Rayonier Advanced Materials Inc (RYAM) 2016 Q1 法說會逐字稿

Greetings, and welcome to the Rayonier Advanced Materials first-quarter 2016 earnings conference call.

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

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mickey Walsh.

Thank you, you may begin.

Thank you, and good morning.

This is Mickey Walsh, Treasurer and Vice President of Investor Relations.

Welcome to Rayonier Advanced Materials 2016 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 yesterday afternoon 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.

Thanks, Mickey.

And good morning, everyone.

I will start today's call with highlights of the quarter before turning it over to Frank to review our financial details.

We had a solid first quarter and we made a lot of progress on our two key strategic initiatives.

First, reducing cost, which is part of our broader transformation initiative, and second, driving innovation.

These initiatives will enhance our long-term competitive position.

Specific to our transformation initiative, we are rapidly advancing towards our three-year $75 million to $90 million goal.

For 2016 we're on track to achieve $25 million of newly-identified transformation cost improvements.

When coupled with the carryover from savings generated by our actions taken in 2015, we are targeting cost improvements of $40 million to be realized in 2016.

Additionally, lower raw material input and transportation costs provided a moderate tailwind to our quarter.

As a result, we are raising our pro forma EBITDA guidance by $10 million to $185 million to $200 million for 2016.

With that, let me turn it over to Frank to review our financials and more details on our transformation initiatives.

Thank you, Paul.

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

Sales totaled $218 million for first quarter 2016, 2% below 2015.

The decrease was largely driven by lower prices on cellulose specialties, offset by increases in commodity sales volume.

For the year, cellulose specialty prices are expected to be 6% to 7% below 2015 levels.

Operating income was $32 million for the first quarter of 2016, compared to $24 million for the first quarter of 2015.

Our variance analysis for operating income relative to the first quarter of 2015, and the relevant price and volume statistics are provided on slides 4 and 5 of the financial presentation material.

As you can see, first-quarter 2016 operating income was negatively impacted by $12 million due to lower prices.

As expected, cellulose specialty prices were down approximately $112 per ton, or 7% from the prior year.

Aggregate prices for commodity products were down slightly from the prior year.

Volume and sales mix increased operating income by $3 million compared to the first quarter of 2015.

As you can see on slide 5, cellulose specialty sales volume declined 1,000 tons to 106,000 tons, while commodity volumes increased 17,000 tons.

The increase in commodity tons is due to improved production and efficiencies and better throughput, as a result of specific actions by our manufacturing team.

Additionally, the ship from an annual maintenance shutdown at our Fernandina facility to an 18-month schedule moved that shutdown from the first quarter in 2015 to the third quarter of this year.

As a result, first-quarter operating income was approximately $2 million favorable in 2016.

Our adjusted facility will continue to have a shutdown on an annual basis, which this year began on April 15.

As of today, two of the three lines are back up and running, with the third line expected to be up later this month.

Costs for the first quarter of 2016 were $12 million better than the prior-year, driven primarily due to our cost improvement initiatives and assisted by favorable transportation, energy and chemicals pricing.

The Q1 savings were derived across all functions of the organization, including improved operational efficiencies at our facilities, better management of purchasing and usage of wood, energy and chemicals and reductions in SG&A.

Specifically, SG&A and other costs for the first quarter of 2016 were $5 million better than the prior year, driven primarily from decreases in professional fees and stock compensation expense.

Savings from SG&A continues to be a focus of our transformation initiative.

In 2016, SG&A reductions are expected to comprise approximately $9 million of our total cost improvements.

Additionally, moderate tailwinds in chemicals, energy, and transportation provided incremental benefits in the quarter.

These benefits are expected to be partially offset in the remainder of the year, as we convert from biofuel to natural gas as result of the Boiler MACT regulation, beginning the second quarter.

Taking all of this into account, we are ahead of target for the year and are increasing our guidance for 2016 pro forma EBITDA to $185 million to $200 million.

In addition to cost improvements, we remain focused on driving cash flow throughout the organization.

Along with the increased guidance to EBITDA, we're now targeting free cash flow for 2016 of $85 million to $95 million, up by $10 million from prior guidance.

As shown on slide 6, in the first quarter 2016, we generated $63 million of EBITDA and $54 million of adjusted free cash flow.

As a result, net debt was reduced by $63 million.

The reduction in net debt was aided by a $25 million improvement in working capital, and a $9 million gain in extinguishment of debt, as we took advantage of market conditions to purchase and extinguish approximately $44 million of face value of our senior notes in the open market.

For the remainder of the year, cash flow will be impacted by maintenance shutdowns in the second quarter for Jesup, and the third and fourth quarters for Fernandina, as well as having interest payments on our senior notes during the second and fourth quarter.

As a result, we expect the cash flow generated during the first quarter to be the strongest quarterly cash flow for the year.

We ended the quarter with $346 million of liquidity, including $236 million available under our revolving credit facility, after taking into account outstanding letters of credit.

Our capital allocation strategies remain as previously communicated.

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

Next, we will invest in our 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 approximately $90 million in capital expenditures in 2016, and we plan to carefully evaluate how we deployed this capital with a key focus on maintenance, regulatory and high return projects.

We continue to believe that debt reduction and reinvestment in our business at this point in the cycle is the prudent course and will provide the best long-term returns for our stockholders.

Our updated full-year guidance is provided on page 7.

To recap, our transformation initiative, as outlined on page 8 of the slide deck, we announced a three-year plan to achieve $125 million to $140 million of cost improvements from our 2014 cost base.

In 2015, we captured $35 million of these cost improvements.

In 2016, we estimated that we would realize another $25 million to $40 million of improvements.

Through the first quarter of 2016, we have captured approximately $13 million of this year's $25 million to $40 million target, bringing our total savings over the past 15 months to approximately $48 million.

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

Thanks, Frank.

In addition to our solid financial performance, including the progress on our transformation initiatives that Frank just discussed, we're making meaningful strides to bolster our innovation platform.

You'll see comments to these efforts on both pages 9 and 10 of your materials.

First, we continued to add resources to our R&D capabilities, focusing on areas of specific research and new product development knowledge.

Second, we are rapidly identifying and vetting top priority concepts through our stage gate process, with a significant number of active projects in the pipeline.

Additionally, we are running trials with our customers on the most promising new product offerings.

We're pleased with the progress we're making against this initiative.

Finally, as previously announced, we are also pleased to complete a new two-year agreement with Daicel, our third-largest customer, through 2018.

Over the last seven months, we have now renegotiated contracts with our three largest customers, and put in place contractual commitments for a significant amount of our cellulose specialties volume for the next several years.

We value the long-term relationships that we maintain with our customers.

In conclusion, we remain steadfast at our strategy to both transform our cost structure and accelerate our innovation platform positions us for near and long-term value creation for our stockholders.

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

(Operator Instructions)

George Staphos with Bank of America Merrill Lynch.

This is actually John Babcock in for George.

I just have a couple of questions for you.

First, on the outages, including the Jesup and Fernandina Beach outages, can you sort of quantify that?

Yes.

On the Fernandina Beach outage, last year was a shorter outage, because it was on the 12-month cycle.

It is about a $2 million impact.

This year, it will be a longer outage, roughly 30 days or so.

So, it will be twice that amount, and that outage begins late in the third quarter and will move into part of the fourth quarter.

Okay.

Jesup is roughly the same impact.

Okay.

Great.

Thanks.

And then another question for you, just on the commodities, it looked like the pricing was a little bit better than we expected there.

Did it ever reflect any sort of mix shift towards fluff pulp, or ultimately was commodity viscose trending pretty well during the quarter?

And, also, on that note, if you could just generally discuss how commodity viscose price trended from the beginning, from January through April, that would be great.

John, this is Paul.

Commodities are roughly about the same.

We haven't seen a lot of change, up or down in either the fluff or viscose market to significantly comment on.

So, we expect them to go plus and minus here through the quarter and the balance of the year at this point in time.

So, we do not see a lot of change, so therefore, we just continue to work on with the optimization that we can do between the two different products that we make at our facilities to give the best returns for our shareholders.

Fair enough.

And then, another question I had just on volumes here, do you ultimately see potential to grow higher fluff pulp volumes, and also if you could generally discuss the importance of that to RYAM's overall strategy and kind of touching on that point as well, clearly, [Cellulosese] stepped away a couple of years ago, I would assume that it is going to be up for biding at some point here, any sort of color you could provide on volume potential, that would be helpful.

John, of course that is our ultimate goal and plan, is to increase our high-value business over time.

As you know, we got ahead of ourselves with an expansion that we announced, and we reconfigured that last year, and said, look, we can be patient and wait for the market.

We retracted a little bit in our volumes this year, and we will continue to look at our volume mix of the high-value and optimize it based on contracts and what we think is the long-term interest of our shareholders.

But ultimately, our goal is, of course, to increase our existing position and leading position into the cellulose specialty areas.

But we will do that with patience, and we will do that in time.

Okay, perfect.

Thanks for your help, and I'll get back in the queue.

Thank you.

Roger Spitz, Bank of America Merrill Lynch.

Thank you, good morning.

While you may not want to provide Q2 EBITDA guidance per se, can you review some of the puts and takes we might think about as we compare it to Q1.

For instance, were any volumes in Q1 purchased under, perhaps, higher-priced 2015 contracts?

I don't think so, Roger, and I guess the best thing that I can put forward is Q1 was a very strong quarter for us.

There were no shutdowns in the quarter.

We will have shutdowns in the second quarter, and then in the third and fourth.

Obviously, depending on when the actual orders come in on some of the CS volumes in shipping, that has some impact from quarter to quarter, so it is somewhat hard to call.

But for your purposes, and I would say this was a good quarter.

We shouldn't see a lot of variability over the course of the year.

We will see some, based on timing.

But, again, it was a pretty good quarter, and it is right in line with our $185 million to $200 million EBITDA guidance.

Thank you.

Can you speak about your next CS, large CS contracts that might expire?

Who they might be with and when they might expire, after having tied down the three largest?

Roger, we report on the three largest material contracts and that's it.

Obviously, we always have contracts up each year of different sizes and different stages of their contractual commitments.

So, we will continue to work on those.

But we will just report out on the material ones.

Last one.

Will you consider doing more bond repurchases, and depending on whether you may or may not want to respond to that, can you at least tell us what metrics you consider when you do think about doing bond repurchases?

We continue to have the ability to do bond repurchases, both under our bank covenants and from our Board's perspective.

That being said, the bonds have moved up since we did those repurchases.

So, we will have to look at that on a quarter-to-quarter basis and determine whether that is the best use of our cash.

As I said earlier in the call, this quarter will be our best cash flow quarter of the year, most likely.

And that is roughly $54 million out of a total of $85 million to $95 million.

That was the quarter where we took a lot of advantage of our bond repurchase activity.

But we will continue to look at that going forward.

Thank you very much.

Chip Dillon, Vertical Research Partners.

Hello, good morning, Paul and Frank.

First question is on -- you mentioned you do have, I think, contracts with your biggest customers, you mentioned that.

I just had a question -- do those contracts -- do you know today what the prices will be like for year 2017 and 2018, or is there something that either gets negotiated later, or is it a function of something else that takes place in the future?

Chip, the only thing we've got out there is what we believe to be 2017 acetate pricing, based on the fact that most of that volume is contracted in price.

So, we have got some perspective on that.

Beyond that, we don't have anything that we can discuss at this point in time.

Okay.

So, you have a pretty good idea what your pricing will be like in 2017 at this point?

Yes, we've communicated in the past, it's roughly down about 2% from where we are in 2016.

So, yes, we have.

Of course, it is still slightly below where we are now, but we are encouraged that it is more stable than we have seen in the last few years.

I see.

And it is interesting, because I know you did say that before.

Any guess as to whether you might have a good view of 2018, say, later this year, or is it just hard to say if you'll know at that point?

I think we have a good guess that we don't know at this point in time.

So, I think that is still open out there.

We are encouraged by what we see happening in the market, as publicly reported by some of our competitors in the other spaces, like, particularly, ethers, where we saw some pretty muted pricing changes in 2016.

So, that gives us some encouragement.

At the same time, Chip, we are still unknown for beyond the 2017 time frame.

Okay.

That is helpful.

It was very helpful on the downtime outage sensitivities.

And I think you said Jesup goes out in the second quarter, that stays on an annual basis.

Was it also second quarter a year ago, and you said about the same impact, is that about a $4 million hit every time you take that mill down?

No, it was second quarter last year.

We haven't put out what the impact of that is in the past, but obviously, it is a bigger mill than Fernandina.

I think you said that the impact of this year would be $4 million.

About the same as Fernandina.

Is that still fair?

I think Frank was commenting on the $4 million about Fernandina for 2016.

Okay.

So, Jesup that might be a bit bigger.

You shouldn't see much of a difference quarter over quarter, since the shutdown was last year for Jesup.

Okay.

Year over year, I mean, not quarter over quarter.

I see.

Just to make sure we are clear, Chip, the $2 million that we referenced earlier was the difference for this quarter at Fernandina versus the prior year's quarter.

Just to be clear on that.

And the average for Fernandina in the third quarter is roughly twice as long this year, so it'll be a bigger impact than the third/fourth quarter.

And while we are on this, you will likely keep Fernandina on that 18-month schedule.

Any reason why or why not you might try to move Jesup to that same type of 18-month rotation?

Jesup is a very different operation, different technology.

We have got a kraft process there.

It requires us, really, to go down every 12 months for proper cleaning of the boilers.

So, I don't see that moving at all into a longer schedule.

We can do that at Fernandina.

That is not uncustomary with a sulfite type mill like we have in Fernandina go to 18-month, and we were confident that we could do that, so we made that move in this year.

Got you.

And I appreciate the very specific plans for the free cash flow.

Not to play Monday morning quarterback, but had a great first quarter, and let's say that you had taken $30 million, you could have easily bought back, I guess when the stock was trading 10% of your equity very easily in the first quarter.

Was there a covenant issue that would not have allowed you to do that?

Or was it just purely your choice to focus on the debt ahead of that?

There is no covenant issues.

The focus is as we've been consistent is, we really feel at this point in the cycle the best and most prudent course of action is to use the cash flow to lower the debt.

We do look at share repurchases every quarter with our Board and discuss the applicability of them.

But at this point, we think that using the cash to get the leverage in line is the most effective way to use that cash.

Chip, as you know we are probably on the higher end of the leverage spectrum, relative to most of the companies in our industry.

So, that is really the focus, to make sure that we have that financial flexibility to both navigate the downturn and invest in the assets.

Okay.

And I'm sure this is -- I must have missed it, but you said you were out there in the first quarter buying in the debt.

How much of the free cash flow that you generated ended up being used to buy the debt, versus sitting on the balance sheet?

We repurchased roughly $44 million of face value of the debt.

Okay.

And would you want to tell me how much you spent to buy that?

We recognized the $9 million gain on that.

So, we spent $9 million less, and then we will pay taxes on the gain.

Got you.

Good.

Thank you.

Bill Hoffmann, RBC.

Thanks, good morning.

Good morning.

Paul, can you talk a little bit about the acetate markets in 2016 versus 2015, and maybe also thoughts on 2017, and I'm just trying to get a sense of where you see the trend going.

Last year, there was destocking in China and it sounded like that was ending by the end of last year compared to this year, but I'd like to get a better sense on your thoughts there.

Sure, Bill.

Be glad to.

And I will start with that, just on the acetate destocking issue, because we've talked about that over the last handful of calls.

Our perspective, which really hasn't changed much from when we talked about this a little bit in February, that we believe, globally, outside of China, that the destocking of tow inventory has been largely completed.

So, that is our perspective.

We think that is done.

I think that is shared by others that we hear report out on the matter.

So, the question is, what is really happening in China?

And as we have reported before in 2015, our belief is normal imports of tow into China's in that 100,000 to 120,000-ton range, and we thought that it may have been reduced to about 50,000 tons to 60,000 tons in 2015.

And we reported last quarter, in February, that we thought 2016 -- at one time we're hopeful that was going to be largely completed.

But we reported in February that we thought that maybe we would see the same type of destocking effort, and therefore, imports dropping roughly in half again in 2016.

We've heard some recent calls and may be more optimistic than we are right now, so we need to go back and triangulate our data.

But that is kind of roughly where we are at, and again, we hope that it will be complete this year, and it sounds like others are more optimistic that it definitely will be, and I think that is very encouraging.

In the longer run, we think again that China, in terms of just actual tow consumption, is probably somewhere between flat and 1%.

And then globally, it may be below that at 0%.

So, overall, we're kind of saying now that we think overall, a tow consumption's roughly flat, globally.

And that is our perspective at this point in time, and of course, obviously, as we learn more we will share it with you as we have some information to share.

Thanks.

Then just with regards to the other end markets, ethers, etc.

Can you just give us some general thoughts there, any developments in those other markets, so many [firming] in ether, [there's a certain flat as well].

Actually, we see ethers continuing to grow somewhat modestly, as well as the other segments.

Tire cord, filtration, [saw sidcations], we see all of that still going up in that kind of global GDP, if there is a net 2%-plus type of range, 3%.

And then certainly we see pockets of it growing much faster than that, and particularly in the ethers area.

It may have not been as robust as we previously talked about a couple of years ago, but seeing 4% to 6% in some key pockets of pharmaceutical and food is certainly some of our observations out there in the ethers.

So, overall, there is growth out there in those markets.

So, we appreciate that.

Obviously, it's dependent, again, on the global economies.

So, we will continue to monitor it.

But, again, we think it is certainly in a positive direction.

Right.

Just another question there.

Could you talk about some of your innovations and some of the new product development.

Any thoughts on whether you can outpace some of these growth rates, or would you be able to make some penetration this year, or is it more of a 2017, 2018 kind of concept?

We've talking about innovation as a longer-term play.

As we talked about in this call, we are very pleased with what we see with our teams.

We're very encouraged by the activity that we have with various existing and new customers.

But it is a longer-term play, and I cannot say if we will see anything material this year, or when exactly we will see that.

But I think, for sure, we will see that at some point in time.

But it's just going to be a longer-term.

These trials take a while.

The feedback takes a while, and then you have to tweak and continue to move on.

So, again, it is a longer-term play, but we want to express again that we are very positive about what we see from our team and from the customers.

Great.

Thank you.

Thanks, Bill.

(Operator Instructions)

Steve Chercover, DA Davidson.

Thanks, good morning, everyone.

Some of my questions have been answered, but have you ever revealed what the mix is in the commodity segment, between commodity viscose and fluff?

We haven't, we've said in the past that the majority has been towards the fluff side of the equation.

And, again, I would say that is still true today, but we will continue to flex that ratio as we see the markets respond to different pricing.

So, we will just continue to be focused in on that, but again, I would say still a majority is in that fluff, and we remain committed to a certain amount of both sides of the equation and tend to switch back, kind of on the margin, there.

That was my impression.

So, I was wondering if you thought that fluff prices could be sustained with two new facilities coming online this year?

We are a small player in the fluff market, even at the max commodity production of fluff, if you will, that we would produce, we are 4% of that 5 million tons.

So, again, our ability to place that volume, we feel very confident on what the pricing is, I think we are a little bit of a price taker, obviously.

If price has moved down, you will see us make more viscose.

If price has improved, we'll make a little bit more fluff.

As far as the impact, obviously, more supply into the markets is not necessarily hopeful, but at the same time that market is growing fairly robustly, and it is at that 4% type of growth level from what we can see.

So, it is going to be able to absorb a lot of this new capacity coming on, and we'll just respond accordingly.

That is a good segue into my next question, because I heard you say earlier that -- we understand that the specialty cellulose is your key business.

But if a couple of fluff mills were to become available due to a DOJ ruling, would you have the capability or the desire to get bigger in fluff?

I cannot answer that specifically right now, Steve, obviously, we keep all of our strategic options open and discuss them with the Board.

But at this point in time I could not comment on that.

I will leave it there.

Thank you.

Thank you Steve.

(Operator Instructions)

Paul Quinn, RBC.

Thanks, good morning, guys.

Just a couple of questions.

It seemed last quarter your 2016 guidance on specialty prices, on specialty with prices down 6% to 7%, and volumes down 4% to 5% is unchanged, but it looks like you've change your 2017 pricing guidance down now 2% from last quarter, which you said it was flat.

Now, last quarter you had just renewed Eastman and Nantong, and I guess the only difference is, really, the renewal or the contract extension at Daicel.

Is there something specific in the Daicel contract that has caused you to adjust your pricing guidance for 2017 down 2%?

And what is your volume guidance on 2017?

Paul, the 2% down for 2017, that is the same guidance we gave on our annual call back in February.

So, we have not changed our outlook for 2017 pricing.

We have not given guidance out on 2017 volume.

It is too early.

Do you have a guidance on commodity product volumes in 2016 here?

We have said, I think in the last call, last year we did 248,000 tons, I believe, of commodity volume.

And we think that that is a reasonable number, plus or minus, depending on the mix that we have in that viscose or the fluff.

Okay, so that should be pretty much flat year over year?

It should be up a little bit, right now is our view, but again, it could be impacted by how we shift around mix throughout the rest of the year.

Just on the cost savings, help me understand between slide 8 and slide 10, it looks like you have cost savings at the goal of $25 million to $40 million, and then I guess on slide 10 you've achieved $13 million in 2016 so far.

I'm just wondering if that comes from the initiatives that you put in place in 2015, or is this new from work that you have done in 2016?

$6 million of the initiatives are carryovers from last year.

What we call legacy initiatives.

And then $7 million of that $13 million is new initiatives that we put in place this year, about half of it is driven by SG&A and about half of it is driven by manufacturing and supply chain.

Okay.

Any cost reductions in input pricing that has affected the $13 million as well?

Yes, and I think we mentioned -- we have seen some -- not would, necessarily, but we have seen some tailwinds in energy and things that are related to energy, and a little bit in chemicals.

We won't get that benefit, or we don't foresee getting that same level of benefit in the next couple of quarters.

As we said, boiler max coming on and it's causing us to buy more natural gas, and more natural gas on some fixed terms as we move forward here.

And that was the last question I had.

What is the impact of that move from biofuels to natural gas?

In the last guidance we gave last year, we said it is roughly $5 million.

It could be a little bit more, depending on the gas infrastructure and some of the firm contracts we are putting into place.

You are saying $5 million annually, right?

Annually.

Yes.

Excellent.

Thanks, guys.

Thanks Paul.

Mr. Boynton, we have no further questions at this time.

I would now to turn the floor back over to you for closing comments.

Great.

Thank you.

There's no more questions at this time, I would like to thank you for joining us today.

We're off to a good start for the year.

We remain focused on executing our two main strategic initiatives and providing long-term value creation for our stockholders.

We look forward to updating you on our progress in a timely manner as we go forward, and have a good day.

Thank you.

Ladies and gentlemen this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.