Tembec's (TMBCF) CEO Jim Lopez on Q1 2016 Results - Earnings Call Transcript

| About: Tembec Inc. (TMBCF)

Tembec Inc. (NYSE:USA) (OTCPK:TMBCF)

Q1 2016 Earnings Conference Call

January 28, 2016 02:00 PM ET

Executives

Jim Lopez - President and CEO

Mich Dumas - EVP, Finance and CFO

Analysts

Chris Ryan Bank - America Merrill Lynch

Bill Hoffmann - RBC Capital Markets

Sean Stewart - TD Securities

Paul Quinn - RBC Capital Markets

Joseph Von Meister - Bennett Management

John Babcock - Bank of America Merrill Lynch

Operator

Good afternoon, ladies and gentlemen. Welcome to the Tembec Inc. First Quarter Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Jim Lopez and Mr. Mich Dumas of Tembec. Please go ahead gentlemen.

Jim Lopez

Good afternoon, everybody. It's Jim Lopez speaking. Thank you for joining us this afternoon. We’re going to go through our usual update post quarterly results announcements. So what we’re going to do as we usually do is I’ll let Mich run through the financial highlights from the quarter and then I’ll follow up and give you some perspective on some of the key events in the quarter, some of the things to look forward to, and finally some idea what our outlook is for the coming quarter.

So with that, I’ll turn it over to Mich.

Mich Dumas

Good afternoon. I'll start with the Forest Products segment. Negative adjusted EBITDA of $1 million on sales of $110 million, U.S. dollar reference prices per random [ph] were down $5 per thousand; but the real weakness was in studs. So we saw prices drop $32 per thousand on average quarter-over-quarter. We had a slightly offset with currency at 2%, Canadian dollar down 2% versus U.S. dollar; but overall, Canadian dollar prices down on average $22 per thousand for us, which is a big drop, decreasing adjusted EBITDA by $4 million, which accounted for most of the variance. Volume was good at $197 million. We actually shipped a little bit more than we manufactured. Sawmill costs were seasonally higher, $1 million. We take some downtime in December and as it gets colder the sawmill was required. They’re not quite as efficient as in the summer in the warmer months.

Specialty Cellulose segment, very good quarter. Adjusted EBITDA of $19 million on 109. Kallima pricing for specialty grains was nearly flat. We had the 2% currency offsetting about 2% mix decline. And so that really didn’t change. Pricing for viscous was up CAD78 and it was all currency pretty well. It was nice to get the currency benefit in our results. Overall pricing impact, mostly viscous increased adjusted EBITDA by $2 million.

The volume of Specialty Pulp was 41,000 tons, which was down 6,000 tons from the prior quarter, but an increase of 3,000 from the same quarter a year ago. So, it depends; is the glass half full or half empty? In this case we’re 3,000 tons ahead of the last year’s pace after fiscal Q1. Lower shipment reduced adjusted EBITDA by $2 million quarter-over-quarter.

Improving the adjusted EBITDA was really due to performance of Temiscaming and the full benefit of the Cogen project. We produced 4,200 more tons, cost down by $5 million quarter over quarter. Only $1 million of that was energy. $4 million was absorption of fixed and daily and lower operating and maintenance cost. Cost down $20 million year-over-year at the mill, but the previous year included the effect of a strike that we had there, but still a significant drop in costs year-over-year. And when you compare to the prior quarter, a year ago, we didn’t have the Cogen running at all. Chemical EBITDA was down by $1 million. The fall and winter are seasonally weaker periods for the lignin business.

The Paper Pulp segment, negative adjusted EBITDA of $2 million on sales of $68 million. Prices for high yield pulp were down by $33 per ton, selling at a relatively high discount to BEK. Canadian dollar price was down by $30 per ton quarter over quarter. We shipped lower volumes. Demand was not strong. We took 33 days of downtime at Temiscaming. Production down 30,000 tons. We didn’t want to put it in inventory. We rather take the downtime, but it did increase our manufacturing cost by $4 million for absorption.

The Paper segment, good quarter, adjusted EBITDA of $16 million on $94 million of sales. U.S. prices for coated bleached board were flat. We had the benefit of currency and EBITDA increase by $1 million. U.S. dollar Newsprint prices were down $13 and Canadian equivalent we were down CAD19 million, which reduced EBITDA by $1 million. And really the improvement was due to the higher productivity and lower cost at the cap newsprint mill. It ran very well and it reduces cost by $3 million quarter over quarter, which is good to see.

The Corporate segment, general and administrative expenses totaled $4 million. That's normal. CapEx for the quarter was $10 million, also normal now that the Cogen project is completed. Liquidity was $78 million at the end of December quarter, up from $56 million at the end of the September quarter. The new ABL FILO provided approximately $42 million in net liquidity mid-quarter and subsequent to that we made our interest payment and we also made a tax payment in France which reduced it from the time we actually raised the money.

On a consolidated basis, we had consolidated EBITDA of $29 million compared to $36 million in the prior quarter. We had anticipated it would be down. We knew lumber prices were weaker and high yield pulp markets were difficult when we had our last conference call mid-November. We could see it coming. The improved result of Temiscaming specialty cellulose mill provided a partial offset to the drop in those prices. Net loss of 28 million or 28 per share, but it includes $24 million of non-cash loss on debt translation.

Jim Lopez

Very good, thank you Mich. As Mich mentioned, EBITDA for the last quarter was $29 million. So that's a good quarter. Not as good as the one we had previously with $36 million EBITDA, but still we think that the trend is positive, and we continue to focus on those things in the Company that we can control and we think that we're going to continue to generate good results.

We had some headwinds and tailwinds in the quarter that Mich had mentioned. Certainly the decline in the Canadian dollar throughout the period helped our results. However, we also had as Mich mentioned, lower commodity prices. So much of what we gained with the currency we lost in the commodity prices. So just one of these things where we know when the currency moves that there's going to be some movement in commodity prices. It's rare that you could take it all and put it all in your pocket, but that's been our model for some time and we know that.

We had a really good operating quarter. Notwithstanding the downtime that we had to take in our high yield pulp mill in Temiscaming, we had excellent mill performance. I could say that in the quarter, every one of the company's pulp and paper mills beat our budget and beat their 2015 productivity numbers. So it was a great start to the fiscal year. I'm very proud of that. We're seeing lower cost as a result of the good productivity, and other good things that our teams have going on in various operations. Also, our saw mills ran very well and most of them ran ahead of the budget and the 2015 numbers as well. So a lot of good things about that quarter, and what I'm most thrilled about is it's the controllable things that are helping the most in terms of improving our earnings.

Not the least was our new energy project in Temiscaming. When you look at that project, we had three major areas where we expected benefits. Of course, we were expecting an increase in electricity revenue. We expected lower maintenance and operating cost and we expected a higher productivity at the pulp mill because the new boiler was going to allow that mill to run without steam interruptions or issues with disposing of liquor. What I'm pleased to announce is in the December quarter, we met all those objectives. We met the full objective in terms of energy cost improvements. Our maintenance and operating costs were definitely lower and our mill productivity was very good at the specialty cellulose mill in Temiscaming. So we're at that run-rate where we thought we would be right now, a40 million improvement in EBITDA due to this large investment in Temiscaming. So we're thrilled by that and I'll have to say that even here we are one month into the new fiscal quarter and that trend is continuing.

Looking at our various businesses, I'll start with lumber. I mentioned that our mills ran well last quarter. We saw the seasonal decline in U.S. dollar selling prices. That is normally expected. It was a little worse than what we thought it was going to be in the quarter. And then fortunately, we’re off to a slow start this quarter. Randomly [ph] prices are down. Mich mentioned the gap between random [ph] and studs is at $80 which is unusually high. And of course this has to do with the fact that studs is a product that goes into new home construction, and the housing starts for various reasons, including weather are off to a slow start in the U.S. for 2016. So we’re disappointed in lumber prices.

However, we think that there is a good opportunity for an uptick this quarter. It appears that there is a lot of wait and see on the customer side in prices, and that people are carrying in low inventories, and are going to buy once they see their takeaway start to improve with the seasonal start of the construction season. The thing is many customers are taking the same approach. So when they all start calling for product, I'm not sure if there is going to be enough product there. So I do believe there will be a seasonal improvement. It's just a matter of degree. And as most of the analysts on the call will tell you, it's darn hard to predict right now.

Mich had mentioned that the lower U.S. dollar selling prices, we are seeing some mitigation with the devaluation of the Canadian dollar. So our results in lumber are lagging. What we expected them to be when we put our budget together, but not near to the degree, thanks to the help with the currency.

One of the things that’s on the mind of all Canadian lumber producers is the softwood lumber agreement with the United States. The last agreement that we had expired in October of 2015, and that agreement had embedded in it a one year stand still clause, which requires the U.S. to put their pencils down for a year before contemplating any new potential trade action against Canadian producers of softwood and lumber. So nothing can be done by the U.S. before October 2016, and realistically probably not till early calendar ’17.

Our expectation is that in the very near future discussions will commence between Canadian and U.S. officials. I think there is a lot of will on both sides of the border to avoid another trade dispute and to get another trade deal in place. So our expectation is the discussions will start shortly and we’re hopeful in that we can find a place in the middle that satisfies the demands of the U.S. and still leaves Canadian producers in a good place. So it's too early to tell whether or not that will be successful. But I would say I am cautiously optimistic that this can happen.

I guess overall, given the unpredictability of lumber when I look at all of our segments, this is the segment that poses the greatest risk to our earnings in fiscal 2016. I think we have a pretty good fix on the rest of our businesses and what the models is going to look like, where pricing is going to come in and so on. So the lumber is the one that has us a bit nervous about that.

Moving on to our largest business segment, the Specialty Cellulose. Our mills ran well and continue to run well last quarter, and even into this quarter which is, those are high fixed cost shops. So with the good productivity leading to some good things in terms of cost reduction in the mill. So this business has been a strong contributor to profitability and I expect that to continue if not improve in the future. On the market side, of course, it's that time of the year where everybody is going to ask -- so I will head off the questions about what’s happening with specialty prices in 2016.

Overall, when we look grade by grade, customer per customer, overall specialty prices will not change from 2015 on a U.S. dollar and euro basis, depending on the customer in the market. So we’re happy with that after a couple of years of fairly substantial price reductions that did affect the Company’s earnings, we think we hit bottom and indeed that is the case. We think a large driver to that is the competitor that converted the commodity mill to make specialty pulp, made the decision last summer to reverse that investment, and to go back to make commodity grades at that facility. So that facility frankly contributed a lot to the imbalance in the marketplace and decline in price. And now we’re seeing a rebalancing and we have a relatively balanced specialty pulp market out there. So I am pretty happy about that. Obviously, we don’t have to take a step change in our specialty earnings, like we've had to do for the last two March quarters as new prices were put into effect.

So that’s great. I would say if I look at the commodity side, this time last year commodity viscous prices, the whole market was pretty challenging and prices were in the $700 range, $700 to $750, and there was some substantial weakness in the marketplace. Fortunately, that was the bottom, and throughout the later part of calendar 2015, we saw the U.S. dollar price for viscous pulp improve into the mid to upper 800s. So we’ve seen and I would say a descent step change in terms of the U.S. dollar pricing, and that let price going into our March quarter is in the range let’s say $840 to $860 in China. So that step change in price has certainly helped our operations in Temiscaming in terms of improving the profitability, but we’re still producing substantial volumes of commodity product.

Our commodity volumes in 2016 will be up over ’15. The good news is, this is virtually all due to the improvements and productivity in our Temiscaming facility. It is running darn well. In fact, it’s running much better than what we had forecasted when we made the decision to put the energy investment in place. So the result is we'll be producing more product and our volumes in specialty are contracted more or less for the entire year. So we will move those into the commodity markets. It’s a very good problem to have.

Last year -- last couple of years actually when we’ve talked about the viscose sales out of our Temiscaming operation, we talked about the economics of that product being such as we are contributing a couple of dollars to fixed costs, I think with the term that I have been using. But I can tell you as of today, we are now generating reasonable EBITDA margins in selling the viscose product. And this is due to the new boiler and turbine reducing the cost of that site by about $200 a ton. The higher price of course contributes and the lower Canadian dollar contributes.

So now we’re very, very happy to produce viscose out there; albeit, we remained focus on converting that mill to more and more specialty grades and that work does continue. We're having some excellent results in terms of lab trials with some of our targeted customers and we think that the work of the last couple of years probably won’t increase specialty volumes substantially in Temiscaming for 2016, but we see the opportunity for a substantial impact going into calendar 2017.

It’s interesting, this energy project in Temiscaming. The objective of that project was to get the economics in Temiscaming comparable to Tartas. Tartas has been our almost profitable operation for a number of years now, as our other specialty cellulose operation, and Temiscaming has been fairly unprofitable, except for a couple of peak periods a few weeks ago due to the higher cost structure. So the objective is we like the business of Specialty Cellulose. We're good at it. We're one of the world leaders. But we need to improve the margins.

So if we look at margins last quarter for the two businesses, we don’t often disclose individual operations in terms of profitability. But I can say that the EBITDA margins in Tartas and Temiscaming were virtually equal for the last quarter, generating 18%. So to us, this is what our target was and now we’re fulfilling the target. And who knows, with a little bit of tweaking and some other hard work at the Temiscaming side, maybe even Temiscaming can step ahead or Tartas in terms of profitability.

Moving to our high yield pulp business. Mich had mentioned, we took substantial market downtime last quarter. Actually there is two weeks of market downtime the carried over into the first fiscal month of this quarter. So it was the last week of December and the first week of January. So we’re going to see some impact on results due to that market downtime. We’ve now taken the approach that we’ve taken the downtime. We've now reloaded on order book. The market has improved and as a consequence our order book is looking much, much, much better then where we were three months ago. In fact, we’re completely sold out for the next three months. So we're thrilled by that. We’ve achieved some I'm calling relatively modest price increases, and we’re going to be targeting more as the year ago buy and of course to the conditions dictate, we’re going to be targeting more price increases in our high yield pulp business. With the small improvements in the selling price, the Canadian currency where it is; notwithstanding what’s going to happen in January because of the downtime, but that business will be profitable under current conditions.

I mentioned all our mills ran well last quarter including our two high yield pulp mills, and what I’m really thrilled with is even that high yield pulp mill in Temiscaming under very difficult conditions, knowing that there were facing downtime still have very good productivity numbers. So our expectation as of today is there will be no more downtime in this fiscal year.

Moving over to our Paper segment, like our other pulp mills, our paper mills also ran well in the last quarter. This is a recurring theme that I’m happy to have and we’ve seen the impact on the cost of those facilities. Looking at the markets, the coated bleached board market has seen some challenges in the last, I would say six months, with the lower value of the euro vis-à-vis the U.S. dollar and the addition of about 1 million tons of new capacity in Europe.

Our European -- there's been some European competitors that have been more aggressive in the marketplace, trying to pick up market share to take advantage of the currency difference. And the result has been well, we haven’t lost any market share. There is been an impact on our U.S. dollar price. So in some of our products, not all of them we’ve had to take some price reductions over the last six months.

That being said, the Canadian dollar is going to help the bottom-line of this business dramatically, and far overshadow the small U.S. dollar pricing decreases that we’ve seen there. So the coated board business will continue to be very profitable for the Company and will continue to round about $1 million a week of EBITDA.

In the Newsprint, I think everybody on the call knows that the Newsprint story as North American and global demand continue to decline. It's been a challenging market and we’ve had substantial price decreases over the last several years. There has been recently a rebalancing of the marketplace, with the mill closures and announcements of capacity that’s going to be converted over to packaging grades. It's changed the dynamic in the market at least for now. The industry was able to obtain $20 price increase in January, and there is a very strong possibility we’ll have another $20 price increase in February. So that’s great. Frankly when we put our budget together, that was unexpected but certainly well deserved.

So given the price increases and what’s happening with the FX and the very good cost structure of that facility, Newsprint at least for the short term is going to be pretty good contributor to EBITDA for the Company. So we’re happy to have the Newsprint, which has always been positive to slightly positive in EBITDA, but it's going to be more material given all the factors that I mentioned above.

So just summarizing everything up. First of all, I’ll highlight that we have no major maintenance planned in our pulp mills for the March quarter. I will continue to emphasize that this Company is focused on productivity and cost. We’ll continue to optimize the Temiscaming energy assets. So we’re going to see if we can squeeze some more dollars out of them. It certainly is possible. And if I just want to give you some view of what the March quarter is going to look like from an EBITDA standpoint, given everything we know and if the prices and the currency are relatively stable this quarter, we would expect a comparable result to the December quarter.

So with that operator, that’s management’s comments for the quarter, and we’d be happy now to open up the phone for questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone line [Operator Instructions]. The first question is from Roger Spitz from Bank of America Merrill Lynch. Please go ahead.

Chris Ryan

It's Chris Ryan sitting in for Roger today, thanks for taking my questions. So my first question is the calendar 2016 specialty cellulose prices were essentially flat, you said with 2015. What drove that given the oversupply on the acetate especially cellulose side?

Jim Lopez

Chris, first of all, I should have mentioned, just to give everybody a heads up, because I know there is a lot of analysts here with good spreadsheets and chart pencils. You guys would attempt to watch our quarterly pricing numbers that come up for specialty, and try to compare that to my comment about flat pricing. I should point out that you’re going to see some fluctuation in our average specialty pricing downward about 1% or 2% because of a mix change. We’re going to sell more MCC grade nitro grades and probably less ether grades and acetate grades. So there is a difference in the pricing structure for those. There is also a difference in the cost structure fortunately. So just before warned, as you look at our future results and you try to articulate that with my comments, that it's going to be hard to get it to one for one transfer there because of what I would say a somewhat substantial grade mix change for this year.

But Chris going specifically to your question, the market has rebalanced because our major competitor in the U.S. that created a lot of the imbalance with the conversion of a pulp mill makes specialty cellulose. That created a lot of disruption in the marketplace. He announced last summer that he is converting it back to make commodity grades. So there has been a lot of capacity removed from the marketplace to rebalance it. So it's in reasonable shape right now. There's not a big overhang in supply.

Chris Ryan

Okay. And so what percent of your accounting year 2015 Specialty Cellulose volumes were in acetate and how did that changed versus 2014?

Jim Lopez

I'm sorry. We don’t give that detail. That’s just not something strategically that we give out.

Mich Dumas

But we are not a big acetate producer.

Chris Ryan

Okay. That's fine. And have you seen your market share change on the ether specialty cellulose market or others market share change? And do you see [indiscernible] in the ethers market?

Jim Lopez

Our market share has not changed materially. We’ve seen some softness in demand where our customers demand for his product has been down a bit. So we’ve seen a little bit of softness there. But no, we haven’t lost any material market share. And in terms of the competitor, you have to ask him what his success is in the marketplace. I really don’t comment on competitor activities.

Operator

Thank you. The next question is from Bill Hoffmann from RBC Capital Markets. Please go ahead.

Bill Hoffmann

Jim, could you talk a little bit more about the viscous market and the opportunities there from a volume standpoint. You guys were running call it 8% in December quarter. Just wondering how much incremental you can run viscous and your ability to push that into the market?

Jim Lopez

Well, it's a commodity market. So if we want to sell more, we can go out and get the orders and we’re price takers. So whatever the price is to get the order, we do it. It's a big market. It's a 3-million-ton market or actually a little bit more than 3 million tons now. So to go out and try to place another 5,000 or 10,000 tons in the market of that size is not really a big deal. But we have a high class problem right now Bill. Our mill in Temiscaming is running even better than we dreamed. The productivity numbers are fantastic. So actually our sales guys had some budgeted numbers they hit that incorporated some productivity improvements, and now we’re saying all right, well get your butt back over to China, because we need another 5,000 tons for next quarter. So it's a high class problem, and we don’t expect any problem at all in moving the product into the marketplace.

Bill Hoffmann

But do you think that pushes up your operating rates down, and to what kind of levels?

Mich Dumas

As a rule, Bill, if you’re making viscous as post true specialty, the lower spec and the higher yield, you get 10-15 more tons out. So there is a cost benefit. I think Jim was referring that you guys might see our top line on average drop a little bit. But then the cost should come down as well. So the margins will still be reasonably good.

Bill Hoffmann

And then just with regards to the power project; have you guys tried to quantify -- you said you had the full benefit in the December quarter. Have you tried to quantify the impact on the quarter?

Mich Dumas

Well, if we haven’t had it, the costs would have been $10 million higher.

Bill Hoffmann

Okay. And then looking into -- Mich you mentioned that there was no downtime planned in the pulp mills in the March quarter. What’s your expectation in the June quarter as far as maintenance requirements and downtime?

Mich Dumas

Yes. We will have our annual maintenance shutdown in Temiscaming in May. Tartas has none this full year. They're on an 18-month cycle and they have none this year.

Jim Lopez

So Tartas will have theirs in the fall, but this fiscal we’ll have the one in Temiscaming in May and that's it.

Bill Hoffmann

Okay, and then you also talked about Temiscaming, the downtime in the paper pulps, from the high yield pulps. Is [indiscernible] excellence that have been [indiscernible] when this now shut, is that correct?

Jim Lopez

That’s our understanding.

Bill Hoffmann

So is that really what’s leading to a better balance in that business again?

Jim Lopez

I guess you could say it helps. Certainly when they started up, they think create some new tons and they were disruptive in the marketplace and certainly having those tons out of the marketplace helps.

Mich Dumas

We took 30,000 tons off to reduce our inventory.

Bill Hoffmann

Great….

Mich Dumas

And then when people start taking downtime, the problem tends to not last as long.

Bill Hoffmann

And then Jim, just comments on the Softwood Lumber agreement. Expectation here, given the fact that you’re in this waiting period for a year. Do you think the Canadians are going to be shipping more lumber into the U.S.? Do you think they’re going to try to be somewhat constrained just because they don’t run into bigger duty problems? What are your thoughts on that?

Jim Lopez

Well, I’ll answer the last one first. I don’t think anybody is going to create their change of behavior on what may or may not happen in the future. I really don’t see a big change in shipping patterns though. What will change is you’re going to see the differential between Canadian prices and U.S. prices shrink. Because when prices were low and the duties were in effect, your Canadian buyers would just do the calculation on the impact of the duties on our mill nets and he would build that into his expectations in terms of price. So there certainly has been no big mix change for us and I don’t think there has been for anybody else.

Operator

Thank you. The next question is from Sean Stewart from TD Securities. Please go ahead.

Sean Stewart

A couple of questions. Mich on the liquidity trend. So after you arranged the financing, I think November 18th you had $112 million, the end of the quarter $78 million. You mentioned an interest payment and tax payment in France. Can you quantify those two items?

Mich Dumas

Yes, we paid about -- all interest payments in the quarter totaled about $25 million. And we had $3 million in France. It's on the cash flow statement, Sean. You can see it.

Sean Stewart

Okay.

Mich Dumas

We had tax payment of -- it was around 2 million. [indiscernible] 2 million. But we paid $25 million in interest Canadian equivalent, because one of the things you have to remember, as the FX rates is helping us on the EBITDA, it's is boosting my coupon cost on my U.S. dollar desk. So that’s where most of it went. We built about $6 million in inventory in the quarter, and really there is an opportunity going forward to extract some of that to bolster our liquidity going forward. We can’t hold it too much. We dealt with the high yield issue but there is other segments where -- some of it as Jim has mentioned, productivity was really good and the sales guys are now trying to catch up.

Sean Stewart

And then Jim, just a follow up on the lumber trade file. Can you speak to engagement that you guys have had with the new trade minister or her representatives? It sounds like you're pretty comfortable that negotiations should start soon, but maybe just a little bit more context on engagement that that industry has had with the government to this point?

Jim Lopez

Sure, I'd be happy to. I've had the opportunity to speak to Minister [indiscernible] and myself and I know she's engaged a good part of the industry herself directly and through her officials. I'm impressed with how quickly she has come up to speed on a relatively complicated issue, with a lot of history. So in my engagement with her, it was very little she didn’t already know about the file. She has directed her staff in what's now global trade, global affairs to maintain very frequent updates with industry on the file, and they've gone as far as -- they've actually toured Canada before the Christmas holiday, met with industry representatives in every province, and met with the provincial governments to get some clarity on the views of the industry and the provincial governments on what a new trade deal could look like. So they put a lot of work into this thing, and I think the new government is going to be very focused at getting something done and putting this behind them.

Operator

Thank you. The next question is from Paul Quinn from RBC Capital Markets. Please go ahead.

Paul Quinn

Just a question on the specialty pulp mix that you expect in '16. It looks like you did sort of 45% commodity in '15. Should we see that moving up to 50% in '16 with the increased production at Temiscaming, and what should be the overall volume?

Mich Dumas

Well, we did 169 Paul in specialty and about 68 in commodity last year. We're targeting to do a little bit more specialty, and as Jim mentioned some of it might be in the lower selling grades like MCC or nitro as opposed to more ethers and acetate. But definitely the viscose number is going to go up, but it’s not going to go up to 160, 170. It's going to go up to 90 or 100.

Paul Quinn

Thanks for the color on the Specialty pricing. So it sounds like in U.S. and euro terms flat year-over-year on calendar basis. With the Canadian dollar that should actually boost you. I missed the commodity – your forecast on commodity dissolving. Could you just repeat that?

Mich Dumas

Yes, we're expecting this quarter's going to range – Chinese price will range – for softwood, because it's different for hardwood and softwood, but $840 to $860.

Paul Quinn

Okay.

Mich Dumas

U.S.

Paul Quinn

And in terms of -- Jim you talked a lot on SLA. In terms of your engagement with the U.S. side, do you actually feel that there's willingness on the part the Americans, especially the government there to actually get something done before the expiry of the one-year period noting the U.S. elections are looming near?

Jim Lopez

Yes, I think there is. There I would say a lot more transparency engagement between the Canadian and U.S. industry. As you know, now, we formed the Softwood Lumber Board after the Binational Softwood Lumber Council was formed. This Softwood Lumber Board, the stated objective is to grow the market for wood in the United States and I sit on a Board of Directors of about 14 Canadian and U.S. CEOs. So when you have that kind of quarterly contact with each other, it just builds a lot more transparency and goodwill. So I think there's definitely will to do something. I don’t think anybody has the stomach for another trade war. I think they have certain expectations of border measures as we call them on Canadian lumber and they expect to achieve those border measures, either through a trade agreement or through trade actions by the U.S. Department of Commerce, but nobody wants to be paying lawyers and lobbyists for years like we've done for the first four softwood lumber disputes.

So I think there's goodwill there. I think that the Canadian dollar where it is, it's creating some consternation with the U.S. producers right now, because we mentioned that lumber prices are relatively low. But on the C dollar basis they're not a disaster at all. So I think that has created maybe a bit of a sense of urgency to get something done. So I guess I'm allowing myself to be, as I said earlier cautiously optimistic, because I think there's a degree of urgency on both sides to get something done, and not let this thing linger on until the end of the calendar year.

Paul Quinn

And just lastly, your forecast for a comparable quarter I guess in calendar Q1 or the current quarter that we're in right now, it sounds like we'll see higher pricing partly due to the Canadian dollar on the specialty pulp side. Lumber might be up and newsprint will be up, paper board should be up reasonably, and it sounds like you've seen a lift in high yields. So I'm just wondering, why comparable as opposed to a smaller gain?

Jim Lopez

Well, we're going to be bearish lumber for now.

Paul Quinn

Okay.

Mich Dumas

And Paul as our cost, January, February, March are our highest cost periods. Everything costs a little bit more energy wise. So it will be a couple of million dollars and cost sales line for energy.

Operator

Thank you. The next question is from Joseph Von Meister from Bennett Management. Please go ahead.

Joseph Von Meister

So your margins were about the same at Tartas and Temiscaming in the dissolving pulp business. What kind of volumes around those two facilities this quarter?

Jim Lopez

In production both ran well Joseph. They both had high pretty good costs.

Joseph Von Meister

What kind of capacity do you think?

Jim Lopez

The big improvement was in Temiscaming. They made the extra 4,000 tons.

Joseph Von Meister

So that all came in Temiscaming?

Jim Lopez

Yes, yes. Perfect cost structure, cost quarter-over-quarter was based on that.

Joseph Von Meister

And what kind of capacity utilization are you running at in charter?

Jim Lopez

We’re running at about the regulatory 300 tons a day

Mich Dumas

380 tons a day.

Jim Lopez

380 tons a day and they’re running pretty well at that rate.

Joseph Von Meister

And do you expect the Tartas folks to the shipping any commodity product this year?

Jim Lopez

Yes. I do have an expectation that there will be some fluff sales. There already is some flat sales coming out of that operation, but very small volumes measured in hundreds of tons of months, not thousands. But I would anticipate probably come Q3, we’re going to produce a little bit of viscosestrate [ph] straight and ship that as well. In Q3, Q4, you’re going to see a bit of commodity -- I wouldn’t call it a big number. It won’t be 10% of the mix there, but there will be a few thousand tons.

Joseph Von Meister

And is that just because the either demand isn’t there?

Jim Lopez

Yes.

Operator

Thank you. They next question is from John Babcock from Bank of America Merrill Lynch. Please go ahead.

John Babcock

My first question is on the Specialty Cellulose side. I was just wondering if you could kind of talk about the key demand market that you compete in there and ultimately what sort of trends you’re seeing?

Jim Lopez

Well, our key market is the ethers market. And I think the ethers market has been relatively flat. So much of that is leveraged to construction materials. And a big part of that market is in Europe. And as you know that Europe has been pretty sleepy when it comes at construction for the last couple of years. Well that pick-up? I guess, you apply your own forecast to what you think it’s going to happen in Europe. We’re going to just take a modest view for modest growth for a while. That’s the big -- that’s the one is really going to drive that companies improve volumes for Tartas, because that mill produces so much ether that really it’s bread and butter.

With the one grade that’s really interesting -- there is an interesting trend is what we call the MCC grade, microcrystalline cellulose. That is the food and pharma, and that scenario, that is projected to grow substantially over the next dozen years or so. Its food processing continues to grow in a developed world. The demand for MCC will grow. As a demand for pharmaceutical drug grows in the world, the demand for MCC will grow. So I would say, if you’re looking for the one that has the biggest arrow up, it will probably be the MCC grades, followed by the ethers grades. I would say the major market that's most at risk and has some downside risk is the acetate rate, because it goes into cigarette filters.

John Babcock

Okay, thanks for the color there. Just quickly on the asset side of things there, will you look at ultimately your production capacity? How does that compare with your peers? I guess essentially just want to get a sense for whether not the quality is basically on par with the other guys or if there is any sort of variance that we should be paying attention too?

Jim Lopez

That’s a good question and honestly, it varies by customer. We make strictly a softwood acetate. The largest producers in the world make a hardwood acetate. In the eyes of some customers based on their process, the softwood doesn’t have the same runability and quality attributes as with the hardwood does. On the other hand, we have other customers who have a different process, and they tell us they see virtually no difference in the performance of softwood versus hardwood. So I know it’s kind of big answer of your question, but it really just depends on to the customers.

John Babcock

And to the extent you can provide some color there, ultimately what are those customers looking for that prefer the hardwood side versus the softwood side?

Jim Lopez

I think, it would require technical discussion and I’m not prepared to get into that.

John Babcock

Okay. But they more or less compete in the same markets though, I guess is what I was getting at?

Jim Lopez

Yes. I mean like 90% of the acetate market is cigarette tope.

John Babcock

Okay, got it. Okay, thanks. And then just to get a little bit of clarity there, I guess with regards to last year’s performance. Was Specialty Cellulose pricing -- was it down? I think it was -- 78% is what you were guiding earlier in the year for 2015 on a constant currency basis?

Mich Dumas

Yes, it was. It happened last January.

Operator

Thank you. The last question is from Roger Spitz from Bank of America Merrill Lynch. Please go ahead.

Chris Ryan

This is Chris Ryan in for Roger. I just had some follow up questions. In regards to the bleach board market, how much of the bleach board market is now being supplied by European importers? If you can give a number on that?

Jim Lopez

I couldn’t give you the number, I don’t have it. And I'm not sure the number exists.

Mich Dumas

We see the more [indiscernible], but I couldn’t give you the volume…

Jim Lopez

It's not insignificant but it's not something that would be 20%, 30% or anything of that magnitude. But I really don’t know the number. I’d be afraid to thrown on a number, because I'm probably wrong.

Chris Ryan

And just why you think stud lumber prices has been weak given electricity prices have generally risen from August to current?

Jim Lopez

Well, the demand we think is seasonally low and I think that a lot of the wholesale is just sitting on our hands instead of stocking up for spring building season. And there is a perception, and maybe it's a reality, there is more studs on the market now than there was before. So, maybe it's oversupplied.

Mich Dumas

But it's in stud more than random lengths

Chris Ryan

And if you could, what is your sales and EBITDA exposure for each penny move in the dollar --euro versus the CAD. Could you just give an effect from sales or EBITDA?

Mich Dumas

Well, the effect, assuming no pricing offset on U.S. dollar prices or Europe prices would be about $5 million, about $500 million to $550 million long, net long U.S. dollars.

Jim Lopez

So, $5 million per year.

Mich Dumas

$5 million per year, $0.01.

Chris Ryan

And do you have any update on the fiscal year 2016 CapEx, for modelling purposes?

Mich Dumas

40 to 45.

Operator

Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Lopez.

Jim Lopez

Okay, thank you, operator. I would like to thank everybody for joining us this afternoon. I know everybody has a lot of things to do. So I appreciate your interest in the Company. And we hope to talk to you again in early May when we announce our next quarter. So thank you very much.

Operator

Thank you. The conference has now ended. Please disconnect your line at this time. And we thank you for your participation.

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