Jan 30, 2013
Operator
Good day everyone and welcome to the Buckeye Technologies’ Second Quarter 2013 Earnings Results Conference Call. Today’s 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, Director of Investor Relations of Buckeye Technologies. Please go ahead sir.
Eric Whaley
Thanks Ann. Good morning and welcome to Buckeye’s conference call commenting on our results for the second quarter of fiscal year 2013 which covers the October to December period.
Today, I am 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; Marko Rajamaa, Senior Vice President of Nonwovens and Hank Hall, Vice President of Cotton Cellulose. After John and Steve 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 that involve 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 this presentation as well as the company’s most recent annual report on Form 10-K and the quarterly report on Form 10-Q. I would also like to refer you to the supplemental earnings slides posted on our website and on streetevents.com for additional details related to this call.
Now I’ll turn it over to John.
John Crowe
Thanks Eric and good morning. My opening remarks will be referencing slide three in your presentation material.
Our second quarter fiscal 2013 financial results were weaker than we expected with adjusted earnings of $0.60 per share which is $0.05 below the low end of our range. We provided guidance on our last earnings call that we expected earnings to be in the range of $0.65 to $0.70 including and an expected $0.15 insurance recovery.
The net positive impact to the final insurance settlement related to the steam drum failure in June 2012 at our Florida mill which we received in December was $0.11 which was $0.04 lower than we had anticipated. Net sales revenue for the October-December quarter was $204 million, down $17 million or approximately 8% year-over-year.
The February 2012 sales of the Merfin Systems converting plant in King accounted for $4.3 million or 2% of that reduction in sales. The main difference in our results versus our anticipated earnings for the second quarter was the already mentioned lower insurance recovery plus the impact of product mix and lower margins on our specialty wood pulp delivered to the viscose staple fiber market.
In our second quarter, we shipped approximately 12,000 tons into viscose staple fiber’s market. Additionally our fluff pulp prices were lower than predicted due to the increase in spot business this quarter.
You will recall, we overshot our inventory targets during the first quarter and we were committed to bringing inventory back in line. To accomplish a better balance we chose to sell into the viscose staple fibers market for the first time in over two years and we purposely increased our spot fluff sales.
At the end of the quarter two, our finished goods woods inventory is very close to our target level. During the quarter we continued to experience weaker market conditions in a few of our specialty fibers markets such as European high performance tire cord, acetate filament, and LCD screens.
We had exceptional production in the second quarter resulting in stronger shipments, up 6.4% compared to a year ago quarter. While the second quarter is seasonally weaker quarter for nonwovens, we are pleased with another strong revenue quarter for nonwovens and we're experiencing and improving ROIC for the nonwovens segment.
The closure of our Delta nonwovens facility went as planned with production ending in late November and the organization made great progress on equipment decommissioning during the months of December and January. We expect to close on the sale of the Delta land and buildings on February 06, with the expected net sales proceeds of about $20 million.
The Delta organization performed very well and delivered on the plan with record safety and quality performance, a class performance that now allows us to improve nonwovens ROIC due to lower cost structure and higher capacity utilization. During the quarter, we made good progress on our Specialty Expansion and the Oxygen Delignification Projects at our Florida wood facility.
Both projects are on schedule and both are important long-term initiatives for our specialty fibers business. We anticipate that they will come online in April and July 2013 respectively and that they will be key contributors for revenue growth and cost reduction.
We continue to focus on a balanced approach to the allocation of capital. Yesterday, the Board of Directors voted to pay a quarterly cash dividend of $0.09 per share on March 15, 2013.
We continue to return cash to shareholders during the quarter with $9.2 million in share repurchases and a $3.4 million dividend pay. We anticipate your interest in our market conditions and after Steve reviews the supplemental of financial reconciliation chart, Doug, Hank and Marko will provide brief updates on some of our key markets.
Now, let me turn it over to Steve for his remarks.
Steve Dean
Thanks, John. Good morning.
I'll start with slide number four where you can see a summary of key financial metrics for the quarter compared to the same period a year ago. John already commented on the year-over-year sales comparison; adjusted earnings per share of $0.60 which excludes the impact of all fuel tax credits, asset impairment and restructuring was down $0.09 per share compared to $0.69 in the second quarter a year ago as the unfavorable impacts of shipment mix and lower fluff pulp prices were larger than the $0.11 pickup from the insurance settlement.
Gross margin of 23.2% was down from 24.8% in a year ago quarter for the same reasons adjusted earnings per share was down. Excluding the impact of the insurance settlement, our gross margin in quarter two ‘13 was 20.7% while disappointing compared to the last two record years, this is still a healthy margin level better than nine out of the last 11 years for Buckeye.
Net debt of $41 million is down $10 million compared to December 2011 and remains at a very low level. Over the past 12 month period, we generated $50 million in free cash flow in spite of ramping up capital expenditures to a $113 million to fund the specialty conversion project.
During the same period, we reported adjusted earnings per share of $2.55, generated EBITDA of $211 million and paid out $44 million to our shareholders in the form of dividends and share repurchases. Buckeye’s ROIC during this 12 month period was 14.5% well above our cost of capital which we estimated 10%.
Moving to slide number five, you will see a consolidated earnings summary comparing our earnings for the just completed second quarter of fiscal year 2013 to the first quarter. Second quarter net sales of $204 million were up 4% compared to the first quarter.
Specialty fiber sales were up 7% as volume increased 24%, prices were down 6% on the average and the mix impact was negative 11%. This increase in shipment volume was driven by a 31% increase in shipment volume from Foley compared to our first quarter heavily impacted by the June steam drum failure outage.
Shipment volume from our Memphis specialty cotton fibers plant was down 16% in spite of a small pickup in demand for us take pulp from the LED screen market. Selling prices were up $51 per ton for fluff pulp and were down 5% for specialty cotton fibers, as we pass through lower cotton and the prices to our customers.
The negative mix was driven by shipments into the viscose staple fiber market along with the combination of higher wood pulp shipments and lower cotton pulp shipments. Nonwovens sales for the quarter were down 7% sequentially because of an 8% reduction in volume due to the end of production in our Delta plant and normal seasonal weakness.
Moving down the chart, you can see that adjusted operating income was down $2.6 million compared to the first quarter. Operating income was down $2 million for specialty fibers and another $1.8 million for nonwovens.
Adjusted operating income for corporate, excluding restructuring and impairments improved by $1.2 million as our corporate SRA expenses in the first quarter included $1 million in expenses related to our strategic growth initiatives. At the bottom of the chart, you can see that we had $10.7 million after-tax in asset impairment and restructuring cost related to the closure of our Delta airlaid Nonwovens plant which negatively impacted our reported earnings in the second quarter.
We expect to recognize an offsetting gain of about $8 million in February when we close on the sale of the land and buildings. Moving to slide number six, we have a waterfall chart that shows the drivers behind the $2.6 million reduction in operating income between the first and second quarters.
Sales price is negative $6.6 million and mix is negative $7.4 million were the biggest drivers of this reduction all in specialty fibers. Volume had a negative $2.3 million impact driven by lower Nonwoven production volume compared to the first quarter when we were rebuilding inventories.
On the positive side, there was an $8.7 million improvement related to the final insurance settlement for the steam drum failure, transportation costs were down $1.3 million most of which is mix related, energy and direct costs combined were down $2.9 million and SRA expenses were lower by $1.1 million. On slide number seven, you can see at a more summary level the drivers behind the $0.02 reduction and adjusted earnings per share between the first and second quarters.
Volume, selling price and product mix together cost us $0.27 per share. The June fully outage impact was $0.14 better than in Q1.
We made up $0.07 on lower costs, $0.02 on lower SRA expenses and a lower tax rate saved us another $0.01. On slide number eight, I have updated the table from last quarter on the impact of the Foley steam drum failure.
In terms of lost production volume, the total impact was about 18,500 tonnes over the past three quarters of which 13,000 tonnes was on the fluff pulp line. Total loss sales revenue was about $20 million.
The total loss including replacement costs for capital equipment such as the steam drums was $24.1 million and our total insurance recovery was $18.9 million. As you will recall, we had a $2 million deductible in our insurance policy.
Over the last three quarters, the net impact of this loss net of insurance recovery on operating income was about breakeven but we incurred incremental capital expenditures of about $5.6 million. The final settlement came up $2.1 million lower than our estimate from last quarter and related costs came in at about $0.4 million higher for a total impact on EBIT that was $2.5 million or $0.04 per share lower than our estimate going into the quarter.
It’s just difficult to estimate very accurately in advance the amount of final insurance settlement given all the subjectivity involved in measuring the business interruption and other losses. Finally, I have added another chart on slide nine that shows the expected impact of the Delta plant closure on the going rate financials for our Nonwoven segment.
For the 12 months period ending 12/31/12, our nonwovens business excluding the Merfin systems converting business we divested at the end of January 2012 reported net sales of $227 million, gross margin of $27 million or 11.9% of sales and EBITDA of $33 million or 16.4% of sales. Up until November when we stopped production, our Delta plant was shipping about 13,000 metric tonnes annually.
During the last 12 months, Delta’s gross margin was $0.6 million with depreciation of $4.9 million. On a going rate basis, we expect to transfer about 5,000 tonnes of this Delta business to our Gaston and Steinfurt facilities.
As a result, we expect net sales to drop from $227 million in calendar year 2012 to about $201 million in calendar year 2013. Since we don't expect to need to add any shifts or any significant fixed cost in order to take on this additional production volume at Gaston and Steinfurt, our projection for calendar 2013 Nonwoven gross margin is $31 million or 15.5% of sales, an improvement of $4 million or 3.6 percentage points in gross margin compared to calendar 2012.
EBITDA, which was $32 million over the last 12 months, is expected to increase by $1 million in calendar 2013. EBITDA as a percentage of sales is expected to increase from 14.1% in calendar year ‘12 to 16.4% in calendar year ‘13.
The reason for the smaller improvement in EBITDA relative to gross margin is that the reduction in selling, general and administrative expenses carried by this business, both direct and allocated was smaller than the reduction in depreciation due to the closure of the Delta plant. Now, I will turn it back over to John
John Crowe
Thanks, Steve. As Steve shared, we had strong shipments during the quarter but continued to experience softness in several markets.
I will ask Doug, Hank and Marko to provide updates on several key markets for wood, cotton and Nonwovens. Doug, (inaudible) it off.
Doug Dowdell
Sure, thanks, John. I am going to give an update on our expansion project in this market trend, shipments and pricing for the wood portion of our specialty fibers division for the just completed quarter, our current quarter and our outlook for calendar year ‘13.
Our second quarter wood shipments were up 31% from the first quarter and due to Foley’s full recovery from the drum failure incident and outstanding operational execution in areas of safety, production, quality and logistics. As we had indicated in our October conference call, we did viscose staple fiber market in the second quarter to fill the gap of softening specialty demand, primarily driven by the European tire cord market.
However, we did see some softness in smaller markets like MCC and nitrates. Prices are spot viscose stable fiber fell rapidly throughout the second quarter resulting in lower net realization than we had planned.
In our core business specialty fluff prices were down 1% from the first quarter due to cost past through in some product mix. Fluff prices were down $51 per ton sequentially with most of the decline due to increased shipments into the spot market.
We decreased finished goods inventory in the second quarter and are very near to our inventory target levels. The current third quarter is looking better on the specialty side with increased demand and acetate casings in filtration markets.
However, tire cord demand has not improved as our customers had indicated and now appears to be up only slightly versus the second quarter. With improving demand in our other specialty markets, we will reduce our sales into the viscose staple market from 12,000 in quarter two to 5,000 this quarter.
Also our total wood shipments in quarter three will be down 9% versus Q2 due to a combination of lower production related to plant maintenance, time needed to do tie-ins for the oxygen delignification project and to build inventory for increased specialty orders in quarter four. On the pricing front, spot viscose staple prices are trending up slightly and our core halve value specialty markets prices will be down 1.5% from quarter two to quarter three and based on the current product mix, our calendar year 2013 prices for specialty will be down 3% to 4% year-over-year.
Specifically, prices in asset acetate will be up, ethers and filtration will be flat, casings, tire cord and other markets will be down. We have committed about 90% of our specialty volume for calendar year ‘13 but actual customer orders will be the determining factor in specialty sales utilization.
Our specialty capacity has sold out this quarter and we remain sold out by filling any specialty volume gaps with viscose staple fiber tonnes on an as needed basis. At this time, we do have increased specialty demand on our key specialty markets in Q4, and we expect specialty demand to continue to rebound through the second half of calendar year ‘13.
On the fluff front, year-over-year discounts are up and prices are down from a lower base. At this time, fluff supply appears to be exceeding fluff demand due to increased supply.
We would expect the fundamental fluff market to improve in the second half of calendar year ‘13 as growth occurs at 300,000 tonnes of annual fluff capacity is taken out of the market. The Foley expansion project will be completed this quarter and we will start our [best] plant in April of 2013.
Total project costs are now estimated to be up 5% to $89 million. The current long-term volume commitments remained unchanged at about 75% and we are committed to delivering the estimated internal rate return of 15% to 20% and incremental EBITDA of $20 million annually.
Our customer qualifications and ramp up plans are unchanged; we expect to achieve full capacity utilization of the additional 42,000 tonnes annually by the end of the fourth quarter of next fiscal year. Lastly, we remained very confident in our long-term specialty markets and believe our unique capabilities will provide our customers with better value and we will benefit from improved financial returns.
Now, I will turn it over to Hank Hall to discuss our cotton markets.
Hank Hall
Yes, thank you, Doug. As mentioned on last quarter’s conference call, year-over-year volume decreases in cotton cellulose were primarily due to the reduction in acetate shipments to the LED market.
The supply chain for this market is quite volatile and has been trending down the past four quarters. Looking forward, we feel like the market is at the bottom of the demand cycle and volume will start to strengthen in past this quarter.
Our paper and ether segments remain barely stable, our European markets are showing signs of weakness. In general, the prospects for growth in continental pulp markets continue to improve.
As lower raw material costs pass through to our customers, cotton pulp becomes a voluble alternative to other raw materials. Our focus over the next several quarters will be on improving our cost structure and enhancing our competitive position.
We are currently looking at several projects to lower our cost and provide high rates of return. Despite the drop in volume our cotton sales business continues to generate strong cash flow and provide returns well in excess of the cost of capital.
I will now turn it over to Marko for comments on non woven.
Marko Rajamaa
As John stated in his remarks the Delta organization did a remarkable job working through the 18 month journey towards the site closure end of December 2012. The process went extremely well thanks to our dedicated employees at the Delta sites.
There were no loss time injuries, the highest quality standards were maintained, and world class operating metrics were achieved. The objective for this closure was simple, to improve our financial performance.
Even with our near term revenue shrinking our financial performance will improve as capacity utilization rate will be nearing 90% across our two other sites in (inaudible). This will help reach our goal of delivering the return on invested capital at or above the weighted average cost of capital.
We are on track to meet or exceed the account transfer objectives from Delta to our two other Airlaid sites. We started the transfers during our second quarter and this work will accelerate during our third quarter so that we expect to reach an annualized shipping rate of 5000 metric tons or more during this fiscal year.
In addition to the restructuring, strong demand has lifted our performance. In North America our premium wetlaid business had another strong quarter and (inaudible) continues to grow.
Apart from the normal seasonal slow month in December, our European customers continue to be optimistic and our shipping volume was trending higher than the same period a year ago. With our lean and manufacturing footprint we will be in an excellent position to develop or improve our airlaid business going forward.
I will now turn it over to John.
John Crowe
Thanks Doug, Hank and Marko. We continue to work towards increasing shareholders value by executing a disciplined approach to capital allocations.
We expect capital spending this quarter to be in the $35 million to $40 million range, higher than both the first and second quarter, as we ramp up the specialty expansion project at Foley and continue the installation of oxygen delignification capability on our pulp mills line. We are on track on both projects and anticipate CapEx spending of $120 million for fiscal year 2013.
As I said, we continue to evaluate several opportunities for growth including acquisitions, joint venture or partnerships. As we enter quarter three we are seeing a modest improvement in the tire cord market with increased orders compared to the first and second quarters.
Additionally the next two quarters will be exciting transition from building and construction on the transformer and oxygen delignification projects to start up customer qualification and process enhancements. In this period we will begin receiving modest benefits of both the projects, revenue growth, cost reduction, environmental footprint improvements and operational flexibility.
Once these two projects become fully utilized which will take six to eight months for the O2 project and 12 to 15 months for the transformer project, we expect to exceed our committed improvement of $25 million EBITDA on an annual basis. While the markets in world economy are improving, albeit slowly, we are committed to a discipline execution of our strategy and we have positioned ourselves to grow with our customers and markets overtime.
Our continued strong cash flow from operation and attractive balance sheet provide us the flexibility to allocate capital to growth opportunities and to increase shareholder returns by dividends and share repurchases. Our capital spending will decrease significantly at the end of this fiscal year and we expect to see a large increase in free cash flow next fiscal year.
We will continue to benefit from the consolidation of our non-wovens business, improving our ROIC for that segment of our business and we anticipate receiving cash from the sale of the delta land and building soon. As markets recover, we are positioned to take advantage of that recovery.
We anticipate sequential earnings will be comparable to the just completed quarter minus the $0.11 insurance recovery or approximately $0.49. We expect input cost to remain relatively flat with higher wood cost, offset by lower energy and cotton linter cost.
We are well positioned to continue to provide shareholder value and to meet the challenges of slow growth economy over the next couple of quarters. Looking forward, we have said our foundational business improvement plans well on their way for wood, cotton and non-wovens and we are in a favorable strategic position for long-term value creation.
This completes our prepared remarks. We will now turn the call over to Ann and we look forward to answering your question.
Ann?
Operator
Thank you very much. (Operator Instructions) We will take our first question from Gale Glazerman from UBS.
Gale Glazerman
I don’t know John or Doug which one of you want to answer, but when you talk about the 90% sold within the wood specialty business, does that include any of the volume from the conversion project or is that based on kind of current volume?
Doug Dowdell
Yes that would include that as well.
Gale Glazerman
Okay and when there is talk of cotton becoming more attractive and attracting little more business. Would that cannibalize any of the volumes you are selling in with the specialty or would that focus on other end markets that you are not participating in?
Hank Hall
Gale this is Hank, no it would not if you look at the markets that we would enter because of our lower input cost it would be in the very high viscosity markets and compete more in that as oppose to our specialty wood.
Gale Glazerman
Okay and just in general can you talk a little bit about the demand patterns you saw through the quarter, was it just kind of a consistently lower number through the quarter or were there acute weakness towards the end of the year beyond what you would expect during the holidays and may be just a little bit more color on other than the small pick up you are seeing LED and tire cord just may be a little bit color more color on that in January?
Doug Dowdell
Yeah, as we stated in the comments certainly tire cord we knew what that was last quarter and where we are now. It’s about the same, may be slightly, it is slightly up this quarter.
But we are seeing now some improvement in our orders for acetate [tool] in particular and casings and filtration and we are seeing those continue and based on the orders that we have they will be up even more in our fourth quarter.
Gale Glazerman
Okay, and fluff pulp, forgive me if you mentioned it, but would you expect the mix term in the same or would you expect to do more contractual business on the third quarter?
Doug Dowdell
Yeah, we would expect to have more contract, but we could have a price decline of $10 to $20 a ton this quarter, depending on the outcome of our, how much thought business we end up placing.
Operator
We will go next to Tim Quillin with Stephens Incorporated.
Tim Quillin
I am trying to figure out your continued confidence on the customer commitments on your conversion and how that might progress with the weakness or the spotty weakness you are seeing in market demand. So I am just wondering if there is a chance that you might end up selling more in to the viscose market as you ramp up or as you make the conversion.
Doug Dowdell
Yeah, Tim this is Doug, I will answer that. Well we have to role out first, our line actually starts at next quarter, so an AMJ quarter and that will be a quarter mostly of lining out the operating and beginning qualifications.
And we are committed to bringing this capacity fully on line by the fourth quarter of next fiscal year. so based on that, in the near term its our constraints of really more related to getting customers qualified and working through those details versus supply demand fundamentals, so that really will not play into calendar year ’13 as it relates to constraint of sale, that's more related to qualifications in bringing the line.
So really what our commitment is long-term based and we feel very good about that, so we do not expect the long-term impact of all as it relates to supply and demand at this time.
Tim Quillin
And maybe, I mean I am just kind of looking at this from a big picture perspective, but with Rayonier and you guys doing pretty major conversions from fluff to specialty and having this somewhat spotty demand, it would seem somewhat more difficult than maybe we envisioned a couple of years ago for the market to absorb that new capacity. I am just wondering what that might translate into as far as mix or expectations for pricing as you ramp up?
John Crowe
Let me start and then Doug can add some to this. Two years ago when we made a decision on this we were certainly listening to our customers and they were all sold out.
We believe those markets will recover in that situation where you turn, that may take a while. But as Doug said, we still have full commitment from the customers on this capacity overtime.
We have to go to the viscose market; that's the flexibility we have. Obviously, we continue to sell fluff pulp too, so we are going to remain full and sold out, but the decision we made two years ago is still a good decision.
The customer growth is going to come and as we and our competitor fill up that capacity, we see this being good for Buckeye and good for the Foley side. You want to add anything to that?
Doug Dowdell
Yeah, I would just say what Tim, it’s saying really applies more very near term and certainly with the tire cord market softness and some others we are selling 5,000 tons this quarter into the viscose staple market; we will see if we sell some next quarter; if we have a gap we have that opportunity to go there, that's a huge market. Certainly, its not the pricing we want, but its there and if we need it, we will utilize it; but the key thing I think John said is you know you have to look at this really as a long-term project and we feel very, very certain that it will be filled up.
Tim Quillin
And then just last question is around cash flows and your balance sheet and John I think you mentioned that capital expenditures should drop off significantly; in fiscal ’14 you should be generating a lot of free cash flow. I am just wondering how are you thinking about allocating that capital in terms of buybacks, dividends and what your acquisition pipeline looks like?
Thank you.
John Crowe
Let me ask Steve to answer that, I think we are aligned on that so, Steve.
Steve Dean
I think what we've been saying all along is we want to maintain a balanced approach and so you've seen us grow our dividend overtime and be opportunistic about share buybacks; we will see that continuing. You know there are other internal projects in the pipeline, I mean we don't have $85 million project, but we are going to have the opportunity to execute some more of those as we go along and certainly our strong balance sheet gives us opportunity to take advantage of acquisition or joint venture opportunities as they arrive.
Operator
We will take our next question from Chip Dillon with Vertical Research Partners.
Chip Dillon
First question is on the tax, sort of the way you see the tax refunds or credits flowing through and that might actually be, I guess, technically avoided, you know, payments as opposed to receipts I am not sure, but could you, it looks like you didn’t really see those in this last quarter and I think you are expecting, I guess, the remaining black liquor credits etcetera to kind of flow through in the second half and can you sort of quantify how that sort of unfold then and beyond if it continues?
Steve Dean
Sure, Chip. This is Steve.
I can take that one. You remember that we had to payback of the black liquor credit of $28 million in the first quarter and then we realized the cellulosic biofuel credit benefit overtime through reduction in our quarterly estimated tax benefits and so actually in the second quarter we did realize about $16 million benefit from that and anticipate another $8 million a quarter, basically in reduced tax payments in the next two quarters.
So for the year, I would say we paid back $28 million and we took $32 million. We were expecting originally going into this year there is an additional amount of money that we're going to receive through a tax refund of about $13 million.
We are originally expecting to receive that in the March-April timeframe; just due to the a review process with IRS and all of that, we think now that’s going to be more like the October-December quarter. We had like last quarter, I think we said, we had a maximum of $56 million remaining benefit.
We recognized $46 million of that on the income statement. So we have until 2016 to realize this and so you are going to see this slowly overtime, not going to be as large as it's been in the past.
The one thing, a piece of good news I guess is that the latest tax legislation that was passed at the beginning of the year, it looks like we may have one additional year to utilize those products so that’s good for us.
Chip Dillon
And then on the black liquor front where you have repaid it and then you are getting the benefits back over time, you paid there 28 you are getting 32 this year, so that’s already a positive, is 32 the limit of that particular credit or does it continue in fiscal ‘14?
Steve Dean
It continues I mean, basically, we have a pool of black liquor credits that we can trade, so that will be $0.50 credit you are trading for a $1.1 and you are basically limited by how much taxable income you have, so you can offset up to 75% of your taxes for the year. So the more income we make the faster we can use it.
Chip Dillon
And then could you talk a little bit about this where I am clear on this on the conversion project which I think you said would start up in the next several months, it sounds like if you expected to be fully on to your, again the market is going to somewhat determine this but fully in the higher value non-viscose business, you are saying that’s about with the qualification issues that’s going to be about a year process, so may be by the June quarter or next year call it ‘14 that’s when you expect to sort of have that new line completely on the higher value grades?
Doug Dowdell
Yeah that’s exactly right, qualifications for each customer, they can go pretty past in fact we have already started because of our ability to make that product and lab samples, we have already started qualifications.
Chip Dillon
And just if you went through this I apologize but I think on the third quarter guidance you are suggesting something around $0.50 because of the insurance looks like it was around 11 this quarter, so high $0.40-$0.50, so just clarify that or verified that view and then if you could give us some, I guess feel for how you see the fiscal fourth quarter, I know historically, its been a stronger seasonal quarter, you mentioned that some of your markets are coming back and some are, but maybe not that quickly and obviously it depends what happens to fluff prices etcetera, but how much of an improvement do you think we can see magnitude, I guess sort of a low and high scenario, if you have just a rough guess there?
John Crowe
Well, we'll do the best we can, without to forward looking, and obviously those things that can happen most positive and negative, but what Doug share and then may get Doug to repeat it, was that we have seen tire cords in particularly the orders starting to come back, in fact we already have orders for the fourth quarter. So we believe that's the tire cord business will continue to improve.
Obviously, we need to see improvements in other markets too, Hank talked about the LED starting to move back, and Marko’s talked about the growth he is seeing, the upside been flushable product. So those could all be very positive for us.
The one that we don't control is the fluff market, so Doug mentioned that it could be down $10 to $20, Doug.
Doug Dowdell
Yeah.
John Crowe
And then we will see if it bottoms and we start backup because starting in April and again we'll startup with our expansion project this April and our competitor’s starts up in the middle of the year. You will start to see fluff come out up to 300,000 tonnes over the next 12 to 18 months, so fluff should start turning around, so these are all positives for us.
Steve Dean
I think one thing Doug commented on it, his comments earlier where that we expect our wood shipments in the third quarter to be down 9% sequentially for various reasons and so in the fourth quarter we really expect those volumes to be back up to where they were in the second quarter. So there's a system that’s going to definitely be positive.
Chip Dillon
And just one last one, you might have addressed this but if I heard you right, you are saying as we look at the calendar year for your pricing in the high [offers] I think you said ethers would be flat and acetates should be up and tire cord down and I'm just a little I guess I'm wondering why acetate might be the strongest when that seems to be where most of the capacity is coming on and is that just really a timing issue, and then I guess looking at tire cord, it would seem like what's hurting you there just if you could help us is not certainly unless you can tell us there's something that's changed with your customers in the process that's probably not structural right, if this just more of the more cyclical based on the auto production in Europe?
John Crowe
Doug, you want to clarify what you said about…
Doug Dowdell
Yeah, first I would say on the acetate side, I mean there's that's not coming I mean that is just a very, very strong market, the end use is just something that's very favorable and as it relates to tire cord you hit it. I mean it is an economic situation in Europe with the auto industry and what's going on there and we expect that in time to fully rebound.
Operator
We will go next to Steve Chercover with D.A. Davidson.
Steve Chercover
So we've already been touching quite a bit on discussion of cellulose but given that the other major producer is getting low single digit price hikes, is the weakness solely attributable to mix or is there anything to do with trying to recover share?
Doug Dowdell
Yeah, this is Doug. For the most part, we have, its mix related, we in calendar year ’13 we have less acetate volume and that's one of the stronger markets so that impacts our overall pricing mix more.
Steve Chercover
And I suppose this one is presumably for Hank. So why do you think the demand for cotton pulp through LCDs is down, is it due to diminished end market demand for the television?
Hank Hall
No, Steve I mean if you look at it overall there is a growth rate in LCD business, LCD-LED business its very low but at the same time, if you look over the past probably let's call it 15 to 18 months, the films that go into these applications are becoming thinner. So that's probably more than offset the growth rate that we see this low growth rate.
We think that that's coming to an end at this point in time and also there's been some destocking in the supply chain. We've seen this in the past when you run into these cycles and right now we feel like that we are actually under shipping the true demand of the whole supply chain right now.
So those are the two factors that are causing it. Actually, there is a slow growth rate that has been offset by thinner films right now.
Steve Chercover
Okay and the thinner films I mean presumably there's a minimum thinness that or I guess a maximum thinness that you can use and that doesn't change the performance attributes?
Hank Hall
That's correct, I mean at some point in time you do run into diminishing returns obviously, but this is you know a lot of it is cost savings down the supply chain but its also general films have some performance attributes to it, but at this point in time, we don’t see that's going to be a factor going forward.
Steve Chercover
Okay, and it sounds like cotton, winter availability is improving or at least prices are going down. Is that surprising given the drought that grip the south last year?
John Crowe
Not really. I mean it's more of a demand function right now.
If you look at what's happening in the viscose staple market, there is a lot of dissolving wood pulp that’s going in to that market right now which is driving down the prices of cotton linter pulp and it's also driving down the raw material input of the linters. So it's not surprising.
The supply of cotton linters is actually fairly good right now, but the demand function is what's causing the decrease in the price of linters.
Operator
We will take our next question from Paul Quinn of RBC Capital Markets.
Paul Quinn
Just a couple of questions. One, you stated the 25 million EBITDA target from the cellulose expansion, the O2 delay.
Is that a bit of a 5 million from O2 and 20 million from the cellulose expansion?
John Crowe
Yeah, that’s how you do the math and I did say we expected to be higher than that.
Paul Quinn
Okay, and then
John Crowe
Those we what the original savings were based on.
Paul Quinn
Okay, and to just kind of reconcile this on the acetate. It sounds like that market is stronger than I guess you expected, because it doesn’t sound like in calendar ‘13 that Doug stated that your acetate volumes down.
What I am trying to understand is if you anticipated sort of a weak tire cord markets, why wouldn't you shifted in to acetates in a bigger way and helped to improve (inaudible)?
Doug Dowdell
Yeah. Well, certainly if we had our ideal situation that’s the kind of thing you would do.
However, it's also some fundamental things going on in that industry relating to some downtime, some moving up, some shut down. So there is some incremental impact on the type of product that we supply, but we see that in calendar year ‘14 reversing certainly, but our near term when you are short on volume you would take anything you get and when we feel very good about it in the long-term.
Paul Quinn
Okay and then just on the acetate market itself, it seems like cigarette consumption is coming down overall. The strength of that market is that because filter user are growing, I guess we are seeing lengthening filters across the states is that what you are seeing?
John Crowe
Well really that market continuous to grow 1% to 2% a year, and really its driven from the emerging markets China and India, and China alone is approaching 50% of the world’s smoking capacity and yes so it’s also incremental filters utilization. Certainly in developed world you see smoking declining.
Paul Quinn
Okay and just over on ethers and filters which you have mentioned are flat. I think we are expecting a sort of stronger demand growth in ethers and even sort of a year ago we thought that segment of the specialty market was sort of fastest growth what’s happened with ethers why is it so slow?
Doug Dowdell
No actually what you must referencing prices moving into this quarter on ethers and filtration looks flat, but we still volume in ethers and filtration are up quite a bit and we expect on ether side that’s one of the faster growing segments in our specialty wood.
Paul Quinn
Okay, thanks for that clarification. Last questions easy one for John, just on growth, just looking at your business mix here maybe, I don't need specifics but I just needs sort of what you’d be looking for in terms of what’s attractive in terms of your businesses going forward that you’d like that add to?
John Crowe
Well, the things we have been looking at, and the things we will continue look at are things that first we have return on invested capital better than cost of capital. Certainly we weren’t looking for business that compliments our business that build our core competencies and technical skills and that match up to our assets.
So those are the kind of things we are looking for, and if they are immediately accretive and cash flow and earnings per share.
Operator
(Operator Instructions) We take our next question from Stuart Benway with S&P Capital IQ.
Stuart Benway
I think you said specialty prices would be down 3% to 4% this calendar year, is that because of demand or is that more of the raw materials or cost environment or how is that determined?
Doug Dowdell
Yeah, well it’s a number of markets and as we said some market pricing was up, some flat and some are down, and basically it’s a combination of mix, we have less volume in areas where we had the price increases and more in the area, where we had price declines relating to kind of the other supply-demand fundamentals.
Stuart Benway
And it seems like the tire cord business is quite important to you, can you give me a rough size I mean specialty fibers in total was 40% and I guess tire cord is a fair part of that and maybe the margins is that one the better margin business in that segment.
Doug Dowdell
I would say for the most part our business is fairly well distributed between over time acetate, tire cord, filtration and casing and then growing more so in the ether side of the business, and they are all fairly close within a narrow margin of profitability and pricing with maybe some being slightly higher, I would say tire cord is right there close to the other, so its not a driver or better than the other markets though.
Stuart Benway
But it would seem that the other markets for the most part are fairly stable, I mean personal care products, food casings and cigarette filters. I guess tire cord and LCD are probably the most volatile of those in that area.
Doug Dowdell
Certainly at this time with what's going on in Europe with auto industry and sales down significantly, you have the tire cord industry hurting. So certainly we have to be aware of that in near term, and help where we can with our customers in that market.
Stuart Benway
And you said I think John you said that cash flows are going to be higher coming up in coming quarters and I think you bought back $9 million worth of stock in October. I mean do you see yourself getting back into that market, back into the stock soon.
John Crowe
Well, yeah we try to be in the share repurchase business every question I mean we are going to look at the price obviously, but certainly with the strong cash flow in the second half of the year that should give us the opportunity to continue to buy back stock going forward.
Doug Dowdell
And the team looks at the best use of cash. If we have high rate of return projects those will compete very favorably and we try to be opportunistic with share repurchases.
Stuart Benway
You have a set authorization right now?
John Crowe
I think we have 3.6…
Doug Dowdell
Almost 4 million, yeah just short of 4 million shares authorization right now.
John Crowe
So we have more than adequate authorization to continue buybacks for quite a while.
Operator
And with no further questions in the queue, I would like to turn the call back to John Crowe for any additional or closing remarks.
John Crowe
Okay, thanks Ann and thanks for listening to our call and we look forward to being back in April and sharing with you our results of third quarter and outlook for the fourth quarter. Thanks and have a good day.
Operator
This does conclude today's conference. We thank you for your participation.