Rayonier Advanced Materials Inc.

Good morning and welcome to Rainier Advanced Materials second quarter 2021 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 this call over to your host, Mr. Mickey Walsh, Treasurer and Vice President of Investor Relations for Rainier Advanced Materials. Thank you, Mr. Walsh. You may begin your presentation.

Thank you, operator. Good morning, everyone. Welcome again to Rainier Advanced Materials second quarter 2021 earnings conference call and webcast. Joining me on today's call are Paul Boynton, our president and chief executive officer, and Marcus Moultner, 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 rainieram.com. I'd like to remind you that in today's presentation, we will include forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Our earnings release, as well as our filings with the SEC, list some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on slides two and three of our presentation materials. Today's presentation will also reference certain non-GAAP financial measures, as noted on slide four 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 GAAP-comparable financial measures are included on slides 17 through 25 of our presentation. I'll now turn the call over to Paul.

Thank you, Mickey, and good morning, everyone. I'm pleased to report second quarter results were significantly favorable to both the prior year and sequential quarter. We also made substantial progress on our strategic initiatives. Let's start by looking at slide five. The total company EBITDA improved by $130 million from prior year to $149 million, driven by continued momentum and high purity cellulose commodity products prices essentially viscose and fluff bulbs, and solid demand for cellulose specialty products, as well as, of course, our ability to capture the record lumber prices in our forest product segment prior to their divestiture. Additionally, we saw higher prices and volumes in the paperboard and high-yield pulp segments. With the strong EBITDA results, we have generated $141 million of free cash flow year-to-date, including $120 million in the second quarter. In addition to the exceptional financial results, we progressed towards a successful closing on the sale of our lumber and newsprint assets to Green First Forest Products, which is expected to occur on August 28th. This sale will complete the Strategic Portfolio Optimization Plan that commenced with our 2017 acquisition of Tembeck. and has included the divestiture of the resins business, the Matan high-yield pulp mill, the Huntsville hardwood sawmill, and now in this sale, the six Quebec and Ontario softwood sawmills and the newsprint mill in Kapuskasing. Each sale was well-timed to optimize the value to our shareholders. Now with the lumber and newsprint asset sale, the company is well-positioned for the future as we will use the cash flow and the proceeds to reduce leverage and support disciplined investments in our core high-purity cellulose business, including investments in green energy and our biofuture. We also expect the sale to reduce the volatility and the cyclicality of our future earnings as we focus on our core high-purity cellulose business, along with the integrated paper board and high-yield pulp business segments. Now I'd like to ask Marcus to take us through the numbers for the quarter and discuss our capital allocation priorities in more detail. I'll come back and provide additional perspective on our markets. Marcus?

Thank you, Paul. Please note that the company's lumber and newsprint operations have now been classified as discontinued operations, given the upcoming sale of these assets. I will review each of our business segments, including the discontinued operations, beginning first with continuing operations. Starting with high purity cellulose on slide six, second quarter sales held flat at $255 million, driven by a 17% increase in sales pricing, offset by a 17% decline in sales volumes. As expected, CS prices were down slightly, while higher commodity prices drove the combined increase. CS sales volumes increased 6%, driven by strong demand for construction, automotive, and natural plastics applications. Commodity volume declines were driven by a more favorable mix shift towards CF, which has lower production yields, and by logistic constraints and the extended planned outage at our Jessup, Georgia facility. EBITDA for this segment improved $7 million to $38 million driven by the pricing improvements and more favorable mix of CS. Looking forward to the third quarter, we expect to benefit further from significantly increased pricing for commodity products in continuation of recent trends, while CS prices are expected to be slightly below prior year, supported by strong demand as we fulfill our annual contract commitments. Total high purity cellulose volumes are expected to be slightly below prior year, and we expect a very favorable mix towards CS. As is typical, we do anticipate significantly higher CS volumes in the second half of 2021 as compared to the first half of the year. Next, turning to slide seven, paperboard segment sales improved $14 million, driven by a 23% increase in sales volumes and a 5% increase in sales pricing. EBITDA for the segment declined $3 million to $7 million as the sales price increases were more than offset by higher raw material costs and the impact of operational cost increases. Looking forward, we expect to realize higher prices as demand for packaging remains strong and offtake for commercial print application appears to be rising. We are also seeing supply disruptions in the industry drive increased pricing, while raw material pulp costs are expected to decline later in the year. Turning to our standalone high-yield pulp segment on slide eight, sales increased $5 million from prior year, driven by a 9% improvement in price and a 4% improvement in volumes. EBITDA for the segment held flat at $2 million, as sales improvements were offset by higher operational costs and the impact of logistic constraints, including the Montreal port strike. Turning to slide nine on a consolidated basis, operating income from continuing operations improved $7 million from prior year. The company experienced price increases across all segments and volume improvements driven primarily by higher paperboard sales. Costs were negatively impacted by higher purchase pulp costs for paperboard, higher input costs, as well as maintenance and logistics cost impacts. Corporate costs improved $7 million, driven by favorable FX and lower variable compensation expense. Turning to slide 10, our discontinued operations EBITDA improved by $121 million versus the second quarter of 2020. driven by a 213% increase in lumber prices and a 28% increase in new spring prices. We did take advantage of these strong prices and increased lumber sales volume by 10% versus the prior year period. As a reminder, the company deposited an additional $10 million for duties during the quarter. Since the initiation of softwood lumber duties on shipments into the US in 2017, Brian has now deposited a total of $108 million of duties with potential interest on these duties at dispute resolution estimated at approximately $5 million. Based on the results of prior trade disputes, Canadian producers have historically recovered all or a vast majority of these duties and interest upon resolution. In addition, the company will retain the rights to these duties after the sale of the lumber business. Turning to slide 11, our net debt currently stands at $877 million at the end of the quarter, including $215 million of cash. We expect approximately $170 million of net cash proceeds from the asset sale later in the month and $30 million in tax refunds in the next six to 12 months. In addition, The company will have access to a further $30 to $40 million from the cash value of the green first shares that RIAM will receive as consideration for the sale. Combined, this will reduce net debt to approximately $650 million. Taken together with the recent rebound in commodity pulp prices to drive incremental cash flow, the company is well positioned to execute a disciplined, and balanced capital allocation strategy. Turning to slide 12, we remain committed to using at least $150 million of proceeds from the asset sale to repay debt, making progress to our ultimate target net leverage ratio of 2.5 times. While repaying debt is an important part of achieving our target, we also see significant upside in investing and optimizing our high purity cellulose assets. As such, we will target to invest a portion of our excess liquidity on high return projects, including green energy initiatives and reliability enhancements. We have had recent success with these type of strategic investments, including the most recent $15 million investment in green energy at our Tartus France facility. This investment went online in the second quarter and is expected to generate $10 million of incremental earnings annually. These investments provide returns well above the company's cost of capital and position Ryan to lower costs and remain a leader in cellulose specialties. As we execute on our strategy and move closer to our targeted leverage levels with ample liquidity, We will also be in a position to evaluate programs to return capital to their shareholders via dividends and share buybacks in the future. With that, I would like to turn the call back over to Paul.

Hey, thanks, Marcus. As noted on page 13, we are experiencing higher prices across all of our key commodity segments. We captured some of the benefits in our second quarter earnings, but anticipate higher prices in high yield pulp and paperboard in the third quarter, as well as much improved selling prices for HPC viscose and fluff pulps in the coming quarters, as actual company sale prices lag the market indices. Additionally, the robust viscose market, particularly softwood viscose pulp, which is commanding a substantial premium over the index, provides a strong backdrop as we begin our 2022 cellulose specialties negotiations. Referencing page 14, we see demand for our cellulose specialty products strengthening, specifically in construction, automotive, and acetate plastic end markets. Prices for cotton lint, a competitive substitute product for many of our cellulose specialty grades, have also increased substantially from 2020. We are also seeing supply disruptions in the industry, and market participants have looked to us as a backstop given the size, scale, redundancy advantages of our five cellular specialty manufacturing lines. We are managing contracts with existing customers, but given the level of demand and our extended outages in Jessup both in 2021 as well as now in Q1 of 2022, we are not able to address most of the additional volume requests. We do expect substantially higher volumes of high-purity cellulose in the back half of this year, with a stronger mix of cellulose specialties as compared to the first half of the year. Also in the back half of 2021, we anticipate significantly higher costs for our key inputs, including wood, chemicals, and transportation, and we anticipate these costs remaining elevated through 2022. However, in spite of such inflationary pressures, we intend to use every tool available to us to maintain or improve CS margins in 2022. Given improving market fundamentals, including strong cellular specialties demand, a robust commodity viscose market, and global market supply disruptions and constraints, we feel confident in our ability to achieve this goal. In our paper board segment, we are also seeing stronger demand from the return of the commercial print market along with continued industry supply disruptions, both of which will likely lead to further price increases. In high-yield pulp, again, we will recognize higher prices in the third quarter as realized prices tend to lag the index prices by two to three months. As discussed earlier, we are able to capitalize on the recent record lumber prices. Further, the sale of the lumber and new sprint assets will generate significant cash. With our strong cash position and improved outlook, we have substantially enhanced financial flexibility to invest in our core high-purity cellulose business and reduce our overall leverage. Lastly, on slide 15, we are excited about the future of RIAM. Our reputation as a market leader in cellulose specialties with differentiated commodities within the fluff and viscose markets positions us well for the future. Our diverse assets and redundancy allow us to service all of our cellular specialty market segments while providing security of supply to our customers. In fact, this security of supply came into play in our Ether segment in the second quarter, as many of our customers were able to rely on our redundant global assets to meet the strength of their markets. Our improved balance sheet will also allow us to invest in our leading R&D platform and biofuture opportunities. As we work with both new and existing customers to develop natural-based solutions, which will further broaden our presence. We have a proven track record of controlling cost and managing cash to drive stronger liquidity and a more stable balance sheet. Now as market conditions have begun to turn in our favor, we are well on our way to capitalize and grow our business. With that, operator, please open up the call to questions.

At this time, we will be conducting a question and answer session If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question calls from the line of Paul Quinn with RBC Capital Markets. You may proceed with your question.

Yeah, thanks very much. Good morning, guys.

Hey, good morning, Paul.

Maybe we can start on the paperboard side. That cost increase, it looks like $12 million in your graph, and I just can't understand the magnitude of that. But what happened to Miskaming to increase the cost that much?

Good morning, Paul. It's Marcus. The majority of that increase is the purchase pulp component of the market pulp to support that business. As you know, we're 80,000 tons on the open market to support the business. In addition, we saw some chemicals. And the other theme is, again, logistics, the impact of transportation on those products.

Okay, and then, you know, you guys have signaled out these higher costs in the back half of the year, especially wood chemicals and other. How material is that? What kind of delta are we seeing in the cost increase from H2, from H1?

Again, it's Marcus again, Paul. So if you look at the inflationary pressures we're speaking to, They're in a couple areas, right? Chemicals we mentioned, wood, and logistics, and then your normal inflation on your labor contracts. If you're looking for an order of magnitude, these are, you know, approaching double-digit levels.

Yeah, an ongoing run, right, Mark's right. So, yeah, it's real, Paul, and we're not alone, obviously, in the experience that we're seeing it, but again, it's across the board. transportation being as large as any of the others as well, right? So wood chemicals, transportation, and then more muted on kind of the labor side of things. And ramping up hard into the fourth quarter, and we think continuing, obviously, in the 2022.

Okay, and then just on high-yield pulp, I mean, you've referenced that prices are expected to decline later in the year. I would say global market prices, pulp prices have rolled over in China and You know, does that bode, you know, difficult negotiations, you know, coming up for your CS22 contracts?

No, so there we're referencing the high-yield pulp, so that segment, which, again, is going up against BEK and kind of the market pulp. And so that's already kind of, you know, softening out there if you look at the indices. Our comments there is that we really just kind of lag that market with our sales prices. So our prices in Q3, we're messaging, you know, and high-yield pulp are going up, but I don't think we'll tie that into, in any way, our cellulose specialty prices. The robust viscose market continues, and particularly, as you know, Paul, we're a softwood viscose pulp producer, and we continue to see that differentiation between that and the hardwood increase. Maybe a year ago, it was probably $50. Now we're sitting probably $150 on softwood viscose pulp going into the market because it's a relatively limited supply. And in fact, if anything, it's a declining supply. And we continue to pick up more supply on the hardwood side, but most producers need a nice mix of softwood into their operations. And that helps support the pricing we're seeing out there. And that's going to help our conversation because we're not alone in that. A lot of our competitors are in the same way. And that's the backdrop. and the alternative to see us out there.

Okay, then just lastly on the, I guess, discontinued operations. I mean, it looks like you've got quite a bit of softwood lumber deposits that are yours, 108 plus, I guess, August. Sorry, July and August. So it probably will be up in the, sounds like with interest, it might even be 120. Any plan to monetize that? in the near term?

Paul, as far as prioritizing that as a monetization, given the prior reference that was in the market, that wouldn't be that attractive through our lens, given the liquidity profile that we have currently. We'll continue to monitor developments and discussions on the softwood lumber file. I think given rates are projected to go up, deposit rates. Maybe that's a catalyst for some discussions, and we'll see what happens.

Okay. Thanks very much, guys. All right. Thank you, Paul.

Our next question comes from the line of Roger Spitz with Bank of America. You may proceed with your question.

Hi. Thank you very much, and good morning. Can you give an update on... for CapEx for 2021? What's your report on a continuing basis and the full amount of CapEx that you'll spend, you know, including the lumber and this come through in the broadest?

Yeah, good morning, Roger. It's Marcus. You know, in this six-month period, as you saw in our disclosures, around $47 million for continuing operations And that was including about $4 million for strategic capital. I would say for the full 2021 fiscal year, in the range on a net basis of $95 million, $90 to $95 million would be a good number for everything.

And is that $90 to $95 million just on a continuing basis, or does that include lumber this spring through August?

Yeah, there would have been some allocated to lumber and newsprint. Okay. Right, if you looked at our... Go ahead, sorry.

No, please.

You know, if you looked at prior actuals, that footprint used to be in the range of 9 to 12 million, depending on the year, for lumber, newsprint, and the road network.

And how should we think about maintenance capex going forward on an annual basis?

We had indicated, you can see on our capital allocation, in the range of $100 million for custodial capital to reinforce reliability across our operating footprint. Roger, if you look back historically, 2018, if you normalized the spending level there In that year, we were around $127 million. After normalizing for the disposed ops, we were just over $100 million. So you're into a situation where you've got a higher weighting to this custodial to drive reliability.

Got it. And lastly, any tax on the cash proceeds in August that we should think about? And can you comment on your intent with that August cash, for instance, perhaps taking out $150 of the 75 base at 103 or some other piece of proceeds?

Thank you. I'll take the first question. We have indicated in our disclosures in the range of $5 million as a placeholder for any tax leakage related to the transaction. And again, we'll look to do better than that. But that's our estimate. And we have set out in our capital allocation framework in that disciplined and balanced approach. We are certainly prioritizing the $150 million pay down. Strongly committed to taking those proceeds and paying down debt.

Thank you very much.

Thanks, Roger.

Our next question comes from the line of John Bangkok with Bank of America. You may proceed with your question.

All right. Good morning and thanks for taking my questions. I guess I just wanted to talk about high parity cellulose. You mentioned some margin improvement opportunities there, you know, for next year, you know, to offset some of this inflation. Can you give, you know, some detail on that? And then also, you know, as it pertains to, you know, the roughly $10 million in savings that you expect from the TARDIS mill, you know, how much of that is part of that or incremental? And then, you know, how should we see that, you know, generally flow into earnings?

Yeah. So, John, yeah, just kind of maybe just as a reference point again, we talked about inflation and questions already coming up. We're seeing a lot of it, right? So, we see it in and the U.S. Southeast would quite considerably here, and really ramping up into the fourth quarter, probably beyond anybody's original predictions, even just as of one or two months ago. So that's ramping up. Chemicals, as everybody knows, are very well elevated and continue to be rising. So we have that going against us. And then I think everybody's experiencing logistics. So we've got a lot of pressure out there on the business. But look, we will do what we've always done, which is look at everything we can to, you know, protect our margins and if not improve them. So certainly cost takeout is an important component of that. Working on our operational efficiencies and making some investments in operational efficiencies. And certainly making sure we're getting fair value when it comes to our products to our customers, right? So we got to look at all those components. And we think that the backdrop we're sitting at today which, again, as we've already referenced, we've got strong demand for our products. We've got limited supply ourselves, right, even just to get out of this year, let alone in 2022. We've got supply disruptions sitting out there with some of our competitors for a variety of different reasons. And so that's tightening the market as well. And so, and again, these inflationary pressures. So they're all part of the conversation that we have out there. And And that's how we're looking at it. We just got to look at every angle and see if we can improve our margins. And that's what we'll do and feel confident we can get there.

Okay. Thanks for that. And then any update on Temsilk and the opportunity you see there?

Look, that's going very well. We've got, you know, Temsilk is mainly being, is being sourced out of our We continue to slide product into key customers in China, and the acceptance is excellent. So we feel good about that. We're really just kind of waiting on that market in China to kind of heat up the way it should be expected. We expect it to heat up. And we fully anticipate, as our customers will tell us, that that business could be the 300,000 to 500,000 tons in terms of the total market size in a five-year period. So we're anxious to see it get there. Right now we've got plenty of alternatives to supply in other areas in terms of demand. But we will continue to monitor that. And, again, our product is already well accepted into the marketplace.

Got you.

Can you provide any more?

Go ahead. Go ahead. Yeah, you referenced a question related to the Tartas investment. That's a very good example of the kind of green energy investment that on a risk-adjusted basis exceeds our cost of capital, really positions the Tartas mill well. That project was started up through the first quarter, and we have included in our in our disclosure there, a $10 million run rate improvement for that project. So again, exporting green energy to the grid and driving further green energy production.

That would be very helpful. John, that may be part of the equation. Those are things we're going to continue to look at. But again, as we message here, we're approaching double-digit inflationary for cost in 2022. So there's a lot of work to be done ahead of us.

Okay. But back to Temsilk, could you provide any sense in terms of, like, what sort of volumes you might have there, you know, whether that's kind of like, you know, a couple thousand tons or maybe more meaningful than that, and also, you know, generally how we should think about, you know, the run rates as, you know, we get over, you know, kind of over the next couple years, basically?

Yeah, I'd say right now it's very light, just based on how most of the Lyocell customers are running today. We fully anticipate that will ramp up. And again, we are a long ways away from where we could potentially be in terms of our supply of that into the market. But out of Temiscaming alone, you know, that's a 140,000, 150,000 ton facility. You could easily see the majority of that volume being consumed into Temsilk when we get to kind of what we would think kind of targeted run rates. So, large opportunity sitting up there. look at the opportunity as it involves our other facilities going forward once we reach where we think we're at capacity and to miscreant. We're a long way from that right now. No question, John. Okay.

And then, you know, I also wanted to ask, because I think you, you know, made a kind of passing reference to eventually, you know, having a dividend and or, you know, looking at share repurchases. You know, what's the trigger to, you know, to get to that point where you'd consider, you know, instituting a dividend or pursuing share repurchases?

Yeah, I'll start. Marcus, I'm sure we'll jump in. It goes to that capital allocation on page 12, right? John, we want to make sure we're comfortable in our net leverage, and we're not there yet. And Marcus talked about our commitment to taking that first $150 million and bringing that down. We've still got that near-term target of $650 million. And then we think the next best use of capital right now is investing back into the business. So we're going to look at it in a very disciplined way to see, what is out there that really drives EBITDA growth, and if it drives EBITDA growth, I think that would be the next best use for our capital, and I think our shareholders would like that. And then we go beyond that. We get back into our target net leverage range, and then we'll look at the other alternatives. So I don't see that anywhere near in the immediate future. Obviously, it's something our board talks about regularly and consistently, but I think that's out there a little bit, and I think we want to bring that debt down and our leverage where it should be for the size of our company.

Okay, great. And sorry, just last question before I pass it on. I just want to ask about the offtake agreement that you have regarding some of the wood chips that will come from the lumber operations after sale into miscommitting. Is there going to be any change in the rate for that? So will you see any cost increase because of the sale of the lumber newsprint assets?

Yeah, it's Marcus. So the residual fiber supply agreement reflects, you know, offtake of the residuals from the mills that we currently source our operation into miscoming from. The mechanism in that agreement is that annually there'll be a discussion on pricing. And as we've always done, it's a market-based price. So that'll be part of the negotiation. But the great thing about this agreement is access to an FSC-certified fiber supply, along with the residual bark. So we'll cover both our production of high-purity pulp and the green energy investment in Tumiskame. But there'll be a negotiation annually.

Sure, which is basically what we do now, Marcus. And Marcus, the length of that agreement, which I think we found very attractive.

20-year agreement, yeah.

All right, so 20 years out there, which, again, really put us as the right partner with Green First Forest Products.

Thanks for all the details. Sure, Jessica.

Our next question comes from the line of Paritosh Misra with Barenberg Capital Markets. You may proceed with your question.

Hey, good morning, guys. This is Jared on for Paritosh. First question for me, is there any color you could provide on the supply-demand balance across your different geographies, or are you kind of seeing the same trends globally?

And again, on cellular specialty, sorry, Jared, just want to make sure.

Yes, sorry. It was just generally speaking for all products across your geographies.

Okay, across the geography. So, look, we'll start at the ones that are most commodity-like, which is obviously our high-yield pulp. And if you're tracking out indices out there, certainly China has led the way in some of the recent slowdown. Europe is still relatively strong and lagged China on the prices going up and will lag on the prices going down. And that's what we referenced. The indices show them going down a bit. We'll still have an increase in our pricing in the third quarter, but we expect that to kind of decline. And I think the forecasters have it ramping back up shortly thereafter in early 2022. You know, paper board, as Marcus noted, is very strong. And, you know, for us, that's a North American and predominantly a U.S. market. That's very strong. And I think it's a parallel to the economy. But also, you know, there's been some supply disruptions in that as well here in the U.S. in terms of fellow suppliers. So that has been strong. You know, Visco's pulp, that's mainly and largely kind of a, for us anyway, an Asian set of markets. They've been strong and robust since really last fall, almost coming up in a year, and remain so in that regard. So it's good strength out of Asia. We expect that to continue. Fluff pulp is global. We see the strength globally. Prices are up real strong. And as mentioned, we expect even increases, both DISCOs and fluff pulp, coming into the final quarters of this year. And Cili, especially, it's a global market, right? And we indicated where the strength is coming from. It's coming out of construction markets, which for us is largely ethers, right? We're the leading supplier of ethers. A lot of that is Europe. So we see some really good strength there. Automotive is strong globally, right? And for us, that's That's engine filtration. That's products going into tire cord. That's acetate plastics going into automotive paint. So a lot of different applications there that we benefit from in the automotive area. And, again, just broadly in plastics. We see also just a good strength out of ethers in the nutrient area and some of the other areas there. So, again, I would not say that it's regional applications. For the most part, it's really global outside of that construction market for easements, which is always traditionally largely influenced into the European area.

Okay, that's great. Thanks. And then second question, just kind of looking out at the horizon, are there any near to midterm peaks that you guys are seeing for costs and particularly materials, but Also, any color you could provide on logistics and labor as far as peaks or even slowdowns in inflation?

Yeah. Look, again, when you say peaks, I guess the question is, do you see it getting to a point where it's going to start coming back down? Right now, they're all still elevating out as we look into our future. And we said we expect it to remain elevated for 2022. That's, you know, Obviously, wood, chemicals, certainly, they continue to rise. Our largest expense in chemicals is in the caustic area, and that continues to climb here. And transportation, everybody's facing this, and certainly we are. We're seeing substantial constraints and expenses in transportation. We don't see that leveling out or declining anytime soon. And there's a host of issues there, right? In trucking, it's a lot around driver or driver availability and government programs that may limit the availability right now. So maybe that's a benefit at some point in time if those come off. Vessels are tight. We are one of the largest users of vessels on the eastern seaboard, and particularly out of the Port of Savannah, which is an excellent port. But they've been backlogged since weather conditions in the February time frame. I think today we've got 16 vessels sitting off the coast waiting to come into the port. And that slows everything down. Some of our carriers actually skip the port. That creates constraints for our customers. So we don't see that leveling out anytime soon, although we hope that's going to get to resolution. And we'll be looking at other solutions ourselves. And then, of course, just containers continue to be tight. They're trying to get all the containers, empty containers, back to Asia as soon as possible, and that doesn't help the situation at all. So logistics are going to be an ongoing issue, and I can't say when that's going to break at all. So, again, we add it all up. These are not insignificant. We've had a lot of conversations early with customers. They're seeing the same thing, certainly in logistics and chemicals. Most of our customers aren't directly involved in the purchase of wood. So across the board, we've got this inflationary pressure. And again, it's going to be back to us to look at what are the alternatives to maintain our margins, improve our margins. We'll be having that dialogue with our customers coming up.

That's great. Thanks very much.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Paul Quinn with RBC Capital Markets. You may proceed with your question.

Yeah, thanks, guys. Just following up on the TARDIS Green Energy, if you could give some more details around that project, just wondering why it's came around today. I mean, you know, investing $15 million for a $10 million annual benefit is a no-brainer, right? So you'd be doing that all the time. Just wondering if there's anything that changed to allow that to happen and what exactly is the project?

Yeah, Paul, we had a stream of energy and the government had a program where we could increase the amount of green energy component versus brown energy. So basically you're just You're expanding the – so we expanded the capability of the boiler and, in addition, got that higher rate. So it's, again, leveraging programs that are available in the space there.

All right. That's helpful. Thanks.

Yeah, and a great example of high-return projects, right? So when we talk about our capital allocation and what we're going to do with past – kind of some of these investments to bring our leverage back down. That's a great example of high-return projects, and particularly going to the green energy space. We'll be continuing to look at that. You know, there's a strong demand out there for biofuels, and particularly bioethanol, that's non-food source, right? And we've got assets in these biorefineries. We've got four biorefineries, essentially, right? And these assets can produce bioethanols, and, of course, they're non-food sourced. And there's programs in the centers out there to, you know, make sure we look in that direction. So we will do that. So those are great, I think, examples of our biofuture and really leveraging the products we have. We've also talked, you know, a lot about in the past and will continue to as, you know, growth in cellulose-based biofuture opportunities, right? Temcelco is a good example. Anamira is another good example. We talk about that. Those are going out there to replace plastic microbes. petroleum-based versus we're going to be supplying a natural base. So these are the things that we look at. We look at what the world's demanding right now and I think will continue to demand, which is more environmentally friendly products. And we just happen to be a company that's based on natural feedstocks, renewable, sustainable natural feedstocks. So we think it's a great platform for growth. So we're glad to have our portfolio optimization kind of concluding here as we focus in on these high-purity assets. And we think it's a perfect time as we look at what the future will hold for us. Great. Thanks, guys. Yeah. Thanks, Paul.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back to Mr. Paul Boyan for closing remarks.

Yeah. Hey, thanks, Laura. Hey, again, thanks everybody for your time today. You know, with the current market tailwinds and significant opportunities to reinvest in our business, we're, excited about the future we have in front of us, that bio future, and we're excited about bringing in advanced materials. So thank you for your time. Look forward to giving you an update next quarter.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.