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Rayonier Advanced Materials Inc (NYSE:RYAM)
Q1 2020 Earnings Call
May 6, 2020, 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 First Quarter 2020 Earnings Conference Call. [Operator Instructions]

Following the presentation, the conference will be opened for questions with instructions to follow at that time. [Operator Instructions]

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.

Mickey Walsh -- Vice President, Investor Relations and Treasurer

Thank you, operator, and good morning, everyone. Welcome again to Rayonier Advanced Materials first quarter 2020 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 Executive Vice President of High Purity & High Yield Cellulose Businesses. Our earnings release 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 an alternative to GAAP measures. A reconciliation of these measures to their most directly comparable GAAP financial measures are included on slides 16 through 20 of our presentation.

I will now turn the call over to Paul.

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

Okay. Thanks, Mickey, and good morning. The COVID-19 pandemic has disrupted everyone's lives. It has changed the way we work, the way we operate our plants and our offices and the way we interact with our customers and strategic partners. And while many aspects of our business have changed, we remain essential for our customers and for the products they produce including products going into food, pharmaceuticals and a variety of important industrial use applications.

We will continue to serve our customers with the best products and security of supply, while maintaining the utmost focus on the safety of our employees. As a cultural cornerstone of our company, safety has always been paramount at our facilities. COVID-19 has brought on new safety challenges that I'm proud to say the team has met head on. We have been monitoring the outbreak of the virus from very early in the year. And in January, we started daily conference calls to understand its implications and ways to mitigate its impact. We established COVID-19 task force staffed with key leaders across the organization to set guidelines and create protocols for employees to operate during the crisis.

Key actions including requiring all office support functions to work remotely as possible were put in place. In our operations where employees don't have the option to work remotely, we installed physical barriers. Moved interface equipment where possible, implemented strict practices of social distancing and established other safety protocols, including wearing additional PPE, limiting outside contractors and visitors from entering our sites and enhancing our sanitation practices. I am very proud of the way our employees have stepped up to ensure both the safe operations and quality production for our customers. We're fortunate to say that none of our 21 manufacturing sites, R&D centers and office locations have been directly impacted. However, we recognize the ongoing risk. And, therefore, we will maintain these practices well beyond requirements to do so otherwise.

On the financial front, we were already reducing costs and driving improved cash flow through lower capital expenditures and working capital improvements before the pandemic. Last month, we announced curtailed production at our lumber and newsprint facilities to minimize losses. We are well-positioned with $145 million of liquidity. However, given the uncertain future, we have been in discussions with our lead banks to ensure that we have the flexibility to manage through the impact of the pandemic. While we have challenges ahead, first quarter results were positive when compared to the prior year results. As expected, we started to see good momentum across most of our businesses. As noted on slide five, we delivered $27 million of EBITDA in the quarter on $410 million of sales, a $17 million EBITDA improvement from prior year.

Results were driven significantly by improved operational reliability and lower costs, primarily in our High Purity Cellulose and Paperboard businesses. Additionally, we benefited from positive pricing momentum in Forest Products. High yield pulp prices rebounded from the fourth quarter lows while newsprint prices remain challenged. Typically our first quarter cash flows are lower due to seasonal working capital requirements. But with significant focus, we were able to improve free cash flow by $35 million from prior year with improved operations and reduced capital expenses.

Now I'm going to ask Marcus to review the first quarter results and then I will share details of our corporate governance changes and provide market assessment before opening up the call to questions. Marcus?

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Thank you, Paul. Starting with High-Purity Cellulose on slide six. First quarter sales decreased by $36 million driven by a 30% decline in commodity pricing, primarily from viscose pulp and an 18% decline in CS volumes. As shared with you in February, the decline was driven by expected volume reductions due to a decision, not to pursue certain lower-margin business and favorable sales timing in 2019. These sales declines were partially offset by a 30% increase in commodity volumes driven by improved productivity and a 2% increase in CS prices. EBITDA for the segment was $26 million, up $1 million from a year ago. The price and volume declines were more than offset by lower wood and chemical input costs and improved production reliability.

Turning to slide seven. Sales in our Forest Products segment improved by $7 million from the first quarter of 2019, driven by a 5% price increase and a 1% volume increase for lumber products. EBITDA for the segment increased $4 million to a positive $1 million driven by stronger sales pricing, partially offset by higher costs, primarily related to duties for sales to the U.S. As a reminder, EBITDA results include $6 million for duties paid in the quarter. Since the start of the softwood lumber duties on shipments into the U.S. in 2017, we have paid a total of $65 million of duties plus accrued interest of $3 million. Based on the results of prior trade disputes, Canadian producers have historically recovered all or a vast majority of these duties upon resolution. The next step in the process will come later this year as the tariffs are expected to decline from 20% to 8%, once the preliminary determination is finalized.

Turning to slide eight. Paperboard segment sales increased $3 million driven by a 7% improvement in sales volumes. EBITDA for the segment increased $7 million driven by lower raw material costs and improved sales volumes. Turning to our Pulp & Newsprint segment on slide nine. Sales declined $4 million from prior year due to a 20% decline in high-yield pulp prices. Additionally, results were impacted by a 30% decline in newsprint prices, partially offset by an increase in sales volumes. EBITDA for the segment decreased by $9 million to a $4 million loss driven by the lower sales prices.

Turning to slides 10 and 11. On a consolidated basis, operating income improved $16 million from prior year due to benefits of cost improvements, increased sales volumes, productivity, and lower SG&A costs. These benefits were partially offset by price declines of 26% in commodity HPC, 30% in newsprint and 20% in high yield pulp. The decline in these commodity prices negatively impacted operating income by $40 million in the quarter. Sequentially, operating income improved by $20 million. This sequential improvement was driven by lower production costs and SG&A spending including favorable currency impacts and the environmental charge that was taken in the fourth quarter of 2019.

Turning to slide 12. Total debt remained at $1.1 billion. Our net secured leverage ratio finished at 4.1 times compared to a covenant requirement of not more than 5.4 times. While the interest coverage ratio ended the quarter at 2.2 times compared to a covenant of 1.75 times, a 19% cushion to the covenant. We ended the quarter with $145 million of liquidity including $43 million of cash, $90 million available on our revolving credit facility and $13 million on a new factoring facility in France. We are comfortable that this liquidity provides adequate cushion to operate our business as we have no significant near-term debt maturities.

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

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

Thanks, Marcus. Before getting into our market assessment, I want to provide you with an update on some changes that we're making to our corporate governance as laid out on slide 13. As previously shared in the back half of 2019, our Board and management reached out to over 80% of our shareholders to solicit feedback. We heard three consistent themes Board refreshment, separation of the Chairman and CEO roles and better alignment of compensation to the shareholder experience. Effective mid-May we will be adding David Mariano and Ivona Smith to our Board of Directors two highly qualified individuals who will contribute significantly to the makeup of our Board. David has been an owner of Rayonier Advanced Materials stock for many years.

He has a history of a successful investor at Wellspring Capital, including in our industry as former CEO of Neucel and experience at Blackstone and Ernst & Young. Ivona comes to us with a background in financial management and investing, including roles at Restoration Capital, Citigroup, Kidder Peabody as well as Ernst & Young. I'd like to take this opportunity to publicly thank David Brown and Mark Gaumond who will be retiring from our Board in May after serving the company since before the separation from Rayonier Inc. in 2014. I wish them all the best in their future and I thank them for their incredible guidance, support, professionalism and highest ethical standard.

In addition to these changes, we also announced that we will separate the roles of Chairman and CEO. I will continue my role as CEO and a Director on our Board and DeLyle Bloomquist will become our Non-Executive Chair effective May 19. DeLyle has been on the Board since the separation in 2014 after a career as CEO of General Chemical and President of Tata Chemicals. DeLyle brings over 25 years of industry experience to this role and I look forward to leveraging his knowledge as we navigate through these challenging times and emerge a stronger company with a goal of returning value to our shareholders.

Lastly, our compensation committee, along with key members of our management team, restructured our executive compensation to align more closely with shareholders' interest in the current environment. As a result, the total targeted compensation of the CEO has been reduced 38% and the long-term incentive plan for senior management of the company has been modified, so that the majority of their long-term compensation is tied directly to shareholder returns. Additional details of the plan are laid out in our proxy statement filed with the SEC and available on our website.

Now turning to slide 14. I want to provide you with an assessment of our markets as viewed through the lens of the COVID-19 pandemic. In high-purity cellulose, cellulose specialties has seen only modest impacts from the pandemic, as price and volumes remain in line with original expectations. Prices are expected to increase 2%, while volumes are expected to decline 7% to 8% on a contractual and agreed upon basis and between 11% and 12% after the favorable impact of sales timing in 2019. We see strength in food and pharmaceutical end markets and weakness in automotive and certain industrial segments. Acetate tow demand has remained stable, while we see potential weakness in acetate industrial and textile applications.

With diversified end markets and customers who, in this environment, focus on security of supply, demand for these key products have been relatively stable. However, we remain cautious about the balance of 2020. For our commodity HPC products we are seeing positive price momentum in fluff due to strong demand. We expect to maintain or grow these prices through 2020. Meanwhile, the market for viscose pulp remains extremely weak, as demand for textiles has further decreased with many shoppers staying at home in response to COVID-19. We do not see a near-term catalyst to reverse the demand weakness in this market. As such, we will continue to shift more production toward fluff and paper grade pulps to maximize profitability to the extent possible. We have also been the beneficiary of favorable wood, chemical and energy pricing in recent quarters.

We are watching these markets closely, as future price and availability of key raw material inputs could have a significant impact to our profitability. In our Forest Products business, we have seen a dramatic decline in demand for lumber due to restrictions on residential constructions and concerns of future housing start activity. As such, the positive pricing momentum we saw in the first quarter quickly eroded. We are operating these facilities on a market-driven basis, balancing demand for lumber with availability of wood chips for our mills, as we maximize profitability and optimize cash flows until markets return to more normal levels. Later this year, we expect a reduction of duties for lumber sales from Canada into the United States from 20% down to 8% as the U.S. reaches a final determination on the softwood lumber duties.

We have seen limited impact from COVID-19 on our Paperboard business sales. Margins are improved from lower raw material costs, offset by some mix degradation due to COVID-19. We expect to run this asset at normal levels. High-yield pulp has been another bright spot, with positive pricing momentum and solid demand since the beginning of the year. Meanwhile, newsprint demand has declined significantly, due to lower newspaper sales and lower page count. We idle our newsprint mill for two weeks, early in the second quarter. And we'll continue to operate it in a manner that best optimizes profitability. We know these are uncertain times for our employees and for our shareholders. We have taken. And we will take actions necessary to protect our employees. And our businesses, to manage through these market conditions.

I believe the company is significantly undervalued, due to both the negative impact of the China trade dispute and now the COVID-19 pandemic. We believe these issues are temporal in nature and not attributable to the fundamental value of our business. Within the High-Purity Cellulose commodity products alone, there has been a price decrease of $200 to $250 per ton for commodity viscose and fluff pulp, just in the past 12 months. With approximately 500,000 tons of HPC commodity products, there is a significant EBITDA leverage in these commodities as they return to more normalized level. And these prices will return. In the meantime we are focused on, controlling costs preserving cash, and executing on reliable operations. We will persist and merge a stronger more resilient company.

And with that operator, please turn the call over to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Steve Chercover with D.A. Davidson. Please proceed with your question.

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

Thanks. Good morning everyone.

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

Hey. Good morning, Steve.

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

So I think the most encouraging statement in your release is that, Q2 will be well above Q1 2019. But can you refine that for us? Does that mean cut the loss by half EBITDA doubles? You hit breakeven I mean, what does that mean?

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

Yeah. I can let Marcus expand on that and Frank is sitting here as well, Steve. But look, we're looking forward to a continued stronger HPC environment. What you saw in our comments of where volume was for the first quarter, which is well below what we anticipate the volume to be for the full year. So, that's going to start folding into the balance of the quarter. So we can receive the orders lined up for the second quarter. So, a lot of it's just flat out driven by a stronger HPC and stronger EBITDA in that business.

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Yeah and Steve, its Marcus, as you know last year forest products was a difficult start to the year. So when you compare that year-over-year, you'll see that deliver a change as well.

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

Well, I was going to say last year HPC was a difficult start to the year with the Temiscaming boiler and then the Nomas arch situation is down, in the south. So how does that play into the improvement?

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

That was -- a lot of that was in Q1 Steve. So, that would have been reflected Q1-over-Q1. So what you saw is the weak pricing environment in commodities really offsetting getting back on to the operational improvements and the wood cost piece of it quarter-over-quarter.

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

And Steve as you know in March, the Chinese government provided a mechanism for producers in China to get an exemption from the duties. So year-over-year that's a nice pickup for our core business as well.

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

Okay. So let's talk a little bit about your proactive conversations with your banks. How would you characterize them? Are they more amicable today than last summer? And does the covenant coverage get easier as you start to lap the really ugly quarters that you put up in the first quarter of, 2019?

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Yeah, Steve, it's Marcus. So as you saw in our release, we're operating with a cushion or buffer, call it, in the range of 20%. And obviously, given the uncertainty of the markets, we are of the mind that it was best to be pre-emptive. And maintain a dialogue with our lead banks. And as you mentioned, it's all about flexibility. Our last amendment there is a step down in the covenant. And we just thought it would be best to have a dialogue. And that dialogue is a good dialogue, just to make sure that we have the flexibility to continue to navigate through these markets.

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

Yeah. And Steve just to add and I think I get it in your tone there. But Marcus is saying look, we've got high-quality lenders and we're having good quality conversations with them. It's been very positive. So, we look forward to updating you when it's appropriate.

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

Okay. Thanks. So just switching to the segment for my last couple of questions are there any new product developments worth noting, on the specialty cellulose side?

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

Look, we are -- as we've talked about in the past, in the recent past too, we've narrowed our R&D down to some really more impactful, new product efforts that we've got under way, the ones that can actually benefit from us from now within the next three years. And at this point in time, we have nothing to update on them, but we have a lot of I think a good momentum that we're building on. And I think at the right time, we'll share that with you. But I don't think it's appropriate given where we are in the dialogue with our partners in the trade.

Frank A. Ruperto -- Executive Vice President

And I would tell you Steve, we believe we'll see some benefits from those new products in the second half of this year.

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

Okay. Thanks. Fine. And then the sawmills are back up and running for the most part. I think your mills are particularly well suited to produce studs. So can you comment on that? And did the downtime impact your chip supply for your Canadian pulp and paper assets?

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Yeah. Hi, Steve. It's Marcus. Good question. As you mentioned, we're around 50% stud and 50% random. So when we look at planning our downtime, we are obviously taking into context the chip supply for our paper and pulp mills. And in addition, the demand we're seeing in the market, and we were pretty clear in our disclosure that the stud market given our program sales with the big box stores has had better pull-through, and so we kind of balance it between the two mills random and stud.

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

Got it. And then finally newsprint was challenged just thanks to iPads and kindles. And then you get COVID, which is basically killed off advertising. So what's the prognosis for tablets spacing? I mean I think I always ask about this is it still a first quartile mill? And does that even matter?

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

Yeah. Well, I think two good perspectives on that. Yes, it is still high-quality first quartile mill in terms of its operating cost there. But to your second point doesn't matter. Look in an experience that we're in right now the whole industry is in right now, we're estimating -- the industry is estimating that the market's going to be down for newsprint 30% and this is off of what we had thought was about a 15% decline for the market for the year. And I already noted that in the first quarter it was about 12%. So you got to get that 30% in the back half of 2020, so you're talking a 35%, 40% down in the back half of the year.

And to your point, how do you manage that regardless of what quartile you're in, it's difficult when the demand just is not there Steve. So we did take it down as we talked about that facility in the first couple of weeks at the beginning of the second quarter. We're going to continue to match demand and our production. So we're going to be very focused on that. There's a lot of demand decline right now that's impacting other facilities as well. Again, if you take a 30% decline on a three million ton plus market per se you've got about one million tons out, right?

And right now you've got at least that in downtime going on currently, but it would have to stay down. So I think you're going to see some ultimate demand destruction beyond what we anticipated of the 15% for sure that just will never come back. And to make that work, we're going to have to see assets close out of this business going forward, because I don't think there's any way to get the balance in the pricing back. Now Steve as you know this has been going on for quite some time. This is not a new phenomenon. It's just accelerated right now in 2020. And what has happened in the past is that you do have assets to shut and prices come back and rebound to have the right balance and we expect that to happen, but I think you're just going to see acceleration of that process in 2020.

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

But it is low cost. How is it situated to end markets or other mills to the best of your knowledge?

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

Yes. It is a little cost. It is a first quartile at the mill. Of course, one thing you always have to factor in there is transportation to your customers, right? And I think that's the variable that we got to continue to monitor, and as customers go out then you got to say well where is the next customer? And what's the distance? And what's the impact on that on your cost. So that's the balance we got achieved at our particular facility in campus casing.

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

Got you. Okay. Thanks and stay safe.

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

Yeah. Thanks Steve.

Operator

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

John Babcock -- Bank of America Merrill Lynch -- Analyst

Good morning. I guess I wanted to start out if you could kind of talk about end market trends particularly in High-Purity Cellulose and lumber I guess. And also Paul to some extent just generally, what you've seen in April? And then how that kind of evolved in May?

Frank A. Ruperto -- Executive Vice President

So I'll start. This is Frank on the HPC side. So starting with the cellulose specialties, each end market has reacted differently. The acetate tow market has been very stable. All the customers reporting have been consistent with that outlook and we've seen good demand for the acetate tow, which is a very significant part of our business, still to this date. The acetate for industrial and Textiles has seen some weakness as we look forward here. It's a smaller part of the business, but again those end facing markets with plastics and textiles have been a bit softer than the Tow business, which has been stable.

On the ether side, across the board it's been relatively strong, food and pharma obviously being driven by strong consumption. But even the construction segment has been strong as we look at the demand patterns that we see here, we are cautious about the second half of the year in construction given what's going on with COVID etc. But some of our industry sources are focused on putting people back to work through construction projects as a way to get economies going again. And so our customers although cautious or optimistic about what the second half of that year could look like. Where we've seen the biggest negatives have been in the automotive end market.

So tire cord and filtration products have had significant declines in outlook, which has been offset by some of the strength we've seen in the other sectors to date. So that's the cellulose specialty. So relatively stable to forecast. But saying that, we are very cautious about the outlook, because we don't know-how and when these economies open up, what order patterns and other things will look like as we move forward here. But to date, we feel pretty good about it. In the commodity sectors, the absorbent materials fluff market has seen strong pricing, very solid demand and price increases in those markets. Most people believe that that will go through this summer and some of our customers believe it may go significantly longer through the end of the year. So we'll just have to keep an eye on where that absorbent materials are.

In the viscose market that's been by far the most challenging segment. When you look at textiles and I'll just use the U.S. and many of our customers are in China, when you look at textiles in the U.S., March sale -- retail sales of clothing manufacturers or clothing stores was down roughly 50%. And that's manifested itself in significantly lower capacity utilization in many of the Viscose Staple Fiber manufacturers and downtime in certain areas like India where it's been government-mandated to some extent. But even in Europe we've seen some closures of VSF. So our demand has been keeping up, but it is by far the weakest market that we are entertaining at the moment. So all in that's probably our biggest soft spot. But again, I just caution the one thing we know is that visibility is difficult both for us and our customers in this market and we're going to have to be flexible and move around quickly to deal with changes in demand patterns across the different segments.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you.

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

John hopefully that's helpful. And you just added the question about the forest products in the lumber, right? So -- and as we've noted the maybe even somewhat surprising, but maybe not that remodeling repair side of the business has been very strong. So these are your retail buyers, your Home Depot Lowe's. So those customers have continued to buy. So that is benefited about half of our facilities that are focused in on basically stud type of product. So that's been actually strong through this whole time frame. So that's the good news. Our random length facilities a little less so which is a little bit more dependent on kind of housing starts if you will and new construction. So that's been kind of the drag on the business. But the good side of that is we've had good demand for our stud business.

Frank A. Ruperto -- Executive Vice President

Paul the one thing I would add is when we look across our products including viscose those are good long-term markets. The growth is there. We're dealing with a significant temporal issue at the bottom of the cycle. So as Paul mentioned, we've got about 500,000 tons of commodity sales in our portfolio. We believe even those that have strengthened are well off of what their normalized levels will be. So the turn will happen. The question is more of when than if. Whether it's the fourth quarter of this year or early next year as we start to see some of these markets rebound to more historical normalized levels.

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

Absolutely, Frank. And so a huge leverage factor there.

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

And John on the lumber markets we are seeing signs and you're probably seeing this in the newspapers as well of states reopening construction. Just last week Pennsylvania and Texas opened up. So that should drive some better demand. And the industry has been quick to respond to justify which has at least stabilized the western based benchmark pricing for lumber.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Okay. That's helpful. Just kind of on the CS side of things. I was wondering if you could talk about what sort of flex is allowed in kind of the contract from a pricing standpoint? I mean, clearly things I guess are -- seem OK. I mean obviously, it depends by end market, but I was wondering if things materially were to weaken and customers might become more to stress per se how much flex is there in those contracts to allow for kind of price adjustments in that scenario?

Frank A. Ruperto -- Executive Vice President

Yes, typically, we don't see price adjustments in the CS market. We plan for and our customers plan for and everyone plans for the prices to be fixed for the year. So that usually is reasonable. I think the bigger risk is if demand takes a significant hit, there are abilities for customers to lower some of their demand. There's incentives for them not to in many cases, but there are clearly the ability that if they have no end market demand, they won't be taking as many tons from that. So that's where you would see the weakness is in the volume not -- likely not in the price side.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Okay. And then just kind of following on Steve's question just with regards to kind of the discussions you've had with banks. I mean, do you have any sense that this could ultimately lead to some higher costs for the company? How are you kind of thinking about that? And also if you can just kind of remind me what the EBITDA level is that you have to kind of clear to be able to make the covenant the next step of the covenants?

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Yeah, it's Marcus. As we said, we -- given the uncertain markets, we thought it was best to be pre-emptive. So it's a bit early to start commenting on specifics that you're looking for John. But again, I'd like to stress that the dialogue has been positive in construction. But I can relative to the cushions that we disclosed on our covenants as you know, we're the covenant amendment does have a step down in the LTM EBITDA, but we're still maintaining a reasonable cushion to our business plan right now.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks. And then just last question before I turn it over. I was wondering, I mean, it seems like cost was a pretty good positive for the company during the quarter. How much of that cost was from lower raw materials versus generally cost improvements?

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

Just a second here, John, if we can kind of give you a ballpark, Marcus?

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Yeah, it's Marcus again. So if you look at our HPC segment as you know last year we had challenges on wood. So year-over-year that's a big change. And as global GDP has contracted we have seen chemical pricing coming down as well as energy input. So you're seeing a lot of direct inputs being reduced. So, the key ones being wood, chemicals and energy. I think you have to be careful though looking forward Frank mentioned it well. Given these uncertain times some of those inputs can turn again such as chemical based on supply and demand.

But and then lastly, as you know we had the challenges at temiscaming with the Energy Island last year, and much more reliable operations this year. And I'd like to also highlight you probably saw this in the corporate segment, there's some improvements there. A portion of it is FX related. We're showing a $14 million change a $7 million of that is related to FX. Then some is based on variable compensation around $5 million. And then expense, we're seeing signs that are focus on discretionary spending is delivering some savings as well. That's reflected in there.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Yeah. That's all I have. Thanks.

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

Thanks John. Yeah, a good balance as Marcus said, between operational improvements that Steve noted last year was a terrible start to the year and we didn't fortunately repeat that again. And just cost wood, chemicals all benefiting as well. So a good balance between the two.

Operator

[Operator Instructions] Our next question comes from the line of Paul Quinn with RBC. Please proceed with your question.

Paul Quinn -- RBC -- Analyst

Yeah. Thanks, good morning, guys.

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

Good morning, Paul.

Paul Quinn -- RBC -- Analyst

Hey, just a question on HPC here just on the commodity side. You've got quite a bit of exposure to it any month you want to shift from viscose to fluff, if you could just give us your current mix and then how much of a shift you could been do?

Frank A. Ruperto -- Executive Vice President

Yeah. So when you think about it Paul, we've said we're going to try to dedicate at the beginning of the year or last year, our strategy was this year to dedicate our sea line to fluff as much as possible. So we can push pretty much all of the sea line or the predominant amount of sea line into the fluff market. So that's a 200,000-plus facility that we've talked about before. So that's there. There's also some opportunity to do it in one other line in Fernandina. And so we're exploring that. But again it is not -- we have made that grade there.

In the distant past, and we're looking at that now in regards to mitigation plans, if we see weakness in the viscose market to take advantage of that as we can see. Obviously a little bit more difficult given it's not -- it hasn't been in the market in that product, but we do see opportunity there to do some things. So we have flexibility in a number of our assets. And so that's really, what we're going to try to maximize, but it's not unlimited flexibility as you point out.

Paul Quinn -- RBC -- Analyst

Okay. So you're going to be moving to more fluff, but it still be majority of viscose at the end of the day?

Frank A. Ruperto -- Executive Vice President

I think it will be relatively balanced.

Paul Quinn -- RBC -- Analyst

Okay.

Frank A. Ruperto -- Executive Vice President

We make some other commodity grades, Paul. But all in, it's relatively balanced.

Paul Quinn -- RBC -- Analyst

Yeah. Thanks for that, Frank. And then maybe just on Forest Products. You mentioned you're working to order files and rates are reduced. What's the current operating rate and what that differ between stud mills and random like mills?

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Yeah, Paul, it's Marcus. So in April, we took some downtime at our sawmills obviously to adjust to the market, and a good way to look at it on studs, we were kind of taking two weeks and on random a bit longer say three weeks. And then going forward, we will adjust as we see demand coming in. But as we mentioned, the stud business and given that pricing has converged there where the gap is down we're seeing good demand on the stud side with our big box sales. So we'll continue to look at that. But obviously in this market you would expect a higher weighting to random.

Paul Quinn -- RBC -- Analyst

Okay. And then just lastly discussing your bankers you posed the idea of asset sales, are you still pursuing that?

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Yes. So Paul look as you know we were in an extensive process last year. I think, we were successful. Obviously, we believe in good sale and good value for -- the company on the sale of Matane. We concluded that process. But we -- at our core we're an HPC business and so we're going to always look at it opportunistically going forward. But as you can imagine in this market there's not a lot of anything happening on any one side as far as I know.

Paul Quinn -- RBC -- Analyst

All right. That's all I have. That's all my questions.

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Thanks, Paul.

Operator

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

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

Yes. Thanks for the follow-up. Well, Paul just prompted my question. With Matane out of the mix, how should we in incorporate that into your guidance for Q2 indicating that things will be better?

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

Sorry, Steve I'm thinking about your question. How do we incorporate that into Q2? I think...

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

Is Matane had profitability in Q2? Are we including that profitability in the year-over-year performance?

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

Yes. I think we'd look at an apples-to-apples comparison and exclude Matane in anything that we're comparing here. So we mentioned year-over-year the Forest Products, Frank spoke to HPC. The other business that year-over-year is -- would be experiencing benefits is our Paperboard business given that market pulp is down right that's the partial opposite.

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

Okay. So you'll try and present it absent Matane and we shouldn't be concerned that the lack of Matane it's still going to be better despite that being out of the mix

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

You could -- Steve I think for your analysis I would look at our Q2 last year and just normalize it for Matane without Matane and you'd be at a $20 million quarter.

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

So $20 million.

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

Last year -- if you take adjusted EBITDA last year and then normalize it for Matane.

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

And that's the whole company.

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

Correct. Yes.

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

Okay. Thank you.

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

Yes.

Operator

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

Paretosh Misra -- Berenberg -- Analyst

Thanks. Good morning. So for second quarter how much of your raw material cost is already known or locked in? Would you say 100%? Or it's maybe less than that?

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Yeah, some of our raw materials obviously chemicals you tend to have storage on site for call it 10 days to 14 days. So a lot of that isn't locked in forever. Certainly, wood supply is something you have greater control of in Canada. Energy pricing will somewhat follow the market. So a bit of a mix.

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

Yes. So yes, Paretosh it's the question you're getting at is certainly we see some potential volatility in chemicals particularly around caustic and maybe sulfur, which is coming out of the refining of crude. So we're watching that carefully. And we're largely covered for the second quarter as Marcus is talking about given where we are today in May, but there's some exposure in June certainly. And certainly in the back half of the year, right? So it's one we've got to make sure we're right on our toes on to make sure that we've got one supply to an appropriate cost to run our facility.

Paretosh Misra -- Berenberg -- Analyst

Got it. And is electricity also a big part of your cost structure?

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Yes. Certainly, for a mechanical operation such as newsprint and high-yield pulp, but fortunately we operate in low-cost energy jurisdictions for that. But certainly those mills would be the higher consumers of electricity. And then at -- as you know at Temiscaming, we actually export and sell electricity to the grid. And in France as well.

Paretosh Misra -- Berenberg -- Analyst

I see. And then, I guess, lastly on the fluff market is the strength that you're seeing is that both pricing and volume? And maybe if you could provide some more color that would be great.

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Sorry, repeat that question?

Paretosh Misra -- Berenberg -- Analyst

So for the -- in the fluff market some of the strength that you're seeing or saw in Q1 and still seeing in Q2 any way you could quantify that on a year-over-year basis? And is that -- is that both pricing and volume or mostly just volumes?

Frank A. Ruperto -- Executive Vice President

Yes, yes. It should be -- we've got higher volumes and higher pricing in our fluff products for the year. We haven't broken that out for people historically, but both volume because we have been dedicating more of Jesup sea line to fluff this year and the pricing has been increasing through the first part of the year. There is a little bit of a lag effect in pricing as we see it flow through. But it has been going up month-over-month.

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

And Frank, you'd say the order book is strong.

Frank A. Ruperto -- Executive Vice President

The order book is strong and out a bit. So, we're feeling good about at least this next quarter and fluff.

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

And you probably saw RISI index did go up $40 in April. And given the supply is more concentrated that bodes leases better for those price increases.

Paretosh Misra -- Berenberg -- Analyst

Got it. Thanks guys.

Operator

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

John Babcock -- Bank of America Merrill Lynch -- Analyst

Hey guys. Just a quick follow-up here. Just on working capital. You had a pretty decent usage in 1Q. I was kind of wondering if you could talk about what happened there and then also how we should think about 2Q?

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Sure John. It's Marcus. If you look at working capital and I'll address them in their components. The inventory obviously we went through our seasonal build to working capital on logs in Canada. We did see that on our trade accounts receivable, some slowdown coming out of the year-end and we're focused on bringing those percent overdues back in line.

And the other thing that you'll see in our disclosure is that, given the Cares act and the development there, we actually had a receivable established for some NOLs that we can carry back and that's $20 million as well. Looking forward, I would say that Q2, Q3 we'll see some higher capex given the timing of shutdowns. You saw our capex level for Cabot One was slightly lower than usual. But currently we feel that on working capital we're focused on it. And we're obviously in this uncertain market looking to be neutral or slightly negative.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Okay.

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

So -- and John if I could just add to that in the guidance we gave in February, we talked about four components of our act now efforts and Marcus just took you through one of them which is your question around working capital. And yes we'd all agree. We're behind in our plan for that which for the reasons stated and we think we can move that back on track. And again log is driven around how we're running some of our business right now and moving out shutdowns and things.

But also keep in mind there are the other three components, right? capex reduction, which we're right on track. Corporate cost elimination; I'd say we're right on track. Operating cost improvement also right on track. So, of the four components that we provided to you in guidance three of those I'd say we're right on track and you're right. We're off track on working capital. But we've got plans to get that back on the path that we need to be on. And I -- and we're going to reiterate maybe Marcus you can just make sure we're talking about the tax benefit later on as well.

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Yes. As I mentioned, the $20 million related to the Cares Act, so the path forward on that is once we file our July income tax return, we should be able to secure that $20 million refund in the back end of the year. So obviously that will improve our situation on that in the back end.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Okay. So that will show up in cash flow. Does that show up on the income statement at all?

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

There's a -- given the difference in statutory rates, there is a tax benefit in the first quarter to reflect the 35% versus the 21%. But the $20 million I spoke to was -- is mainly the cash.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Okay, thanks. That's all I had.

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Thanks, John.

Operator

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

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

Well, thanks operator and thanks everybody for your time today. And certainly, as we all recognize, these are challenging markets, but we are taking the actions to ensure one that we got the safety of our employees focused on; two, we've got security of supply for our customers; and three, the future value of the company. And for our stockholders is right at top of our priorities. So, we appreciate your questions and your focus and we look forward to giving you updated guidance again next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Mickey Walsh -- Vice President, Investor Relations and Treasurer

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

Marcus.J. Moeltner -- Chief Financial Officer and Senior Vice President

Frank A. Ruperto -- Executive Vice President

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

John Babcock -- Bank of America Merrill Lynch -- Analyst

Paul Quinn -- RBC -- Analyst

Paretosh Misra -- Berenberg -- Analyst

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