Rayonier Advanced Materials Inc (RYAM) 2017 Q1 法說會逐字稿

Greetings, and welcome to the Rayonier Advanced Materials First Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mickey Walsh, Treasurer and Vice President of Investor Relations for Rayonier Advanced Materials.

Thank you.

You may begin.

Thank you, Melissa, and good morning, everyone.

Welcome to Rayonier Advanced Materials 2017 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'd like to remind you that in today's presentation, we will include forward-looking statements made pursuant to the Safe Harbor provision of federal securities laws.

Our earnings release, as well as our filings with the SEC with some of the factors which may cause actual results to differ materially from the forward-looking statements we may make.

There are also reference on Slide 2 of our presentation material.

Today's presentation will also reference certain non-GAAP financial measures, as noted on Slide 3 of our presentation material.

We believe non-GAAP financial measures provide useful information for management and investors.

The non-GAAP measures should not be considered an alternative to GAAP measures.

A reconciliation of these measures to their most directly comparable GAAP financial measures are included on pages 13 through 17 of our presentation.

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

Thanks, Mickey, and good morning, everyone.

We're off to a strong start in 2017.

Our continued focus on costs and operational excellence delivered solid results that are in line with our expectations for the quarter.

Implementation of our 2017 cost transformation initiatives are ahead of plan, and we are now on track to deliver the entire $30 million of cost improvements we have targeted.

Therefore, we are confident that our team will generate net income and EBITDA at the high end of our initial guidance.

To date, we have achieved over $90 million of savings, and continue to advance towards our ultimate 4-year goal of $140 million of cost improvements.

With our focus on our 4 strategic pillars, we are building a more globally competitive company, with low cost operations and innovative product offerings that enable us to provide superior value and service to our customers.

With that, let me turn it over to Frank for a review of the financials and more details on cost transformation.

Thank you, Paul.

Let's look at Slide 4 to review our financial highlights for first quarter.

Sales totaled $201 million for the first quarter of 2017, 8% below prior year.

The decrease was driven by contractually lower prices on cellulose specialties, a higher mix of lower value specialty cellulose products and lower commodity sales volume.

Operating income was $26 million for first quarter 2017 compared to $32 million for first quarter 2016.

Our variance analysis for operating income relative to the first quarter of 2016 and the relevant price and volume statistics are provided on Slides 5 and 6 of the financial presentation material.

As you can see on Slide 5, first quarter 2017 operating income was negatively impacted by $7 million as a result of the previously announced lower cellulose specialty prices.

Prices for commodity products were up 6% from the prior year due to higher prices, as well as a mixed shift towards viscose, which currently provides better profitability.

Volumes and sales mix lowered operating income by $3 million compared to the first quarter of 2016.

As you can see on Slide 6, cellulose specialty sales volumes increased 1,000 tons to 107,000 tons, while commodity volumes decreased 16,000 tons.

The decrease in commodity tons is due primarily to the timing of revenue recognition and sales mix.

Returning to Slide 5. Costs for the first quarter of 2017 were $6 million better than the prior year, driven primarily by our cost transformation initiative, offset in part by higher caustic prices.

On balance, inflation on most of our key inputs was roughly in line with our expectations.

SG&A and other cost for first quarter of 2017 were $2 million negative from the prior year, driven primarily from the timing of recognition of stock compensation expense and increased research and development spending.

Our cost transformation strategy continues to produce solid results.

As a reminder, on Slide 7, we have a 4-year plan to improve cost by $140 million from our 2014 cost base.

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

In 2016, we recognized another $50 million in improvements.

Through the first quarter of 2017, we have captured approximately $7 million of this year's target, bringing our total savings to $92 million.

Taking all this into account, we believe our 2017 net income and pro forma EBITDA will approach the high end of our original guidance.

As a reminder, our initial net income and EBITDA guidance was $41 million to $48 million and $190 million to $200 million, respectively.

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

As shown on Slide 8, in the first quarter of 2017, we generated $24 million of adjusted free cash flow.

As a result, net debt was reduced by $22 million from year-end.

With the improved operations and other cash initiatives, we are now targeting adjusted free cash flow for 2017 of $90 million to $100 million, an incremental $10 million increase over the prior guidance.

We remain well positioned with $574 million of liquidity, including $345 million of cash, $229 million available under our revolving credit facility.

This strong cash and liquidity position gives us the capacity to make meaningful investments in our business that will allow us to grow and diversify, enhancing our competitive position.

We will focus on deploying this liquidity into investments that drive superior long-term shareholder returns.

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

Thanks, Frank.

From a strategic perspective, we are focused on our 4 pillars of growth, as shown on Page 11.

As we discussed in our Investor Day 6 weeks ago, we laid out our objectives for each of the 4 pillars.

Frank provided an update on the cost transformation pillar.

Now let me provide a few comments on the other 3 pillars.

Specific to market optimization, we continued to cultivate opportunities in markets where we remain underrepresented or have not had a meaningful presence.

The overall goal of our market optimization strategy is to maximize the capabilities of our assets and optimize the product mix for the greatest bottom-line return.

We believe that this strategy allows us not only to optimize our base level volumes, but increase overall cellulose specialty volumes by utilizing the full 485,000 tons of cellulose specialty capacity, a 30,000 ton increase from 2016 levels.

In our commodity segment, we aggressively entered the viscose market with a strong product offering and leading technical service, which is beginning to pay dividends.

In 2017, viscose will play a more meaningful role in our commodity mix than any time in the past, allowing us to maximize profits in the current market environment.

Combined, these cellulose specialties and commodity segment initiatives could generate an excess of $10 million to $15 million of profit, above (inaudible), driven by market conditions within the next 2 to 3 years.

With our focus on market optimization and our continued success in cost transformation, we are very confident in our ability to defend and grow our existing positions by offering customers a value proposition of quality, price, technical service and security of supply that we believe no other competitor can match.

New products will continue to be an ever-increasing focus of Rayonier Advanced Materials.

We are progressing projects with the strongest potential through our stage gate process.

Our focus is on making commercially attractive products that can drive growth in our existing businesses, as well as provide us an entry into other attractive and faster growing segments.

As such, we are accelerating our goal to capture $200 million in revenue by pushing to achieve the target within the next 5 years.

Based on the opportunities on our current pipeline, we hope to generate $20 million to $40 million of incremental EBITDA within the 5-year period.

We have a lot of work to do, but we're pushing hard to achieve this goal.

Within our acquisition pillar, we are actively evaluating opportunities that possess strategic rationale, attractive end markets, strong growth, and most importantly, high returns.

We will pursue acquisitions that meet this criteria and offer significant synergy potential, all at a price that is accretive to our shareholder.

We accelerate our efforts in this area in the second half of last year.

However, we remain disciplined with regards to purchase price, and we will look for other means to drive shareholder value if compelling opportunities do not present themselves in a reasonable timeframe.

We are confident that our 4 strategic pillars position us well for both the near and long-term.

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

(Operator Instructions) Our first question comes from the line of John Babcock with Bank of America Merrill Lynch.

This is John Babcock.

I just want to quickly follow up on that last point you made with regards to acquisitions.

I was wondering if you could talk about whether anything has really changed since the Investor Day back in March, if any interesting opportunities have come across your desk or if there is any sort of update their we should be -- we should know about.

John, nothing we can comment on.

We continued to look and have looked at compelling opportunities, and we will update you and the others as soon as we have something to share.

Okay.

And then with regards to the commodity business, just wondering how you think about that.

I mean it sounds like you guys predominantly target the spot markets.

And I was wondering if you could kind of talk about the pros and cons of targeting more the contract market there, particularly since you now have a machine that's not focusing on specialty cellulose.

I was wondering really like how much -- because it seems like you get a pretty decent EBITDA pick up from contracting more of that business instead of targeting the spot markets, and I just want to get your sense and approach there.

Yes.

So John, first, let me say, I wouldn't characterize what we're doing is targeting the spot markets or focusing on that.

We are looking at a balance between absorbed materials fluff pulp, as well as viscose pulp.

We are continue to watch the markets.

We look ahead in the near future and say is there one that is more attractive at the end than the other, and do we want to shift our waiting to one or the other.

And when we decide to do that, we typically enter into contracts into that segment more than the other segment.

So we're heavily contracted on both sides, but as we commented, we have shifted more of our volume in 2017 towards the viscose market as we saw prices there rise in 2016, putting the profitability ahead of what we look at in the absorbed material side.

So again, to answer your question, we're more focused on the contracted volume.

It's just we're going to go ahead and shift that around as appropriate as we look at more attractive returns against the 2 different segments.

Okay.

And have you talked about how much of that is contracted?

We have not talked about that, but I will tell you it's, of the majority, it's a pretty significant amount.

But we remain -- always keep a little bit of flexibility out there as well.

Okay, appreciate that.

And then next, just recently, one of your largest customers reported earnings and provided some commentary on the acetate tow side of things.

And they mentioned specifically, I guess, that they're seeing some turnover in the first half that could lead to lower volumes during that period.

And while they expect it to recover in the second half, I was just wondering if you could talk about how that might impact Rayonier's order pattern for acetate.

Yes.

So all of our customers, and we talked about this at the beginning of the year.

Most of our -- all of our volume in the cellulose specialty side is contracted out.

So we're usually able to predict our volume levels for the year fairly well, and we've given you that guidance and that guidance is out there.

They're relatively flat year-to-year.

So we don't anticipate any change in our business as a result of what they had indicated.

We have that already baked into our plans going forward.

So I wouldn't expect to see anything.

We talked about a little bit of shift out there in our volume, and we said it's going to be roughly flat or slightly down.

That's mainly due to revenue recognition and not anything on any particular customer.

Okay, great.

And then the last question I had was just also following on some of their commentary.

They talked about how they're seeing some stability, well, not until '17, but potentially expect some stability in 2018.

Given conversations with some of your other customers, I was just wondering if that's something reasonable to expect or if you might be seeing potential signs on the contrary?

Look, I think I would look just more broadly at what we've talked about in the past, which is just the fundamental demand for cigarette tow, and we believe that demand out there is roughly flat, and you can argue it's slightly up or down, but we're going to call it roughly flat.

And so as we look at that, we look at the overall demand for our type of products to be in that same region of roughly flat for that acetate market.

So no, I have no commentary on how '18, '19, '20 looks relative to '17 at this point.

We just say, look, we think the market is fairly steady out there.

And the growth opportunities, we believe, are in the other segments outside of acetate.

Our next question comes from the line of Roger Spitz with Bank of America Merrill Lynch.

So regarding the commodity volumes, I think in the last presentation, in the outlook, it gave the volumes up 10%, and in this slide, in this presentation, it just says higher.

Are you backing off the 10% up volume or you're just going to put it in there?

Yes, Roger, the way we look at the commodity volumes is that 2 things impact that.

One is just a level of CS volumes, which we know were set for the year.

And then the second biggest impact is mix.

And so when we are making viscose and we shift to viscose, we will typically lower the volume a little bit than we would otherwise sell just because it takes longer to make.

So some of what you're seeing in there is some mixed shift as we think about looking forward, and the other impact is as we think about sales timing at the end of the year, the revenue piece of that and when we see things shipping.

So we haven't changed our guidance materially from that, but again, there are just a couple of things that may impact whether or not it's at 10% or slightly lower.

But from a profitability perspective if we're moving the viscose, we're doing that for a reason.

It's because it's better profit today.

Okay.

And my other question was going back to John's question regarding the -- I know your CS volumes are set under contracts.

You know what those volumes are this year, but the (inaudible) guys who are showing -- those are reporters showing down volumes a bit, and do you think they're just taking the volumes beyond their underlying requirements, and that, that might catch up to you later?

Or how do you compare your volumes being flat where a couple of the big customers and other (inaudible) guys are showing down volumes, at least, for the first quarter?

Yes.

I mean, Roger, this is Paul again.

Just look back, and we have certainly adjusted our total volumes a bit from the last -- in the last couple of years, right, where we were up at our full capacity, and we've guided that we're below that in the last year to hanging roughly flat.

Part of that is the acetate impact out there.

And then we guided this year that we've got more other cellulose specialties in our mix this year and less acetate.

So we're adjusting with them.

Keep in mind, a lot of this is being attributed to China and CNTC's plan to reduce inventories and to reduce their inventories.

They're mainly adjusting their import amount.

And as such, it's hurting some of our customers and some of the players out there in the industry.

So that's what you're hearing about, but we have adjusted along with that in the last couple of years, and so you're seeing that show up, of course, in our financials as well.

Is your view that China is still doing some destocking at least in Q1 of '17?

Yes.

We said we think that they're settling out the beginning of this year, and I think our position is that's still what's happening out there.

And again, I think probably the best words I can use is settling out.

I can't say that it's done, and I can't say it's going to continue on much longer, but it's still settling.

Our next question comes from the line of Chip Dillon with Vertical Research Partners.

Paul, as we think about the -- you mentioned the $200 million goal.

I think you said like over 5 years from new products, if I got that, or new markets.

And could you -- I think you mentioned a smaller number, and if you could just repeat that and for what period.

And then would that include, for example, expanding into more of the ethers categories as an example or am I misunderstanding that?

Well, let me just kind of first of all just capture what I did say.

And I just said, look, we're continuing to drive growth and focus in this area.

And we said that our goal is to accelerate what we previously had announced out there and capture $200 million of revenue by pushing that target within the next 5 years.

And that $200 million can come from replacing existing business, as well as growing in some.

So it's -- as you look at our total revenue now, it's taking that total revenue and capturing $200 million of that into new products that don't exist today.

And with that, we hope to generate $20 million to $40 million within that 5 -- of EBITDA within the 5-year period.

So hopefully, that clarifies a little bit.

Yes, yes.

And then just so I also understand, you're sort of suggesting that maybe the commodity part of volumes this year that I think you said were up 10 would maybe be up a little less, assuming you can get a little bit more mix into the specialties.

Is that what I heard you say?

Is that correct?

You actually heard me say, in consuming, we get more mix into viscose.

So again, we are always looking at which of those commodities are going to generate the most incremental profit.

So when we talk about mixed shift in commodities, it's fluff versus viscose.

And so as we see it, we look to go to the markets with our swing volume into the higher value market at that given time, and they're both commodities.

They both move around.

But right now, we've been moving volumes towards viscose, which (inaudible).

I got it.

That's clear.

But are the overall combined fluff viscose volumes supposed to be up about 10% still this year?

They -- it depends on the mix.

So if we're shifting more towards viscose, those will be down a little bit.

Down below our 10% -- yes, down below the 10%, but they'll be above this year's.

I got you, okay.

And it's interesting you say that because we see the fluff prices, if they stick in May, would be up over $100.

I think like $115 since January.

And is it fair to say that not despite that, the viscose improvement is even better at least for you guys?

Yes.

Good observation, Chip.

So that is happening out there about -- from the beginning of the year fluff pulp price is up about 7.5%.

But keep in mind, viscose prices really rose last year quite a bit.

And to John's earlier question, based on that, we shifted over and contracted and worked with customers out there for more viscose volume.

And even today, even with that rise in fluff pulp prices, we're still committed and we have better profitability to where we're sitting today in our mix.

If it shifts around, we may look at that for 2018 and say, "Okay, do we want to contract anything different at that time?" And we'll make that decision later in the year.

I see.

And the last quick question is, as we think about the acetate business and some of the other specialty businesses, I know that there's been a range of dates where you've given us some indication about what the business looks like for '18.

I think you even might have indicated that some of your contracted business might be, I'm not sure if that was for this year or next year, down 2%.

But what -- if you could just review what you have said for 2018, and what you might be able to tell us, whether it's later this year or as late as January?

So we have not given any guidance out on 2018, Chip.

So the 2% that you're referring to is what we've said about acetate pricing this year.

And we started saying that kind of mid last year or earlier last year when we have contracted out at roughly down 2% of acetate pricing for '17.

We haven't given out any guidance on '18.

As you know, those discussions tend to take -- to start in the second half of the year in earnest, and we typically would announce the outcome of that guidance in the January '18 call.

Our next question comes from the line of Steve Chercover with D. A. Davidson.

So my first couple of questions.

One is operational, a couple modeling.

So starting with the operational question.

Just how easy is it to toggle between fluff and commodity viscose on your flexible line, like, is this a changeover that takes hours or days?

Yes.

So we're very fortunate in this regard because we do have assets that we can move in between and experience that we can move in between fluff and viscose, not only on the customer side, but as you indicate, on the operational side.

So it is something that's relatively easy and -- to shift on over, and so it's not a long take of time.

It's not a days type of thing, so I'll just say leave it at that.

It's just a -- it's a relatively short change over.

Great.

And then your tax rate was pretty elevated in Q1.

I was just wondering if you could remind us what the full year tax rate is expected to be.

Yes.

We're expecting the full year tax rate to be now at somewhere in the 36% to 37% range for book purposes.

Obviously, cash purposes will be materially lower.

Okay.

And then on that anti-dilutive earnings calculation, I just want to verify.

It looks like there's an inflection point right around $16 million a quarter or 64 or 65 a year or are we thinking of that the right way?

We'll have to get back to you on that because I haven't looked at the specific inflection point, but we can get back to you, Chip.

Okay.

And one last question, is lignin included in that $200 million 5-year objective?

No, it is not.

Not the LignoTech Florida joint venture.

If we do something else, it would be, but not LignoTech Florida.

Because that's going to be accounted for as a line item, correct?

A line item and we'll -- as we talked last call, we're working through what the disclosure would be in the footnotes on more expanded exposure.

(Operator Instructions) Our next question comes from the line of Paul Quinn with RBC Capital Markets.

Just a question back to this viscose versus fluff.

It sounds like you guys have indicated that you are more profitable right now on viscose than fluff, recognizing that fluff prices are moving up almost on a monthly basis right now.

But what do you think you have better visibility in terms of the long-term pricing outlook between those 2 products?

Good question.

And I think both are difficult to look out past any certain amount of time.

That's why we want to be somewhat flexible with in keeping a foot and a base in both.

As you're well aware, most analysts out there looking at the fluff market for 2017 have predicted it actually going down slightly, kind of flat to down.

And as you just indicated, it's actually moving in the opposite direction.

So even the folks who just track it dead on have a hard time predicting it.

So it's not easy.

That's why I think we just need to stay nimble.

And again, fortunately, we have assets that can do that, and so we'll just continue to monitor it.

And if we think we're at a point where we're going to push our weight to another side, we will do that.

Okay then.

I like your 4-pronged strategy, and you guys have done a really exceptional job on the cost side.

I would say, on the other 3 pillars, not so much.

And just wondering if you can give us some metrics as to on the market optimization, where your mix is right now between acetate?

I mean, we've been talking about diversification in the marketplace for, I guess, as long as I've covered you.

And I think the only data point I've got is like 2013 when you were kind of like 82% acetate.

Can you give us a benchmark sort of mix between acetate, ethers and others at this point, so that we can track how you're progressing on the diversification or optimization?

Yes.

Paul, you're right.

We don't have that detail out there, and the majority of our mix is still sitting in the acetate business.

But as we indicated, as over the last couple of years, that's come down a bit as our customers have experienced pressure on themselves, and so we've adjusted.

We'll have to look into how and if we'd ever want to disclose that differently out there.

At the current time, we decided probably not a value.

But so we're still out there saying that we're over half on the acetate side, but we're gaining certainly on other cellulose specialty area.

And so that's all we have out there at this point in time, but I appreciate the question.

I think, Paul, last quarter -- Paul, I was just going to say, last quarter, Paul pointed to some of the other CS markets, tire, cord and other markets where we've been focused and have seen some opportunities there over the last year.

Yes, no, I recognize that.

And you've got one of the public competitors has had some very strong results here and a global leader in the ether side.

So I'm just -- it'd be just brilliant to be able to track your progress as you diversify, and I struggle with that because you're -- you've signaled to the market that you want to diversify, but you don't seem to want to give us any kind of overall metrics around that.

So I'll leave it to you to figure out.

Last question I had was just on your balance sheet, you've done a great job taking down the debt.

Where does this balance sheet have to get to before debt reduction starts being a priority?

Yes, I think, Paul, we're at a point now where our priorities are investing in growth as much, and so we put the balance sheet in a position to act on the 4 pillars, whether it's investing in our assets through market optimization, investing more in R&D, and then, obviously, the acquisition pillars, we look at that, and we actively evaluate or are actively evaluating opportunities as they come along.

But as we've said before, if we can't find opportunities to reinvest that money in a reasonable timeframe, we'll have to consider other alternatives to drive returns for the shareholders.

Our next question comes from the line of Dan Jacome with Sidoti & Company.

I just wanted to skew the conversation a little bit kind of thinking longer term beyond the core business.

At the Analyst Day, you guys provided a lot of rich detail on how you're thinking about things like acquisition.

And then I think you gave us a lot of details on the lignin as well.

I'm just wondering, keeping in mind it's just been 2 months since Analyst Day, has anything changed on first the lignin on some of the core markets you're targeting.

I think you highlighted construction, ag and feed when you guys spoke with us.

And then for the acquisitions, it seems like that conversation during Analyst Day, there's a lot of talk about maybe the private label tissue and then a part of the more economic side that I'm excited about is the nonwoven.

Has there anything changed?

I know it's been 2 months, but has anything changed there on what you've seen with that regard?

Any new updates for us?

Yes.

So just on the lignin, no, our focus has not changed on that, with our partner, it stays in construction, ag and seed.

So that is the focus of that business.

I will say that, that project, LignoTech Florida, is proceeding right on schedule.

So we're very pleased with the progress on the construction side.

We are still on plan to have that facility up and running mid-2018, so no change in that, whatsoever.

On the acquisition front, Dan, I would tell you that we actively look at opportunities as we see them, both reactively and proactively.

And when we have something to tell people, we will.

But I think that the key is we are focused on those areas that are close to home, that we can find synergies, whether it's in the cellulose or the specialty chemical sector, where we see very strong returns, opportunity for shareholders and real synergy potential to drive through that and grow the business.

So not a lot more -- not a lot has changed that I can talk about.

But I think what I'd tell you is the focus is close to home and finding synergistic opportunities to grow this business.

Our next question comes from the line of John Babcock with Bank of America Merrill Lynch.

Just one quick follow-up.

I was just recalling, is that one of your peers obviously announced that they're planning on adding a little bit more capacity than expected at their facility over in Scandinavia, and I just want to get a sense from you as to where you think that capacity might land.

Yes.

I assume you mean the Norwegians and their announcement.

Look, I can't see where that's going to land, and I don't say that it's anything that we look at this point and say that's of concern.

We compete out there on the global market against them all the time and have for decades.

So no, I think you'd have to ask that question of them, John, and not from me.

We have come to the end of our time for questions.

I'll turn the floor back to Mr. Boynton for any final remarks.

Thank you.

Look, there's no more questions at this time.

I'd like to thank everyone for joining us today.

Look, we're off to a good start for the year.

We remain focused on executing on our strategic pillars and in providing long-term value creation for our stockholders.

We look forward to updating you on your progress -- of our progress in a timely manner as we move forward.

Thank you.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.