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Rayonier Advanced Materials Inc  (NYSE:RYAM)
Q2 2019 Earnings Call
Aug. 08, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Rayonier Advanced Materials Second Quarter 2019 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. [Operator Instructions].

I would now like to turn the conference over to your host Mr. Mickey Walsh, Treasurer and Vice President of Investor Relations for Rayonier Advanced Materials. Thank you. Mr. Walsh. You may begin.

Mickey Walsh -- Vice President of Investor Relations

Thank you, operator. And good morning, everyone. Welcome again to Rayonier Advanced Materials second quarter 2019 earnings conference call and webcast. Joining me on today's call are Paul Boynton, our Chairman, President and Chief Executive Officer; Marcus Moeltner, our Chief Financial Officer and Senior Vice President of Finance and Frank Ruperto, our Senior Vice President of High Purity and High Yield Cellulose Business.

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 two of our presentation material.

Today's presentation will also reference certain non-GAAP financial measures as noted on slide three of our presentation. We believe non-GAAP financial measures provide useful information for management and investors, but non-GAAP measures should not be considered in 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.

Paul G Boynton -- Chairman, President and Chief Executive Officer

Thank you, Mickey. And good morning, everyone. First let me just recognize the changes we made to our senior leadership team in June and introduce Marcus Moeltner, who was promoted to Chief Financial Officer. I've worked closely with Marcus since he joined the company two years ago through the Tembec acquisition, initially overseeing corporate development which has been focused on our ongoing portfolio optimization review, including the recently announced sale of Matane.

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

And as you know, last quarter was Frank Ruperto last earnings call as CFO. In addition to leading our finance and strategy group, which was pivotal to the company's successful cost transformation and subsequent acquisition and integration of Tembec, Frank was a key part of our developing, our go to market strategy. He has very purposely spent significant time over the past five years with our customers developing those key relationships and as a result, I'm excited about the experience and strength he brings to his new role as Senior Vice President of our High Purity and High Yield Cellulose business.

Additionally, Dr. Erin Byers has begun his new role as Senior Vice President of Research and Development. Erin has a Ph.D. in paper chemistry and brings with him 35 years of cellulose technical expertise, which will bring focus and acceleration to our new product development and commercialization process. With this new leadership structure we believe we have the right people in the right positions to deliver more quickly on our growth objectives.

Now before we review our second quarter results. Let me comment on the progress of our strategic objectives, in the context of a cyclical decline in commodity prices, driven by significant macro-economic and trade issues. Our priorities are clear. First, we got to maximize free cash flow. Second, optimize our commercial strategy by securing contracts with key customers at margin enhancing prices. Third, focus our asset portfolio to reduce volatility and maximize returns. And finally, enhance our financial flexibility by negotiating an amendment to our credit facility. We believe we have a good plan to manage through these more than challenging markets and emerge a stronger more resilient company.

Turning the second quarter results on slide four. We delivered sequential growth in both our core high purity cellulose segment and for the company as a whole. In high purity cellulose, we demonstrated improved performance with higher sequential EBITDA, as we ran much more reliably and started to drive down hardwood costs as we rebuilt inventories and took advantage of drier weather. However, the benefits of improved operations and costs are being offset by severe price decline for commodity products, negatively impacting pricing for our high purity cellulose viscose and fluff products, as well as for our lumber, high yield pulp and paper products.

Year to date, price declines have negatively impacted profitability by $85 million. As we face these extremely challenging markets, we're taking immediate actions to preserve our cash flows through working capital optimization and reductions in capital expenditures. With this keen focus, we generated $20 million of free cash flows for the quarter. We are also taking additional measures to improve both profitability and cash flows, which I'll expand upon later. In addition to managing through significant decline in commodity prices, we remain focused on executing against our key strategic objectives to drive long term shareholder value.

Turning to slide five. As part of our portfolio optimization initiative, we announced last week the sale of our Matane facility to strategic buyer Sappi Limited for $175 million, a very attractive valuation. This transaction is a significant step toward mitigating volatility and focusing our business around our core, high purity cellulose business. It reduces our exposure to commodity pulp by half to 240,000 metric tons.

Now please note that we will retain our ownership of our high yield pulp asset in Temiscaming Quebec as it's integrated with the paper board facility and co-located with our high purity cellulose line. The Matane transaction is anticipated to close in the fourth quarter subject to customary closing conditions.

Next I want to provide you with an update on our go to market strategy. As we announced in March, the high purity strategy is focused on realigning our assets and taking commercial actions to improve cellulose specialties pricing and margins. Five months into the implementation of the strategy, we're pleased with our progress. We started the asset realignment process in Temiscaming with this facility slated to produce only commodity viscose and a regulated cellulose specialties product known as microcrystalline cellulose.

As of the second quarter more than half of the cellulose specialties volume that we plan to transfer out of Temiscaming has been moved to other operating lines at more attractive margins. Additionally, we have qualified new customers to accept Temiscaming viscose product, therefore diversifying its end market opportunities. On the commercial front, we typically negotiate cellulose specialty pricing for the upcoming year in the third and fourth quarters. However, we are already seeing good momentum from our early discussions.

Thus far, we have signed two significant multi-year contracts with existing customers at improved pricing and margins over the life of those contracts. We will provide a further update on 2020 price and volume estimates at the conclusion of our negotiations, likely on our investor call in February.

Turning to our commodities, as shown on slide six. Key markets that were very robust in 2018 have rapidly deteriorated, including commodity viscose, fluff and high yield pulp, on the heels of the US-China trade dispute as much of this business is dependent upon Chinese demand. Additionally, wet weather which reduced regional North American housing construction in the first half of the year, along with an oversupply of product caused continued price pressure in the lumber markets as shown. Lastly a 15% reduction in North American newsprint demand drove further declines in prices.

The rapid price decline across these commodity markets has put increased pressure on our financial results. In response, we are taking the actions to mitigate the impact of these declines, including working capital management to improve cash flows, reducing capital expenditures, curtailing underperforming assets and eliminating nonessential spending. Despite these efforts, we will need to amend our current debt covenants in order to manage through these difficult global commodity markets and trade issues.

As laid out in detail on slide seven, our senior secured credit facility contains two financial maintenance covenants. As if the end of the quarter we in compliance with both of these covenants and all debt agreements. However, no near-term recovery in sight we expect we will be in breach of our covenants when we file our third quarter results. Therefore we have engaged in discussions with our lenders to negotiate an amendment to our loan agreement to allow us to navigate the weaker commodity markets.

Now as a reminder, our lenders are well-known commercial banks and farm credit providers with whom we have worked with for many years. As such we expect to complete this amendment in the third quarter. We believe this amendment together with implementing the actions I just discussed, provide us with great confidence of managing through these challenging markets and trade uncertainty.

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

Marcus Moeltner -- Chief Financial Officer and Senior Vice President of Finance

Thank you, Paul. Staying on slide seven. I will start with a bit more detail on our covenants. As a reminder, our key covenants are tied to our senior secured credit facility, which includes $599 million of term loans and a $250 million revolver, of which $50 million was funded at the end of the quarter. These debt agreements are not set to mature until November 2022 for the revolver and $160 million of the term loans with the remaining $439 million of term loans due in 2024.

As of the end of the second quarter, we are in compliance with both of our financial and maintenance covenants. Net secured leverage is at 2.85 times compared to a covenant of less than three times. While interest coverage is at 3.79 times versus a covenant of greater than three times. Note, that in both cases covenant EBITDA adds back or deducts certain non-cash or onetime expenses such as stock compensation and restructuring charges, compared to our reported adjusted EBITDA. Secured debt includes all of our outstanding debt except for $496 million of senior notes which mature in 2024.

Next, I will provide an overview of the quarterly results focusing on net sales and EBITDA and an outlook for each of our business segments. As outlined on slide eight. High Purity Cellulose sales decreased by $16 million, driven by a 1% decline in cellulose specialties sales price, due to Chinese tariffs, sales mix and the sale of the resin business in 2018. This was partially offset by 9% higher commodity volumes.

EBITDA for the segment was $34 million compared to $56 million in the quarter a year ago. The decline was largely attributable to declines in CS sales price and mix, as well as the continuing impact of higher hardwood costs in Jesup and elevated maintenance costs. These negatives were partially offset by cost improvements notably from procurement activities and higher commodity production volumes compared to the prior year period. For 2019 we expect CS prices to be down 1% to 2% from 2018, excluding the impact of Chinese tariffs, as previously guided. However, volumes are expected to decline 4% to 5% due to global economic weakness in acetate and automotive end markets.

Commodity products are also expected to experience continued price pressure as global trade disputes have significantly impacted pricing for these products. With the majority of our planned maintenance outage complete other than Tartas we anticipate improved production and wood costs in the back half of the year. I should note to Temiscaming had a minor reliability upset in the third quarter. Overall, we now expect full year adjusted EBITDA for the segment to be in the range of $150 million to $160 million.

Turning to slide nine, sales in our Forest Products segment declined by $16 million from the prior year period, largely driven by a 33% price decline for lumber products. This was partially offset by an 18% increase in volumes due to increased productivity and inventory reductions. EBITDA for this segment fell $32 million from the year ago quarter, driven by lower sales price, higher transportation and wood costs and the impact of a $5 million write down of inventories to market value.

In the quarter, $7 million of duties were also expensed. Since the start of the softwood lumber duties on shipments into the US in 2017, a total of $48 million of duties have been paid. Canadian producers have historically recovered all or a vast majority of these duties upon the resolution of these trade disputes.

Looking forward, US housing starts and remodeling activity are the key drivers for lumber demand. US housing starts have remained relatively stable on an annual basis, although poor weather has negatively impacted starts earlier this year. With an abundance of supply in tariffs for Canadian producers impacting current prices, we have seen a number of publicly announced curtailments in British Columbia. As such, we expect lumber prices to improve once the impact of these actions reach the market. With lumber prices at current levels, we will also be curtailing production in the third quarter and absent any improvement in prices further reductions should be expected.

Turning to alide 10. Pulp segment sales decreased $13 million, which drove EBITDA down by $15 million. These results were driven by a 17% decline in prices for high yield pulp, off historical highs due to softening demand from export markets. The price decline was partially offset by a 2% increase in sales volumes, as we are focused on reducing inventories and improving cash flow. Looking forward, high yield pulp prices are expected to experience pricing pressure as weakness in the Chinese economy continues amid trade disputes. Prices are expected to bottom in the third quarter, as prices near the cash costs are the highest cost producers.

Turning to our paper segment on slide 11, sales decreased $10 million, primarily due to a 17% decline in newsprint prices and a 15% decline in volumes due to the reliability issues and energy related curtailments. EBITDA for the segment decreased by $4 million as lower sales were partially offset by the receipt of an electrical credit associated with energy curtailment.

Looking forward, paper board prices are likely to remain under pressure due to increased supply from imports as global producers redirect volumes from weak markets, principally China. Meanwhile, newsprint demand continues to decline as industry production capacity remains stable, resulting in continued pricing pressure.

Turning to slide 12, on a consolidated basis first half operating income declined $139 million from the comparable prior year period. We continue to make strides on our strategic pillars and remain focused on meeting our full year target. However, impacts from sales, reliability and higher costs which were mostly incurred in the first quarter are overshadowing the benefits from our cost transformation actions. A majority of the decline from prior year or $85 million was driven by sales price declines, primarily from commodity markets.

Additionally, volumes were impacted by operational issues, including the Temiscaming boiler, hardwood shortages in Jesup and lower newsprint production at kapuskasing which mostly occurred in the first quarter. With these reliability issues mostly behind us, we expect improved productivity and results in the back half of the year. Higher costs also contributed to the decline, driven by wood, transportation and maintenance. Wood costs continue to improve as we leverage inventory levels and take advantage of drier weather. Maintenance costs should also improve with more reliable operations.

Turning to slide 13, sales for the quarter came in at $488 million, down $54 million from the year ago quarter. EBITDA for the second quarter was $29 million, a decrease of $77 million from prior year, primarily driven by lower commodity prices and higher costs. Price alone represented $57 million of the decline from prior year.

With the current pricing challenges, we are focused on enhancing cash flow. We generated $21 million of adjusted free cash flow in the quarter. Adjusted net debt declined to $1.15 billion and total net leverage based on the last 12 months of EBITDA rose to 5.2 times. Cash on hand totaled $90 million. Additionally, we expect to receive a substantial amount of net proceeds from the $175 million sale of Matane, which is expected to close in the fourth quarter.

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

Paul G Boynton -- Chairman, President and Chief Executive Officer

Thank you, Marcus. As you can see, we are facing a number of significant market related headwinds, particularly in our commodity businesses. In the context of this environment we are diligently focused on maximizing our liquidity, running our business as efficiently as possible, generating free cash flow and ultimately reducing our elevated leverage to sustainable levels.

While we expect to amend our debt covenants in the coming quarter, we continue to proactively evaluate other ways to improve our financial flexibility. Certainly, one of our strategic initiatives, portfolio optimization, which has led to the sale of the Matane facility to a strategic buyer, not only narrows our focus to our core HPC business and mitigate some commodity volatility, it also better positions us to reduce net debt and improve leverage ratios.

Additionally, we are fully focused on all of our controllable actions, including very actively managing working capital, reducing capital spending, curtailing un-performing assets and eliminating nonessential spending. We are confident in our ability to manage through these difficult times and we know the company will be much stronger as a result.

Operator, please open up the call to questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is coming from the line of Chip Dillon with Vertical Research.

Howard -- Vertical Research -- Analyst

Hi. This is Howard [Phonetic] [Indecipherable] in for Chip. So my first question is. I'm trying to understand a little bit about the situation with the debt and the covenants, personally if I recall, last time the discussion was that -- sorry, can you hear me?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yes, Howard. Go ahead.

Howard -- Vertical Research -- Analyst

Okay. I'm sorry. The landline I guess was broke down. Sorry. Yeah, on the covenant side last quarter there was -- we discussed that old debt expense for I think $505 million in notes was part of the covenants. And I think the slides what you're presenting now is missing around $90 million in the term loans, Canadian term loans. So what are we missing here, are the covenants actually based on less debt, at around $600 million lesser than the total?

Mickey Walsh -- Vice President of Investor Relations

Hey, [Indecipherable] this is Miki speaking. So yes, there is $496 million of senior notes that are not secured, our covenants are based on a senior secured leverage ratio. That does include the term loans, the revolver that we left there on the page, as well as $90 million or so of what I'll call Cogen debt or debt related to the Cogen facility in Canada, as well as a few other small things such as capital leases.

Howard -- Vertical Research -- Analyst

Okay. So essentially -- yes, it is these two types of debt plus the $90 million, just -- as we're trying to think about. Okay. That's clear. Thanks. The second would be a little bit on how your covenants look given that your [Indecipherable] you know you mentioned yield, that met process should be a very high amount of this $175 million, essentially even though you will be in breach of a covenants by September 30. That won't happen until you filed the 10-Q, I guess certainly in November, so that pretty much means there's a good chance you could be in compliance again with the covenants by the time the Q is filed, even though technically you have to show a breach. Is that the thinking correct?

Mickey Walsh -- Vice President of Investor Relations

So look Sal, let me think if I understand your question. Well, first of all as we indicated in the call that we certainly have discussions ongoing and have had some ongoing with the banks around our covenants and we'll get the amendments that we need, we feel confident that to continue running the business as we should.

The sale of Matane which we think is a good sale not only us but also our partner Sappi in this occasion is just helpful. I would think about it, it's just helpful from a net debt and a leverage perspective. So I would think about it in those terms. So -- and you're right, we should see the benefit of that in the fourth quarter.

Howard -- Vertical Research -- Analyst

Well, just elaborate a little bit. The ideas is that, when we kind reduce some back of the envelope math, it seems that given that you're getting a lot of proceeds. As of September 30 you may not be in compliance, but as of December 31 you may be in compliance.

So I know that that's not how the covenants work if you are breaching them, you are breaching them first, but obviously that could give you a lot of leeway during negotiations. The fact that this a very temporary breach, so that's what I'm trying to understand. Basically in your projections following the sale would you have not breach the covenant or put it simply if it was taking place as of September 30 for sale, would you have breached covenants as of the end of 3Q?

Marcus Moeltner -- Chief Financial Officer and Senior Vice President of Finance

Yeah. It's Marcus here. So to your question obviously given the downturn in the commodity markets that we covered in our call here. Certainly we can't predict how long that might last. So this is all part of renegotiating a covenant package in the context of that runway of a downturn in the markets such that Matane proceeds and our overall business plan will be part of that discussion.

Paul G Boynton -- Chairman, President and Chief Executive Officer

It's really a function of that EBITDA against our covenant constraints. Right? that we talked about. So we're going to -- obviously that's the challenge. And again, if you look at the cash inflows from the Matane deal, that's unrelated to that. So...

Howard -- Vertical Research -- Analyst

Sure. And just as we're looking obviously on cash flow. Is there a kind of indication, I think you're still -- you're working capital still use of cash in the first half, how should we think about the use -- the working capital for the full year and how lows kind of the capex go, you did break it down $10 million, but I would imagine given what's happening it could go much lower, as you know, maintenance can be squeezed a little bit more?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yeah. So let me take the second part of that, and I'll ask Marcus on the first part. Just our capital investment, right. We indicated that and guided that will be down about $10 million from our original guidance. So taking off 10 of that, how low can they go? A lot of that was spent in the first part of the year in terms of either spent or committed. So we only have a certain amount that we can pull that down for 2019 and because again all of our shutdowns maintenance have already occurred with the exception of one facility at Tartus in France. So that is yet to go.

So we have some levers we can pull there in the short term and we will do that. And that's where you see that $0 million coming down. But again, we'll refocus that in light of where we are today as we look at 2020 planning.

Marcus Moeltner -- Chief Financial Officer and Senior Vice President of Finance

And to your second part of your question on working capital, we still remain focused on improving our cash conversion cycle. We have established targets for our finished products inventory across the business segments and there's still some further work toward those targets. What you should make sure you incorporate in your modeling is obviously the seasonal build that will start on our log inventories as you look out into the September to December timeframe.

Howard -- Vertical Research -- Analyst

Okay. Thanks very much.

Operator

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

Roger Spitz -- Bank of America -- Analyst

Thank you, very much and good morning. Just one clarification on Matane, is the deal, it says LTM on the slide, that's $43 million, is that LTM as of June or is that LTM as of March?

Paul G Boynton -- Chairman, President and Chief Executive Officer

No, that's LTM as of June. Correct.

Roger Spitz -- Bank of America -- Analyst

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

Paul G Boynton -- Chairman, President and Chief Executive Officer

First half '19.

Roger Spitz -- Bank of America -- Analyst

As far as that now. And I'll ask another question and come back.

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yeah, the first half -- first half of '18, right, you asked?

Roger Spitz -- Bank of America -- Analyst

'19. Check in the run rate.

Paul G Boynton -- Chairman, President and Chief Executive Officer

Okay. Yeah $18 million.

Paul Quinn -- RBC Capital Markets -- Analyst

'19 -- Oh, $18 million. I'm sorry. Can you explain why you can't draw down further on your revolver currently? It looks like you have zero availability under -- to draw under the revolver, if I read the press release correctly, maybe I read it incorrectly.

Mickey Walsh -- Vice President of Investor Relations

Hey, Roger. It's Mickey, again. At the end of the quarter we were right at that 2.85 times, so we'd be allowed to draw up to that three times at least at the end of the quarter.

Roger Spitz -- Bank of America -- Analyst

And so you do have some availability under the revolver right now?

Mickey Walsh -- Vice President of Investor Relations

Yeah. As long as you're able to make the rest that you're less than three times at the point of the borrowing, then yes, you're able to borrow.

Roger Spitz -- Bank of America -- Analyst

That's why I thought. Okay. I ought to reread the press release. Just coming back once on the capex. As a general matter, do have a number -- figure in your mind for what is -- what we refer to as maintenance capex and perhaps if it's a different number what a bare bones capex might look like on an annual basis, not nationally this year but just as in how you're configured today?

Marcus Moeltner -- Chief Financial Officer and Senior Vice President of Finance

It's, Marcus. So for maintenance of business capex, you know steady state you should perhaps work with a number in the $85 million to $90 million range. And then obviously we would modulate that based on the cash flow performance of each business such that, you know just like in this example we took it down 10 initially to 7%, based on what we were seeing. And we continue to evaluate that.

Paul G Boynton -- Chairman, President and Chief Executive Officer

So it would -- Roger as you know these are these are large fixed assets that we're running, they do take and unfortunately quite a lot of capital investment and we're mindful of the fact that when you pull back capital you may introduce reliability issues and you can see as we noted in the past the expense of that as well.

So it's a fine balance, but we're going to be looking at everything we can to kind of taper that back down as Marcus has indicated where the kind of a good run rate is for maintenance capital, but not everything needs to be done in the near term and so we'll look at pulling that back a bit and we'll give you better guidance for future periods somewhere that would be below that number that Marcus provided.

Roger Spitz -- Bank of America -- Analyst

Sure. And do you have a sense of how much of the 85 to 90 maintenance capex would be Matane that would or Matane that would go away once you saw that...

Paul G Boynton -- Chairman, President and Chief Executive Officer

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

Roger Spitz -- Bank of America -- Analyst

And lastly, can you -- if you haven't discussed it, talk about it, the Temiscaming two to three interruptions, was that related to the boiler issues you had spoken about in Q1 or was that a different issue?

Paul G Boynton -- Chairman, President and Chief Executive Officer

It's more general reliability across the complex given the integrated nature of that facility.

Roger Spitz -- Bank of America -- Analyst

Thank you very much.

Operator

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

Steve Chercover -- D. A. Davidson. -- Analyst

Good morning.

Paul G Boynton -- Chairman, President and Chief Executive Officer

Good morning, Steve.

Steve Chercover -- D. A. Davidson. -- Analyst

So it's not that great, but look, figures speech. So starting with lumber, in my opinion that was actually the biggest source of the shortfall and you know I can't imagine you'd operate at cash negative levels if you didn't need the chips for your pulp and paper based operations. So can you operate them as more like chipping facilities?

Paul G Boynton -- Chairman, President and Chief Executive Officer

So first of all, you're right, that was a big part of our negative, keep in mind, $5 million of that is guided was related to -- if you were almost to a kind of a mark to market inventory write down if you will. So that was that was a chunk. You get that back in the future at some point if these prices rise. But -- so that's part of it.

Steve, no look, you don't operate in a negative environment like this and so as communicated we are you know moving forward and we'll be doing some curtailments of our facilities where it makes sense. Yes, we got to keep in mind the equation as well as providing chips to our facilities, but we have different levers we can pull, we can buy in from the outside, we can run intermittently down for a while and then come back up to get the chip supply. So we'll be pulling all those levers to what it does that make sense to run those lumber assets.

Steve Chercover -- D. A. Davidson. -- Analyst

Well, as I recall once upon a time in Quebec you had a paper mill, you had to produce lumber in order to get the chips. I mean is that rules still in effect?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yeah. If you think about it this way, the rights to harvest and the cut usually are connected with a lumber facility, at least in our case they are. And so yes, you do need to get those chips, you need to run those facilities.

Now as you know we've got lots of facilities and we also buy chips from the outside from other partners. And so we can again flex that runtime, we can flex our purchasing increase that and take greater downtime at our facility based on what the local chips supply is for our different facility. So we will do those things, but you are correct, that the lumber facilities are connected in with the harvest plans. And so you have to keep all that in mind and make sure that all balances.

And we said that you know from the beginning, it's kind of the tricky part of the supply chain that we have in Canada is making all those connections from the forest to the lumber mills to our pumping assets.

Steve Chercover -- D. A. Davidson. -- Analyst

Okay. I'm kind of spit balling this question, but when you consider that historically the Canadians have received the overwhelming majority of the duties as refunds. Can you somehow factor that in you know get $0.80 cents on the dollar or something to that effect on the duties that you've paid?

Paul G Boynton -- Chairman, President and Chief Executive Officer

It's a good spitball, Steve. I don't know if anybody out there that is willing to do that. I haven't heard of anything like that from past experiences. And Marcus is also nodding his head no. So -- but, no it's a good question, but I'm not aware of anything like that.

Steve Chercover -- D. A. Davidson. -- Analyst

Okay. Then switching to Temiscaming, if half of the CS volume has been shifted elsewhere, by definition it's becoming more of a commodity mill. Did you actually decommission any of the capabilities the way you did with the C line at Jesup?

Paul G Boynton -- Chairman, President and Chief Executive Officer

No, not so much. That facility is just ideally suited to run a commodity viscose across it. So the more volume we can put on there that is uniform commodity viscose, the higher efficiencies, the better throughput, the lower cost per tonne. So it is well set up to do that, and as again as we did all our analysis after the acquisition, we said you know that's the model we should run there outside of the microcrystalline cellulose, so we'll continue to keep there. And so we'll run it that way and you're right, it'll become more of a commodity product into the high purity cellulose area.

Steve Chercover -- D. A. Davidson. -- Analyst

But I was thinking at the extreme if it could be transitioned to a full blown commodity mill then it might also be considered non-core. If we are correct to assume that the true core business of [Indecipherable] advanced especially cellulose?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yeah, I see where you're going with that and I think look that's -- that's an open thought. Again, the equipment that is available and invested in that facility even prior to Ryan was ownership was in such a way that is better suited for commodities. It's one of the struggles I think that that facility has had and it does not have the equipment that are in our other three facilities that make it ideally suited for a high purity cellulose specialty. So it's a good comment and it's not lost on us and that thought is certainly in front of us. But right now the goal is to make sure that we're just lowering our cost in that facility and running commodities against it is the best thing we can do.

Steve Chercover -- D. A. Davidson. -- Analyst

Got you. Okay. Final question, if I recall the cap newsprint mill was first quartile on the North American cost curve. So could you confirm that? Is it still the case?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Confirmed, it is still the case. It's still a low cost asset in a newsprint world. It's a tough market. We've talked about it. It's got secular decline associated with it, but -- overall despite some operational issues that we've had it runs well and it's a low cost facility.

Steve Chercover -- D. A. Davidson. -- Analyst

I mean, it's up there geographically, but it should be one of the last [Indecipherable]?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yeah, it should be in the operating world continue to operate, there should be a lot of the facilities if the market comes to that -- the drop out. And as we've seen they do -- you tend to get one or two shutdowns a year in the newsprint facilities, but there's -- I think probably you've probably 30 plus newsprint facilities in North America that would come out somewhat in that order.

Steve Chercover -- D. A. Davidson. -- Analyst

All right. Thanks. You get back to the covenant negotiations.

Paul G Boynton -- Chairman, President and Chief Executive Officer

Thanks, Steve.

Operator

The next question is from the line of John Babcock with Bank of America.

John Babcock -- Bank of America. -- Analyst

Good morning. I just want to start out, I guess you talked about, you know taking additional measures to reduce cost. I was wondering how much that is focused on the cash flow side of the equation. And then also how much of that is focused on you know, also just generally like what you're seeing in costs across the rest system to offset some of these earnings declines?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yeah. Again, just going back to the levers that we shared, the things that we can control that would be completely focused on, right. Obviously, one is around working capital management. So that of course that's receivables and our payables and we'll have a lot of focus on that. As we've already had focus on the inventories and we'll continue to maintain that.

Drawing down that capital spend, that's certainly another one that certainly helps keep cash in the family curtailing these underperforming assets right, that stops the bleed more. We will be focused on that. And then we've got a lot of things we can pull on just on hey look, what's critical spending at this point time and what's not critical spending. And so the whole team will be focused on making sure that every dollar goes out is really for serving our customers and producing the best highest quality product possible.

So those are the key levers we have John. And we'll be focused in on all of those and certainly some of those are again more one time balance sheet opportunities and others are just straight out improvements with the cash flow.

Marcus Moeltner -- Chief Financial Officer and Senior Vice President of Finance

And just to echo Paul's comments, obviously working capital piece is something we can directly influence and has an immediate impact. So that's certainly a key lever that we will be focused on.

John Babcock -- Bank of America. -- Analyst

And is it possible to quantify the impact of curtailing the facilities. I don't know if you have any rough estimates at this point in time?

Marcus Moeltner -- Chief Financial Officer and Senior Vice President of Finance

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

John Babcock -- Bank of America. -- Analyst

Okay. And then the next question is just on the high purity, I was wondering if you can provide a bit more detail on what's driving your reduced volume forecast there and in the past, you know I just remembered hearing that you had pretty good visibility to volumes for the year and so really just want to get a sense for why this mid-year revision so steep?

Frank Ruperto -- Senior Vice President, High Purity and High Yield Cellulose Business

Yeah. John, it's Frank. You know, we typically do have very good visibility into it. Remember that we've moved roughly a percent or so which is about 6000 tons on 600,000 tons of CS volume, so we're not talking about huge shifts in volume here, but we continue to see -- I point to two factors.

One is given some of the trade issues in China we're seeing lower demand from domestic acetate customers being able to import into China. And then secondly the European automotive sector has backed up a bit here and we've seen that impact the filtration and tire court business.

So we're not talking about huge volumes here to move at 1% or so and that's really what you're seeing and I think we've said before you know our contracts typically have some wiggle room plus and minus to some base volumes and we're within those plus and minuses.

John Babcock -- Bank of America. -- Analyst

Okay. And given that the declines you know it seems like are clearly expected to steep it in the second half. I mean, is it reasonable to anticipate the volume declines will continue through the first half of 2020 at a similar level?

Paul G Boynton -- Chairman, President and Chief Executive Officer

You know, it's hard to tell what's going to happen in 2020, we're in the -as you know we're in our negotiation period in the second half of the year where we're setting both volumes and pricing for our products as we go out there. Now I've just referenced you to our go to market strategy, which is you know we have said that we are going to look at becoming less dependent on acetate and exiting lower margin business in that world and focusing on higher margin business and higher growth areas in it.

So you may see some modest decline from that. But the goal is to improve margins gross overall gross margin as we do that. So -- but again it's too early to tell John where this all comes out as we go into those discussions.

John Babcock -- Bank of America. -- Analyst

As far as the wiggle room though, I mean that that kind of 4% to 5% I guess for the year what was like prior on 7% or so maybe from the back half of the year. I mean is that when they make those adjustments. How long do those adjustments typically last for?

Paul G Boynton -- Chairman, President and Chief Executive Officer

You typically -- you know, the adjustments don't last, what I tell you as this the year goes on, we get more visibility into the order patterns. So typically we're 45, 55 or 40, 60 front end -- back end from a volume perspective on our CS business. And so we're when we see those volumes coming out and they're lower in the first half we usually -- that's usually just normal seasonal.

What we're seeing now though is actually some lower order volumes going in that roughly one 1% worse than the last time we came out. And so that's what we're factoring into that guidance today.

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

John Babcock -- Bank of America. -- Analyst

Okay. And just one clarification -- issue on this, the volume impact, was that spread across multiple sectors or was that more concentrated?

Paul G Boynton -- Chairman, President and Chief Executive Officer

I would tell you it was in the automotive sector and in this [Indecipherable] sector.

John Babcock -- Bank of America. -- Analyst

Okay. So some more spread out?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yeah.

John Babcock -- Bank of America. -- Analyst

Okay. And then the last question I had was primarily just on lumber, I mean realizations clearly came down pretty sharply there and it seems like even more so than the benchmark. You know was there any impact of pricing from clearing out your inventories?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yeah, I mean I would say that certainly we e did move volume out as noted on the inventory side. You know, we took them within the range. Obviously, we didn't have any fire sales or anything like that. But you take the opportunity where you can and probably some of that herd on mix well a little bit out there.

But if you look at the where our sales was relative to the change in the market indices, you will see a point or two perhaps decline more than what the market was and I'd say yes that was partly out of mix partly out of moving that incremental volume out.

John Babcock -- Bank of America. -- Analyst

Okay. Thank you. I'll turn it over.

Operator

Your question is from the line of Paretosh Misra with Berenberg.

Paretosh Misra -- Berenberg. -- Analyst

Thank you. Yeah. Is there any other assets in the portfolio where you are in active dialogue with other parties in terms of selling it in Q3?

Paul G Boynton -- Chairman, President and Chief Executive Officer

So you know we launched -- thanks for the question, we launched this paradox as you know earlier this year and talked about the time, our goal was to have this process evaluated -- our assets evaluated in any kind of potential transactions out there announced by the end of Q2. Obviously, that slipped into to Q3 and we had a recent announcement.

We are committed to closing this process by the end of this quarter. So we'd like to have whatever we can have. If there's anything more be announced and if not, we'll wrap it up.

So that's our plan at the current time is to go ahead and have this wrapped up this quarter. And if there's anything else we'll announce it at that time. But we have nothing to pre-announced or -- we're looking at all our commodity assets as you know.

Paretosh Misra -- Berenberg. -- Analyst

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

Marcus Moeltner -- Chief Financial Officer and Senior Vice President of Finance

It's, Marcus here. You know, we just have customary closing conditions, you know, everything that you would expect in a transaction like this.

Paul G Boynton -- Chairman, President and Chief Executive Officer

I don't I don't think there's any significant hurdles out there Marcus that you'd say or unusual in any way right. So I think it's just a standard thing. But it still takes time as you know [Indecipherable] just unfortunately these just have to go through and transfer all systems over and everything else and then just takes a little bit time.

Paretosh Misra -- Berenberg. -- Analyst

Okay. And then just the last one, how are you thinking about the operating cost structure in the second half of this year, mostly for the commodity part of the business, how is the raw material inflation in the second half versus first half and any opportunities to cut cost in any other segments? Thank you.

Marcus Moeltner -- Chief Financial Officer and Senior Vice President of Finance

Yeah, it's Marcus. You know, as we alluded to in the call, we see our reliability improving. We mentioned the wood costs that are trending in the right direction. Given what's happening in the economy, we're seeing chemical pricing in our favor as well. So I think if you look at the key levers it's running to our operating rates, taking advantage of these chemical prices where we can and the wood costs that trend down.

Paretosh Misra -- Berenberg. -- Analyst

Thanks, guys.

Marcus Moeltner -- Chief Financial Officer and Senior Vice President of Finance

You're welcome.

Operator

Our next question is from the line of Chip Dillon from Vertical Research.

Howard -- Vertical Research -- Analyst

Hi, guys. Sal, here again. Have a couple of follow up questions. First one thing, you know, we discuss about pulp and lumber, especially lumber you know, your operating profitability is negative. Firstly, can you let us know, it seems to elevate -- it seems elevated sales volumes were due to inventory sales you mentioned, how much was the difference between sales volumes and the productions for both lumber and high yield pulp?

Paul G Boynton -- Chairman, President and Chief Executive Officer

In a quarter we moved volume of about %180 million feet, as we disclosed and that was up from around 150. So we did move the higher volume as we mentioned to focus on our inventory reduction targets.

Howard -- Vertical Research -- Analyst

You know, we're trying to think about the operating costs and I think in lumber -- sorry, I think in especially outside the high yield probability, a bit more elevated than we would think on a unit cost basis given your volumes, it seems there -- you know you're simply not producing 100 million board feet into Q unless I'm wrong. So I'm just trying to get the understanding how much are you producing versus how much you're selling?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yeah. In Q2 we produced across all our lumber mills 164, so others up you know, about a 20 delta to what we sold. Sorry on high yield pulp is your question?

Howard -- Vertical Research -- Analyst

Yes. What was this number for pulp?

Paul G Boynton -- Chairman, President and Chief Executive Officer

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

Howard -- Vertical Research -- Analyst

Okay. And just a little bit -- you know broader picture you know you go to a number of questions about the sale of Matane, et cetera. You know, the fact of the matter is you are kind of in a difficult situation. You said you're trying to wrap up the asset sale program, but on one hand we have an enterprise value that I think we've referred to as well, right now it's probably $1.2 billion, $1.3 billion. And on the other hand you sell one middle -- 475, it seems like if somewhat worse to evaluate you on an asset basis you know, your enterprise value would be much higher, your stock would be much higher. Does the sale of you know -- does a bigger workout you know -- a work kind of conversion opportunity like a sale of the entire company makes sense given you know where things are going?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Look, it's an interesting question, but let me just answer from the perspective of the value of our facilities. I agree with you 100%, they're worth a lot more than what our share prices is trading at right now. I think if you -- again just keep in mind on the sale of Matane, to $175 million. That is a high yield facility that is not to be compared really to our cellulose specialties type of assets which would be much higher value in each one of them on a per tonnage basis.

And so it's not quite compared -- if that's what you're trying to do there. But I think the overall message on terms of the value of the company absolutely it's much greater than where our equity values certainly and it's trading at this point.

Howard -- Vertical Research -- Analyst

Yeah, exactly. That's the idea, you sold four times [Phonetic ] and yet you know that you have formulas that are much more available on a person basis. So if it comes to you know -- I understand this all you have to do is amend the code announce and you know you continue operating, you have a lot of equity clearly, enough cash on hand, but if there's any bigger issue with the lenders, you know would that be an option to say hey, if we sell the company or you know you're getting everything shareholders get also -- you get all your debt back and shareholders get a lot more than the kind of stock price?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yes, Sal. We're not going to speculate on whether or not large transactions like that make sense. That's something that the board discusses time to time and evaluating its value.

Howard -- Vertical Research -- Analyst

Okay. Perfect. Thank you very much.

Operator

[Operator Instructions] Your next question is from the line of Daniel Jacome with Sidoti.

Daniel Jacome -- Sidoti -- Analyst

Hi, good morning. Thanks for the time. Just two quick questions. Can you talk a little bit more about these incremental reliability issues you saw at Temiscaming? I just wondering if you could quantify if there was any -- material in the last days of production and then maybe you can isolate by where it was kind of like on the equipment chain, was it a chip or a digester, a boiler that was my first question.

Marcus Moeltner -- Chief Financial Officer and Senior Vice President of Finance

Yeah, it's Marcus. You know, it didn't take the mill down. It just reduced the operating performance of the facility. So if you're looking directionally $2.5 million to $3 million of impact.

Daniel Jacome -- Sidoti -- Analyst

Okay. That's very helpful. You don't have to take it down, you just kind of had some fixed cost deleverage and margin went sour for a short time it sounds like?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Again, when Marcus got the earlier question on this Dan, we kind of indicated that it's just broad reliability challenges at that facility, where we're trying to get them back to a much higher performance level. So they are across the board a bit. So we'll continue to work on the reliability there. We've got incremental teams up helping the local team on these issues and so we just thought you know we should note it. And Marcus put it out there that's in the range of $3 million type of issue for the third quarter. So not anywhere close to the earlier issue that we had in the first quarter, but we thought in the best interests of disclosure we just let you know that it still continues to be challenging for us.

Daniel Jacome -- Sidoti -- Analyst

Appreciate that. And that brings me to my second question. I think on the same mill for May 2020 you're expecting some sort of closure to -- or at least receipt of some finishing equipment that you needed to have that fully where you guys wanted it. Is there any update there or is it just kind of like that's still the expected date and would just be a wait see next?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yeah, I think you're referring to you know the challenges we have with the number 10 boiler that we talked about in the first quarter. And yes, we've got her scheduled annual maintenance downtime for May of 2020. And at that time if needed we'll address these -- we're prepared to address any bigger issues with that boiler then. But even at this point in time we're saying you know, overall, it's operating on that boiler with the changes we've already made in a much improved way.

So we'll assess that at that point in time, but we've already had -- went ahead ordered the equipment and have a standing by, if we do to make any change either at that time or before that time.

Daniel Jacome -- Sidoti -- Analyst

Okay. Terrific, thank you the details. Good luck with the rest of third quarter.

Paul G Boynton -- Chairman, President and Chief Executive Officer

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

Operator

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

Paul Quinn -- RBC Capital Markets -- Analyst

Yeah. Thanks, guys. Good morning.

Paul G Boynton -- Chairman, President and Chief Executive Officer

Good morning, Paul.

Paul Quinn -- RBC Capital Markets -- Analyst

I hear, you mentioned two significant multi-year contracts signed. Just wondering if those were on the specialty side and if you could give additional color on the magnitude of the increase?

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yeah. So I will tell you that the -- they are on the specialty side. We don't want to get into the contract terms at this point Paul, but I would tell you that we were pleased with the outcome of those contracts both on a price and volume perspective.

Paul Quinn -- RBC Capital Markets -- Analyst

All right. That's all I had. And best luck.

Paul G Boynton -- Chairman, President and Chief Executive Officer

Thanks, Paul.

Operator

Okay. Thank you. We've now reached the end of our question-and-answer session. I would like to turn the floor back to Paul Boynton for closing comments.

Paul G Boynton -- Chairman, President and Chief Executive Officer

Yes. Thanks everybody for your time today. We appreciate the audience and we'll be in touch as we move forward.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Mickey Walsh -- Vice President of Investor Relations

Paul G Boynton -- Chairman, President and Chief Executive Officer

Marcus Moeltner -- Chief Financial Officer and Senior Vice President of Finance

Howard -- Vertical Research -- Analyst

Roger Spitz -- Bank of America -- Analyst

Paul Quinn -- RBC Capital Markets -- Analyst

Steve Chercover -- D. A. Davidson. -- Analyst

John Babcock -- Bank of America. -- Analyst

Frank Ruperto -- Senior Vice President, High Purity and High Yield Cellulose Business

Paretosh Misra -- Berenberg. -- Analyst

Daniel Jacome -- Sidoti -- Analyst

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