Rayonier Advanced Materials Inc (RYAM) 2015 Q1 法說會逐字稿

Good morning.

Welcome and thank you for joining Rayonier's Advanced Materials first-quarter 2015 (inaudible) conference call.

At this time, all participants are in a listen-only mode.

(Operator Instructions).

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

Now I'll turn the meeting over to Ms. Beth Johnson, Vice President of Investor Relations and Planning.

Ma'am, you may now begin.

Thank you and good morning.

This is Beth Johnson, Vice President of Investor Relations and Planning.

Welcome to Rayonier Advanced Materials 2015 first-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, 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 slide 2 of our presentation material.

At this time, I would like to turn the call over to Paul for his opening remarks.

Paul.

Thanks, Beth.

Good morning, everyone.

I'm going to start with a few brief comments about the quarter before turning it over to Frank to review our financial results.

This morning, we reported first-quarter earnings of $11 million or $0.25 per share and EBITDA of $46 million on sales of $221 million, in line with our expectations for the quarter.

During the first quarter, we made significant progress on our $40 million cost-reduction initiative and we are on track to realize a substantial portion of the targeted cost savings in 2015.

Additionally, we are benefiting from lower-than-anticipated chemical and energy costs.

As a result of our initiatives and lower costs, we expect to exceed the midpoint of our previously announced full-year EBITDA guidance of [$200] to $200 million and as a consequence, we are raising our EBITDA guidance to $210 million to $225 million for 2015.

So with that as a backdrop, let me turn it over to Frank for a review of the financials.

Thanks, Paul.

Let's look at slide 3 to review our financial highlights for the first quarter.

Sales totaled $220 million for first quarter 2015, 11% below fourth quarter 2014 and 9% below first quarter 2014.

Operating income was $24 million for first quarter 2015 compared to pro forma operating income of $47 million and $46 million for the fourth quarter and first quarter of 2014 respectively.

The 2014 pro forma adjustments exclude one-time legal -- one-time separation and legal costs.

Fourth quarter 2014 also excludes environmental charges discussed in the last earnings call.

There were no pro forma adjustments for the first quarter of 2015.

Our variance analysis for operating income relative to the fourth quarter and first quarters of 2014 are provided on slides 4 and 5 of the financial presentation material.

As you can see on slide four, for the sequential quarter comparison, first quarter 2015 was negatively impacted by $7 million due to lower prices.

As expected, cellulose specialty prices were down approximately $68 per ton, or 4% from the prior quarter.

For the year, cellulose specialty prices are expected to be 7% to 8% below 2014 levels reflecting the full impact of 2015 price negotiations.

Aggregate prices for commodity products were relatively unchanged between the periods.

An unfavorable sales mix and lower cellulose specialty sales volumes reduced operating income by $15 million from the fourth quarter of 2014.

First-quarter cellulose specialty sales volume declined 16,000 tons to 107,000 tons.

Typically, sales volume of cellulose specialties in the first half of the year are lower than the second half due to the timing of customer orders and our annual maintenance outages.

This quarter was further impacted by fewer operating days and the inventory destocking in acetate tow, which is expected to be completed by Q3.

Commodity volumes for the first quarter increased 12,000 tons to 58,000 tons over the fourth quarter due to strong production at the end of 2014 and our planned increase of commodity sales.

It is important to note that most of our estimated full-year 2015 cellulose specialty sales volume is contracted.

Therefore, while the timing of our cellulose specialty sales may be impacted by seasonal order patterns and inventory destocking, our full-year sales volume is largely known and expected to be comparable to 2014 and 2013 levels as previously guided.

Costs for Q1 were up slightly from the prior quarter reflecting lower fixed cost absorption as production rates declined primarily due to lower operating efficiencies and fewer production days, which include the impact from Fernandina's first-quarter annual maintenance outage.

Slide 5 shows the pro forma operating income variance from Q1 2014 to Q1 2015.

As you recall, Q1 2014 is reflective of carveout accounting treatment.

As such, the overall results may not be indicative of the standalone company.

However, sales and production costs are comparable between the periods.

Operating income declined $22 million primarily driven by lower cellulose specialty sales pricing.

As anticipated, CS prices were down $156 per ton or 8.5% from the prior year due to the outcome of 2015 negotiations and the mix of the cellulose specialty products in the quarter versus the previous year's Q1.

Again, average CS prices for full year 2015 are expected to be 7% to 8% below 2014.

Cellulose specialty sales volume was approximately 6000 tons, or 5% below the previous year's first quarter.

This was offset by 8000 tons or a 16% increase in commodity volume and improved commodity profitability.

Costs increased approximately $5 million from the prior-year period primarily due to higher SG&A expense as a result of being an independent public company and higher professional fees.

Recall that the Q1 2014 SG&A expense was done on an allocated basis and is not comparable to 2015.

Now let me switch to our 2015 outlook and guidance.

As shown on slide 6, we expect CS sales volume to remain comparable to 2014 and 2013 levels with prices down 7% to 8%.

However, we have raised our guidance for 2015 EBITDA to $210 million to $225 million reflecting lower full-year costs.

As a reminder, in our Q4 earnings call, we announced a plan to achieve approximately $20 million to $40 million of cost savings in 2015.

These initiatives cut across all functions of the organization, including contractor costs, supply chain savings and headcount reductions, amongst others, with no one activity accounting for the lion's share of the expected savings.

The estimated range of savings reflected the uncertainty around the timing of implementation of some initiatives.

To date, we have realized approximately $6 million in operational savings in the quarter.

The benefit of which is largely capitalized in our inventory.

Based on our performance to date, we believe we are on track to capture a significant portion of our targeted savings in 2015.

Additionally, we continue to see opportunities from declining chemical and energy prices, which in the aggregate could provide incremental benefit to 2015 EBITDA if these trends continue.

However, factors such as longer than forecasted energy curtailments or increased wood cost due to significant weather events could offset a portion of these benefits.

In addition to cost savings, one of our top priorities in 2015 is to prudently invest our cash.

We remain focused on driving efficiencies throughout all levels of our operation, including working capital in which we are targeting $15 million of improvement by year-end.

As shown on slide 7, in the first quarter of 2015, we generated $46 million of EBITDA, $32 million of adjusted free cash flow.

As a result, net debt was reduced by $32 million.

We ended the quarter with $300 million of liquidity, including $222 million available under our revolving credit facility after taking into account outstanding letters of credit.

As shown on slide 8, our capital allocation strategies remain as previously communicated.

Our first goal is to preserve and improve our financial flexibility by reducing our debt.

Next, we will invest in the business through a prudent capital expenditure program set at levels to optimize profitability and return on capital.

We have stated that we expect to spend $75 million to $80 million in capital expenditures in 2015.

Of that $15 million to $20 million is for the Boiler MACT project with the remainder being allocated to maintenance and high return cost-reduction projects.

Finally, we intend to fund a modest return of capital through our quarterly dividend.

At this point, let me turn the call back over to Paul.

Thanks, Frank.

So as you just heard, our first-quarter performance was in line with our expectations.

The progress we've made on our cost initiatives, as well as certain lower raw material costs, allow us to raise our previous EBITDA guidance.

However, the overall market dynamic remains consistent with what we communicated on our fourth-quarter call and as a result, our priorities in the near and long term remain the same as shown on slide 9.

In review, we will continue to move aggressively on cost-reduction and continuous improvement initiatives across all aspects of our business.

For example, in our wood procurement group, we recently announced the realignment of the organization with the closure of our chipping facility in Jarratt, Virginia and reductions in the size of our management team.

With these changes, we will save approximately $1.4 million of expense annually.

Beyond 2015, our goal is to hold costs flat by continuing to identify and implement savings to offset typical cost inflation.

In anticipation of this, we have already begun to size up additional cost-saving opportunities required for 2016 and 2017.

For example, in April, we celebrated the groundbreaking of a combined heat and power plant to be built by Chesapeake Utilities adjacent to our Fernandina plant.

As previously discussed, this partnership will provide our business with up to $2 million of annual savings through lower-cost steam beginning in 2016.

Second, we are reviewing our assets to be sure we are leveraging them to the greatest value given today's market conditions.

As such, we've entered into multiyear commodity contracts for a substantial portion of our C line capacity until the cellulose specialty markets regain momentum.

We will decide if any further changes in manufacturing strategy are warranted as market conditions change.

Additionally, we're making good progress on identifying co-product opportunities that might yield higher returns than their current value as a source of energy in our recovery boiler.

While it is too early to provide the size or the timing of benefits that might be realized, we can share that we are in active talks with several potential partners for our co-products.

And finally, we are reinvigorating our product innovation process with a focus on driving greater value with enhanced products that improve customer performance, as well as new products to help us serve additional markets.

For example, one breakthrough that we are particularly excited about is a new product to increase customer productivity, which builds on our leading expertise in cellulose technology.

The early results with a significant customer demonstrate the product allows them to achieve throughput well above normal levels and providing them the potential for both greatly reduced costs and future capital avoidance.

Additionally, we have recently filed several new patent applications for products outside our existing markets with plans to file more through the balance of the year.

We share this progress with you not because we expect to see commercial value from any of them in the near term, but rather to demonstrate our renewed R&D effort and our commitment to have 20% of our revenues derived from new products within a decade.

So in summary, we continue to take actions that are necessary to compete effectively and position ourselves for the near and long-term success.

Now, I'd like to open up the call for questions.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions).

Chip Dillon, Vertical Research Partners.

This is actually Brian Lynch filling in for Chip.

I just have one quick question.

It is regarding the fluff pulp market.

Given the recent activities you have seen from Domtar and then a recent conversion by International Paper, I was curious about what you guys' plans were for the leftover fluff capacity at the Jesup mill and kind of how you guys see that in your long-term strategy.

As we commented, we've got our products placed for the year and our new C line, the majority of that contracted into the commodity market.

If the question is about this new capacity coming on, I think the perspective here that we take is that it's a 5 million ton market for fluff pulp and therefore, our sales into it are very small and so we don't see the additions that we've heard announced coming on in 2016 that changes our thoughts or our plans in any way.

It certainly has the potential to affect pricing in some way, but we will see and we will make those decisions as to how we run our facilities accordingly at that time.

But, overall, we are a very small player in a 5 million ton market.

Thank you.

That was helpful.

Roger Spitz, Bank of America.

Regarding the CS volumes under contract in 2015, can you say how the contracts typically work?

Are the volumes set for the year and the customers can take volumes during the year as they see fit, or are the volumes set quarterly, or are they requirements, contracts by customer facility?

Let me just say generally that, first of all, our CS volume is largely contracted for the year and there typically are contracts -- are volume contracts over many years and then pricing is negotiated on an annual basis and we have disclosed that before.

So again, for 2015, our volumes are largely locked in and contracted.

Okay.

The reason I was asking the question the way I did is I am trying to figure out is whether they have flexibility to push off volumes during the course of the year and only have to make up the volume for the full year.

We often move volumes around quarter to quarter based on our production based on our customer needs.

We've got to make sure we are flexible and match their needs, but, overall for the year, as we have communicated, our volumes are largely contracted and in this case, they are going to be largely comparable with the prior 2014 and 2013 years.

Okay, thank you.

Regarding the Jesup C line contracts, were those contracts recently -- that you mentioned earlier in the call -- were those contracts recently entered into?

Are they volume contracts?

Are they all in fluff pulp?

Yes, again, on the C line, we commented on multiyear commodity contracts.

Those were largely contracted at the end of 2014 for the 2015 and beyond years.

They are both -- in some cases, certainly they are volume contracts and they have different pricing aspects to them.

Okay.

Last question is SG&A was $12 million in Q1 2014.

Should we think about that being the run rate for the year, or perhaps some of the cost-savings initiatives reduces that?

Thank you.

Yes, that's reasonable.

We would think it would be somewhere in that range plus or minus.

Obviously, the cost savings as we get those into the hopper should help minimize that to some extent, but that's a reasonable run rate.

Thank you very much.

(Operator Instructions).

George Staphos, Bank of America Merrill Lynch.

This is actually John Babcock sitting in for George.

I just wanted to quickly ask you, clearly, with commodity volumes increasing, but I was just wondering if you could provide an update on the market conditions you are seeing in those markets for both pulp and also commodity viscous?

We have reported that it's relatively steady.

We've talked about, for us, we've got the ability to move fairly flexibly into either market.

We've talked that probably the majority of our volume at the current time is going into the fluff market.

But both markets are relatively stable with stable pricing, if not slight price increases that we can see out there.

But you can look at our data that we have provided.

You can that on the pricing per ton side has been pretty consistent over the last year and for everything you can see, you can see that going forward as well.

Okay, thank you.

And that also with regards to the latest guidance there, you talked about a couple items there.

Is there anything more substantial that also might be driving your guidance revision at this point in time and also any sort of color you could provide on your comfort level for achieving those -- that $40 million of cost savings or rather the majority of it by the end of the year would be helpful.

Yes, I think we feel very good.

I think the two things that are driving the increase is that we are making very good progress against the cost-saving initiatives.

And so that -- if you remember, we were originally out with a $20 million to $40 million range and we will be well -- I think we have said a significant portion of that could be realized this year, so we feel good about that.

That has been very good progress.

And then I think the other thing that we have noted is the better energy and chemical costs.

Now there are some offsets to those like usage and curtailments that we've seen on the energy side, but in general they've given us a little bit more confidence as well in regards to raising that guidance range.

So we feel very good about the guidance range that we've put out there.

Got you.

Okay, great.

And then another question I had, it pertains to the movement in the US dollar.

Clearly, we have seen a strengthening over the last couple months or so.

I just want to get a sense of the impact that will have on your business, particularly from a cost perspective.

So we sell in dollars and our costs are largely in dollars, so we don't see that having an effect on us in any way.

Obviously, it is a component for our competitors that are global competitors, but it is one of many factors that we will look at and that will go into -- and potentially impact the CS market, both positively and negatively, in the coming years.

So for 2015, we don't see an impact with the changing currency.

Okay.

And then quickly, just a tagalong to Brian's question earlier on the fluff pulp market.

Do you guys sell into different channels than the companies he mentioned, or are you targeting -- I guess just any sort of color you can provide there just to give us some sense as far as what those markets look like.

No, we sell in I would say relatively similar markets to everybody in this segment, the fluff market segment and keep in mind, John, we pioneered this 45 years ago, so we know the markets really well, we know the customers really well.

So we decreased our emphasis in that as we kind of brought up our C line and then we said, look, we are going to maintain a position in those markets going forward.

So it's with good relationships that we've had with existing customers for decades and they are across the board in different aspects, whether they are diapers or feminine napkins or adult incontinence, it is across the board.

So again very similar channels to everybody else.

Okay.

So are those customers -- is that more spot tonnage that you guys are selling, or is that going to be contracted tonnage?

So we said the majority of that now is contracted and that's one of the things that we did do and dedicated a good portion of that C line in a multi-year contracted way and we think that pricing is better than the spot market pricing out there, so we thought that was a bit of a benefit to us to go ahead and do that, as well as go ahead and dedicate that volume on our new C line.

Okay.

And so these aren't by any means customers that you deal with in a specialties or commodity-based [cost] market.

Is that correct?

Yes, totally separate.

Okay, great.

And then just a last question before I turn it over.

Clearly, there was a little bit of a negative trend from the destocking in acetate and I am just wondering how that impacts your comps as the year progresses and some of that starts to back off?

I will take a stab at this.

I think Frank is going to add some comments too.

First of all, that destocking is what we talked about last year and the beginning of this year.

It is well-anticipated and it's already into our plans.

So again, our volumes for 2015 will be comparable to 2014 and 2013, so we don't think it has an impact in any way other than a bit around the timing of orders.

And again, I think we see a little bit light in the first quarter, but we've guided for the full year in terms of our CS volume and we should hold consistent to that guidance.

Okay.

Great.

Thanks for the help, guys.

(Operator Instructions).

Paul Quinn, RBC Capital Markets.

If you could give us some volume guidance on what you expect to do on the commodity side in 2015?

I think what we said last call was that obviously that commodity runs at a higher rate than our cellulose specialty lines from that perspective.

And if we just took our 675,000 guidance or capacity stated in CS, that alone would have added roughly 50,000 tons of commodity volume.

Our commodities are running very well.

We're getting a lot of efficiency; that's part of our cost initiative.

So we see at least that if not more commodity volumes coming out for the rest of this year.

In terms of the $40 million cost-savings initiative and your statement that you expect the majority of that to be realized, what are we talking in terms of majority, 51, or are we talking 80 or (multiple speakers)?

I'm hoping it's materially higher than 51 -- materially higher than 51.

So it's real early in the year, Paul, and we've got a lot of work to do, but I think we want to get a significant portion of that [debt] this year and as much of that $40 million as we possibly can, so again significantly higher than the 51.

Okay.

And then last year, you renewed a multi-year contract for another year, or I guess extended it for a year.

When do discussions around that contract come up and when do you expect to be able to report on that?

So the contract you are referring to is NCFD; that's the public information there, Paul.

We will have those discussions with them in the back half of this year and finalizing at the end of the year, I am sure.

So likely we will give you color on that not till the January timeframe, but as we have the information and it's timely, we will give you an update on it.

Okay.

And just on the last question just on the cost side, you've stated lower chemical and energy costs.

Just wondering which chemicals are lower and then also what you are seeing on the fiber side.

Well, our biggest chemical, as you know, is caustic and we've seen lower pricing on that in particular, but there are some other chemicals that we're getting a little bit lower prices on as well.

And expectation on the fiber side going forward?

The fiber side, the fiber costs have been running relatively stable to where we budgeted them.

As you well know, they are very susceptible to weather and those type of things.

So we are always cautious on the outlook for fiber because it can change on a week-to-week basis, but right now we've seen them relatively stable.

Okay, that's all I had.

Best of luck.

(Operator Instructions).

Steve Chercover, D.A. Davidson.

So a couple quick questions.

The volume that you've replaced on the specialty side, that is encouraging.

Do you feel that you are going to be establishing new long-term relationships based on quality and service?

Yes, if I understand your question right, Steve, certainly, again, our volume this year, we feel very -- that it's a very solid 2015 relative to 2014 and comparable in that regard.

Most of our volume, I would say, is currently committed to long-term contracts.

We think that is going to continue and of course, we always compete out there.

We look at it in kind of a total value in use, so that takes regard to our quality, to our consistency, to our multiple lines that we have that can produce CS volume.

So all that into the same equation combined with price is how we are out there competing in the marketplace and we expect that to continue.

Yes, because I think it's notable.

It is well-known that you lost a significant customer and yet, the volumes are the same, so you've replaced that and I'm just hoping that that is going to be stable, not an annuity, but long-term business.

Okay.

And also I thought it was interesting that you are applying for patents for some of your new products.

That's a bit of a departure because I thought you -- part of the attraction of the specialty cellulose is it wasn't patented, but the business was won on purity and collaboration.

So are these altogether different products than what you make now?

Yes, I think that's a great distinction.

So I talked about some breakthroughs that we are having right now on some new products that we are working with customers on and really we are seeing a remarkable difference in their performance.

Those aren't likely to be patented in any way, we don't believe, but we will see.

What we talked about on patents are outside of our existing markets today and again we will be looking at patent and applications for those and those have been filed and we have more to file.

So again, different applications altogether to help us branch out from where our core markets are today.

And I am no genius, but if you're patenting something, it means no one else is doing it, right?

Yes, that's right.

And again, Steve, just so you know, our focus over the last handful of years, as you are well aware, has been just to help serve the market with our products and it was really tight there for a while.

So we shifted all of our focus to throughput to serve our customers.

And as the market has shifted here a bit and we've talked a lot about that, we said, look, we're going to go back in and reinvigorate our R&D engine and we've got a lot of good ideas.

We are waiting and we are reallocating time now and making that a greater priority and we are already seeing the benefits from some of the prior work that we had sitting there.

And we've reprioritized, we've started filing these patents and again, it is more of a longer-term story here, but we just want to let everybody know that we are having near-term progress.

That's good.

Well, I think one of your initiatives was to grow your share in ethers because you've become very focused on acetate, I guess pulled into acetate, so how is that initiative going?

Are you making some traction?

Yes, so we didn't disclose (technical difficulty) different positions on our share for acetate, ethers, others and I would say right now it is relatively consistent to the prior year, probably a little bit less in acetate and more into ethers and others, but we still maintain our focus in that direction, certainly.

And what is going on with smoking in China.

Do you have any observations?

Inventory stocking and destocking is one thing, but has there been any change in terms of attitude towards actual consumption of cigarettes?

Certainly, we are monitoring that.

Certainly, I think, as we discussed in the past, there is a far greater awareness in China, as well as the rest of the world, on the ill effects of smoking and so we're watching those trends.

But overall we believe, and I think most of our customers would also say is consistent, that we think global acetate demand is relatively flat to slightly up, so we see 0% to 1% and our belief on an ongoing basis, at least our perspective at this time, is that China is at least at the high end of that or a little bit above.

Okay.

And one last one, perhaps it is for Frank.

Q1 is your seasonally weakest quarter for EBITDA and I assume also for free cash flow because you are presumably building log decks for your mills.

So is that accurate and if so, can we expect even more free cash flow dedicated to delevering in the next three quarters?

Yes, I guess I would say that you are correct that it is a lower quarter for cash flow.

Typically, from an operating perspective, we actually have more tax payment and interest payments in Q2 and then interest payments in Q4.

So from a financing perspective, we'll have slightly lower cash flow from that piece of it, but the operating cash flow should pick up throughout the year.

But the priorities for the deployment of that free cash flow remains debt repayment?

Absolutely.

Okey-doke.

All right.

Thank you very much.

(Operator Instructions).

I think we can assume there is no further questions, so I'd like to thank everybody for joining us today.

And again in summary, I think we are off to a good start in an environment that remains challenging.

We are aggressively addressing the immediate priorities of maximizing profitability and cash flow and remain vigilant in providing long-term value creation for our stockholders.

So we look forward to updating you on our progress in a timely manner as we move forward.

So again thank you and good morning.

This is Beth Johnson.

I would like to thank everyone for joining us.

Please contact me with any further questions.

Thank you.

Thank you.

And that concludes today's conference.

Thank you all for participating.

You may now disconnect.