Oct 24, 2012
Operator
Good day and welcome to the Buckeye Technologies first quarter 2013 earnings conference call. Today’s conference call is being recorded.
Presently all parties participating on this call will listen to opening remarks made by the company. After the prepared remarks, Buckeye management will answer analyst questions.
At this time for opening remarks and introductions, I would like to turn the call over to Eric Whaley, Investor Relations Director. Please go ahead sir.
Eric Whaley
Thanks Lindy. Good morning and welcome to Buckeye’s conference call, commenting on our results for the July – September quarter, 2012.
Today I’m joined in this call by John Crowe, Chairman and CEO; Steve Dean, Executive Vice President and Chief Financial Officer; Doug Dowdell, Executive Vice President of Specialty Fibers; Marco Rajamaa, Senior Vice President of Nonwovens; and Hank Hall, Vice President of Cotton Cellulose. After John, Steve, Doug and Hank have made some introductory remarks we will respond to your questions.
First let me briefly cover our safe harbor statement. The matters discussed in this call include forward-looking statements and while risks and uncertainties that may cause the company’s actual results to differ materially from those projected in such forward-looking statements.
For further information on factors that could impact the company and statements contained herein, please refer to the slides accompanying these presentation as well as the company’s most recent annual report and form 10-K and quarterly report on form 10-Q. I’d also like to refer you to the supplemental earnings slides posted on our website and on www.streetevents.comfor additional details related to this call.
Now I’ll turn it over to John.
John Crowe
Thanks Eric. Good morning and I will be referencing my comments to slide number three in our information we have online.
Our first quarter fiscal 2013 was as we expected that the impact of the June Foley outage on the quarter was less than we expected. We provided guidance at our last earnings call that we expected earnings in the range of $0.55 to $0.60 and we delivered adjusted earnings of $24.6 million or $0.62 per share.
This compared with our record adjusted earnings of $29.9 million or $0.74 per share for the first quarter last year. Our quarter one fiscal 2013 results included the impact of the June steam drum failure of $0.04 per share versus our forecast of $0.10 and over $1 million for approximately $0.02 per share impact of our growth initiative, expenses for travel, consulting and legal fees.
During the quarter we made good progress on our specialty expansion project and the Oxygen Delignification project at our Florida wood fibers facility. Both are important projects that will be coming online in April and July of 2013 respectively and will be key contributors to our revenue growth and cost reduction efforts.
Net sales revenue for the first quarter was $197 million, off 15% from our adjusted first quarter revenue last year of $231 million and down 12% from our previous quarter. The sale of decaying assets accounted for $5 million of the reduction in sales revenue and weaker sales in wood and cotton accounted for the additional $30 million year-over-year shortfall.
We had forecasted some of this shortfall due to our recovery from the June/July Foley mill outage. In the just completed quarter we needed to restock what at that time was a depleted inventory situation.
But then headwinds in the market particularly softness in our key markets of tire cord, auto filtration and fluff for more than expected. We were able to offset some of this shortfall by generating a strong gross margin of 25.4%.
Our nonwoven segment was also a good contributor. We are pleased with the strong revenue quarter for nonwovens and the improving ROIC for the nonwoven segment.
Balance sheet debt climbed during the quarter as we repaid approximately $28 million of alternative fuel mixture credit for a higher value cellulosic biofuel credit to be received in the near future. Steve will speak to this in his remarks.
We continue to focus on a balanced approach to the allocation of capital. Yesterday the board of directors voted to increase our quarterly cash dividend to $0.09 per share, a 1% increase, payable on December 14th 2012.
While we have seen softening in some of the markets where we are the number one supplier, we have a number of opportunities to continue improving our results and delivering on our profitable, sustainable growth strategy. I will discuss the outlook going forward after Steve reviews the supplemental financial reconciliation charts.
Steve?
Steve Dean
Thanks John. Good morning?
I’d like to review a few of the supplemental financial reconciliation charts posted on the website with you this morning focusing on comparing the July – September quarter which is our fiscal first quarter. To the April – June quarter which was our fiscal fourth quarter of the previous year.
I also wanted to provide you with some additional details on the actual and projected impacts of the June steam drum failure outage at Foley on our financial results. We have included the usual slides with comparisons against the year-ago quarter and the appendix for your reference.
Starting with slide number four you can see our summary of our key financial metrics for the quarter compared to the same period a year ago. The only thing I wanted to point out on this slide is that our ROIC for the quarter came in at 14.6%.
While this was down from the 16.6% in the year ago quarter, it is still well above our cost of capital which we estimate at 10%. On slide number five you will see a consolidated earnings summary comparing our earnings for the just completed quarter or fiscal year 2013 to the fourth quarter of fiscal year 2012.
First quarter net sales as John mentioned were $197 million down $28 million or 12% compared to the fourth quarter. This is mentioned in the press release.
This was mainly due to a $27 million reduction in sales from our Foley specialty wood fibers facility whose shipments were impacted by the June outage and by weaker demand in some of our markets. Sales from our specialty cotton fibers plants were about the same as they were in the fourth quarter whose increase shipment volume offset reduced pricing which was lowered to pass through reductions in our cost for raw cotton (mentors).
Nonwoven sales were down $3.5 million or 6% versus the fourth quarter due to lower shipment volumes. However compared to last year’s first quarter shipment volumes, volumes were up 2% in spite of a 12% reduction in shipment volume from our Delta BC Canada facility which will be ceasing operations in December.
Moving down the chart you can see that adjusted operating income was down $1.3 million compared to the fourth quarter. Operating income was down $2 million for specialty fibers even though the negative impact of the June power outage was $1.9 million less and operating income for our cotton specialty plant showed improvement.
This is due to reduced shipment caused by lower demand from automotive and fluff puff customers and to an unfavorable shipment mix at out Foley mill. Operating income improved by $1.9 million over the fourth quarter for our nonwoven segment.
Nonwovens production volume was up as we rebuilt inventories that have been depleted by strong sales in quarter four. Operating income for corporate is down $1.2 million as our corporate SRA expenses in the quarter included $1 million in consulting and legal fees related to our strategic growth initiatives.
At the bottom of the chart you can see that we had $4.9 million after tax in special items which positively impacted our reported earnings in the first quarter. The largest item was the recognition of an additional cellulosic biofuel tax credit benefit of $5.5 million based on updated forecasts of the company’s ability to utilize these credits.
Our latest forecast indicate we will be able to utilize approximately $46 million out of the maximum $56 million remaining incremental benefit available from these credits prior to their expiration in our fiscal year 2016. Moving on to slide number six we have a waterfall chart that shows the drivers behind the $1.3 million reduction in operating income between the fourth and the first quarters.
Volume outside of the impact of the unplanned Foley outages had very little impact as increased nonwovens production volume during the quarter offset the impact of reduced specialty wood shipment demand. Selling prices were down $0.8 million quarter-over-quarter as a reduction in cotton lint or pulp pricing could passively lower raw cotton lint costs.
It was partly offset by higher fluff pulp and nonwovens pricing. Mix had a negative $2.3 million impact as high end specialty shipments accounted for a smaller share of Foley specialty wood fiber shipments in Q1 versus Q4.
In Memphis, specialty cotton fiber shipments to the LED/ LCD screen in market made up a smaller portion of shipments relative to the preceding quarter. Raw material costs were down $2.2 million due to lower cotton lint or raw material prices but energy costs were up $1.4 million due to seasonally higher summer purchased electricity rates and increasing natural gas costs.
The impact of the June steam drum failure outage at Foley was $1.9 million less in Q1 than it was in Q4. I’ll talk a little bit more about that in a minute.
Finally, selling, research and administrative expenses were up $0.9 million as already mentioned. On slide number seven you can see at a more summary level the drivers behind the $0.04 reduction and adjusted earnings per share between the fourth and first quarters.
Selling price and product mixed together cost us $0.05 per share but we made up $0.02 on lower costs. The June Foley outage was $0.03 better than in Q4 and the higher tax rate and foreign exchange cost us $0.02 each.
On slide number eight, I’ve updated the table from the last quarter on the impact of the Foley steam drum failure outage in June both on the just completed quarter and the expected impact on quarter two. You will recall that both of our lines went down on June 17th with our number one specialty line coming back up on June 23rd and our number two fluff pulp line back in production on July 4th.
In terms of lost production volume we’re looking at a total impact of about 18,500 tons. Of which 13,000 tons was on the fluff pulp line.
While the production lost primarily impacted the fourth quarter, the impact on sales was mostly in the first quarter. The biggest difference between our guidance last quarter and our current expectations is that we have recognized a greater insurance benefit in the first quarter than we had forecasted.
The accounting rules on income recognition for this type of loss require that reimbursement for replacement of capital equipment should be reported as a gain in the current period rather than reducing our capital investment. That is what is reflected on our income statement as other operating income of $2.5 million in the first quarter and we expect another $2.7 million gain to be recognized in the second quarter.
Mostly because of this and some timing differences on receipt of cash advances from our insurance company, the quarter one impact of this outage was $0.06 per share less than we had expected and we now expect to pick up a favorable impact of $0.15 per share in the second quarter when the insurance claim is settled. The total negative cash impact of the outage when the insurance claim has been settled is expected to be about $3 million which includes out $2 million deductible.
Finally as John mentioned, our long-term debt increased this past quarter by $23 million after a long string of consecutive quarterly debt reductions. I wanted to point out that this was a temporary increase caused by our repayment in September of $28 million and alternative fuel mix or credits to be traded for higher value cellulose and biofuel credits over the next several quarters.
We expect to realize cash benefits from the cellulosic biofuel credit of between $40 million and $45 million over the next three quarters from a combination of reduced estimated quarterly tax payments and tax refunds. Now I’ll turn it back over to John.
John Crowe
Thanks Steve. Well it was a challenging quarter.
We continued to generate a return on investor capital well above our cost of capital of 10%. We overshot our target inventory but we anticipate inventories returning to normal over the next quarter or two.
Now I’m going to ask Doug and Hank to provide comments on the status, on key wood and cotton markets for your benefit, Doug?
Doug Dowdell
Okay. As our listeners know the specialty wood how (alpha) markets are normally very stable and we typically do not see big customer usage swings up or down in short periods.
Until recently we had not seen much impact to our specialty business due to the struggling European economies. It is evident now that the European slowdown has finally caught up with several of our key markets specifically tire cord and to a lesser degree, automotive filtration.
Late in the first quarter, our tire cord customers saw steep declines of about 30% in demand from their customers and our automotive filtration customers have seen about a 10% decline in their demand. We expect to see this continued through the end of calendar year 2012.
Our tire cord customers believe we’ve seen the worst of the down turn and expect to see us back at about a 90% usage level in our third quarter. In filtration, we believe that it will return to normalize the levels in calendar year 13 and grow from there at 6% – 8% a year.
We see our filtration customers moving ahead with expansions in Asia and outlook for them is very good. Since we are the largest supplier in the world to these two markets, this short-term volume reduction has resulted in reduced sales in our first quarter and will impact us similarly in the second quarter.
Our first quarter shipments were complicated by the left over effects of the fourth quarter Foley drum failure incident and customers taking short-term measures to protect themselves in case we did not recover quickly. Specialty volume shipments were off by about 8,000 to 10,000 tons from our long-term normal levels and half of that was due to the planned rebuilding of finished goods inventory and the other half was due to the market softening and timing of some shipments.
As we move into the second quarter, we expect tie-in demand to be off by about 5,000 to 7,000 tons due primarily to the tire cord and filtration softness. We maintain our long-term optimism in these markets and have not reduced our commitments or our long-term outlook.
And with the combination of specialty volume of softness from Q1 and Q2, this adds up to about 10,000 tons that we have now. To stay true to our commitment to maintaining lean inventory targets, and maximizing cash generation, we will likely move some of this volume this quarter and cut into the lower end dissolving applications where demand is high but prices are lower.
Our other key specialty markets we supply like casings and ethers continue to be good for us and with our casings producers having recently increased their productive capacity by about 10% in anticipation of continued growth. Our high purity ether expansions are also going on in numerous locations globally and we expect a growth rate of 5% plus per year from here forward.
The largest specialty wooden market as to take to appears to be steady. On the fluff front, as expected, we had far fewer tons available to sell in Q1 due to reduced fluff production which was about 12,000 tons between Q4 and Q1 combined from the drum failure on our number two machine and the need to rebuild finished goods inventory to our normal lean upgrading levels.
We did end up with better fluff mix than we had earlier anticipated due to less spot volume and our average fluff price is actually up $16 per ton from Q4. However, our year-over-year fluff prices were down in Q1 by $119 per ton and the average receipt based index was down $87 per ton year-over-year.
Fluff supply continues to outplace global demand and with the receipt index down $35 since June to $9.20 September, we expect our fluff prices this quarter to be down $30 per ton due to this pass through. However our fluff customers tell us that businesses are growing and we expect increased demand from most of our key customers in 2013 which is a positive trend.
Also during calendar ‘13 global fluff capacity will see reductions of about 5% to 6% as over 300,000 tons is converted into high-end dissolving pulp including our 42,000 ton projects. The fluff markets should tighten in the second half of 2013.
Certainly the global major economic factors will play a major role in both our specialty wood and cotton businesses. Hank would you give us an update and some comments on our cotton lint markets.
Hank Hall
Yes Doug. Over the past six months we have seen a softening out of the cotton lint or pulp markets from levels that were driving up our raw material costs to unsustainable levels.
In the first half of fiscal ‘12, virtually all of our customers were taking volume over their contractual commitments. In the same period these fiscal year and customers are ordering at contract levels.
Despite the market pullback, the performance of the Memphis plant remains strong due to our ability to flex production with demand. Looking at our markets we see positive signs in the LCD/ LED segments.
Industry reports are forecasting at 10% growth in optical films next year and our pulp is well positioned as displayed films continue to move thinner. In the LCD segment we are at the end of a long supply chain that is quite volatile but we see growth returning in 2013.
Our ethers and technical paper markets are stable but these markets are tied to the automotive and construction segments. These segments have short-term regional demand concerns.
Our strategy moving forward continues to be aligning customer commitments with raw material supply. This offers supply security to our customers and less volatile input calls for Buckeye in the entire supply chain.
John?
John Crowe
Thanks Doug and Hank for you market summaries and updates. In our nonwovens business we continue to work transitioning the supply of our current Delta customers through other to nonwoven facilities following the closure at Delta.
We remain on schedule to close the Delta facility in December of 2012. Recent sales volumes have picked up in both the U.S.
and Europe in our nonwovens business. Including Delta, we anticipate second quarter shipments (inaudible) and to be higher than they were in the same period last year.
However, the second quarter in Europe is usually seasonally weaker than quarter one. In Delta shipment volumes will be off significantly year-over-year, about 45% down as we start ramping down production towards the end of November.
We continue to increase shareholder value by executing a disciplined approach to capital allocation. We expect capital spending in this quarter to be approximately $38 million, that will be up about $10 million compared to quarter one spending of $28 million and this is due to ramping up and spending on our wholly specialty expansion project and beginning the work on the installation of Oxygen Delignification on our fluff mill line.
We are on track on both projects and anticipate CapEx spending for the year of about $120 million for fiscal 2013. This includes $6 million in capital spending related to the steam drum failure that is being funded by our insurance settlement.
Steve covered this in his comment. We continue to evaluate the opportunities for growth including acquisitions, joint ventures or partnerships.
This is reflected in our higher SRA expenses in the quarter. Our evaluation criteria remain ROIC better than our cost of capital, rapid earnings in cash flow attrition and assets that complement our core competencies in operations.
We have nothing to announce at this time but have and will continue to be active in our research and evaluations. While the headwinds we forecasted in August did arrive, we are committed to a disciplined execution of our strategy.
Our continues strong cash flow from operations and our attractive balance sheet provides the flexibility to allocate capital to growth opportunities and to increase shareholder returns via dividends and share repurchases. Recently we repurchased approximately 290,000 shares of Buckeye common stock and for the calendar year 2012 we have repurchased approximately 1 million shares, a $30 million investment.
There is a lot of uncertainty in the world economies due to several national elections, European financial issues and slowing, emerging market growth. However, Buckeye is well situated due, again, to our very attractive niche markets and our strong balance sheet.
We will continue to complete the nonwovens consolidation, improving our ROIC for that segment of our business. We are continuing to execute the Foley expansion project will start up in April 2013, moving that 42,000 tons of lower margin fluff pulp into much higher margined specialties.
We will also benefit from the Oxygen Delignification project which will reduce cost, improve our product mix and increase our operational flexibility. The ramp up for the ‘02 project is July – December 2013.
Year turn the headwinds may continue but we are preparing for a strong recover. Therefore, in our October – December quarter, we anticipate year-over-year in sequential earnings will be challenged by the same conditions we experienced in our just completed quarter.
As Doug described, we expect softness in certain specialty markets and we expect input costs to remain relatively flat. Given these conditions including a $0.15 insurance recovery, we expect our quarter two adjusted earnings to be in the range of $0.65 to $ 0.70 per share.
We are positioned and committed to continue to provide shareholder value and meet the challenges over the next couple of quarters. This completes our prepared remarks and we will now turn the call back over to Lindy and look forward to answering your questions.
Operator
(Operator Instructions). We’ll take our first question from Gale Glazerman with UBS.
Please go ahead your line is open.
Gale Glazerman
Hi good morning?
John Crowe
Good morning Gale.
Gale Glazerman
Could you just give, maybe just a little bit more color on the weakness that you are seeing within wood specialties and then you talked about seeing weakness in the Zen markets kind of on your last call. And I’m just wondering if you just could give a little bit more perspective on the magnitude of it.
I guess it affected the quarter and that’s going to affect the next quarter or two moving out.
John Crowe
Okay, I’m going to ask Doug. He has some of that in his remarks and I’ll ask him if he can add to it.
Doug Dowdell
Yes I’d be glad to. Specifically tire cord in Europe where the majority of that business occurs is where we’ve seen a pretty steep decline.
In the first quarter it was an impact of about 5,000 tons and combine that with what we see in the automotive filtration. Between now and the end of the year we believe there will be another softness in the range of about 5,000 to 7.000 tons.
If you add those two together we’re looking at about a 10,000 – 12,000 ton shortfall and that’s why we’re concerned –
Gale Glazerman
Yes and I’m just trying to understand like how much worse they’ve got as you moved through the quarter compared to kind of what you were talking about in August.
Doug Dowdell
Yes. Well I think what you could say basically for that I would say slightly worse than we were thinking in August certainly.
The total decline is about 30%, I would say, for let’s say August through December for tire cord.
Gale Glazerman
Okay and can you give a little bit of color how that might be affecting negotiations as you are sitting down with customers for 2013 pricing?
Doug Dowdell
Oh this year. Obviously we’ve begun our pricing negotiations for next year and we have another major round of meetings with customers in mid-November at London pulp week.
We expect to move forward significantly around that time period. We are currently projecting that we would have increased sales volumes in all of our high-end markets.
Acetate casings, tire cord, filtration and ethers next year. But still it’s too early for us to provide a precise pricing expectation and what’s going to happen because we are in the middle of and those negotiations wouldn’t be appropriate.
But as we’ve indicated earlier, we are seeing some markets where there will be some nominal increases. Some markets where prices likely will remain flat and some markets where there will be some small reductions.
We do expect to completely sell out 2013 all into the high (alpha) markets. In our January call frankly as one would be able to give you an update on how we’ve come out.
Gale Glazerman
Okay. Would it be fair to say maybe a little bit more cost and some pricing menu would have been back in August?
Doug Dowdell
I think that’s fair.
Gale Glazerman
Turning to nonwoven, you did quite a bit better John in the quarter than I would have expected and I think there was some reference of maybe already moving some of the Delta volumes to the other facilities. Is this kind of a new base to look out or is there something unusual in the quarter?
Doug Dowdell
I’m going to ask Marko if he’ll comment on that. Marko?
Marko Rajamaa
Gale, we’ve seen now a couple of very strong quarters in terms of shipments starting with A and J and moving into the first quarter which is finished. We feel pretty good about this, the base business.
And we really haven’t moved any volume yet to (inaudible). It’s really the base that is carrying the day for us now.
Obviously we were building some of our inventories particularly in gas for this past quarter. That’s the foundation of our performance.
Moving forward, thinking of the Delta, that project continues quite well. The site continues to operate well.
We are starting to move some of our accounts over to (inaudible) and that works continues and we will be continues more cover on that in the next call.
Gale Glazerman
Okay and then just two more quick ones. Can you give an update on this sale on the Delta property and kind of what these more expectations are and timing?
John Crowe
Sure. Steve?
Steve Dean
Yes Gale. We are still targeting to close on that sale in December but we haven’t finalized it yet.
Gale Glazerman
Is it still in mid-20, low-20 range, in terms of cash?
Steve Dean
Yes that’s right.
Gale Glazerman
Okay and just to make sure I understand about the fuel types credits change. It seems like it’s a net kind of $15 million, $20 million that cash benefit compared to what you say or what you’ve paid back or is there more money that you’d have to pay back for all this $48 million or $45 million?
Steve Dean
Well there are two sides to it. There is what we recognize as income.
That’s where you saw the $5.5 million. Now we’ve recognized we’ve got another $10 million out there that we could recognize in the future based on expected income and taxes payable and future out years.
In terms of cash, yes. We are going to realize as I said $40 million to $45 million in cash benefit in the next three quarters but there are additional payments that we’ll have to make in future years to trade more credits.
Gale Glazerman
On top of the $28 million that you’ve paid back, I’m just trying to understand what the net cash benefit. It doesn’t seem like it would be tremendous then.
Steve Dean
The net cash benefit for this year is going to be in the $15 million range. You look in the future years and it will be much smaller.
I think that’s the way I would look at it.
Gale Glazerman
Okay, thank you.
John Crowe
Thanks Gale.
Operator
And we’ll take our next question from James Armstrong with Vertical Research. Please go ahead, your line is open.
James Armstrong
Good morning?
John Crowe
Good morning.
James Armstrong
First question is, you mentioned margin improvement in the cotton specialty mills. Was it just lower costs and linters or is there more to it there?
John Crowe
Hank?
Hank Hall
Yes. I mean if you look at it, it really is merging as lint costs go lower we will pass those through to our customers but we do see some increased margins in the short term.
James Armstrong
And the linter market right now, is it staying relatively low relative to where it had been?
Hank Hall
At this point in time we don’t see any demand side that would drive cotton costs up at this point in time.
James Armstrong
Okay. Then following on to Gale’s question with the weakness in tire cord and auto filtration, is there any indication yet that the demand for these products are picking back up?
And have you seen the weakness spread to other markets in October?
Doug Dowdell
Yeah I’ll answer that. We listen to our customers and basically they are telling us that they see their demand coming back a bit and we have not seen further weakness in October.
We remained cautiously optimistic but obviously we’ll have to see what happens going forward.
James Armstrong
Perfect. And then you built inventories in multiple areas.
How much above what you want to be are your inventory levels and your opinion. Are you at the level you’d like or should we see reduction in the second quarter?
Doug Dowdell
Certainly in the wood side, this is Doug. We are slightly higher on our specialty as we indicated.
We think we’ll need to move about 10,000 tons and we’re just slightly higher on fluff pulp not much at all. Frankly we had a lot to rebuild there because at that line had been down much longer.
We are not far off from our inventory targets. As John indicated in his comments, over the next quarter or two we plan to bring those back on the wood side to their normalized levels.
James Armstrong
And then lastly real quick. How much do you have left on your share purchase authorization?
Steve Dean
About 4 million shares.
James Armstrong
4 million shares?
John Crowe
Still quite a bit.
James Armstrong
Thank you.
John Crowe
Thank you James.
Operator
And we’ll take our next question from Tim Quillin with Stephens Incorporated. Please go ahead your line is open.
Tim Quillin
I understand it’s a little too early with your negotiations on the pricing and some may be ups and may be down some may be flat but net-net would you expect to implement a pricing increase for a calendar ‘13?
John Crowe
Well you heard Doug’s comments that we are in negotiations now and November is an important month for negotiations. The paper week in London is generally when things start to come together where you know exactly where you’re going to be and I think it’s a little early for us to give you too much more guidance than what Doug said.
He said there are some markets that could be some increases and there is some markets that may see flat and some maybe even down. I think the thing that’s in fact impact us the most short-term is mix.
Tim Quillin
Yes.
John Crowe
But we’ll be able to give you much more color on that in our January meeting Tim.
Tim Quillin
Okay. And then in terms of the commitments that you have for your Foley conversion right now.
I just want to understand kind of the strength or nature of those commitments. In other words, if we had the global economy deteriorate a little bit next year, how much of those commitments are actually firm?
John Crowe
Yes well certainly we’re still at that 75% – 80% commitment level but those are not take or pay contracts like we have on our cotton business certainly. It’s dependent on a number of things obviously.
We have to get the line up as we think we will in April. We have to qualify customer’s products and it has to ship to them and work and obviously have to remain as they are projecting and forecasting does.
If there is a major economic downturn then that’s certainly going to impact that. We are not immune to the global economic fundamentals.
Tim Quillin
Okay, that’s fair. And then on the cotton side, you’ve mentioned some strength on the LED/LCD screen side and I know that cotton utilization is down, maybe close to 50% now but where do you think utilization can go with a pick up and demand on the LED/LCD side?
John Crowe
Yes Tim. Obviously when you look at the demand returning we’re talking about 2013.
I think we can see out utilization get back into that 55% – 60% range next year.
Tim Quillin
Fair and then just lastly, John, you talked about you’re looking at joint ventures and other alternatives like that. And I was just wondering if you could give us maybe an update on what you’re thinking in terms of capital deployment for that type of a project, thank you.
John Crowe
Okay, good question and we’ve talked about that a lot. One of the things we believe because of the strength of our balance sheet and the strength of our niche markets and our ability to remain sold out because we have operational flexibility.
We are going to continue to generate strong cash and the combination of cash flow and you know where we are on our debt. We have some cash coming in.
We’ve got the sale of the property. We’ve still got some credits to reclaim.
The combination of pre cash flow and being able to go to the debt market at pretty reasonable rates and not lever up. Steve likes that number not going above two and a half times levered.
But given our EBTDA performance, we can do a sizeable transaction if it’s the right assets that meets our core competency criteria, meets our return on investor capital. We feel pretty comfortable that we’re in a good position to do what we would like to do in terms of our growth strategy.
Tim Quillin
Okay. Thank you.
Operator
And we’ll take our next question from Steve Chercover with D.A. Davidson.
Please go ahead, your line is open.
Steve Chercover
Hey good morning?
John Crowe
Hey Steve?
Steve Chercover
Hey John. First quick question, I think Gale kind of alluded to it.
It sounds like the margins in nonwovens should be sustainable at these higher levels. With some bumps ups and downs obviously but –
John Crowe
I’m going to let Marko answer that but the key for our nonwovens and that was the reason for the closure of Delta is utilization. Capacity utilization is so important in those assets.
One of the big things is we get more volume into the other two facilities and fill them up at our low cost facilities and margin will expand. Marko did you –?
Marko Rajamaa
Yes John I think you are hitting it big. It should be utilization rate we are after but with that also focusing on the businesses where we believe we can win and that’s really wipes particularly here in North America.
We’ve seen very strong demand in that segment and with some of the new introductions we’ve had in that segment particularly the flushable moist toilet tissue. We believe in that and it continues to grow going into calendar year 2013.
Thinking of Europe, obviously we all know what’s going on in the southern European economies and it’s a concern for us but looking into the first quarter in all of our segments, table top, wide spending and hygiene, the demand was strong. There as well we have some very strong defensible niches where margins are attractive and that will be our focus going forward.
Short answer to your question, yes margins are critical for us and we believe we can build on those.
Steve Chercover
It’s great, yes. I guess the benefits are still ahead of us.
I was just wondering if you could quantify the financial benefits of the Oxygen Delignification project either on a cost per ton or ROI given the investment.
John Crowe
I believe we said that conservatively we know there’s $5 million of savings and IRR of at least in the 12% – 15% range. This has some real benefit in product yield and in chemical savings and energy.
It supports this expansion project and it also supports the project. We just completed the first phase of resetting the energy project.
This is a very complementary project and we are conservative, I think, on our savings.
Steve Chercover
Okay, a sure way to return.
John Crowe
And the start of that is an environmental project. A commitment we made to improve our environmental footprint.
Primarily in color water discharge.
Steve Chercover
And now that you’ve hit your 25% gross margin target. Is that it or do you raise the target?
John Crowe
Well, we had it at 20% for a long time and we just didn’t buy that and we just weren’t going to lower it. At 25% and we’re above it and we believe we’ll stay above it.
That obviously the consolidation and what Marko said about his ability to continue to improve his margins in the nonwovens segments. That’s encouraging and it should allow us to stay in the 25% or greater.
That should be nice for him to even change that goal one day. That would be possible.
Steve Chercover
But it’s not going to get as high as in the specialty sales?
John Crowe
It’s not going to get as high as what?
Steve Chercover
As in the specialties.
Doug Dowdell
Nonwovens (inaudible)
John Crowe
No, oh I’m sorry. Nonwovens, wow, that would be something.
Right now we want to get it better than the cost of capital and then move forward from there.
Steve Chercover
Okay. Final quick question and I hope I don’t sound dense but, the guidance for Q2, would that be 50 – 55 without the insurance or 80 – 85 if you back out the insurance?
John Crowe
I think it’s the former.
Steve Dean
It’s going to be – take 15 off of it.
Steve Chercover
Got it, now that’s what I thought.
Steve Dean
So it’s 50 -55, yes.
Steve Chercover
Alright, thanks very much.
John Crowe
You’re welcome.
Operator
Looks like our next question with Hamir Patel with RBC Capital Markets. Please go ahead, your line is open.
Hamir Patel
Hi good morning guys? With the 42,000 ton conversion, how do you expect pricing on the additional volumes to compared to whatever you might realize on the base business in calendar of ‘13?
John Crowe
In calendar of ‘13, the line is going to come up in our fourth quarter and frankly that quarter will be more of qualification and not much volume. So the remaining part of that year, those volumes will ramp up at about 25% per quarter and pricing would be similar to our other specialty business.
Hamir Patel
Right, okay. And then just the final question I had was in the fluff business.
Are you guys seeing any impact from the shutdown of the, I believe Nippon has a sap facility in Japan?
John Crowe
You know we have not seen that yet. There could be possibility of that occurring.
However, we are a small supplier in the overall global fluff world. Right now our volumes with our key customers, the big customers, remain steady.
Hamir Patel
Okay, that’s it from me. Thanks.
Operator
(Operator Instructions). Our next question comes from Stuart Benway with S&P Capital IQ.
Please go ahead, your line is open.
Stuart Benway
Thank you. How about Asia?
You said Europe is fairly weak. Are you seeing similar conditions in Asia or are not all not like that?
John Crowe
Doug you want to talk about –?
Doug Dowdell
Yes on the specialty wood side we have a much smaller position in Asia and while there have been some declines, there are some producers in Asia that make some tire cord. They have had those similar declines but overall or other markets we really, really aren’t seeing big declines there.
Stuart Benway
Is that primarily what you sell there? These best, your products, are the similar lines that you sell in Europe?
Doug Dowdell
We sell filtration there.
John Crowe
Yes, filtration, ethers, fluff, tire cord.
Doug Dowdell
Cotton cellulose and the LED/LCD, that’s where the manufacturers are.
John Crowe
Yes that’s correct. Asia is still our biggest growth variant for the company.
Stuart Benway
Yes.
John Crowe
It’s grown to 19% of our sales and probably right now it’s a little bit above that given the mix and the geography and impact from the European issues.
Stuart Benway
And on the LED market and you say that the supply chain is quite variable there but you’re expecting renewed growth. What’s unique about that market is different than some of the others.
John Crowe
Well generally what we see in the LCD/LED market is it has the tendency although there is a long-term growth curve. Let’s call it 10% rate.
This supply chain does have a tendency to have a (inaudible). They have a tendency to run real strong, your demand will be extremely high and then it will pull back very quickly.
We are in one of those pull backs right now but we anticipate a return to growth in 2013.
Stuart Benway
And overall on pricing, do you think you got possibly too aggressive at the last couple of years or especially this year. Has it affected your share at all or has it been purely a market demand situation?
John Crowe
I don’t think I would say we were too aggressive. I think we were meeting demand and supply fundamentals.
Demand was stronger than the supply and right now we are running into a little bit of a headwind there but if we’ve committed to our market some believe that it will turn and we’ll see that dynamic happen again.
Stuart Benway
And with the housing market showing at least some signs of recovery here, are you seeing any increases all in demand for the ultra-fiber 500?
John Crowe
No we haven’t really seen much change here it’s been very steady. It’s got good margins and we just haven’t seen rapid returns on housing market that would impact it.
We are in slide along grey here in the U.S. and in China we’re into much more complex (inaudible) but we’re pretty stable.
Good pricing, good margin, just hasn’t taken off.
Stuart Benway
And how about other new –?
John Crowe
Product, it’s a great product.
Stuart Benway
And how about other new product development plans. I guess the flexible (inaudible) is probably the closest thing?
John Crowe
Right. Marko talked a little bit about – you want to add anything else about the flexible?
Marko Rajamaa
No really I think I told, while he’s critical there it’s a new segment growing rapidly, very, very attractive for us and our customers.
Stuart Benway
Okay and thank you.
John Crowe
You’re welcome, thank you.
Operator
And it appears we have no further questions at this time
John Crowe
Okay Lindy, thank you. And just in closing we thank you for participating in our call and we look forward to discussing our results with you in January.
Thanks and have a great day.
Operator
This does conclude today’s program. You may disconnect at any time.
Thank you and have a great day.
John Crowe
Thanks Lindy.