Rayonier Advanced Materials - Q2 2023
August 9, 2023
Transcript
Operator (participant)
Good morning, and welcome to the RYAM Q2 2023 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Mickey Walsh, Treasurer and Vice President of Investor Relations. Thank you, Mr. Walsh. You may begin.
Mickey Walsh (Treasurer and VP of Investor Relations)
Thank you, and good morning. Welcome again to RYAM's Q2 2023 Earnings Conference Call and Webcast. Joining me on today's call are De Lyle Bloomquist, 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 ryam.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 in Slide two of our presentation materials. Today's presentation will also reference certain non-GAAP financial measures, as noted on Slide three of our presentation.
We believe non-GAAP 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 17-26 of our presentation. I'll now turn the call over to De Lyle.
De Lyle Bloomquist (President and CEO)
Thank you, Mickey. Good morning. I will start this call with a review of the quarter before turning the call to Marcus to provide additional details on each of the business segments, as well as an update on our capital structure and liquidity. After Marcus's update, I will provide an update on our key 2023 initiatives and guidance before opening up the call to questions. Let's now turn to slide four to review our performance in the Q2 of 2023. EBITDA declined $7 million compared to the prior year, with a total of $27 million generated in the quarter. Results were below our expectations, mainly due to the stocking in certain Cellulose Specialties and Paperboard market sectors and ongoing declines in commodity prices, in particular for viscose and paper pulp.
As we experienced softness in our business, we increased our focus on generating positive free cash flow. Adjusted free cash flow generation was $16 million in the Q2, driven primarily by an impressive $55 million of working capital benefits. As I mentioned, the challenges we experienced in our High Purity Cellulose segment were primarily due to the declining commodity prices and lower Cellulose Specialties volumes. However, it's worth highlighting that despite these challenges, prices for our Cellulose Specialties products remained strong, with an increase of 13% compared to the prior year period. Paperboard segment declined $4 million, with the higher prices helping offset the impact of the lower sales volumes. High-Yield Pulp EBITDA increased $1 million, driven by higher realized prices and improved sales volumes over prior year.
Corporate expenses improved by $4 million, attributed to lower variable stock-based compensation and severance costs. Considering the lower than expected EBITDA results, a weak outlook for commodity prices and the stocking in certain Cellulose Specialties and Paperboard end markets, we are updating our adjusted EBITDA guidance to $185 million-$200 million. It's important to emphasize that most of our Cellulose Specialties markets remain stable and ratable, including our acetates, non-Construction Ethers, nitrocellulose, sponges, and other specialties. Our ability to participate in all the Cellulose Specialties markets, whether it be acetates, ethers, and other CS, has provided a strong sales foundation that we can rely on. Despite the lower EBITDA guidance, we are committed to enhancing efficiency and financial resilience.
As such, we are raising our adjusted free cash flow to $55 million-$70 million due to better-than-expected working capital monetization, reduced interest expense, and lower CapEx expenditures. I'd like to turn this meeting over to Marcus to take us through the financial details for the quarter.
Marcus Moeltner (CFO and SVP of Finance)
Thank you, De Lyle. Starting with our HPC segment on Slide five, sales for the quarter decreased by $2 million or 1% to $300 million as a result of a 4% decrease in sales prices. The decrease was primarily driven by weakening commodity markets, while our CS products experienced a 13% increase in price as a result of contract negotiations. Sales volumes increased by 4% to 214,000 metric tons due to a higher mix of commodity sales. Commodity sales volumes increased 72% from prior year, while CS volumes declined 27% as a result of destocking for certain products, including Construction Ethers, MCC, and filtration products. Sales for the quarter included $22 million of biomaterials sales, primarily from green energy and lignin. EBITDA for the segment declined $8 million to $28 million.
The impact of higher sales volumes was more than offset by the weaker sales mix and higher labor and maintenance expenses. Turning to Slide six, Paperboard segment sales decreased by $15 million, driven by a 27% decrease in sales volumes as a result of lower productivity and significant customer destocking.... Sales prices were up 4%, supported by continued demand for sustainable packaging. EBITDA for the segment declined $4 million to $10 million, as higher sales prices were more than offset by lower sales volumes. Turning to the High-Yield Pulp segment on Slide seven. Sales improved by $4 million from prior year, reflecting a 5% increase in external sales prices and 9% higher sales volumes due to stronger demand, increased productivity, and improved logistics. EBITDA for the segment was $1 million as compared to breakeven in the prior year. Turning to Slide eight.
On a consolidated basis, we had an operating loss for the quarter of $7 million. Sales price improvements across CS, Paperboard, and High-Yield Pulp were more than offset by $16 million of unfavorable mix in HPC and lower Paperboard volumes. Costs increased $16 million, driven primarily by inflation on labor and maintenance costs. SG&A and other costs improved $7 million due to lower variable stock compensation and severance costs. Turning to slide nine, net debt declined to $682 million, a reduction of $82 million from the same period in 2022, reflecting our unwavering focus on overall debt reduction. As part of the recent refinancing of our 2024 senior unsecured notes, we demonstrated this commitment by reducing our debt balance by an additional $68 million. As we continue to repay debt, we are still preserving strong liquidity.
Liquidity ended the quarter at $272 million, including $157 million of cash. On a pro forma basis, post-refi, the company's liquidity is $187 million, net of $85 million allocated to support the refi activities. We remain dedicated to ensuring our assets operate efficiently and effectively, allowing us to deliver consistent and sustainable results, while continuing to deliver positive, recurring free cash flow. Such, we are reducing our outlook for maintenance CapEx to approximately $95 million from our previous guidance of $100 million-$105 million. In working with each of our plants, we believe this is a level that will deliver our desired production and sales targets. We have reduced our strategic capital spend to $30 million, net of financing.
These investments are discretionary and are targeted towards high-return projects that deliver immediate and incremental benefits to our business. Net leverage ended the Q2 at 3.4 times, slightly above our expectations, reflecting the lower EBITDA, partially offset by the lower net debt. Turning to slide 10. I am pleased to have the refinancing completed. We secured a $250 million term loan with a four-year maturity. The interest rate is based on SOFR plus 8%, with a 3% SOFR floor. Despite the higher interest rate, we managed to partially offset the higher cost by reducing the overall sizing by $68 million. The loan was issued with a 3% discount at origination and is callable after one year with a 3% premium, and after two years with a 1% premium.
Importantly, the loan facility provides operational flexibility to support our strategic objectives. The company will continue to be balanced from a capital allocation perspective, focused on debt repayment and working towards our 2.5 net leverage target, while also pursuing investments in our biomaterials business. With that, I'd like to turn the call back over to De Lyle.
De Lyle Bloomquist (President and CEO)
Thank you, Marcus. Now, let's shift our focus to slide 11, where I'll update you on our 2023 initiatives. We are forecasting approximately $45 million of negative impact due to declining commodity prices for viscose, fluff, paper pulp, and High-Yield Pulp. Additionally, the lower-than-expected sales orders due to destocking and Construction Ethers, MCC, and filtration and Paperboard market sectors have impacted results by approximately $15 million. While we see disinflation in some key raw material inputs, we continue to experience high prices and/or inflationary pressures for some key raw materials, including wood, caustic soda, labor, and MRO supplies. In response, our management team is proactively reducing our expenses in the second half by nearly $40 million to largely mitigate these impacts.
These mitigation actions include reducing contractor services, reducing overtime and a hiring freeze, lower wood, caustic, and freight purchase prices, and improved productivity and higher power sales prices. Consequently, we can provide an update to the 2023 EBITDA guidance of $185 million-$200 million. That will exceed both prior year results and our current fixed charges. Despite the lower EBITDA outlook, we are raising our guidance for our 2023 free cash flow to $55 million-$75 million. To date, we have generated $52 million of free cash flow, primarily from the monetization of working capital. We expect that this will be partially reversed in the back half of the year as we rebuild the depleted inventories at Jesup and Temiscaming following their annual shutdowns.
We reduced our forecast for total CapEx spending for the year to $125 million. This includes $30 million of strategic CapEx, which remains discretionary. Flexibility is key right now, and we'll dial back the strategic capital accordingly, if needed. We are maintaining our focus on capturing high value for our specialty products, particularly in our Cellulose Specialties segment. Notably, our Cellulose Specialties prices have increased by 13% compared to the prior year period, attributed to the successful contract negotiations for 2023. Moving forward, we will continue to prioritize the value of our Cellulose Specialties, ensuring a strategic approach to optimize profitability across the cycle. Finally, in response to the severe pricing volatility affecting our commodity products, we have initiated a review of strategic options for our viscose and paper pulp businesses.
Our Cellulose Specialties and fluff businesses are core businesses, and Paperboard is a solid EBITDA contributor, provides very promising long-term growth potential. In aggregate, these businesses will deliver nearly $300 million of EBITDA in 2023, exclusive of corporate overhead. This is a strong performance, given today's challenging environment. Conversely, the viscose and paper pulp businesses will subtract an estimated $50 million of EBITDA due to the current low sales prices, with most of these losses concentrated in the North American sulfite mills. We've historically used the production and sale of commodity products to maintain high utilization rates at our six high-purity production lines to maximize fixed cost absorption. However, the production and sales of commodity products have masked the strength and profitability of our Cellulose Specialties segment, and in times like these, only provide marginal financial benefit. Consequently, it's time to reconsider our strategy.
Over the course of the next couple of months, we'll review our options to mitigate most of these commodity losses in 2024. The potential EBITDA of our core business is significantly greater than the market gives us credit for, and so the strategic review will look to optimize our asset base to reduce costs and minimize exposure to these commodity businesses to ensure the long-term success and sustainable growth of our overall enterprise. Now, let's shift our attention to Slide twelve, where we'll review our progress against our 2023 guidance for EBITDA and free cash flow. The waterfall chart reinforces our commitment to achieving free cash flow within the $55 million-$70 million range.
With EBITDA expecting to be $185 million-$200 million for the year, we're also projecting lower cash outflows to more than offset the lower EBITDA, including interest expense, CapEx, and other liabilities, while increasing working capital monetization targets to achieve our goal. With the refinancing complete, we have a clear line of sight to $65 million of cash interest for the year. This fixed charge is likely to increase next year to about $70 million as we realize the full impact of the higher interest rates. Maintenance CapEx remains at $90 million on a normalized basis, but we are now removing most of the catch-up capital in 2023, as we can sustain our current operating levels without the need for the additional capital spend.
With $86 million of working capital benefits captured through the first six months, we expect to retain the majority of those benefits with a $55 million target for the year. Lastly, we are engaged in ongoing discussions with our government partners in France regarding the deferred energy liabilities, for which we expect modest positive outcomes. As previously discussed, our free cash flow will be strategically allocated to either repay debt or invest in attractive strategic projects. On Slide 13, we delve deeper into the expected performance of each of our businesses in the second half of 2023. Cellulose Specialties prices are expected to finish the year at a high single-digit percentage increase compared to 2022. However, we anticipate a decrease in sales volumes for Cellulose Specialties compared to the prior year, driven by weakened demand and significant customer de-stocking.
Market demand for our commodity products is expected to remain resilient, albeit at lower prices than those observed in the first half of the year. Notably, fluff prices have declined compared to 2022 levels, aligning with industry forecasts, and viscose prices are expected to reach a bottom in Q3, followed by a slight uptick in Q4. While certain input costs are moderating, it is important to note that most of these costs continue to remain at elevated levels. As part of our ongoing growth strategy, we are actively pursuing strategic investments in our biomaterials business. Exciting progress is being made with the bioethanol plant in Tartas, and we are pleased to report that it remains on track for production commencement in early 2024.
The second-generation bioethanol produced at this facility is projected to provide an EBITDA benefit of $8 million-$10 million annually, further bolstering our position as we forge ahead with our long-term vision of sustainable and profitable growth. We're excited about our biomaterials business plan. Over the next three to five years, the first phase of this plan is expected to yield an additional $100 million in revenue and about $42 million of EBITDA annually. We expect that most of these projects come with low-cost financing, thus make them extremely attractive investments. We are also working on the second and third phases of this business plan that would create further sustainable growth. Paperboard prices are expected to moderate slightly over the balance of the year, but remain elevated as compared to 2022 levels.
Sales volumes are expected to improve in the second half of the year as destocking eases. As evidenced, we did see orders pick up in July. Raw material prices are expected to reduce further as pulp markets decline. High-yield pulp prices are expected to be impacted by both the global economic slowdown and new capacity coming into the market. As a result of these factors, sales volumes will decline in Q3 as we take necessary downtime in July and August in response to prevailing market conditions. We are continuing to operate one of our two high-yield pulp lines, the supply pulp, and our paperboard operations.
Corporate expenses are expected to be higher than in 2022, primarily driven by expenses associated with the ERP implementation and the absence of foreign exchange benefits that positively impacted in 2022, specifically in the Q3 of last year, that are not expected to repeat this year. As already noted, we are reducing our CapEx guidance to $125 million, net of financing, of which $95 million will be earmarked as maintenance CapEx and the remainder, strategic CapEx. We have raised the investment hurdles for new strategic capital projects to help mitigate the impact of higher interest rates. Projects now need to generate at least a 30% return on equity and have a two-year or less payback period. Turning to Slide 14, we depict the progression of our EBITDA margin growth and net leverage decline.
Throughout the year, we anticipate our margins to remain within the 10%-11% range, which, as noted, is a weighted average of the strong margins we enjoy in the Cellulose Specialties and Paperboard segments, and the negative margins expected in the viscose and other commodity businesses. Net leverage is expected to increase to 3.8x for the full year at the midpoint of the lower EBITDA guidance. However, we remain committed to drive toward our target net leverage ratio of 2.5x over the next three to five years. I'm confident that the second half of 2023 results will be stronger than the first half. Paperboard sales volumes are showing signs of normalizing, and I believe that our businesses that are more GDP sensitive will pick up in the second half.
3 of the 4 scheduled plant outages are now behind us, including the outages of our 2 largest facilities. Thus, we will see improved productivity and lower spending. We will execute on the nearly $40 million in expense reductions and the $10 million-$15 million in CapEx curtailments. Now, I'd like to direct your attention to Slide 15 of the presentation materials, where we have an exciting announcement to share with you. We cordially invite you to attend our Investor Day on Tuesday, October 10, 2023, at the New York Stock Exchange. To secure your attendance, kindly RSVP through the email address provided. As the date draws nearer, we will provide you with the more comprehensive details about the event.
We're looking forward to this occasion, as it will be a fantastic opportunity to connect, discuss our strategic vision, and explore future growth plans, including details about our biomaterials business plan. Your continued support and engagement means a lot to us, and we are eager to share our insights and progress at our upcoming Investor Day. With that, operator, please open the call to questions.
Operator (participant)
Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question is from George Staphos with Bank of America. Please proceed with your question.
George Staphos (Managing Director and Co-Sector Head in Equity Research)
Thanks so much. Hi, everyone. Good morning. Thanks for the details. Just a few questions. I just want to make sure, Marcus, the annualized interest expense on a cash basis, you said, is $70 million, given the refinancing. Did I hear that right? Would there be any additional non-cash that we should be mindful of as we frame our PNL estimates for next year?
Marcus Moeltner (CFO and SVP of Finance)
George, good morning. Yeah, the 65 is reflective of, of this year's estimate...
George Staphos (Managing Director and Co-Sector Head in Equity Research)
Yep
Marcus Moeltner (CFO and SVP of Finance)
... and reflects the timing of when we did the refi and, and the cash we were carrying. On a more normalized basis, you should, you should model just over $70 million.
George Staphos (Managing Director and Co-Sector Head in Equity Research)
Okay.
Marcus Moeltner (CFO and SVP of Finance)
Cash. Yeah.
George Staphos (Managing Director and Co-Sector Head in Equity Research)
Cash is book, or is there a little bit of uptick additionally for book?
Marcus Moeltner (CFO and SVP of Finance)
Yeah, maybe four or five.
George Staphos (Managing Director and Co-Sector Head in Equity Research)
Okay. Got it. Okay. Secondly, just to put a finer point on that, $70 million+ on cash, plus 4 or 5 non-cash?
Marcus Moeltner (CFO and SVP of Finance)
Correct.
George Staphos (Managing Director and Co-Sector Head in Equity Research)
Okay. Thanks for that. On the cost reduction activities, the back half of the year, one of the elements was productivity. Specifically there, and then across the other categories, how volume sensitive are those? So, you know, or said differently, how pressure tested, how confident are you that you're going to get all of that cost reduction activity, to your credit, to the bottom line in, in the second half of the year?
De Lyle Bloomquist (President and CEO)
Hey, good morning, George. This is De Lyle.
George Staphos (Managing Director and Co-Sector Head in Equity Research)
Morning, De Lyle.
De Lyle Bloomquist (President and CEO)
I, I'm pretty I, I'm, I'm very confident that we're going to get the $40 million. You know, the first comment I would make is, the $40 million is conservative. We think there's some upside to it. In other words, I kept a little bit in my back pocket just to make sure that we get to the $40 million. I would say that, you know, of that $40 million, roughly 60% of it is, I would call recurring. In other words, the savings will survive 2023, and we'll be able to look to 2024 to continue to see some of these savings. I mean, as you note, some of it's tied to productivity, and I would say the productivity is, is not so much tied to how much production volume we that we generate.
It's more around improved material usage variances. For example, you know, a better yield, wood yield, things like better caustic usage per ton and so forth. This is really being driven by a lot of activity at our plants to improve the efficiency and effectiveness of our, of our operations. We're beginning to see and enjoy some of those benefits from, you know, earlier activity this year. The other 40%, you know, in terms of, of the sa- of the $40 million, they're not just one-time events. I mean, they're deferrals, and I would suggest that, you know, the deferrals are... We can defer for the medium term without any significant risk. Although there's opportunity-
George Staphos (Managing Director and Co-Sector Head in Equity Research)
What do you mean by a deferral? Sorry. I'm sorry, Lyle. Go ahead.
De Lyle Bloomquist (President and CEO)
Yeah. I was just gonna say, with respect to the, you know, the 40% of the $40 million is, is kind of deferrals, taking, taking spending, for example, in contractor services or engineering services, things around headcount, for example, reducing, and strictly managing our overtime and putting a freeze on hiring. All those things I think, you know, can be deferred for, for the medium term. There is an opportunity cost for doing that. An example would be, you know, engineering services. All those savings I had mentioned earlier in terms of material usage, improvements we've seen, is being driven by the, the, the spending we've had on engineering services to improve the plant operations.
I prefer not to, to defer those for more than just the medium term, but certainly we can, but there's, there's a cost to it.
George Staphos (Managing Director and Co-Sector Head in Equity Research)
Sure. I guess at some point also, you got to watch that because you can wind up with, you know, operational considerations and, and whether you wind up having to take more unplanned downtime, but we'll see how that plays out.
De Lyle Bloomquist (President and CEO)
Yeah.
George Staphos (Managing Director and Co-Sector Head in Equity Research)
My last-
De Lyle Bloomquist (President and CEO)
Yeah, to, to address.
George Staphos (Managing Director and Co-Sector Head in Equity Research)
Please.
De Lyle Bloomquist (President and CEO)
George, just to address that, we were very mindful not to impact our maintenance spending. You know, we want to maintain the level of productivity and reliability that we have spent a lot of money on in the last couple of years to continue forward with that. The spending savings that we're noting here, very little of it, I'm looking through the list right now, almost none of it, as it relates to our focus on maintaining reliability.
George Staphos (Managing Director and Co-Sector Head in Equity Research)
Okay. Thanks a lot. My, my last one, I'll turn it over. Recognizing it's not October yet or November, but, you know, how should we think about the CS pricing outlook for 2024, in light of, you know, the volume so far in 2023 and what's been happening on commodity pricing? You've had the 13% increase year-on-year. It's gonna come off a bit in the back half. It'll still be high single digits. What's the outlook for 2024, given the demand outlook and what you're seeing in commodity? Can you talk about, you know, what kind of Paperboard volume increase you're seeing year-on-year in the Q3? Thank you so much.
De Lyle Bloomquist (President and CEO)
To answer your first question with respect to pricing for CS in 2024 relative to now, and any pressures that you would expect from the fact that the commodity prices have declined as significantly as they have. To answer that question is that when it comes to our CS business, we, we put a priority on the value of that business versus the volume, and we will continue to have that focus going forward. You know, the whole idea that, you know, commodity business is, is putting a drag on our ability to raise prices next year, I, I would say that's not the case.
I, I would suggest that much of our business that we have out there are products that, our customers see the value in, and are willing to, compensate us for the, for the, the value that we do provide. With respect to the destocking we've seen, this year, I would say that, you know, the last thing I want to be doing is, is, is chasing a market where the demand is limited by, by, by lowering prices. Just makes no sense to do that. Why would anybody, lower pricing to get nothing for it? We continue to continue to focus on making sure at the end of the day, that we, that we, we, we maintain the pricing that and the value that we have in our products.
Although, if there is competitive activity out there that threatens our, our share, we will defend it. That needs to be clear, that, at the end of the day, we, we, we are very jealous about the share that we have, and we will defend it.
George Staphos (Managing Director and Co-Sector Head in Equity Research)
And paper board year on year?
De Lyle Bloomquist (President and CEO)
Oh, Paperboard. Yes, I'm sorry. On Paperboard, with respect to, you know, pricing, we're seeing pricing relatively stable from what we saw in the Q2 of this year going into... We forecast going into the second half of this year. We're not really seeing a lot of pressure there. Given that much of our business is on a contract basis, I think it's too early for me to tell you or forecast what I think is gonna happen in 2024. Again, we think that there's a significant demand growth there, and we think that, at least through 2024, that supply will be constrained enough for us to realize additional value in, in 2024. That's, that's our expectation.
George Staphos (Managing Director and Co-Sector Head in Equity Research)
All right. Thank you so much. I'll turn it over, guys. Thanks for the thoughtful answers.
Operator (participant)
Thank you. Our next question is from Paul Quinn with RBC Capital Markets. Please proceed with your question.
Paul Quinn (Managing Director and Senior Analyst)
Yeah, thanks very much, guys. Morning. Just at the beginning of the year, we had a CapEx budget of $140 million-$145 million, with $15 million-$20 million of CapEx, catch-up CapEx. You know, it looks... What's happened to that catch-up amount? You know, how do you, how do you figure you're still gonna maintain the reliability with the reduced maintenance expense?
De Lyle Bloomquist (President and CEO)
Paul, let me start off by saying good morning, Paul.
Paul Quinn (Managing Director and Senior Analyst)
Morning.
De Lyle Bloomquist (President and CEO)
As I was mentioning with George, we're not, we're not reducing our maintenance expense, all right? We're gonna continue to invest and make sure the facilities are properly maintained going forward, to maintain the current level of productivity. The capital that we were planning to spend that we're pulling back now, is to further advance the productivity going into 2024. The fact of the matter is, is that, you know, demand's soft, at least for our high-value products, and frankly, I don't need that additional capacity right now. Why spend the money? Let's, let's wait and see and raise capacity and improve reliability when, when the, the time is, time is needed.
That is the, that is the focus that we have on that.
Paul Quinn (Managing Director and Senior Analyst)
Okay, then, De Lyle, you know, the confidence that you've got on the, "Hey, we're going through a destocking phase," as opposed to, you know, a drop in demand or consumption, how confident are you that, you know, it's destocking, it's gonna bounce back in, in, say, 2024 or 2025?
De Lyle Bloomquist (President and CEO)
I got some confidence in a number of our sectors. There are some areas that we're still, I would suggest, are relying upon what our customers are telling us. For, I'll start with Paperboard. You know, Paperboard, we actually have seen a fairly significant increase, and I would say back to normal levels in terms of sales volumes in July. I would expect it that will continue going forward. With respect to the destocking in some other areas, like, if you take High-Yield Pulp, High-Yield Pulp or the mechanical pulp business, we're seeing prices beginning to increase. That would suggest that we've kind of we've hit bottom and demand supply is back in balance, and prices are starting to reflect that.
We're also seeing that in our, our, our paper pulp business. We're starting to see that rebound a little bit and start heading in the right direction again for, for the same reasons. Tire cord in our CS business is also showing signs of increased activity as the OEMs and the auto industry are beginning to pull increase their demand pull for, for our products. I'd say that that's, again, another nice green shoot that's suggesting that we're, we're, getting to the end of destocking. On Construction Ethers, I would say, you know, a lot of that is both destocking as well as a decrease in market demand. It's tied to higher interest rates we're seeing around the world, and it's had a, a dramatic impact on construction activity in our case, principally in Europe.
We're forecasting that we'll see some sequential improvement in Q4, not necessarily in Q3. Again, to be fully transparent, we have yet to see much of an improvement yet in increased pull and demand for our Construction Ethers. Again, we're relying on our customers and having them give us some of their forecasts of what they think is gonna happen through the rest of the year. The other businesses, particularly around our CS businesses, whether it's acetates or the non-Construction Ethers and things like nitrocellulose and so forth, the demand for those products have been stable.
We've mentioned this a number of times in the past, that roughly, you know, 60 to two-thirds or 60% to two-thirds of our CS business or our, I guess it's our overall business, is recession resistant. I would say that that's. We're, we're hanging in there. That's, that's, that's holding true.
Paul Quinn (Managing Director and Senior Analyst)
Okay, thanks for that. Sounded like you've taken downtime in July at one of the lines in Temiscaming on high-yield pulp and expect to continue that through August. I'm just wondering why only the two months, why bring it back if you're gonna...
De Lyle Bloomquist (President and CEO)
Well, yeah, just to confirm that, yep, we, we did take it down. It was due to market conditions. I think we mentioned that in the last analyst call, that if pricing got to a certain point, we would make that call and, and take the- take some capacity out. As mentioned, we did keep one line open so that we could provide the feedstock into our Paperboard business. We kept it down for, you know, four to six weeks. Then, you know, we started seeing improvement in pricing. Therefore, feel that it's an appropriate time to bring the plant back up, and we'll bring it back up later this month.
Again, we reserve the right, if we see any kind of degradation in pricing, then we'll again consider whether we need to idle up the, that line or not. Again, it's being driven by the market or activity there is being driven by the market conditions.
Paul Quinn (Managing Director and Senior Analyst)
Okay, and last one for me, just on these strategic alternatives. I suspect that doesn't mean sale of assets, but what's the idea with, specifically with viscose? Just to move the production of that from, from an existing facility to a different line, or what are you looking at?
De Lyle Bloomquist (President and CEO)
No.
Paul Quinn (Managing Director and Senior Analyst)
For instance?
De Lyle Bloomquist (President and CEO)
Yeah, it's, it's not reshuffling about the deck chair, so to speak. That's not what we're suggesting here. It's the, you know, the typical options you would look at when you're doing a strategic review of, of businesses. I won't go through all the different options we're looking at. I will say that we've been looking at this for a few months already, so we're well down the path. We got some more work to do on that, but I would say that, you know, we're looking at all the different potential strategic options that someone would typically think of. We'll be prepared in a couple of months, probably by the November analyst call, to give you more clarity on exactly what we want to do.
Paul Quinn (Managing Director and Senior Analyst)
All right. That's all I had. Best of luck. Thanks.
Operator (participant)
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Our next question is from Sandy Burns with Stifel. Please proceed with your question.
Sandy Burns (Managing Director and Head of High Yield Research)
Hi, good morning. Congrats on getting that refi completed in this environment. Maybe first, to talk about the commodities, you know, the commodity business and HPC. Historically, where has pricing bottomed out in that business? You know, if you don't have like a good number, like, how close are we to the bottom, in your opinion? Then kind of tied into that also, at current pricing, was that part of your business EBITDA positive in the Q2?
De Lyle Bloomquist (President and CEO)
Those are great questions. Thanks for joining us, by the way, Sandy. Appreciate it.
Sandy Burns (Managing Director and Head of High Yield Research)
Sure.
De Lyle Bloomquist (President and CEO)
I would say with respect to, you know, the paper pulp business and the High-Yield Pulp business, we're seeing the bottom now. Historically, maybe the prices were lower than when in the past, but because of the inflation that the world has seen over the past 12 to 18 months, that that floor has increased. I think what we're seeing now is the bottom. It has reached bottom, and we're starting to see the prices move, move up. With respect to viscose, I would say we're... I would say it's roughly the same. We've been fairly steady and stable on viscose pricing, although we've seen a little bit of deterioration, just, you know, $10, $20 a month kind of deterioration.
I would suggest we're very close to the bottom there as well. I think we're seeing the bottom on all of our commodity businesses. In the past, you know, your comment about whether or not in Q2 and Q1 or the first half of the year, whether it was our commodity business, what I would again define as our viscose and our paper pulp businesses, were the positive EBITDA in the first half of the year. I would say that they were marginal and probably close to zero, if not negative in the first half, but I would suggest in the second half will be significantly weaker.
Sandy Burns (Managing Director and Head of High Yield Research)
Okay, thanks. Then on the Cellulose Specialties side of the business, you, you talked a little bit about destocking and how you're kind of, I mean, cautiously optimistic into the second half of the year. When you've gone through these destocking trends in the past, and I realize this environment is a lot, seems a lot tougher for chem companies this year, how long has the destocking tended to be? Like, how many quarters or so? I mean, I think at some point, customers must work through their inventories and start to, you know, stabilize and rebuild their inventories. Like maybe on a historical perspective, how long has these destocking periods lasted for?
De Lyle Bloomquist (President and CEO)
Well, Sandy, let me just state that what we're going through right now in terms of destocking is unprecedented. I think if you were, you know, listening to other, other analyst calls from our, from our customers, they would say the same thing.
Sandy Burns (Managing Director and Head of High Yield Research)
Absolutely.
De Lyle Bloomquist (President and CEO)
You know, particularly in our CS business, you know, Dow and Eastman and Ashland, they all talk about the fact that, you know, they're down 20%-30% on their sales volumes and their construction-related activity. In fact, you know, some of them would note that they've actually shut down lines as a result of that. I, I, I think what we're going through right now is unprecedented. It's obviously being, you know, driven by the logistics constraints and bottlenecks that we went through last year. Everybody shifted to just in case buying activity to, and now we're going back to just in time ordering activity. So what we're going through is, is something that I've never, never experienced, and I don't think this business has ever experienced before.
As I said earlier, when I was, you know, answering Paul's question, we're starting to see some green shoots. We're starting to see pull. We're starting to see demand pull in some activity that would suggest that we're getting to the end, if not at the end in, in some of these, some of these activities. Some of the softness, though, that we expect to continue is actually relate more, not to just stocking, but more to, just, suppressed market demand because of a lower economic activity.
Sandy Burns (Managing Director and Head of High Yield Research)
Okay, thanks. Last one for me on the cost reduction actions that you've mentioned, and you, you kind of walked through some of the different specifics. Maybe like in total, how much of it would you say is being implemented at the corporate level that will reduce... we should see in, in corporate expenses come down?
De Lyle Bloomquist (President and CEO)
Okay, let me see if I can answer that question, specifically corporate. Sorry, just give me a second, so I can give you a little-
Sandy Burns (Managing Director and Head of High Yield Research)
Sure.
De Lyle Bloomquist (President and CEO)
The, give you a reasonable number here. It looks like, and this includes some activity that isn't specific to a plant. For example, caustic pricing that was, that's gonna, you know, lower caustic pricing that has been negotiated by the corporate sourcing team, and lower freight rates, which will, which will apply across all the mills. If I add those two up, it's roughly $1.5 million. Then other corporate expenses, we're seeing roughly $4 million, so a total of about $5.5 million or roughly 13% of the total.
Sandy Burns (Managing Director and Head of High Yield Research)
Okay. great. Thank you, and good luck with everything.
De Lyle Bloomquist (President and CEO)
Thank you.
Operator (participant)
Thank you. Our next question is from Dmitri Silversteyn with Water Tower Research. Please proceed with your question.
Dmitri Silversteyn (Managing Director and Senior Research Analyst)
Good morning, gentlemen. Thank you for taking my call. Just wanted to follow up on a couple of questions that were previously asked, just to make sure that I understand what you're telling. If you look at the declines that you had in the volumes, in, in your, specialized specialty business, you talked about destocking, you talked about market weakness, particularly in the construction segment. You also talked about sort of your strategy of, of, taking or keeping price versus, versus keeping volume, so, so playing that volume price, lever.
If you had to take a look at sort of those three components, particularly, in, in light of, of, your peers in the industry, who operate in the same businesses, how much of, of, of the slowdown in volumes that you've seen would you say, is due to destocking and market weakness versus your strategy of, of, keeping price and, and, protecting your market share, but certainly not going after new market share?
De Lyle Bloomquist (President and CEO)
Okay, let me see if I can unpack that question a little bit, and certainly, if I don't answer it completely, then, you know, ask for clarification. I'm gonna start with, you know, the, the last part of your question there about, you know, if we lost any volume due to us holding holding prices and maintaining value for our CS business. I would say that, that, we have lost some volume, but I'd say it's largely immaterial so far. We haven't yet responded in pricing to that, that, that act- that action by one of our competitors. The belief being that it is im- it's been so far been immaterial.
Again, I would go back to back to an earlier point I made, which is we're going to protect our share. There's. That, that should be clear. Frankly, you know, going after share in, in, in such a market today, where you've got no market growth, just seems silly to me. It's something I don't completely comprehend or understand why someone would do that. Because we're going to, we're going to respond, and, and protect that share. To date, and what we expect going forward is that we don't have to, we don't expect that we're gonna have to protect share. And we've only lost an immaterial amount of shares so far. That's the first part of your question.
The second part of the question is, how much of this is due to destocking to versus, call it, general market activity, the lower economic activity because of higher interest rates and so forth? I would say that, you know, 60% has been due to just general market GDP activity. The other 40% and so far has been tied to destocking.
Dmitri Silversteyn (Managing Director and Senior Research Analyst)
Okay. That's a, that's a, a good, a good number. Okay, thanks for that. The second question I guess I have is on the CapEx reduction. I, I think you've sort of addressed the fact that what you're pushing out in terms of CapEx is, is discretionary spending in terms of improving productivity and improving production throughput, but not necessarily or not at all, I would hope, related to your biomaterials CapEx that you're investing to grow that part of the business. Did I understand your comment correctly? I just wanna make sure I, I, I got that right.
De Lyle Bloomquist (President and CEO)
Dmitry, I think you did understand that correctly. I mean, we can remain committed to our biomaterials strategy. As I mentioned earlier, you know, the EBITDA margin improvement, the growth potential, the stability, and the low volatility that that will provide going forward, I think will be well received by our, our, our shareholders. The reduction that you're seeing is really due to us increasing the investment hurdle for that for the discretionary strategic capital investments. The $5 million is essentially the potential projects that fell out that can't meet that 30% ROE or and a two-year or less payback period.
Those just get put back on the shelf, and one day I'll probably pick those back up when capital is more available.
Dmitri Silversteyn (Managing Director and Senior Research Analyst)
Got it. Got it. Okay, great. Then just to clarify, in your previous comment, when you talked about the EBITDA of your commodity businesses in, in the first half of the year, you said it was kind of close to 0, maybe a little bit negative. Did I hear you right, you expect it to get weaker in the second half of the year?
De Lyle Bloomquist (President and CEO)
Yeah, you know, again, quite frankly, that was, that was a big guess on my part. I, I, I would say that, you know, we're gonna lose $50 million in EBITDA. That's our estimate right now, on the viscose and paper pulp business in 2023, all that's being driven by prices. The reason why I, I, I bifurcated the two is our pricing in the first half was, was significantly higher than what we're expecting in the second half of the year, 'cause pricing, particularly with our high-yield pulp and our paper pulp business, started falling off pretty dramatically in the April-May timeframe.
I would expect that pricing, or the results for those businesses will be significantly worse than they were in the first half because of the deterioration in pricing we started experiencing starting in April.
Dmitri Silversteyn (Managing Director and Senior Research Analyst)
Got it. Got it. Okay, that's helpful. Then last question: Typically, in a slowing economic environment, you would, you would see, a decline in, in a lot of the commodity prices that you guys use as raw material inputs. What is your outlook for, for sort of raw materials? I know some of your markets or some of your raw materials are a little bit countercyclical, if you will, to the, to the markets. Any outlook on the second half of the year and getting into 2024, perhaps, on what you expect your raw materials to do?
De Lyle Bloomquist (President and CEO)
Well, and that's, that's one of the questions we continue to wrestle with almost every day, here, is to understand, where our cost of inputs are going, in, in the near and, and medium term. I guess the best place to start is that, a number of our largest input price, input inputs, their prices on those are, are continuing to be elevated, for some of the reasons I think you, you're alluding to. With respect to wood, I mean, one of the... We, we live off of, residual wood, at a number of our facilities.
When the lumber activity, because of housing starts and all the, and all that, goes down, the supply of residual wood also goes down, and therefore, the price of those residuals wood goes up. We're particularly experiencing that in Canada and to a lesser extent in France. Here in the States, we are seeing prices come down, but it's on, on wood, but it's still elevated, significantly higher than we had before we went into the pandemic. We do expect that those prices will continue to moderate over the short to medium term. Going into 2024 and so forth, we expect that those prices will continue to, to, to decline.
With respect to, you know, France and in Canada, the price for wood there is really relying on what the heck happens with the housing market and the lumber market. And so, you know, with the higher interest rate environment and so forth, our thinking is that we're just gonna have to plan to live live with higher, higher wood prices in in those two, two businesses. The other big spend we have is with caustic soda. And caustic soda pricing in Europe has returned back down to, I would say, you know, normalized levels. But here in the States, they tend to be-- they tend to have stayed elevated. And and we would expect or hope that those prices will moderate over time.
We're seeing some moderation. It tends to be relatively slow moderation, quarter to quarter. We're still very elevated there, and I would hope that, you know, as a demand softens and supply increases, which we do expect in 2024, with the new Shintech operations coming on in the Gulf, that supply or pricing for caustic soda should improve in 2024.
Dmitri Silversteyn (Managing Director and Senior Research Analyst)
Okay, if I'm hearing you correctly... I'm sorry, go ahead.
Marcus Moeltner (CFO and SVP of Finance)
... Maybe just to add to De Lyle, the, the other area where, where you're seeing reductions is, is in container rates-
De Lyle Bloomquist (President and CEO)
Yeah, that's right, freight.
Marcus Moeltner (CFO and SVP of Finance)
Ocean freight. That element, certainly I think there's, there's, you know, reference points that, that has reduced and continues to reduce.
De Lyle Bloomquist (President and CEO)
Yeah.
Dmitri Silversteyn (Managing Director and Senior Research Analyst)
Okay.
De Lyle Bloomquist (President and CEO)
Yeah, we'll see some of the benefits of that in H2. Yeah.
Dmitri Silversteyn (Managing Director and Senior Research Analyst)
In the second half of the year, got it. If I kind of put it all together, what I'm, what I'm hearing is, is your input pricing is probably going to sort of stay flattish but maybe trend down slightly, but we should not be looking for significant raw material relief to help, like, help you out on the margins. Is, is... Would that be sort of the correct takeaway?
De Lyle Bloomquist (President and CEO)
Yeah, and Dmitry, that I, I would say that that's correct, and certainly I think that's the position that we have here at the company, is that we're not counting on our raw material prices to save the day. We're looking at being much more proactive and, and more strategic things like finding ways to bring balance to the supply-demand equation, to improve, give us better pricing power. Looking at ways to reduce our exposure to very volatile parts of our business, like the viscose and paper pulp businesses, to eliminate that, that volatility and concern. Those are the areas that we feel that we can control and that we can get after.
The things that are more, you know, exogenous, like input prices, we just assume that we'll live with what, what we have, and then we'll figure out how to, how to mitigate that.
Dmitri Silversteyn (Managing Director and Senior Research Analyst)
Gotcha. Okay, thank you very much. That's all the questions I had.
Operator (participant)
Thank you. There are no further questions at this time. I would like to hand the floor back over to Dr. De Lyle Bloomquist for any closing remarks.
De Lyle Bloomquist (President and CEO)
Well, thank you all for joining us today. We believe that we continue to make significant strides toward achieving our financial and strategic objectives. I'm incredibly proud of, of the collective efforts of our team. I'm very confident that we will continue to enhance the profitability while also working to reduce our debt and our leverage. I look forward to going into more detail at our Investor Day on October 10th. I hope that those on the call will have the opportunity to join us at that time. In the meantime, if you got any further questions that you wanna address, our lines are always open. Feel free to reach out to us with any questions if you require further information. Have a great day.
Operator (participant)
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.