RYAM (2021 - Q3)

Good morning, and welcome to Rayonier Advanced Materials Third Quarter 2021 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions with instructions to follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mickey Walsh, Treasurer and Vice President of Investor Relations for Rayonier Advanced Materials. Thank you. Mr. Walsh, you may begin. Mickey W

Thank you, operator, and good morning, everyone. Welcome again to Rayonier Advanced Materials third quarter 2021 earnings conference call and webcast. Joining me on today's call are Paul Boynton, our President and Chief Executive Officer; and Marcus Moeltner, our Chief Financial Officer and Senior Vice President of Finance. Our earnings release and presentation materials were issued last evening and are available on our website at rayonieram.com. I'd like to remind you that in today's presentation, we will include forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Our earnings release as well as our filings with the SEC list some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on Slides 2 and 3 of our presentation material. Today's presentation will also reference certain non-GAAP financial measures, as noted on Slide 4 of our presentation. We believe non-GAAP financial measures provide useful information for management and investors but non-GAAP measures should not be considered an alternative to GAAP measures. A reconciliation of these measures to their most directly GAAP comparable financial measures are included on Slides 18 through 23 of our presentation. I'll now turn the call over to Paul.

Thank you, Mickey and good morning, everyone. Today I would like to hit some of the highlights for the quarter before turning the call over to Marcus to review the detailed financials. After Marcus's update, I will discuss our strategic outlook for the business. Starting on slide 5 , EBITDA from continuing operations improved by $3 million from prior year to $35 million, driven by continued momentum in commodity product prices, including high yield, discos and fluff bulbs, as well as solid demand for cellulose specialties. In addition to the improved financial results, we have executed on several key strategic initiatives. On August 28, we successfully closed the sale of our lumber and newsprint assets for approximately $232 million, including $185 million in cash, with the remainder consisting primarily of shares of green first forest products. Additionally, year-to-date, we captured $192 million of EBITDA from these businesses prior to the sale. The company also repaid over $150 million of debt including $127 million of its senior notes due in 2024 and $25 million of the senior secured notes. We also significantly increased cash on the balance sheet. This cash along with future cash flow, driven by the announced price increases for cellulose specialties, as well as cash returns from our investments in reliability, cost reduction and new bio products will provide a catalyst to grow EBITDA margins, further right size our balance sheet and drive value to our shareholders. I'll provide a further perspective on our current markets, as well as our longer term strategy shortly. Now I ask Marcus to take us through the financial details for the quarter. Marcus?

Thank you, Paul. Starting with high purity cellulose on slide 6, third quarter sales increased $35 million or 14% to $288 million, driven by a 14% increase in sales prices, offset by a slight 2% decline in sales volumes. As expected, CS prices were down from prior year per contract negotiations from late 2020 while the higher commodity prices drove the combined increase. Overall, sales volumes remained nearly flat at 225,000 metric tons with a stronger mix of CS sales volumes. CS sales volumes remain very strong, driven by demand across almost all end markets including food, pharma, casings, construction, automotive filtration and tire cord and acetate bio plastics. Commodity volumes declined by more favorable mix shift toward CS which has lower production yields. A reliability issue with our at Jesup facility and continued to logistic challenges specifically for ocean going sales. Overall, EBITDA for the segment declined $4 million to $32 million. Costs were impacted by significant inflation in key input materials, higher logistics expense related to trucking and ocean freight, as well as higher maintenance costs and production downtime related to the reliability issue in Jesup. This resulted in lower production of approximately 10,000 tons. Turning to slide 7, paperboard segment sales improved $5 million, driven by a 13% increase in sales price resulting from strong demand for our three ply Kallima brand, partially driven by competitors supply constraints offset by logistic challenges. EBITDA for the segment declined $1 million to $6 million as the sales price increases were more than offset by higher raw material pulp and cost inflation in the operation. Turning to our high yield pulp segment on slide 8, sales increased $12 million from prior year to $42 million driven by a 27% improvement in sales price and a 12% improvement in volumes. EBITDA for the segment grew $6 million to $9 million as sales improvements were partially offset by higher operational costs and the impact of logistic challenges. Turning to slide 9, on a consolidated basis, operating income from continuing operations improved $4 million from prior year. The company experienced price increases across all segments and volume improvements driven by mix improvement in high purity sales. Costs were significantly impacted by higher inflation costs, particularly with respect to chemicals, wood, fiber and energy, as well as reliability and maintenance costs in our high purity segment. Higher raw material costs and paperboard and overall higher logistic costs also impacted results. Additionally, corporate and SG&A costs improve $5 million primarily driven by favorable effects. With the sale of the lumber and newsprint, the company credit profile has improved. We ended the quarter with $279 million of cash and liquidity of $373 million including availability on our ABL and the French factoring facility. In early October, we repaid further $25 million of senior secured notes, and we still expect $29 million of tax refunds by the end of 2022. With the sale of the lumber and newsprint assets, we also have 28 million shares of green first forest products valued at approximately $34 million as of the end of the quarter and the rights to $112 million of softwood lumber duties. Given uncertainty related to inflation and logistics along with significant amount of investment opportunities we are currently carrying higher cash balances for the short term. Overall, we remain well positioned to prudently invest in our assets and generate greater margins. With that, I'd now like to turn the call back over to Paul.

Thank you, Marcus. As noted on page 10, we are seeing the dynamics of uncertain markets. First commodity benchmark prices are moderating in some of our key segments specifically BEK or bleached eucalyptus craft pulp, a proxy for our high yield pulp business has fallen sharply driven by the decreased demand from China amid the governmental policy to reduce energy and emissions output. This causes pulp prices have also received recently, although prices remain significantly higher than the prior year. The strength of the viscose market rebounding significantly off the lows of 2020 provides a strong backdrop for our 2022 cellulose specialties price negotiations. Meanwhile, fluff and paperboard indices have remained resilient with sequential increases from the second quarter into the third quarter, which should provide higher fourth quarter prices for these products given the pricing lag we experienced relative to these indices. Turning to page 11. We see demand for especially product strengthening across almost all end markets, including food and pharma, casings, construction, automotive filtration and tire cord and acetate, bio plastic end markets. Interestingly, prices for cotton lint in Asia at competitive substitute product for many of our cellulose especially grades have also increased substantially from 2020, creating additional interest in our product offerings. We have seen supply disruptions with some of our high purity industry competitors, leaving many of our customers looking for us to us as a backstop given the size, scale and redundancy advantages of our five cellulose specialties, manufacturing lines. We are fulfilling agreed demand with customers but given our extended outages at Jesup in both 2021 and 2022 we're not able to accommodate most requests for incremental volume for the balance of the year and well into 2022. We'd like all producers are also seeing a significant rise in input costs and challenges in our supply chain. So with all these dynamics, strong demand, restricted supply and escalating input costs, we expect significant price increases for the majority of our cellulose specialties in 2022. Overall, we're focused on protecting or improving margins in our CS business for the coming year. In our paperboards segment, we're also seeing stronger demand from the return of the commercial print market, along with ongoing strength in the packaging market. This demand in addition to continued industry supply disruptions are driving prices higher. Our unique three-ply Kallima brand paperboard continues to grow and share in higher end markets as customers value the comparable surface area to weight ratio of our offerings. With raw material cost shrinking as pulp prices decline we expect expanded margins for this segment in the coming quarter. In high yield pulp, we expect to recognize lower prices in the fourth quarter due to the lower demand for pulp from China and increase supply from the South American mills while costs are expected to increase, and logistic challenges are likely to persist. So now let's take a longer view on our strategic outlook for the business. With the sale of lumber newsprint businesses complete, we target to drive both improve costs and margins through our core businesses. Turning to slide 12 year-to-date EBITDA margins are roughly 10%. For a capital intensive business such as our high purity cellulose operations, we would expect to generate EBITDA margins at a much higher level than our current conditions have allowed. Given our specialized asset base, unique product offerings, security of supply and technical leadership, we aim to improve our cost position and generate at least 20% EBITDA margins in this business. To achieve this goal, we have developed a plan focused on a few key initiatives. First, we've already discussed price improvements for our cellulose specialty products. With the majority of our cellulose specialty contracts open for negotiation in 2022, we expect to capture significant price increases for these products in the next year. Additionally, we expect to utilize a significant portion of the proceeds from our assets sale to invest in and improve reliability and drive costs down at our four high purity cellulose facilities. In 2022, we expect to spend approximately $100 million on custodial capital expenditures. However, with inflationary pressures on the cost of materials and challenges with labor availability, we will appropriately modulate CapEx on a real time basis. We know that having reliable assets, lower costs, increases sales volumes and drives efficiencies. As such, we planned extended outages at three of our four facilities in the first half of next year with a focus on improving reliability. Beyond investments and reliability, we also expect to increase our strategic investments in 2022. We are currently evaluating approximately $50 million of high return projects for next year including green bio energy, cost reduction and productivity enhancement initiatives. We've had success with these types of strategic investments including the recent $15 million investment in green energy at our Tartas, France facility. This investment went online in the second quarter and is expected to generate $10 million of incremental earnings annually. Another potential project in Tartas that is part of our green energy bio-future currently under valuation is the production of bio-ethanol; a high demand additive to gasoline required in Europe as consumers and governments seek to use greater natural energy to power vehicles and industry. These investments provide returns well above the company's cost of capital and will drive incremental margins over the medium term. Lastly, we will continue to increase our investment in R&D and innovation driven projects. An example includes our investment in TemSilk , a product used in the production of Lyocell, a natural fiber produced in environmentally friendly method. This year, our R&D team working with innovation trend experts has identified areas for accelerated natural fuels and biomaterials growth. We will be sharing more details of these focus initiatives over time. But two of the most immediate initiatives, however, are in bio-plastics and prebiotics. In bio-plastics, we are looking at a broad set of opportunities to replace petrochemicals in many applications, including single use plastics. We are currently working in collaboration with several leading global research universities, as well as current customers and new commercial partners to capitalize on this opportunity. In prebiotics, we have partnered with the State of Georgia Center for Innovation, the University of Georgia and the Saunders Research Institute to develop nutritional supplements for the poultry industry. Additionally, we will be looking at other growth opportunities outside of our core R&D and process expertise, but closely related to our strengths. An example is our investment in Anomera Incorporated, which has led us into the emerging opportunity for carboxylated nanocellulose with performance enhancing attributes for cosmetics, paints, coatings, and concrete. Anomera is ramping up the production in its newly constructed Temiscaming plant and is looking to capture near term sales in the cosmetic segments through its distribution agreement with , one of the world's leading cosmetic and personal care formulators. As global demand for more environmentally friendly products continues to evolve, we are working to offer solutions from both our existing natural products, as well as developing new offerings to meet growing needs. Combined we expect these actions to drive significantly higher EBITDA to provide positive returns for our investors. As we previously have stated, our goal is to reduce net debt 2.5 times EBITDA. Turning to slide 13, our net debt stands at $676 million as of the end of the quarter, including $279 million of cash. Our new term goal is to drive this towards $625 million with cash tax refunds and proceeds from the green first shares. With our targeted margin growth and the right size balance sheet, our goal of 2.5 times leverage is within range over the next three to five years. And finally turning to slide 14, our reputation as a market leader in cellulose specialties with differentiated commodities within fluff and viscose markets, positions as well for the future. We have diverse biorefinery assets and redundancy that allows us to serve all of the cellulose specialty market segments, while providing security of supply to our customers and offers tremendous growth opportunities into the future. The security of supply is coming to play recently as many of our customers were able to rely on us to meet the strength of their markets. A strong cash position allows us to invest in reliability and cost reduction, strategic projects and leading R&D platforms as we work with new and existing customers develop natural based solutions, which will further broaden our offerings into our bio-future. We have a proven track record and controlling costs and managing cash to drive stronger liquidity and a more stable balance sheet. We look forward to executing on our plan to invest prudently to expand EBITDA margins and we're excited about the bio-future of the company. With that operator, please open up the call to questions.

Thank you. At this time, we will be conducting a question and answer session. Our first question comes from the line of John Babcock with Bank of America. Please proceed with your question.

Hey, good morning, and thanks for taking my questions. I guess first of all, just on the cost side, how are you thinking about the cost pressures across energy, wood, chemicals and logistics for the balance of 2021 and into 2022?

Good morning, John. I'll turn it over to Marcus.

Good morning, John. Yes, as you saw in our bridge on page nine, we were indicating that inflationary pressures were accelerating through the year. And you can see on the bridge close to $15 million in costs. There's certainly some impacts of the Jesup impact in there. And as you know, pulp costs for paperboard is really transitory as that will come down in price, but we certainly saw inflation on chemicals, wood and energy. A slight amount on logistics as well. And I would say on an annualized basis, we're in the high single digits for inflationary pressures. And our lens assuming these conditions remain the same type of percentage increase next year.

Got you. Could you help us quantify the impact of that kiln disruption to adjust a facility and then also you have to do any further work at the mill to ensure it can run as intended?

Yes, so John, as we mentioned 10,000 tons based on your model, you can assume the fixed costs absorption on that and model that. We also had to purchase some fresh line for the makeup and some maintenance. So with those items, I think you could probably get a pretty good gauge on what that is. But it was meaningful enough.

And John this issue, and Marcus mentioned in his prepared comments lime is run very reliably for us reliable 10 year than expected. We're going to go ahead and make some changes to it at the upcoming shutdown, to make sure that that doesn't reoccur. But as we also noted, we got three of our four facilities with the shutdown in the first half of 2022 and our goal, of course is to focus in on reliability and particularly our operational efficiencies. And we can improve upon it particularly in the areas of our evaporators and each of our facility. So we'll be doing a lot of focus on reliability in early 2022 to help improve our overall throughput and production rates.

Got you. For the kiln disruption, though, I mean would $10 million to $15 million be kind of in the realm of reasonableness there.

That's a bit high. John, again, you're probably assuming some live sales. We would just quantify the fixed costs absorption impact.

Okay, got you. And what mills, are you planning to do maintenance on in the first half of next year?

Yes. So, our shutdown schedule, again, is front end loaded next year. So first out of the gate will be Jesup in February, and that's 14 days, except it's extended for the number five recovery boiler now. So it'll extend in the 50 days on that boiler vessel. And that's the reason we built inventories consciously here in anticipation of that. Fernandina is a 20 day outage in March. That's followed by Temiscaming, another 30 days in May. And as Paul mentioned, again, our focus there is unreliability. At Fernandina, it's working on the recovery boiler again and in Temiscaming it's the number 10 power boiler, the economizer that we're focused on. The entire test is in the back end of the year in October for 14 days. Remember, it's on an 18 month cycle.

Okay, got you. That's very helpful. And then recognizing you're still in pricing negotiations with customers, can you give us some sense as to the primary focal points of those negotiations? And then also, to what extent that price has risen for products produced with cellulose specialties in the different markets you serve?

Yes. So look, as we came out and discussed and put out there in a release earlier that we're targeting price increases 15% to 30%, minimum. But that's on contracted were contracts allow so and we said that that's the majority. So we're going out, we're having those discussions now. A lot of it is focused around our raw material cost increases. Marcus just shared what we think those are for us this year. Next year, we share that with our customers. And John, we went out there as early as the June timeframe and started talking to our customers because we don't want this to be a burden on them. We want them to have the communication with their customers about this should be a pass through all the way that we're all getting experiences. And those conversations have actually been very productive. And so we feel confident that we're going to get these increases. Again I said and I'm pointedly on the majority. So that means we have also a minority that probably wouldn't be a because the contracts won't allow that. But overall, we feel good about the conversation and we feel good that our customers are able to pass that on to their customers as well because we know that they're having that dialogue. And again, we give them plenty heads up and that's important to us because this is not just shipping it to our customers. It's really kind of sharing the load across the supply chain.

Okay, thank you. That's all I have.

Thanks John.

Our next question comes from a line of Paul Quinn with RBC Capital Markets. Please proceed with your question.

Yes, thanks very much. Good morning, guys. Just trying to understand that price increase on the sale especially business, what percentage of your contracts are up for price negotiation next year?

Paul, hey, good morning, we said the majority of that out there. So I mean, you can pick that number somewhere over 50% is open for negotiations. On the balance, then we have some that are have caps on what we can do and some don't have any opportunity. But we're having dialogue with every one of our customers regardless about the burden that we're seeing here that we just share with you that you see in our materials that cost increases and having that dialogue with them. So we expect that and we're getting the feedback from our customers given where they are and needing our product that these are price increases that will go through and again on the majority of our volume.

Okay and then just not being able to get that that the one off and the lime kiln for the quarter, if I'm looking at that 10,000 tons on fixed costs, absorption plus, probably what you bought on fresh lime. I'm somewhere in the $5 million range hit for the quarter that shouldn't repeat next quarter. Is that in line?

More than the range I'd say Paul.

Okay, and then on the paperboard side, I mean, we've seen a number of price increases there and sort of expected to trickle through in the Q3 here and it surely didn't, I guess you're expecting better results going forward with the drop off in pulp pricing?

I get, yes, So, Paul, the paperboard business as you know, we're 80,000 tons on the open market with we got a higher weighting on hardwood. We should see sequentially that business benefiting from lower pulp price inputs in the manufacturing process.

Yes, I think our three year-over-year was up quite considerably Paul, some 13% if I got my numbers right. So it's moving in that direction certainly and again, strong demand. So as Mark said, we continue expect that to show those type of increases going forward.

Have you guys been able to implement all the price increases and outs so far? And or another way to look at it is what's left on the price increase implementation?

You're talking on paperboard or back to CS?

Paperboard. Sorry. Confused you. Paperboard.

Yes. Paperboard you kind of saw those increases starting late spring into the summer and then have been accelerating. So certainly, once you annualize all those impacts, it'll be a good outcome I would say. We did a good job in that it's the offtake is good in all the end markets. And our order book looks good and the pricing has been positive.

Yes. Paul there's been supply disruptions out there with other players. And that's kept the market very tight and I think are a key part of these increases on top of demand overall. So yes, we expect that to continue in that business, of course, is dependent on raw material cost of mainly pulp coming through and those prices, of course as we noted, are dropping. So we expect even improved margins in the fourth quarter and I think you could look at that as being a very attractive business in 2022 as well. And we'll come out with further definition on that in our next fall.

Okay, and then just lastly, on your green first shares, and just maybe you can share your forecast on lumber prices, or the value of green per share going forward do you see that being it's something you're going to monetize in the short term or in the long term? How should we look at that?

Paul so as you know you follow the market well. As we closed in August, prices dropped pretty sharply in September. But I think they've recovered pretty nicely. Everything that I'm looking at as a reference point, points to a favorable market looking ahead. So we'll certainly stay close to that situation. We have the six month views on our shares and certainly we'll get smart on how to best monetize that position when the time's right. But I think the fundamentals for lumber are still very, very positive.

Okay, that's all I had.

Thanks, Paul.

Our next question comes from a line of Roger Spitz from Bank of America. Please proceed with your question.

Thanks very much and good morning. So for those turnaround maintenance outages in 2022, can you give us any guidance or steer on what is the full year EBITDA impact if any from those outages?

So, I mean Roger, as you know we amortize these costs over the periods, so it tends to smooth those out. So on a yearly basis, you always have maintenance costs in your P&L, but we don't give specific guidance on those exact amount.

Okay. For CapEx, do you have any guidance for Q4 as well as 2022?

Yes. So you saw from our cash flow year-to-date, we're just over 60 on custodial. And we had guided in our last call and are still committed to on a net basis in the range of 95 to 100 for this full year. So that's the expectation for the balance of the year.

So I should think that your CapEx in Q4 will be $35 million?

Or that would be a combination of anything custodial and strategic.

Okay, and any steer for 2022 now that you're out of the game. I know it's not a big CapEx number, but.

For ‘22 we mentioned for custodial 100 million with the caveat that we would modulate that based on what we're seeing on inflation and the cost to execute those projects. And then, through a critical lens evaluate any strategic opportunities that Paul alluded to in his comments.

Got it. Sorry I missed that. And then lastly, in the press release, you talked about related to the lumber sales, some cash outflows deminimis, maybe $3 million to $4 million including tax adjustments, etc of a million I guess. Did those all show up in Q4 or are they in Q1 next year or when might those hedge your cash flow statement?

The asset purchase agreement provides for a 90 day settlement after closing for all closing adjustments. So that will happen this quarter.

Okay, perfect. Thank you very much.

Thanks, Roger.

Our next question comes from the line of Paretosh Misra with Berenberg. Please proceed with your question.

Thank you. Good morning. Just wanted to go back to that 15% - 30% price increase that you announced a couple of months ago. Is that your asking price for that 50% plus volumes in CS that are up for repricing next year or those are not the same thing?

Hey Paretosh, make sure I understand your question. Let me answer the question, I think you are and if I don't answer just correct me. But Paretosh, we have majority of our volume and think of 50% plus that is open for price discussions. And in that we are depending on the grade and as those contracts allow are having conversations around the minimum 15% to 30% type of range of moving pricing up. So you have the balance of that. So the minority of that there is either price caps or there is no price allowed to move in again, we're still having dialogue with those customers. But if that answers your question, hopefully it does. And again, I know it's a little bit difficult to model. We're in the middle of all those discussions right now. But I can say that they've been very productive, because we started having these discussions in the second quarter and letting customers know that we're seeing the onslaught of a lot of inflation and we can't be trapped with it. So our goal is noted that we want to mitigate the impact of inflation on our business. And if we can't, obviously, in these type of markets, where demand is tight, is actually improved on those margins. So that's what we're out there trying to do is, again we can't take the load of this on our backs. And so we've asked our customers to work with us, and to work with their customers to distribute this across the supply chain.

Got it. And yes that was my question. So I guess, as far as CS pricing is concerned, we shouldn't expect any major changes in the next quarter Q3 to Q4 right?

No, it's they're pretty stable. We've got some opportunity here and there to move pricing up. But for the most part for the year we tend to stay relatively stable in pricing. So you'll see the movement effective January 1.

Got it. And then on Temiscaming maybe if you could just talk a little bit more as to what you're seeing in the market as far as reception for your product, and any other color you could provide?

Yes. Sure. So two different stories here. One, the reception for our product has been very positive. With all the key customers out there, they like our product, it's qualified. So we feel good about it. We're ready to go. I think the second part of that story is that market, the market for Lyocell has been fairly muted through these COVID times. And so I think everybody on our customer side of the equation is really waiting for the market rebound to happen here and for that to take hold. There's no one that's backed off of the potential for that to be an incremental 500,000 tons in next three to five years. But we yet to see that happen. And the good news is, we're in a very good position to take advantage of that market when it's ready to go. And that's what we wanted to do. We want to be make sure we're in position and we're going to be there to support our customers when their markets develop.

Thanks a lot. And maybe last one. So you talked about several new opportunities, bio-ethanol, bioplastics, TemSilk which of them you think might require the biggest spending either R&D or CapEx next year?

Yes. I think certainly when we talked about the potential opportunity for bio-ethanol production at our Tartas facility. I feel really good about that. That's a market that's already sitting out there. They are looking for non-food stores sourced natural based inputs to serve that market. Obviously with a wood based product, we were able to meet that need. And so I believe that we'll be in a position to move forward in our project in Tartas in 2022 and I'd say stay tuned, I think we'd like to be able to talk about that between now in our next call in terms of some project development there.

Got it. Thanks. Well, that's all I had.

Thanks.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Paul Boynton for closing remarks.

Yes. Thanks, operator. And again, thanks, everybody for your time today. These are certainly there's a lot of challenges out there. But there's also a lot of opportunity to drive growth in our business. And for us, it creates a real excitement for Rayonier Advanced Materials. I look forward to keeping you updated on results and we will talk to you in the near future. So thanks everyone.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.