Jul 30, 2015
Executives
Elizabeth Johnson - Vice President, Investor Relations and Planning Paul Boynton - Chairman, President and Chief Executive Officer Frank Ruperto - Chief Financial Officer and Senior Vice President, Finance and Strategy
Analysts
George Staphos - Bank of America Merrill Lynch Roger Spitz - Bank of America Merrill Lynch Chip Dillon - Vertical Research Partners Bill Hoffmann - RBC Capital Markets Paul Quinn - RBC Capital Market Steve Chercover - D. A.
Davidson
Operator
Welcome and thank you for joining Rayonier Advanced Materials second quarter 2015 teleconference call. [Operator Instructions] Now, I will turn the meeting over to Ms.
Beth Johnson, Vice President of Investor Relations and Planning.
Elizabeth Johnson
Thank you, and good afternoon. This is Beth Johnson, Vice President of Investor Relations and Planning.
Welcome to Rayonier Advanced Materials 2015 second quarter earnings call and webcast. Joining me on today's call are Paul Boynton, our Chairman, President and Chief Executive Officer; and Frank Ruperto, our Chief Financial Officer.
Our earnings release and presentation materials were issued this morning and are available on our website at rayonieram.com. I would 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 lists 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 Slide 2 of our presentation material.
At this time, I would like to turn the call over to Paul for his opening remarks. Paul?
Paul Boynton
Thank you, Beth, and good afternoon, everyone. This morning we reported second quarter pro forma earnings that put us firmly on track to achieve our full year EBITDA guidance of $210 million to $225 million, primarily due to the progress we are making on our $40 million cost saving initiative.
More importantly, we announced a strategic repositioning. As many of our investors know, over the last two years, the global supply and demand imbalance has adversely impacted the prices for our cellulose specialties products, and in turn our overall profitability.
In response to these unfavorable market dynamics, we are changing our strategic direction. More significantly, we are reducing our cellulose specialties capacity, increasing our commodity production and lowering our overall cost position.
Shortly, I'll share additional details on our strategic repositioning and our outlook. But first, I'd like to turn over to Frank for a review of our second quarter financial results.
Frank Ruperto
Thank you, Paul. Let's look at Slide 3 to review our financial highlights for second quarter and year-to-date.
Sales for the quarter totaled $221 million, 4% above second quarter 2014. Sales for the six months were $442 million, 3% below the prior-year period.
Pro forma operating income was $34 million for second quarter 2015 compared to $42 for second quarter 2014. Our year-to-date pro forma operating income was $59 million compared to $89 million for the prior-year period.
The pro forma adjustments exclude one-time separation and legal costs. The 2015 periods also exclude a $28 million write-off associated with the asset realignment announced today and a $1 million insurance recovery.
The variance analyses for operating income relative to the three and six months ended 2014 are provided on Slide 4 of the financial presentation material. As you recall, the 2014 periods presented are reflective of carve-out accounting treatment.
As such, the overall 2014 results are not comparable to the standalone company's cost. As you can see on Slide 4, quarter and year-to-date variances have similar drivers.
Cellulose specialty prices were down 8% from the prior-year periods, reflecting the 2015 price negotiations. Aggregate prices for commodity products were relatively unchanged between the periods.
Volume variances and sales mix contributed an additional $2 million to the second quarter of 2015, while year-to-date results were $1 million unfavorable to the prior year. As referenced on Slide 14 of the appendix, second quarter cellulose specialty sales volume of 111,000 tons were 2,000 tons below the prior-year period.
Year-to-date cellulose specialty volumes of 219,000 tons were approximately 8,000 tons below the 2014 period, primarily due to timing of customer sales. Commodity volume for the quarter and year-to-date 2015 were 55,000 tons and 113,000 tons, respectively, an increase to 42,000 tons and 50,000 tons from the prior-year periods.
The increase in 2015 volume reflects the extended shutdown of the Jesup plant in 2014 and improved run rate in 2015. For the six-month period, the benefit from higher commodity volumes in 2015 was offset by lower cellulose specialty sales volumes.
As a reminder, we expect full year 2015 cellulose specialty volumes be comparable to 2014, 2013 levels. However, given the improvement in our commodity run rates coupled with increased days of operation, we now expect commodity sales volumes to be north of 220,000 tons, approximately 17,000 tons over full year 2014 volumes.
Costs for the quarter and year-to-date periods were favorable $4 million and $3 million, respectively. Lower operating cost from our cost reduction activities and reductions in wood, chemical and energy prices more than offset higher cost from labor depreciation and SG&A.
During the quarter, we continued to make progress on our $40 million cost savings initiative. Year-to-date, we have achieved roughly $14 million in savings.
Approximately $9 million is reflected in operating results with $5 million capitalized in inventory as of quarter end. Given the ramp up of savings initiatives throughout the year and the acceleration of sales volumes in the second half, a significantly disproportionate amount of savings will be realized in third and fourth quarters.
We are currently targeting at least $30 million in cost savings to be realized in 2015 operating results, with an annualized run rate approaching $40 million. We still have a significant amount of work to do on this initiative and we remain committed in driving sustainable savings throughout our business.
Based on our performance to date and the progress we have made on our cost savings initiatives, we expect to achieve results in the upper half of our full year EBITDA guidance of $210 million to $225 million. In addition to maximizing our earnings, we remain focused on our liquidity and capital allocation, prioritizing debt reduction and investing in our business.
As shown on Slide 5 in the first six months of 2015, we generated a $101 million of pro forma EBITDA and $47 million of adjusted free cash flow. As a result, since the beginning of the year, net debt has been reduced by $45 million to $835 million.
Since our separation 12 months ago, we have reduced net debt by $94 million. We ended the second quarter with $308 million of liquidity, including $235 million available under our revolving credit facility after taking into account outstanding letters of credit.
At this point, let me turn the call back over to Paul.
Paul Boynton
Thank you, Frank. Now, let's turn our attention to the markets and our strategic outlook.
We believe that the growth in the cellulose specialties end markets will be lower than previously anticipated. In acetate, we believe the demand will be soft in the near term, driven by continued inventory destocking and recent public policy changes in China.
In the ethers, while there are pockets of good growth, the broader category has been pressured by both the softer European economy and depressed pricing for cotton-based alternatives. Markets for high-strength viscose, engine filtration media and casings re main relatively stable and we expect these trends to continue.
On the supply side, cellulose specialties capacity has increased as a result of our 2013 expansion, the expansion of others, and improvement in product quality from certain competitors. The combination of slow demand growth and increased available supply has created a supply demand imbalance and negatively impacted our cellulose specialty prices, declining by 14% over the last two years.
As you recall, the CSE project was initiated in the 2010-11 timeframe when the market had been sold out for several years and the goal was to provide security of supply and stability to an extending cellulose specialties market and support our customer stated growth expectations at that time. We did not perceive the subsequent increase in the supply, nor the slowdown in the broader cellulose specialty end markets.
In light of these dynamics, we are reducing our capacity, improving our cost position, and shifting our strategy to deemphasize volume growth in cellulose specialties. We believe these actions will position us for greater future profitability.
Earlier this morning, we announced the restructuring of our Jesup, Georgia facility to better align our assets to current market conditions. The central component of this initiative is the permanent modification of the company's 190,000 tons C-line to the production of commodity products, namely fluff and viscose.
Slide 6 shows the current configuration of our Jessup facility. As part of the cellulose specialty expansion, Rayonier Advanced Materials installed the newest technology and most efficient process for fiber purification of cellulose specialty grade on our C-line.
As seen on Slide 7, this fiber purification technology will be decoupled from our C-line and reposition to our A-line, replacing less efficient equipment. As a result of these changes, A-line's cost position will improve and its operational flexibility will increase allowing it to produce a broader range of products for customers interested in higher value and performance.
As shown on Slide 8, once implemented, our strategic repositioning will allow us to save an estimate of $14 million annually driven by both improved operating efficiencies and reduction of personnel. Commodity production capacity will increase by 11% to approximately 245,000 tons annually.
While improving the Jesup facilities competitive position and reinvigorating our commitment to our commodity customers, this initiative will also reduce our cellulose specialties capacity by 190,000 tons or 28%. We have already begun implementing these actions.
We expect the project will require $25 million in an additional capital expenditures and be completed in early 2016. And please note, the capital expenditures for 2015 are anticipated to be approximately $80 million in line with the higher end of our guidance, with the majority of the $25 million is expected to be spent in 2016.
We also have a one-time non-cash write-off of $28 million reflected in our Q2 2015 results. Looking forward, we'll be well-positioned to support our cellulose specialty customers with the highest quality products, superior technical service, and security of supply that are critical to their operation.
As a result of our asset realignment, we will have 485,000 tons of total cellulose specialties production capacity, roughly matching our current sales volumes. As shown on Slide 9, these actions are in line with our previously announced strategic priorities.
First, we are aggressively reducing our cost position through cost saving initiatives and implementation of continuous improvement processes. At the beginning of the year, we announced initiative to realize $40 million in annualized run rate cost savings during 2015.
As reported earlier, we are well on our way to achieve this goal. Today's actions will further our ability to reduce cost in the future.
Second, we are leveraging our assets to achieve their greatest value in today's market conditions. Early in the second quarter, we announced a non-binding letter of intent with Borregaard, to product natural lignin-based products used globally in construction, agriculture and other industrial applications.
This project will allow us to lower our overall cost position at Fernandina mill, while providing an opportunity for growth in new and attractive markets. We will continue to explore similar opportunities to grow our business in wood-based and natural chemicals.
The asset realignment announced today furthers this asset initiative with a specific focus on our Jesup facility. And finally, on our third initiative, we remain committed to our innovation effort, which focuses on improving existing products as well as developing new products.
We look forward to updating you as we progress further down this path. In conclusion, we continue to take the actions necessary to compete effectively and position ourselves for improved profitability and long-term success.
Now, I'd like to open up the call for questions.
Operator
[Operator Instructions] Our first question is Mr. George Staphos of Bank of America Merrill Lynch.
George Staphos
I guess, my question to start is just with Jesup C now. You're going to wind up with 280,000 tons of fluff and viscose.
What factors give you confidence that these will be markets that wind up being better from a supply demand standpoint into the future than the specialties market?
Paul Boynton
George, its 245,000 tons off of our C-line into that fluff and viscose market. As we look at it right now, that's the market and those are the market we're serving today off that line.
We are just making a commitment to that set of markets going into the future, because we don't see an opportunity to push cellulose specialties volume into the market. In fact, that's what we felt like we were doing is pushing, and we decided we're better off recommitting and capturing the efficiencies of our new equipment and attaching it and putting into our A-line, then having it inefficiently being used or not being used at all over on our C-line.
George Staphos
Where would you see C, part of the phrasing there, in terms of the cost, whether it's on fluff or viscose? And again, do you have any pause relative and continue to run it, given that there has been a fair amount of fluff capacity announced here in the last year and there seems to be more coming on as well?
Paul Boynton
I'll start with the latter part. First of all, it's a 5 million ton market.
Our position in it is 4%. The additional capacity is obviously a fraction of that.
It's quality asset. We've got a rich history in making fluff material as well as viscose.
We know the markets well. The asset is competitive out there in the marketplace.
So we feel good that it will continue to be competitive into the future.
George Staphos
And then lastly, I know it's hard to forecast forward pricing. But what are your thoughts on viscose relative to what's been certainly a declining overall commodity environment and things like cotton and alike and what that might mean for that business and its prospects going forward?
Paul Boynton
Again, viscose has been a small part of our total mix on that line since last couple of years. But we have seen a meaning recovery in the viscose staple fiber prices in the marketplace.
And it's happened, as we look at with declining inventory and steady operating rates out there in the. We've also seen China import prices for viscose pulp increase over the last several months.
So again, we haven't seen much activity in the last couple of years, so we're encouraged by this recent activity. And we believe it could be the start of a lifting market and we'll continue to serve that market and we can switch back and forth.
And as we see a greater opportunity, we'll serve that market or the fluff market, while we maintain our commitment to large and significant customers with fluff products.
George Staphos
One last one, I apologize, and I will turn over after this. Suppose two years from now you find that the specialties market is back and you feel like you want to reenter, not reenter, but I think regrow your share there.
In theory, how hard would it be to take the C-line and get it back to specialties?
Paul Boynton
So, George, we roughly spent $25 million to permanently covert the C-line production, and we're taking a $28 million write-off. So obviously we're not doing these things with the intent of switch back in any time in the near future at all.
I don't know. What it will cost to do that work?
Obviously, there is a lot of planning and consideration to make that happen. We don't see that happening anytime in the near future at all.
So I'd have to kind of delay that question to some point in the future. But I think right now we are well-positioned to where we need to be for the coming years.
Operator
And our next question is Mr. Roger Spitz of Bank of America Merrill Lynch.
Roger Spitz
When you said that the viscose was a small part of the C-line, is that on the order of 25% of the volume of the C-line or was it much less percentage of that of the C-line?
Paul Boynton
Right now the vast majority of our production is in absorbent materials fluff market, so it's less than that 20% level.
Roger Spitz
In this past quarter, how much of the fluff is contracted or were the prices contracted, if any at all?
Paul Boynton
Roughly half of our fluff volume on an annual basis is contracted. And so I would just assume that that is pretty consistent over the course of the year.
Roger Spitz
That's volumes and price or just volumes?
Paul Boynton
Volumes.
Roger Spitz
And in terms of the CS volumes, is essentially all of that volume contracted and is essentially all the price of those contracted volumes are fully contracted or you sell them in [multiple speakers] market?
Paul Boynton
Yes, predominantly all the price and the volume of the CS product is contracted on an annual basis.
Operator
And our next question is from Chip Dillon of Vertical Research Partners.
Chip Dillon
And to make sure I heard this right. I think Frank mentioned that, I think it was mentioned that, less than 20% of the commodity volume is in dissolving?
Did I hear that right?
Frank Ruperto
With what we're currently selling, it's predominantly fluff, off of our C-line.
Chip Dillon
And then, I guess, the next question is, I was just looking at what you made in 2010, which was 480,000 tons of specialties and 237,000 tons of mostly fluff I guess at that point. And it looks like you're going to be exactly back to that by next year at some point.
I just was wondering why if you spent $400 million or actually it will be $410 million when you at the $25 million, well, let's just leave it to the $385 million you spent on this first conversion. Why would the write-off only be 15% of that?
I'm just wondering, 85% of that investment, is that being moved over to that A-line?
Frank Ruperto
I wouldn't say 85% is being moved over to the A-line, but effectively the asset write-off consist of the assets that will no longer be used in production. So when you look at that investment, a big chunk of it was on equipment on the C-line, which will continue to be used.
A big chunk of it was on the assets that are going to be moved over to the A-line. And then there is significant investment on the facility-wide basis in the backend, which is used amongst all three lines.
So the asset write-off relates just to those assets that are no longer being utilized.
Paul Boynton
And keep in mind, Chip, those assets that aren't being utilized, some of those have been existing for sometime. So the write-off --
Frank Ruperto
So like just the CS technology on the A-line, that is not being used.
Chip Dillon
And getting back to earlier questions, based on what you're saying, it would seem like if you did decide to go 100% high alpha in the future, you certainly wouldn't be talking about once again spending $300 million to $400 million. It would just seem like based on what you said with the movement, it would maybe be something closer to roughly $100 million.
Is that probably a ballpark?
Paul Boynton
I have no idea, Chip, what that would be, and that's not something we will be looking at anytime in the future.
Chip Dillon
And then, if you could talk a little bit about the specialties volumes that you expect in the second half, and you might've mentioned this. But when you look at the acetate market, as you all talk about, there was a big inventory correction among your customers and further down the line.
Has that worked itself through and sort of how should we expect volumes to compare sequentially in the second half to the first half, both in commodities and specialty?
Paul Boynton
So when you look at the specialties volume, Jeff, we've got for the six months, and this is on Page 14 of the presentation materials, for the six months ended this year, we've got about 219,000 tons of CS volume. We've said for the full year, that number would be consistent with '13 and '14 levels, which is roughly 480,000 tons.
So you'll see significantly more volumes in the second half of the year, than you've seen in the first half of the year. In part that's driven by the shut down and in part that's just the normal order cycle that we typically see with our customers.
And as I said before, predominantly all of that volume is contracted. Additionally, we've said, you'll see roughly, you'll see north of 220,000 tons of commodity sales in the second half of the year.
So that is a good chunk, higher than we've run historically.
Chip Dillon
If I heard you right, you said, 220,000 would be the commodities just in the second half?
Paul Boynton
No, north of 220,000 on the full year.
Chip Dillon
And then, shifting back to the -- I had a question about the volumes, and then I guess the price negotiation takes place late in the year. That's correct, right?
Paul Boynton
Yes. That's correct.
We will have those discussions here in the third and fourth quarter and principally in the fourth quarter.
Operator
And our next question is Bill Hoffmann of RBC Capital Markets.
Bill Hoffmann
Just a little bit further on the commodity side of the equation. You talked about some of the inventory destock and we heard from guys like Celanese in the market that they saw their customers starting to re-enter more normal patterns in the acetate business.
Can you talk about whether you're hearing the same thing as we go to the second half of the year?
Paul Boynton
Yes, I'm sorry I think you're talking about on the CS side of the things and acetate throughout tow out into the marketplace. I believe, and we believe, that our acetate co-producers continue to see the impact of the destocking efforts for tow in China.
So we think that is ongoing. The magnitude and the duration are certainly uncertain, but at this point, I think it's fair to say that it's not complete and it will continue here.
But it's largely not very visible from our perspective and we'll continue to watch it.
Bill Hoffmann
And in the viscous market, I just want to get a sense of talking about placing that product into the market in the second half of the year. Do you do that on a contractual basis as well?
Paul Boynton
So as we said, most of that volume coming off the C-line is going to fluff market and the majority of that is contracted out there. We do have some smaller amount of viscose volume off the C-line that's going into the marketplace and some of that is contracted as well.
But again, it's a pretty small part overall to our mix.
Bill Hoffmann
But as you look forward in the viscose market, is there any thought of trying to get some more contracted business or are you better off at running fluff as a product?
Paul Boynton
Right now, as we do the analysis, we feel we're better off running fluff across that C-line and we'll continue to monitor the dynamics out there and if that just shifts, we'll make sure we talk about it.
Bill Hoffmann
And then just last question, on the Borregaard JV, could you just talk a little bit more about the timing, one from the investment standpoint, but also, two, when you expect to see that ramp up and generate cash?
Paul Boynton
Yes, so what we've said out there, we announced the letter of intent June 1. And then we've said, well, we've got a couple of key things to do.
One, the definitive agreements, and then two, finalize the engineering. We've estimated that those two initiatives should be complete in the first half of 2016.
But we'll keep you posted as we got anything to report out there at anytime interim time before that.
Bill Hoffmann
Any thoughts on dollar investment that this might require on your side?
Frank Ruperto
Yes, the dollar investments as you know it's a $110 million estimated total investment. We are 45% owner in that.
Our contribution would be slightly less than that, so that contribution is in the 40% to -- in that range from a proportional perspective on the $110 million. We are looking at ways to finance that, and maybe financed off of our own balance sheet and maybe financed at the JV level, maybe financed in a combination there too.
Most of the capital will not be expended until the engineering is completed, so that we can -- because that is a go, no-go decision. If the engineering comes back at materially higher levels than obviously the returns don't look as good and both parties probably would not move forward on that opportunity.
Right now, though, we feel good about the work that's been done, we feel good about our estimates on the engineering, and I believe that our partner also feels good about their estimates. So we look forward to this moving forward, but that is going to be a consideration as we move forward here.
Paul Boynton
So again, Bill, that decision is first half of 2016, with the plan to be operational from that asset in 2017.
Operator
Our next question is Paul Quinn of RBC Capital Market.
Paul Quinn
Just following up on Bill's question on Borregaard JV, just the timing of that CapEx, you say the majority is going to be done after engineering. What's going to be done in first half of '16?
Frank Ruperto
Very little will be done now in 2015 and until we get the engineering done, it's hard to tell exactly how much will be the spent. There will be some investment in our own facilities, but overall most of it will be spent and the timing of that engineering is unclear.
So if it happened earlier in the 2016 timeframe, then we'd be spending more in the first half.
Paul Quinn
And then just help me reconcile, before we did the conversion on C-line that the capacity on the fluff was 260,000 and then we spent at $385 million to get the 190,000 CS and now we're spending another $25 million and we're getting back to 245,000. So I'm just trying to understand why we lost 15,000 tons of capacity.
Is that something with the process?
Frank Ruperto
So Paul, we did a lot of changes when we put in this investment and then we've made, obviously, we're planning to make some other changes here. Right now our estimate is that the line once converted back will be 245,000 tons.
With time potentially and capital investment, and/or capital investment, it could go back to those levels, but right now we're seeing there's 245,000.
Paul Quinn
And just the rationale for this strategic shift here, is this to try to signal to fluff customers that you're going to be permanently in the market and you're trying to get ahead of some of these capacity additions that come to the market, is that a consideration?
Frank Ruperto
Well, first, let's just say, that we're going to put in $25 million to get a $14 million return, right, so it's a good cost positioning for us to make this change. It does increase our commodity production and it makes a full commitment to those commodity customers, particularly, the fluff customers, because at one-time we had relayed to those folks in that market that we were moving away.
And now we're saying, actually, we're permanently and we've got contractual volume in there and we want to work with you and continue to develop products that serve your need. So it is a commitment to the market and that's an important part of it, but again it's the financial opportunity that we're gaining here.
And then obviously, we've got 190,000 tons of product in the CS side that's not needed out and instead of kind of pushing the rope uphill, we got to roll up the rope and put in our pocket and let's move and let's move on and let's get some cost savings around the assets in a better way than we're doing today.
Paul Quinn
Last question I had was getting a lot of questions just because of your share price weakness of late and on potential take-outs. And I just recall when you did a spin-out there was some kind of freeze period between that, whether that was able to be done.
And my understanding was that was a two year, maybe you could just refresh my memory?
Frank Ruperto
So it's a two year period, if you entered into substantial negotiations with another company prior to the spin. We've been consistently saying since this spin off.
In our case, we're unaware of anything that would prevent or restrict us from pursuing partnerships or combinations. So administratively, we need to require provided tax opinion to Rayonier that any transaction would not impact the tax free nature of the spin.
But we don't see any preclusion or waiting time period for a potential transaction.
Operator
And our next question is Mr. Steve Chercover of D.
A. Davidson.
Steve Chercover
In the context of acetate, you mentioned a public policy change in China. Is that the crackdown on graft or pushback on cigarette consumption or can you elaborate, please?
Paul Boynton
So really two components to that. First has really been a tax and there has been two separate taxes, they accumulate about 8%.
There is a producer tax and there is a consumer tax. But that tax in full is about 8% on a pack of cigarette.
And so that's obviously one element. The other is just a smoking ban in public place, particularly Beijing.
So it's changing what we live habits of the consumer there. So we think both of those things combined along with a more significant issue in the short-term is destocking, as is not or if it's trading it by a more softer environment than acetate than what we've seen in the past.
Steve Chercover
And then, I guess, several people have already discussed the conversion of the C-line and now going backwards. So it seems almost like a nuclear option in terms of capacity management.
Do you believe that this will balance the market, Paul?
Frank Ruperto
Well, I'd tell you what it is, it's certainly, as we said, several factors made that market overcapacity. Number one was our expansion.
Number two is some expansion of others. And three is some quality levels of certain competitors.
Taking out 190,000 tons, that's what we can do, and we will do that. We think obviously at the significant effort and putting in some balance to the market.
Steve Chercover
Well, when you speak to your clients, one of the reasons why you were able to grow evidently or apparently why you expanded so much is that it was this perception that you were the premium product. Have people been telling you now that the other guy's product is fungible with yours?
Paul Boynton
Look, we think our price is appropriate and in line with the value we supply in the market. Last year, as you know, we had a contract that was up.
We had that same customer renew with us, as we previously reported. I think it gives us good testament that our value equation is good out there in the marketplace.
We think there has been a quality rise with some of our competition. There is no question about that.
But we also offer a lot of additional value, we think, in terms of quality, consistency, in terms of just actual redundancy in our product. In fact, that we have three now lines that can produce an acetate product.
So the value equation has a lot of components into it, and one of them is price. But certainly, we've seen some improvement in quality of our competition.
But we think we still have a very high-quality product in the market.
Steve Chercover
And so finally getting back to the manufacturing. First of all, I assume that there is no qualification that has to occur on the A-line.
You're swapping out equipment, but the stuff is already qualified.
Paul Boynton
Yes, exactly. It's a proven technology already.
We've already actually tested the C-line out on this equipment with all of our customers that we would like to serve with it. So attaching to A-line will not back through a requalification.
Steve Chercover
You don't have to ask for permission to tweak your equipment. And then, in terms of the cost savings, $14 million on the A-line, is there any impact on the cost structure of the C-line or is it simply the volume?
Paul Boynton
So of the $14 million, the cost efficiencies on A-line are the largest part of that $14 million, but there's a lot of other components with that, some off of C, some in other area. So it's that whole strategic repositioning project together that gets us to that $14 million.
The A-line efficiencies are one component of that. There are some C-line efficiencies that are component to that.
There are some other efficiency components to that, including the headcount reduction in Jesup.
Steve Chercover
Final question, even though the $25 million is spent primarily in 2016, and you said the project is complete in early '16. For all intents and purposes, when you go to negotiate this year that 190,000 tons is not available to sell next year?
Paul Boynton
It's not available. So right now we essentially have matched our current sales volume to our capacity.
Operator
Our last question on queue is Mr. Chip Dillon, Vertical Research Partners.
Chip Dillon
A couple of quick ones. I think you mentioned the CapEx guide this year still $80 million, and obviously next year is going to really depend on how you finance and capitalize the joint venture, and if you go forward.
But if we leave that aside, since you're going to spend most of the $25 million or $28 million on the switch back next year, so that number approach $100 million or how should we think about 2016 CapEx before the joint venture?
Frank Ruperto
We're thinking, and again, we haven't gone through our budgeting cycle. So there is lot of capital that we'll have to look at.
But I think at this preliminary stage, looking at a number of $90 million to $95 million for 2016 is probably a reasonable deal for modeling purposes.
Chip Dillon
And then maybe '17 goes back down toward 80 again?
Frank Ruperto
We would hope it would go down below 80, materially. I mean if you remember, we have the Boiler MACT in '16 and '17.
So that goes away in its entirety. In '15 and '16, I mean.
So in '17 it goes away in its entirety.
Chip Dillon
Last question is on the cost cutting. I think you said $15 million or $14 million of which $5 million is capitalized in inventory.
So as I measure it, I don't want to be too precise in holding to this, but you probably therefore realized $9 million of this $30 million in the first half of this cost save. So we should expect around $20 million or so in the second half, because it sounds to me that you're looking for an incremental $10 million next year, is that fair?
Frank Ruperto
Yes, that's fair. And if you think about these cost savings programs, as you take these actions.
One, you get the cost savings, and when you take those actions, the timing of that impacts when you get it. Secondly, first on the manufacturing side, it rolls through the inventory.
So you've got the sales timing cycle. So it becomes more like a wave that grows overtime over the course of the year of this cost savings program.
So that $40 million annualized run rate is what we're hoping to get approach by the end of this year. And then next year, as we've said before, we're looking to hold cost flat.
I think some of the cost savings and initiatives that we've discussed here today, go a long way to getting there.
Operator
And I would now like to return back to Paul for the closing remarks. End of Q&A
Paul Boynton
Well, there is no more questions at this time. I just want to thank you guys for joining us today.
In summary, we're pleased with the steady progress we have made against the goals that we shared with you at the beginning of the year. And we feel confident that the strategic steps that we're taking best position our company to serve our customers with the highest level of quality, service and security and supply, therefore enabling us to drive long-term value for our stockholders.
We look forward to updating you on our progress in a timely manner as we move forward. Thank you.
Elizabeth Johnson
This is Beth Johnson. I'd like to thank everyone for joining us.
Please contact me with any follow-up questions. Thanks again.
Operator
Thank you for participating in today's conference. You may now disconnect.