our realizations in the $410 million to $420 million range. And so, if they're trending below those numbers, you'll probably see modest negatives. If they're trending slightly above it, we should start to, given normal operations, break-even and produce profits.

Thank you for that. This next question I recognize it'll be hard, given how difficult what you said it can be to figure out the timing of pricing for the Jesup hardwood lumber. But how should we think about working capital inflows or outflows for the rest of 2019, the last three quarters?

Yes. So we have a targeted program to reduce working capital. The first thing I think that's important to realize is the first quarter is always our most negative because all of the Canadian harvesting and round log build for lumber tends to be in that first quarter. And that was roughly $30 million in net cash costs. So, we just need to remember that, that over the course of the year, should decline as that lumber – as that round wood gets turned into lumber and gets sold. So that should help. Additionally, some of the market weakness has caused some of the inventories in our commodity businesses to be at higher levels than we typically would target. And so, we're working to sell down those inventories as we move forward. In some of the weaker markets, we may, as always, look at should there be some market downtime to deal with those inventory levels. But the goal is to increase the cash flows for those businesses both through the change in the working capital – positive change in the working capital as well as the improved profitability in the business, as we get some of these operational issues behind us.

Got it. And lastly, how you think about share repurchases here? On the one hand, you're obviously working through these various issues. On the other hand, you have – moving your stock price. Thank you.

Yes. Roger, right now, coming out of this quarter, we're levered at roughly 3.9 times net debt to EBITDA. That's greater than we would typically like to see. Our target is 2.5 times. We've ran for the first – last four quarters right around three times and we're comfortable buying back some material shares in that leverage area. But I think when we sit here at 3.9 times, our primary focus is going to be on reducing those leverage levels.

Thank you very much.

Thanks, Roger.

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

Yes, thank so much. Good morning guys.

Good morning, Paul.

Sorry if I've – if you've described this before, but I had three conference calls on the same time and I'm sort of one year short of being able to be on all three calls at the same time. So, you're much in line with what we expected on lumber high yield pulp and paper, as it was really on the cellulose specialty side. So just diving into the two issues there on Temiscaming and hardwood costs, the delta on the hardwood costs $11 million is a lot higher than I thought. What kind of percentage increase is that over their quarterly spend on hardwood fiber?

Yes, that's somewhere on the order of 25% higher on obviously our largest input going into that Jesup facility.

Okay. And then, you covered Tembec for a number of years and call it, through their boiler construction. So it's a very new boiler. Just wondering what the specific issue was at the boiler? And it sounds like – because I hopped in this call later, you've got a solution that you're going to be implementing mid-2020, maybe you could just help me to understand that.

Yes. Paul, let me just clarify a little bit, but you're right. It's a five-year old boiler, put in by a very reputable builder, but really quite honestly, a very poor boiler design. And really it's around the fluid flow of the gas is going through that boiler, which causes greater than anticipated and needed erosion, which creates a thinness on these tubes that are inside, so causing it to fail. That was one part. So we've tried to put temporary – put a solution in place that allows and alleviates that issue. The second part is just how was it being maintained. And we've got a very rigorous and legacy RYAM – a very rigorous process on how we maintain our boilers. And we put that practice now in place and Temiscaming as well to follow that soon. And we think that, that was a key contributor unfortunately to the failure. So those have been remedied and a permanent solution on the actual design is going in place in May of 2020. And by the way, we found another exact design boiler that another producer had that they had to go through the exact same thing a couple or three years ago. So, we have followed their lead on how we're redesigning that. So those are the two components of that. It's really, one around design and the other one is quite honestly is how it's being maintained.

Okay. And then, last call, you talked a little bit about the potential non-core asset sales. I think in your release, you referenced you should have some kind of decision by the end of Q2, is that a sale decision or is that a decision as to what to do with the assets and which assets?

Yes. Let me just talk about it this way. Yes, we talked about this when we spoke originally to investors about going through this process, right. This is one we communicated a process, when we actually made the acquisition. Once we've stabilized and ran these facilities and really understood them well, we'd make sure that we're the rightful owners of all these assets. And at some point, we do this market check. So, we're going through this market value check right now. I'd say we got good interest out there in these various certain commodity assets. And the real question is the value compelling for either us to release them or there is more compelling for us to keep these facilities in our ownership. And so, we'll have more information to share again hopefully in this quarter of what that decision is once we really understand the value that we see out there.

Okay. And then, just last question just on capital allocation. I understand the leverage is up at 3.9 times, but your stock most likely today will come under some pretty significant pressure. And it certainly represents a decent opportunity to be able to do some buybacks. If you think that these major issues are one-offs and which sounds like they are pretty much there. Why would you buy back stock at this point? Is it just fear that you're going to get another couple of one-offs going forward?

No. Paul, it's not that issue at all. And obviously, we consider all pieces of our capital allocation, but we're going to focus on debt repayment. I think you've got to take into account that we're going to be anniversarying very strong commodity quarters in Q2 and Q3 of 2018 relative to today. And so, we've got to be very focused on making sure that we maintain leverage levels that makes sense. And to the extent, we feel comfortable that that's going forward. Then obviously, the other key components of either buying back stock or investing in high return projects will be on the table as they always are.

That's helpful. Thanks.

Thanks, Paul.

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

Good morning. Can you hear me?

Yes. Good morning, Dan.

Terrific. Just on the boiler issue again, not to give you a hard time or anything, but you said it began to manifest in February at the Analyst Day, March 7. Just wondering why you didn't at least somewhat begin to mention that to the investment community at that event? Do you think it was just something at that point was just minor gas flow issue that you thought you were going to be able to surpass? Or was there something specific to the operational structure?

Yes, Well, Dan, as you know, we don't give quarterly guidance. We do give annual guidance. And our policy is not to update that guidance. And our business historically can experience both positive and negative changes relatively quickly. And the magnitude and duration of the changes is uncertain by nature. And so, we buy a lot of raw materials, which can impact that so to the hardwood and some other things. We see swings in other directions in chemicals and energy. In regards to the facilities themselves, they typically – these are big large fixed assets and they can experience disruption generally shorter term in nature. And as Paul pointed out earlier on the call, we were up in fits and starts a little bit here through the back half of the quarter. And so, at that point, we didn't have the full picture on where that was going to end up. And obviously, we've said that continue to dog us through most of the quarter.

Right. Okay. Now I totally understood. And then quickly on paperboard prices, it sounds like your near-term is somewhat cautious. Can you reconcile that with more bullish outlook you provided on your Analyst Day slide deck on paperboard industry pricing over the next couple of years in Temiscaming plant?

Yes, I was quite sure we talk about the paperboard. What we just noted in this call, Dan, is around paperboard coming under some increasing pressure and we think a lot of that is just kind of some of the global macro environment. Right now, people are trying to find a home for paperboard, putting more pressure here in the United States on our product. We did provide in our deck materials that industry folks, market indicators out there have that going up over the next couple of years. We have not fundamentally gone back and revisit that or taking a look at that to say is that any different now. The only thing we say is look we're seeing more pressure in the market than we anticipated through the first quarter. And we tend to believe it's largely related to some of the issues in China as everybody is trying to find out a home for their product and just putting pressure back here on the U.S. from some European producers as well as some U.S. producers. It's just trying to changing the dynamic out there. We'll have to give you an update on does that change our future outlook at all. And we'll also of course, watch what folks who are out there saying in terms of the industry analyst and VC and others on their projection of paperboard pricing. But we have not gone back out there and say, hey, look there is a fundamental change in any way. So right now, we're still investing on the fact that we've got some pressure, but it should be lifting as we go forward.

Yes, perfect. The VC data still cause long-term outlook. It appears very bullish. I just wanted to check with you guys. All right. Thank you very much, and good luck with the rest of the quarter.

Yes. Thanks, Dan.

[Operator Instructions] Our next question is a follow up from Chip Dillon, Vertical Research. Please proceed with your question.

Hi guys. Salvator Tiano here again, just a quick follow-up on debt and leverage. Obviously, you mentioned how on a trailing 12-month base, the leverage is shooting up closer to four times, and you want to gradually take it down to 2.5 times. Besides obviously, what these kind of a prudent target and making sure that the interest expense remains in check. With regard to your covenants, your – and your debt maturities schedule, is there anything else we should keep in mind? I think with regard to maturity specifically, I don't think there's any big near-term maturity. Is that correct?

There's no near-term maturities. We've got our maturities in 2022 on our first tranche of term loans. In regards to your question on covenants, obviously, we have two covenants on those term loans, net secured leverage of less than three times and interest coverage of greater than three times. And as we sit here and at the end of Q1, we've got approximately $90 million of EBITDA cushion against those covenants.

And just since you mentioned the secured leverage, so how much is the secured debt at this point?

We have roughly $505 million of senior notes. So the remainder is all secured debt. So that would be roughly on a net debt basis, roughly $600 million.

Okay. And the interest coverage is that on an EBIT or an EBITDA basis?

It is on an adjusted EBITDA basis, and our covenants allow for the add-back of certain non-cash items like incentive comp.

Okay. Yes, I mean, so you're pretty comfortable there on EBITDA. Perfect. Great. Thank you very much.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Paul Boynton for closing remarks.

Thank you and again thanks everybody for your time this morning. Look, our recent performance is not reflective of our earnings potential. And our long-term strategy that we reviewed with the investors on March 7 highlights our plans to optimize the portfolio and drive growth for our shareholders. So I look forward to updating you again with a more positive outcome for the future. Appreciate your time.

Ladies and gentlemen, this concludes our conference call. You may now disconnect and have a great day.