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Rayonier Advanced Materials Inc (NYSE:RYAM)
Q4 2020 Earnings Call
Feb 25, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Rayonier Advanced Materials Fourth Quarter and Full Year 2020 Earnings Conference Call. [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 -- Treasurer and Vice President of Investor Relations

Thank you, operator, and good morning, everyone. Welcome again to Rayonier Advanced Materials Fourth Quarter and Full Year 2020 Earnings Conference Call and Webcast. Joining me on today's call are Paul Boynton, our President and Chief Executive Officer; and Marcus Moeltner, our Chief Financial Officer and Senior Vice President of Finance. 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 and three of our presentation material. Today's presentation will also reference certain non-GAAP financial measures, as noted on slide four 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 19 through 23 of our presentation.

I'll now turn the call over to Paul.

Paul G. Boynton -- President and Chief Executive Officer

Thanks, Mickey, and good morning, everyone. As we shared with you a year ago, given the state of many of our end markets, we had prepared for a very challenging year. And we received one with the addition of a global pandemic on top. Today, 12 months later, I'm very proud of what our team has been able to accomplish. Despite the difficulty we strengthened our business, improved our financials and further solidified our status as a global leader in converting renewable resources into remarkable materials. Starting on slide five. Our financial commitment to you for the year was to focus on reducing operating and corporate costs, lowering capital expenditures and optimizing working capital, all with the goal to improve cash flow. Then with the global COVID-19 pandemic, our team added incremental measures to meet those challenges head on, including establishing COVID-19 task force to help us effectively navigate the pandemic and its varied and ever-changing impacts on and disruptions to our global business and operations. Securing essential operation status for each of our manufacturing facilities spread across the U.S., Canada and France, incorporating strict social distancing, santization and other new safety all into our manufacturing operations and processes. Shifting our office workforce to home.

And finally, adapting quickly to significant shifts in demand for our many products, including, at times, producing incremental volumes to protect key customer supplies while also taking downtime in facilities where price and demand were insufficient to meet financial hurdles. By year-end, lumber markets had more than recovered and commodity pulp markets were beginning to show signs of a strong recovery. Once again, we adapted quickly, adjusting our production to capitalize on these favorable shifts. These results are reflected in our financials. Through it all, we never lost sight of our needs of our customers. And ultimately, we exceeded our financial commitment delivering $84 million of improvement compared to the original goal of $60 million to $70 million. On Page 6, we highlight the drivers of our improved financial results. Overall, adjusted EBITDA of $153 million more than double the prior year results. In our high-purity cellulose segment, despite significant headwinds on demand for commodity viscose and fluff products, initially from the Chinese tariffs and then magnified by COVID-19, we were able to manage EBITDA to only 5% down from 2019. Now we did this with a keen focus on improving reliability through our continuous improvement processes and reducing costs. In forest products, lumber prices were a significant contributor to the positive results. In 2019, this segment lost $22 million of EBITDA. While in our gradual return to profitability in early 2020, COVID concerns forced the market into a tailspin. In April, we significantly reduced production across our lumber assets for four to eight weeks.

However, demand quickly returned, let it first by repair and remodeling segment for our homebound population and then followed by an increased housing starts as consumers look for open spaces. As the market recovered, our team did a great job of returning operations to budgeted production levels and then exceeded them to take advantage of record pricing, ultimately delivering a positive $71 million of EBITDA for the year, nearly all of which came in the back half of 2020. Paperboard EBITDA grew considerably from the prior year as softer demand due to COVID was more than benefited by local raw material pulp costs. And while we saw ongoing weakness in our pulp and newsprint segment, we managed operations in our newsprint facility to mitigate these losses to the extent possible. The result of our efforts was $73 million of free cash flow, which we will use to invest in our business and reduce net debt. Marcus will now go into more detail on the fiscal results, and then I'll come back and provide you with an updated perspective on the near-term opportunities, key objectives and longer-term focus before opening up the call for questions. Marcus?

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

Thank you, Paul. Starting with high-purity cellulose, on slide seven. Sales decreased by $76 million on the year, driven by an 8% average price decline as a slight increase to cellulose specialties pricing was offset by significant declines in commodity pricing. Results were also impacted by a weaker mix with specialty volumes down 12% from prior year and in line with our expectations. Despite the significant decline in sales, EBITDA for the segment was $121 million, down only $6 million from prior year as cost reductions driven by our continuous improvement program, better reliability and lower wood and chemical costs helped offset the sales impacts. Looking ahead, commodity viscose prices have improved significantly from the fourth quarter. And although lagging, we are now seeing increases for commodity flow. Negotiations for cellular specialties for 2021 resulted in slight pricing decreases for the category, with stable volume demand. As Paul shared, we are focused on improving reliability across our assets. As part of our regular maintenance and reliability programs, we are planning for an extended maintenance outage at our Jesup, Georgia facility in the second quarter. Overall, sales volumes for the segment are expected to remain flat as this extended downtime is expected to offset productivity gains.

Turning to slide eight. Sales in our Forest Products segment increased $93 million from 2019, driven by a 40% increase in lumber prices, primarily in the second half of 2020. We took advantage of the recent strong market conditions and increased sales volumes by 11% in the back half of 2020 compared to the same time period in 2019. EBITDA for this segment improved $93 million from prior year to $71 million primarily driven by the higher sales prices. As a reminder, EBITDA results include expenses for lumber duties. Since the 2017 start of softwood lumber duties on shipments, from Canada into the U.S., the company has deposited a total of $91 million of duties and accumulated $4 million of interest on these deposits. In December, the U.S. Department of Commerce announced that it had lowered the tariff rate on softwood lumber from Canada from 20% to 9%. As a result, we reversed $21 million of duties previously expensed in 2017 and '18, but did not include this gain in our definition of adjusted EBITDA. The timing of when the cash will be returned to lumber producers remains unknown. However, in prior trade disputes, Canadian producers have historically recovered all or a vast majority of these duties upon resolution. Looking forward, lumber prices reached another all-time high this week, driven by strong demand for U.S. housing starts and increased repair and remodel activities as homeowners continue to invest in their homes. We are witnessing a very strong start to 2021, with higher demand and production levels. Overall, we expect a 7% increase in sales volumes for 2021 as we do not plan on market downtime, and we will look to capitalize on prior investments improve reliability and productivity.

Turning to slide niine. Paperboard segment sales, price and volumes fell approximately 3% due to increased competition and COVID related softer demand in some end markets, most notably commercial print. However, EBITDA for this segment grew by $11 million, to $33 million as lower raw material costs offset the decline in sales. Looking ahead, we expect slightly higher prices in early 2021, given good demand for packaging grades and announced price increases. EBITDA for the segment is expected to remain flat as sales increases are expected to be offset by raw material cost increases. Specifically market pulp. As a reminder, our Paperboard segment does purchase approximately 85,000 metric tons of pulp on the open market to produce our Paperboard. As pulp price increases, the paperboard segment is negatively impacted, but the overall company results will more than benefit from the higher pulp prices in our other segments. Turning to our pulp and newsprint segment on slide 10. Sales declined $43 million from prior year due to a 20% decline in newsprint prices and a 33% decline in newsprint volumes, driven by a steep reduction in demand related to COVID impacts on the hospitality and travel sectors, the top two newsprint end market segments. As a result, EBITDA for the segment decreased to a $17 million loss, driven by the weakness in newsprint sales, partially offset by lower costs as we curtailed and restarted operations several times during the year to match market demand and support the company's key customers. Looking forward, we are seeing high-yield pulp prices beginning to recover. In newsprint, we are driving this business to a breakeven financial position. As we optimize production on just one of two lines in an effort to high-grade sales mix and take out costs. Further, we are benefiting from recent price increases pushed into the market. Turning to slide 11.

On a consolidated basis, operating income was $27 million for the year, up an impressive $110 million from prior year. The significant improvements in the lumber markets drove the majority of the pricing benefits with offsets due to a negative sales mix in high-purity cellulose and reduced newsprint sales volumes. Cost improvement were captured across each operating segment with notable improvements in wood, purchase pulp and chemicals, along with lower costs from improved reliability. SG&A and other costs improved $27 million, primarily from the reversal of the duties previously expensed in our Forest Products segment and lower environmental reserves in corporate. Finally, turning to slide 12. We completed a significant refinancing transaction late in the year as we refinanced our term loans with senior secured notes and our maturing cash flow revolver with an ABL. The refinance extended our nearest significant debt maturity from 2022 to 2024 and removed financial maintenance covenants to provide RYAM with the financial flexibility to operate the business while maintaining a solid level of liquidity. Net debt remained at $1 million.

While our net leverage ratio, based on our credit agreement definitions of EBITDA declined to 5.8 times. Supported by the strong operating results and cash flow generation in the year, liquidity increased to $215 million, including $94 million of cash, $102 million available on our new ABL credit facility and $19 million from our factoring facility in France. I will note that availability on our new ABL credit facility will fluctuate more than the prior cash flow revolver based on eligible accounts receivable and inventory levels in the business. Also, these cash and liquidity numbers exclude $55 million of cash expected from tax refunds, which we now expect to receive in 2021.

With that, I will turn the call back over to Paul.

Paul G. Boynton -- President and Chief Executive Officer

Thanks, Marcus. In 2020, we, once again, solicited investor engagement with outreach to approximately 60% of our largest shareholders. One consistent theme we heard was the demand for more disclosure regarding the company's environmental safety and governance, or ESG initiatives. While we believe our 90-plus year history in pioneering natural cellulosics is indicative of our commitment to sustainability, we recognize the need to keep our shareholders adequately informed regarding our progress, achievements and future goals. Turning to Page 13. We highlight various initiatives and accomplishments that demonstrate our commitment. Beginning with environmental. Our product's most significant raw material input are trees grown using industry best practices. We apply internationally recognized four certification standards with third-party verification across our operations. In Canada, we directly manage over 25 million acres of FSC-certified wood and, globally, half of our wood is sourced from third-party certified forest lands. Inside our manufacturing processes, we can serve resources, recycled processing materials and utilize virtually every part of the tree to help ensure a reliable and cost-efficient process. Recently, we began publishing metrics on our greenhouse gas and air emissions as well as water usage metrics in line with SASB disclosure recommendations for our industry. Our products are deployed as natural polymers that serve as essential cellulose building blocks used to make and enhance many products we all use in everyday life.

Often, our cellulose polymers serve as renewable substitutes for nonrenewable petroleum-based products. For example, our viscose pulp is used by our customers to make a natural textile with performance characteristics that can replace petroleum-based polyesters. The same is the case for high-strength tire cord for automobiles films for LCD screens and plastic handles for screw drivers and the list goes on. As such, innovation is a core feature of our commitment to sustainable growth. We are constantly investing in innovation in both new product development and new processes, and I'll cover some key highlights on innovation in just a minute. On the social side, respect for people has always been one of our core values and reflects our belief that our success is tied to how we value employees and their diverse backgrounds and experiences. For us and our employees, this starts with safety. Our vision is to make sure that all of our employees go home safe every day. We employ five leading safety metrics to help drive us toward this goal and have seen the benefit of our efforts with another year of improved safety incident rates in 2020. We also recognize that we are key employers in our communities. We engage actively and closely with these communities, including through formal community advisory committees and charitable foundations. We expect each of our employees to act with the utmost integrity and in line with our code of conduct.

We also have established a diversity and inclusion advisory group comprised of approximately a dozen employees that represent a diverse cross-section of the organization to help the company improve and build upon our culture of inclusion and diversity. In the area of governance, our corporate structure allows our Board and management to focus on creating long-term value for our shareholders. Within the past year, the company has taken steps to further align its governance structure with shareholder interest, including separation of the Chairperson and CEO roles and refreshing the Board with two new highly qualified directors who have enhanced the breadth of skill and diversity so vital to our Board's continued effectiveness. Three of our nine directors are women, and one of the six others as a rational minority. Our management compensation programs are designed to align pay with the shareholder experience. Short-term programs are focused on EBITDA and cash flow, while long-term programs are focused on ROIC, margin growth and shareholder returns. This ties each of our managers success to the financials of the company, which further aligns their experience with your. And speaking of alignment, I'm proud to be a significant individual shareholder holding over 1% of RYAM shares. With the completion of our refinancing in late 2020, we are able to pivot our attention to investing in and growing the business for the long term.

Turning to slide 14. I want to highlight some of our recent strategic investments and product innovations. Reliability has been a key focus for the organization for the past few years. We've made significant strides on improving our operating efficiency, and we continue to invest in targeted areas to capture even further gains. Two projects that I want to highlight are listed on the top of this slide. The first is an investment in the second phase of an energy project in our Tartas France facility. In collaboration with National Utilities, in January, we commissioned a significant investment in green energy to improve the energy efficiencies and cost -- and reduce cost at this facility, while supplying more green energy into the national grid under a long-term contract. This is a similar investment to the cogeneration energy project at our temiscaming facility, which made that facility much more competitive and reliable. We expect to make more of these types of strategic investments in our biorefinery assets as demand for more natural solutions grow, including a potential for non-food source ethanol, known as second-generation fuels. Further, since we purchased Tembec in late 2017, we've made investments into improving efficiencies and reliabilities in our forest products operations, and we benefited from much more reliable operations in 2020. So the second investment I want to highlight is the installation of a new large log saw line at our [Indecipherable] sawmill.

This investment is expected to be operational later this year and will provide increased throughput and reliability while reducing overall costs to create a second quartile asset, and then downstream, increasing the amount of third-party certified wood chip fiber to be used in our high-purity cellulose facility. So these are just two examples. Green Energy and Tartas and the large log line in Lasar that we've recently invested in to improve our operations and provide benefits for the communities in which we operate. Another way we drive value for shareholders is through our product innovation. We have a long history of innovating cellulose materials from our early days pioneering the viscose RYAM industry to developing a high-end wood-based polymer used in optical clarity LCD screens. We continue to leverage our path while working with our customers to develop the future. We have recently shared with you our new innovation in our ether grade products, our Biofloc XV 20 grade, which we believe will grow and take market share from cotton lint pulp over time. And last quarter, we spoke about Enviromax, the new quick service bag grade that we developed in our newsprint facility. Today, I'm going to highlight our newest product, 10 Silk. This is a unique product that is now customer qualified that we are producing in Temiscaming, Quebec, for the use of production of Lyocell, a green textile fiber with rapidly growing demand. Lyocell is produced in a closed loop system, which is far more environmentally friendly and lower cost than most other textile fibers while providing a higher end silky textile fabric.

There are only a few producers in the world capable of making a pulp that works in this process, and we have quickly positioned ourselves to become a leading supplier in this growing market. We are also directly involved in the development of more advanced cellulose building blocks, and we'll be sharing these initiatives with you through the course of the year. These strategic and targeted investments will help drive a sustainable business for years to come. More immediately, we see the upward cycle of commodity pulp and lumber markets that give us a reason to be very excited. Flipping to slide 15, I want to give you a sense of what the industry forecasters are saying in each of our end markets and what it could mean for our business. First, as Marcus discussed, we expect cellular specialties demand to remain stable for 2021, with a slight decline in pricing. This goes and fluff prices, on the other hand, are expected to rise considerably from 2020 levels. Time will tell the shape and the extent of the cycle, but the current pricing trajectory, low inventory levels and a bounce back of the global economy are certainly reasons for optimism. Moving to lumber prices. We have been pleasantly surprised at the resilience of this rally. When we spoke in November, the industry believed that pricing had peaked in September.

Just this week, we saw pricing set at another high. While forecasters don't expect these prices to remain at these levels beyond the near term, they do expect market dynamics to remain above trends for the foreseeable future. Paperboard has remained a steady performer throughout the pandemic. And while we see price increases for packaging grades, we are also seeing raw material cost increases for the 85,000 metric tons pulp that we purchase on the open market. Fortunately, for us, we have a natural hedge against all our pulp raw material purchases with sales of our high-yield pulp products. The increased demand for pulp, specifically from China has driven prices for commodity pulp significantly higher, and we're beginning to capture this value now, and analysts believe this rally will extend through the year. Lastly, in newsprint. Forecasters expecting a small price increase from 2020 levels. However, with our optimized operations of a single production line, we will -- we also expect improved profitability from our very deep lows in 2020 through improved sales mix and the addition of the virus smart food service bag. So wrapping up on slide 16, there's a lot of reasons to be optimistic about our investment in Rayonier Advanced Materials. As the industry leader in cellulose specialties, we are uniquely positioned to service our customers with product diversity, technical knowledge, including two world-class research facilities in the U.S. and in France and an unmatched security of supply. Further, we have strong assets based on renewable, sustainable natural inputs, with the capability of producing far more natural biomaterials than we are leveraging today. We plan to capture stronger cash flows to reduce debt and invest in our business to improve our cost structures and drive new natural based products for a market demanding a sustainable future.

So with that, operator, let's open up the call for questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from John Babcock with Bank of America. Please proceed with your question.

John Babcock -- Bank of America -- Analyst

Good morning and thanks for taking my questions. Starting out, obviously, there was some really tough winter weather that made its way through the US South. Was recognizing your facilities aren't particularly located in that area, I was wondering what impact that might have had to your supply chain or any of your customers?

Paul G. Boynton -- President and Chief Executive Officer

Hey, John, good morning. Thanks for the question. You're right. A large swath of the US Southeast was impacted. But I would say, for the most part, fairly minimal impact on RYAM in general. We probably had a couple of customers that had to slow down orders for a week or two, just as they had to get their facilities a little bit back in line, but didn't see any change in net demand for the near-term or for the year's result. I will say, though, it makes me think that we are experiencing, as everybody is, there's some congestion in the ports and mainly availability of equipment as a lot of containers have been pulled back into China. So, we are seeing a bit of delay in some of our shipments, but not really related to the latest weather issue. But just an issue in general that I think everybody has been impacted by.

John Babcock -- Bank of America -- Analyst

Got you. That's helpful. And then in the release, there was mention about some inflation in chemical and raw material costs. Adding to that, I was wondering if you're seeing inflation in any other areas such as freight, you just touched on that a little bit and labor and/or any other areas that maybe we should be mindful of? And then also if you could just generally talk about what your overall expectations for the year are from an inflationary standpoint?

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

Hi, John, good morning. It's Marcus. I would certainly highlight a couple of themes on material inputs. As you mentioned, chemicals, certainly the sulfur type of products and ammonia are showing some signs of -- because they're linked to fuel and such. The other theme is diesel fuel as oil has picked up certainly on our forest products operation, supporting the hauling activities and the harvesting activities, there's that risk. And another theme that you've probably seen, the Canadian dollar continues to strengthen. Certainly, that currency theme is something you should be aware of in your modeling for next year.

John Babcock -- Bank of America -- Analyst

Alright. And then cellulose specialties. I mean, overall, it seems like the contract negotiations might have occurred in a rather unfortunate time before the commodity started to rally. On that point, I mean, are there any levers in the contract that allow for inflation or other adjustments? Or will RYAM ultimately have to wait until 2022 to get some of that back?

Paul G. Boynton -- President and Chief Executive Officer

Yes, John, most of our contracts are pricing for the year. There's a few that may have some outlets here and there on cost. But for the most part, whether we get the benefit or we experience the negative of it. We tend to -- as you noted, we'll stay the course for the year and then look for the next year for an opportunity to change that.

John Babcock -- Bank of America -- Analyst

Got you. And then just last question before I turn it over. I was just wondering if you could provide an update on cellulose specialties businesses, how they're performing and also how the overall competitive environment is out there?

Paul G. Boynton -- President and Chief Executive Officer

Yes. I think as we noted, look, the demand for cellulose specialties is solid. We're seeing a year that we think looks strong for us. As noted, pricing down a little bit, but as we talked about pricing up a little bit the year before. So on balance, it's pretty steady on both price and demand. We are seeing a pickup in orders here in the first quarter. It's hard to determine if that's just some restocking as some of our customers get ready for a more robust set of demand themselves. Or if it's just, again, just maybe it's just the inventory variations, and we're just -- it's not really a real demand pull-through.

But overall, I'd say that the tone is very positive on our customer front. And with a couple of shutdowns that we actually have in the first half of the year, it's created a pretty tight when it comes to our manufacturing processes are pretty well loaded up for the first half of the year here. And with that, you should note that as typical, John, and you know this well for us, our first half for the cellulose specialties will be lighter than our second half or I should say the second half will be much stronger. And certainly this year with two shutdowns happening in the first half, we'll see a strong second half of the year and a more consistent first half of the year to where we are.

John Babcock -- Bank of America -- Analyst

Alright, great. Thanks for the call.

Paul G. Boynton -- President and Chief Executive Officer

Yes. Thanks, John.

Operator

Thank you. Our next question comes from Paul Quinn with RBC Capital Markets. Please proceed with your question.

Paul Quinn -- RBC Capital Markets -- Analyst

Yes, thanks very much. Paul -- just maybe back on specialty pricing, especially the guide. I would have expected this to be flatter up given some of the swing capacity that's moved out of specialty. Just wondering what you're seeing in each of the end markets in terms of demand, are we still seeing growth in ethers? And what's the decline in acetate at this point?

Paul G. Boynton -- President and Chief Executive Officer

Yes. So, again, I think, Paul, even back to John's comment, there -- a lot of the pressure in the market that were seeing today didn't really happen and rise until late in the fourth quarter there. So certainly, a lot of pressure here today. What's the strength here? We're seeing good growth in interest out of ethers. We are seeing certainly the automotive sector, very, very strong. So that's our engine filtration, tire cord, heavy demand for that beyond what we had in our forecast originally. Acetate has actually ended up for the last year as we looked at the market and what some of the cigarette producers were saying actually turned out to be a bit more flat than the typical that we've expected a few percent down. We'll see if that continues into this year or not. So overall, I think the tone is healthy. Certainly some sectors coming back more quickly than the others, and particularly in that the automotive area.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. And then maybe you could describe why you stopped sort of giving us information on specialty pricing as opposed to commodity pricing and now a blended price?

Paul G. Boynton -- President and Chief Executive Officer

So Paul, are you referring to Page 15 in our notes out there? Look...

Paul Quinn -- RBC Capital Markets -- Analyst

I guess it's also slide seven. Yes.

Paul G. Boynton -- President and Chief Executive Officer

Yes. So look, we are putting these together. We just gave you guidance really on cellulose specialties and where we thought pricing is going to be. We gave you guidance on where we think the volume is going to be. So hopefully, you've got that pretty well locked into your model, though slightly down and steady. So hopefully, then you can take -- you guys track just as well as we do, what's happening out in the commodity side. It's really obviously very dynamic right now. Hard for us to say exactly where it's going, other than it's really strong. And we expect it to be strong really for the entire year. Keep in mind, we're going to see the benefit in viscose more quickly than we're going to see in fluff. Fluff -- our contracts, like a lot of contracts with our competitors out there tied to NBSK and some often lag NBSK. And so, we won't see that surge or rise in the first quarter as much as you're going to see in viscose.

So I guess, our view is we guided a bit on cellulose specialties and you got plenty of market data on the other half, and we got a need of kind of the rough volumes, which, again, is roughly split somewhat evenly between the two. So hopefully, that's enough to build your models there.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. And then maybe you could just outline the cost of the extended shut at Jesup in Q2?

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

Yes, Paul, it's Marcus. So the extended shut, usually as you know, traditionally, these mills go down for 14 to 15 days. So that's a normal shut. We're extending that to do some additional work on our boiler. As we mentioned, it's all about reliability and making sure the integrity of our assets here. So, it will be extended, a portion of the mill, for that extra boiler work, but we have the flexibility given the three lines there to run kind of semi full as that other work gets done.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. So then how material is the shut in terms of the cost or the cost hit in the quarter then?

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

Again, we're -- US GAAP reporter, we're amortizing those costs as part of the shutdown. So really leading into the shutdown, we'll build our inventories to support our customer service levels with our normal customers. And really, it's just an amortization of those costs.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. And then just maybe lastly, just on, I guess, newsprint. We've seen others with a hike in it there. Just wondering if RYAM is joining that? And then how material is the environmental smart product in terms of production volume?

Paul G. Boynton -- President and Chief Executive Officer

Yes, sure. So certainly, we've been right in there then following the bigger players on newsprint in announcing our price increase and seem to be capturing those. As you indicated or alluding to, maybe, Paul, a couple more price increase notifications went out in the industry. And we, again, follow that for the next couple of months as well. So we've got those out there. The Envirosmart bag, look, that's gone very well. We've probably got 20 different trials happening out there. We're starting to see some early orders. Whether that's going to be a significant swing in the year or not is really early. I think it's always going to be a bit smaller. I don't think we expect to load up our line in any large percentage on that, but it could be a really nice contributor to the line once that gets up and going. So I'd say small right now, Paul, and let's see how that develops. But early indication with the trials and orders, good response. So, we're very pleased with what we're seeing out in the market.

Paul Quinn -- RBC Capital Markets -- Analyst

All right. That's all I had. Thanks a lot.

Paul G. Boynton -- President and Chief Executive Officer

Thanks, Paul.

Operator

[Operator Instructions] Our next question comes from Paretosh Misra with Berenberg. Please proceed with your question.

Paretosh Misra -- Berenberg -- Analyst

Thank you. Good morning. So in the Temcell product on slide 14, can you just elaborate what exactly are you selling? Is that some type of cellulose or pulp product?

Paul G. Boynton -- President and Chief Executive Officer

Yes. So it's so cellulose pulp. It's out of our Temiscaming facility. So, it's another fiber just like all our other fibers, Paretosh, but designed and specifically for the lyocell application. So we're selling it like you would, whether it's going into acetate textiles or viscose textiles. This is going into lyocell textiles, which is, again, a very green fiber made in a kind of a closed-loop chemical system. So, that what makes it green and also gives us a very low-cost of manufacture relative to other textile fibers. So, our fiber is a pulp that goes into that application. And there's -- as far as we know, only a handful of folks that can do that, we're really pleased that we've now been qualified. We're selling product out to Temiscaming into that application right now. As you imagine, like most textiles, it was pretty soft in 2020 just with COVID and change in purchase patterns at that time. But our customers are very robust in the growth opportunity in lyocell. And they're talking over the next five years of upwards of 300,000 to 500,000 tonnes of demand for our type of product going into that application. So, we're excited to be part of that going forward.

Paretosh Misra -- Berenberg -- Analyst

Got it. Very interesting. Maybe if you could provide some context here. Like in the cellulose business, how much acetate you made last year? And I guess you probably are expecting that to remain flattish this year. And how much of that is textiles versus cigarette?

Paul G. Boynton -- President and Chief Executive Officer

So Paretosh, we haven't disclosed the breakdown in our different segments within cellulose specialties. I'd say, overall, though, our mix is going to be fairly consistent year-to-year. And just to your specific question around to versus textiles and acetate, again, we don't have that out there. But as you know, the vast majority of our product is going into at this point with some going into textiles.

Paretosh Misra -- Berenberg -- Analyst

Got it. Thanks. And the last one, and I don't know if you've covered that in prepared remarks, but if you could just go through some of the cash flow items for this year, market cash, capex and, I guess, interest?

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

Sure. So the -- as you mentioned, the key focus is bringing in those tax refunds. So, it's $55 million that is classified as short term, and we expect those this year. Secondly, for capex, think of a number $85 million to $90 million on a net basis. And with a higher weighting toward custodial spending this year, we highlighted that we had a couple of high-return strategic projects that we had this year. So, $85 million to $90 million net that would be another key fixed charge.

And then on the interest side, our LTM interest is around $61 million with the refi, that will increase into the low to mid-70 range with the higher interest cost. But I should highlight on a cash basis because of the timing of our interest payments related to the last refi. The cash interest this year will be below $60 million just because of that timing. And then think of that higher number on a forward basis. We have very little, as far as additional amortization payments, we have some up in Canada. Related to the cogen loan and in France, and that's in the range of, call it, $10 million to $12 million. So, those would be your key fixed charges and cash flow items to really consider in your modeling.

Paretosh Misra -- Berenberg -- Analyst

Got it. Thanks to you. That's all I had.

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

Yes. Thanks, Paretosh.

Operator

Thank you. Our next question comes from John Babcock with Bank of America. Please proceed with your question.

John Babcock -- Bank of America -- Analyst

Thanks for taking my second question -- just wanted to jump on a couple of questions I missed earlier. Just in the past, RYAM talked about potential asset sales, and I was wondering if there are any updates there and also if market conditions have changed your thinking around this?

Paul G. Boynton -- President and Chief Executive Officer

So look, when we -- thanks, John, for the question. On our portfolio, look, we're always mindful of -- and looking at our portfolio and what's the optimal strategic path for us. So it continues to be something that we evaluate, John. As you've known, we've been working on that and looking at that over the last couple of years. And if we find an opportunity for the right value at the right time, we will transact on things that we think that provides more value to our shareholders. If it belongs to somebody else than to us. The present time frame and real strong cycle you're in, particularly as you see in lumber, and does that change our thinking in that? Look, I think we always have to think through the cycle when we look at our assets. And we would ask anybody who's looking at them to do the same. Obviously, we're happy to have the cash generation we're getting out of the lumber assets right now. So it's very positive. We're great and pleased that our investment and reliability over the last few years has paid out well. They ran very steady last year when we had them up and running outside of the kind of the shutdowns in earlier part of the year, and they continue to do that.

And as we noted, we're making investments in that Lasar log line to even improve our efficiencies even further. But having said that, again, if someone wants to come to us and talk about value for those or anything else, just in good stewards of our assets in our company and our shareholders, we would obviously have dialogue and discussions with that.

So, long way of saying that, look, we're always focused on our right portfolio. We're always looking at how do we continue to strengthen our HPC asset. And as we believe that those are strategics, so we're going to be looking at the product mix in each of those product innovation, the global competitive cost structure of these. And of course, how do we continue to leverage ourselves into a more green, sustainable opportunities out there. So that's where we got a lot of focus right now, John, but we're going to continue to own and run all our assets for the long term. And if anybody wants to step in the middle of that, we'll obviously talk about value.

John Babcock -- Bank of America -- Analyst

All right. And then that kind of carries to my next question, just on capital allocation. I mean, overall, it seems like you're set up for at least a pretty decent year in cash flow, particularly if prices hold up across several of your markets here. So, how are you thinking about capital allocation? I know you talked about that paydown and investment in the business. What are kind of the other priorities there? And also just from a debt pay down standpoint, if you can just kind of talk about, obviously, with the refinancing, I think that puts some limits on your ability to do that. And so the extent to which you can pay down debt?

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

John, it's Marcus. We would continue to take a balanced approach as far as capital allocation with a strong focus on debt repayment and with a lens to that long-term target of 2.5 times leverage. In addition, though, I would say that we'll -- as I mentioned, we'll focus on maintaining our assets and optimizing cash flow, so we've got that reliability checked off. And in addition, would rigorously look at any high-return projects in our core business in the HPC business, and if that can drive a change.

Paul G. Boynton -- President and Chief Executive Officer

Yes. Great, Marcus. And John, again, just a reminder of that -- a good example of that is that Tar Test Bioenergy project, really great selling green energy back into the grid brand, good return project for us kind of a 1-plus year payback kind of return, and we'll continue to look for those type of opportunities as we leverage really kind of these biorefinery assets we have, right? We think there's a lot more we can do out there, whether it's bioethanol or bioenergy or biomaterials. So, we're going to continue to look at high-return opportunities like that for capital, and we'll share those with you as we have them going forward.

John Babcock -- Bank of America -- Analyst

Okay. Great. And then just last question. Just more of a modeling question. I was just wondering if you might be able to parse that the quarter-over-quarter impact to earnings from the reduced tariff levels in 4Q in the Forest product segment?

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

Yes. So John, the reduced rate of 8% versus the 20% just kicked in, in December, right? So, it's really only one month where we had the impact of that lower rate. So, you're looking for -- it'd be a 55% reduction based on those duty rates. So, I'm not sure what period you're trying to bridge.

John Babcock -- Bank of America -- Analyst

Just 3Q to 4Q if possible.

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

We were at a -- we're on a run rate of $20 million on duty based on those new rates.

John Babcock -- Bank of America -- Analyst

All right. Thank you.

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

Yes.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Paul Boynton for closing comments.

Paul Quinn -- RBC Capital Markets -- Analyst

Thanks, operator. Again, thanks to everybody for your time today. We're very excited about the recent market developments. And of course, all our other initiatives to create value for our shareholders, and I look forward to updating you on our progress in the near future. Again, thank you.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Mickey Walsh -- Treasurer and Vice President of Investor Relations

Paul G. Boynton -- President and Chief Executive Officer

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

John Babcock -- Bank of America -- Analyst

Paul Quinn -- RBC Capital Markets -- Analyst

Paretosh Misra -- Berenberg -- Analyst

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