Rayonier Advanced Materials Inc (RYAM) 2023 Q1 法說會逐字稿

Good morning, and welcome to the RYAM First Quarter 2023 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time -- as a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Mickey Walsh, Treasurer and Vice President of Investor Relations. Thank you. Mr. Walsh, you may begin.

Thank you, and good morning. Welcome again to RYAM's First Quarter 2023 Earnings Conference Call and Webcast. Joining me on today's call are Del Lyle Bloomquist, our President and Chief Executive Officer; and Marcus Moeltner, our Chief Financial Officer and Senior Vice President of Finance. Our earnings release and presentation materials were issued last evening and are available on our website at ryam.com. I'd like to remind you that in today's presentation, we will include forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Our earnings release as well as our filings with the SEC with some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on Slides 2 and 3 of our presentation material. Today's presentation will also reference certain non-GAAP financial measures as noted on Slide 4 of our presentation. We believe non-GAAP measures should provide useful information for management and investors, but non-GAAP measures should not be considered an alternative to GAAP measures. A reconciliation of these measures to their most directly comparable GAAP financial measures are included on Slides 17 through 25 of our presentation. I'll now turn the call over to De Lyle.

Thank you, Mickey, and good morning. I will start this call with a review of the financial highlights from the quarter before turning the call to Marcus to provide additional details on each business segment and provide an update on our capital structure and liquidity. After Mark's update, I will provide an update on our key 2023 initiatives and guidance before opening up the call for questions. Let's now turn to Slide 5. We started 2023 with continued positive momentum on revenue, EBITDA and cash flow. Revenue increased $115 million or 33% from prior year to $467 million, driven by solid price increases across all our products and overall stronger volumes driven by improved operational productivity. Adjusted EBITDA increased $31 million or 155% versus prior year to $51 million as the price and volume increases more than offset the higher costs. Largest EBITDA gain from prior year was led by our high-purity cellulose segment, which delivered $44 million of adjusted EBITDA, up $28 million or 175% from prior year. Paperboard delivered another solid quarter with $13 million of EBITDA and high-yield pulp contributed an additional $8 million of EBITDA as we realized higher prices in the quarter. Corporate expenses increased $8 million from last year due to $14 million from a prior year period gain of the sale of our Greenford shares. By delivering on these positive results, we remain on track to deliver our $200 million to $215 million of EBITDA for the full year, and we are increasing our free cash flow guidance to $40 million to $55 million. Now I'd like to turn the meeting over to Marcus to take us through the financial details for the quarter.

Thank you, De Lylel. Starting with the high-purity cellulose segment on Slide 6. Sales for the quarter increased $93 million or 33% to $374 million, driven by an 8% increase in sales prices, including an 18% increase in CS prices. Sales volumes increased 27% to 265,000 metric tons due to improved production, a higher mix of commodity sales and enhanced customer contract terms. Sales for the quarter also included $23 million of biomaterial sales, primarily from green energy and lignin. EBITDA for the segment improved $28 million to $44 million. The impact of higher prices and volumes was partially offset by higher chemical and logistics costs, along with the impact of annual maintenance expenses in the prior year. Turning to Slide 7. Paperboard segment sales grew $5 million, an 18% increase in sales prices due to demand for packaging grades, which was partially offset by a 7% decline in sales volumes as a result of sales timing. EBITDA for the segment grew 30% or $3 million to $13 million as the higher sales prices more than offset the lower volumes and increased costs for chemicals and purchased pulp.

Turning to the High Yield Health segment on Slide 8. Sales increased by $20 million from prior year, reflecting a 39% increase in external sales prices and a 43% increase in sales volumes due to stronger demand and improved logistics. Cost increases were primarily related to higher chemicals and logistics. EBITDA for the segment improved $8 million as compared to breakeven in the prior year. Turning to Slide 9. On a consolidated basis, operating income for the first quarter improved $33 million to $17 million. Sales price improvements across each segment and volume increases in HPC and high-yield pulp more than offset $59 million of higher costs for chemicals, purchased pulp and logistics expense, along with the impact of annual maintenance expense in the prior year. EBITDA margins for the quarter were nearly 11%, which is up over 500 basis points from the first quarter of 2022 and essentially flat to the prior quarter.

Turning to Slide 10. Net debt declined to $683 million, a reduction of $72 million from the same period in 2022. We continue to repay debt, including $5 million of senior unsecured notes in the first quarter and $10 million of senior secured notes in April. As we continue to repay debt, we are still preserving strong liquidity. Liquidity ended the quarter at $276 million, including $169 million of cash. We recently purchased trade credit insurance, which will increase liquidity by an additional $36 million. This excess liquidity provides flexibility for our upcoming refinancing activities. Given our recent focus on increased maintenance CapEx to improve reliability, we are now capturing the benefits of the improved production. As a result, we are lowering our CapEx outlook for 2023 to a range of $100 million to $105 million, down from approximately $110 million in our original guidance. While we were able to reduce our maintenance CapEx, we still expect to invest $30 million to $35 million of strategic capital primarily focused on high-return projects, which will provide immediate and incremental benefits to the business. Net leverage ended the quarter at 3.3x, an improvement of 0.7x in the quarter and ahead of our initial expectations. With lower debt and an improving credit metrics, we expect to refinance our 5.5% senior unsecured notes, which mature in June of 2024 at acceptable terms in the coming quarter. We recently engaged Goldman Sachs to help advise us on the best structure for our refinancing, including high-yield notes, syndicated loans and privately placed loans. Our existing cash balances and expected free cash flow will allow us to further reduce gross debt and minimize the impact of higher interest expense. With that, I'd like to turn the call back over to De Lyle.

Thank you, Marcus. Turning to Slide 11. We are making solid progress on our 2023 initiatives. So, $51 million of EBITDA generated in the first quarter, we remain on track to deliver between $200 million to $215 million for the full year. Free cash flow generation was also strong with $36 million achieved in the quarter. $31 million of this free cash flow is generated from working capital initiatives primarily from lower inventory, while CapEx was managed to $21 million with the [Tartas] annual maintenance outage executed in the quarter. As we have realized improved operational reliability, we now expect to reduce maintenance CapEx and increase our free cash flow guidance to $40 million to $65 million in 2023, an increase of $5 million to $10 million from our initial estimate.

The strong quarter financial results helped drive down our net leverage to 3.3x, and we expect further improvement in the second quarter. We increased cash balances to $169 million, while continuing to reduce debt. As Marcus noted, this strong cash balance, coupled with the significantly improved credit metrics will increase our flexibility with the refinancing efforts. The maturity of the senior unsecured notes is coming due in just over a year. Consequently, we are keenly focused on refinancing this debt in the coming quarter. The underlying interest rates have continued to increase with the recent federal reserve actions, but markets are currently open and active. We remain flexible on the type of debt and expect to utilize our strong liquidity position to help minimize the impact to interest expense. Operationally, we remain focused on 2 key areas to drive value. First, we are realizing increased benefits from our investments to improve operational reliability, including increased production and sales volumes and lower unit fixed costs. Our total sales volumes for the HPC business increased 27% from prior year.

While a significant portion of this increase relates to the timing of annual maintenance outages, we are realizing a significant increase in overall operational efficiency. If we normalize for the annual maintenance outages, production volumes increased 8% during the quarter versus prior year, even as we reduced finished goods inventories. We continue to invest in our assets with $21 million of total CapEx spent in the quarter, including $6 million of strategic capital. However, we expect to reduce our normalized CapEx to approximately $90 million, while we continue to execute on $10 million to $15 million of CapEx in 2023. For the full year, we now expect to spend $100 million to $105 million on custodial CapEx with a greater weighting of spend around our annual maintenance outages.

Our 2 largest facilities in Jesup and Temiscaming will complete their annual outages in the second quarter. With demand from some products remain soft, we will continue to operate our assets to match market demand. Second, we are capturing higher value for our products. Our cellulose specialty prices are up 18% from the prior year period, driven by our contractual negotiations in 2023. And we will continue to prioritize value of our cellulose specialty products over volumes. The cellulose specialty market is expected to remain balanced as the new hardware viscose pulp supply coming online will not impact the cellular specialty grades. In the fluff and viscose markets, we captured 6% higher prices from prior year. We also realized 18% increases in paperboard prices and 39% increases in high-yield pulp in the quarter. While prices are expected to decline for commodity products in the coming quarter, paperboard prices are expected to remain elevated but steady volumes.

Turning to Slide 12. We present our progress against our 2023 guidance for EBITDA and free cash flow. Note that waterfall chart reflects the updated guidance for our higher target for free cash flow of $40 million to $65 million. Notably, the significant improvement in free cash flow for the quarter includes $31 million of working capital benefits, offset by $14 million payments made against our France energy liability. As we discussed, our free cash flow will be used to either repay debt and/or invest in attractive strategic projects, which were both accomplished in the first quarter. On Page 13, we provide additional color on each of our businesses. 2023 cellulose specialty prices are expected to increase by high single-digit percentages versus 2022. We Demand for our high-purity business remains mixed, with strength in acetate and many other CS grades offsetting softness in construction ethers and food additives.

Bluff prices are expected to decline, but industry forecasts have raised the price floor versus prior cycles. Viscose prices have stabilized and are expected to increase slightly in the second half. Commodity HPC sales volumes are expected to increase as we realize further productivity gains and ease logistic constraints. Certain input costs are moderating, but we expect these will remain at elevated levels. We continue to make strategic investments in our biomaterials business, which we believe will provide incremental growth for the company. The bioethanol plant in Tartas remains on track to begin production in the first half of 2024. And -- the second-generation ethanol produced at this facility is expected to provide a $9 million to $11 million annual EBITDA benefit to the company. In paperboard, prices are expected to moderate slightly over the balance of the year but remain elevated as compared to 2022 levels. Volumes are expected to remain steady, while raw material prices will decline due to lower pulp purchase prices. In high-yield pulp prices are expected to be impacted by both a global economic slowdown and new capacity coming into the market. Sales volumes are expected to improve slightly with ease logistics and higher productivity.

Corporate expenses are expected to be higher than 2022 due to expenses associated with the ERP implementation and 2022 FX benefits that are not expected to repeat in 2023. We Overall, we expect EBITDA for the second quarter to be in the low $40 million range due to our planned maintenance outages at our 2 largest facilities, a slower-than-anticipated restart from the Tartas outage and the calendarization of some customer annual outages. We believe that we remain on track to deliver the $200 million to $215 million of EBITDA for the full year. Turning to Slide 14, we depict the progression of our EBITDA margin growth and our net leverage decline. Margins are expected to continue to improve towards the 11% to 12% range for the full year as we capture both the improved value from our products, realize operational efficiencies and reduce costs. Net leverage is expected to hold relatively steady for the full year, including a slight benefit for the second quarter as we drive our target net leverage ratio of 2.5x over the next 3 to 5 years. With that, operator, please open the call to questions.

Thank you. We will now be conducting a question-and-answer session. One moment, please, will we pull for questions. Thank you. (Operator Instructions) Our first question comes from George Staphos with Bank of America.

I guess the first question I had, you mentioned -- I think it was a $7 million or $8 million impact from sales timing and paperboard, as I recall. Can you talk about what that was? And do you -- I presume, get that benefit in 2Q? And then relatedly, Marcus and Delisle, you talked about a low $40 million in EBITDA for the quarter. One of the things you mentioned, I think, was a slower start-up in Tartas, if I heard correctly. Can you go through the other factors there and the cadence we should expect in earnings 1Q to 2Q across the segments towards that low 40% EBITDA range.

Good morning Georg this is Del Lyle-- the first question on the paperboard and the lower sales in the first quarter of $7 million to $8 million. It's probably a story you've heard many times from -- on a number of calls, which is really around destocking of our… And we expect that destocking is probably going to wane as we go further into Q2. And then we believe that we'll start seeing some growth picking up around historical levels as we get into the second half.

Okay. Is it fair -- sorry about that -- is it fair that you get some of that back in 2Q sequentially versus 1Q in terms of your projections? Or you're not assuming that in terms of how you build up to the 40 -- the low 40s, excuse me.

We're expecting yet that we're going to have a little bit of a pickup in Q2 versus Q1. But again, I would say, I don't think the hope that destocking thing has played self completely out. So, we're going to see a little bit of that in Q2. But we'll see an uptick, we believe, in volume versus relative to Q1. And then you'll start seeing stronger volumes in the second half. Okay. And broadly, just in terms of the cadence, 1Q to 2Q or trends we should expect sequentially across the segments if we've already covered paperboard, the other segments would be great.

Yes. High yield, and again, the same type of impact that we saw with paperboard some destocking, but also, I think there were some demand issues, principally in China, the first part of the first quarter. So, the first quarter was quite light, -- we do expect that the volumes will pick up in Q2 for the same reasons I outlined for paperboard. And then going forward, again, we think that we'll be able to fill out our capacity and sell our production for the rest of the year.

And George, just on high yield, as you know, BEK is trading down in paper pulp. So high yield does follow that pricing cadence -- so expect sequential price erosion.

Yes. And then on CS volume, again, Q1 was actually a halfway decent quarter for us. Again, acetate was very robust for us as well as some other specialty applications around filtration and casings and nitrocellulose. Q2 will be light because we're taking down 2 of our plants, including JEE, the largest facility that we make or see us from. So that will be light in Q2. And then I'll pick back up to close to what we were experienced in Q1 for Q3 and Q4. With respect to the commodity high purity business, and this is relating to viscose and our fluff. Again, Q2 will be lower than Q1. And then you'll see a little bit of a pickup, but we're going to see a sales mix change, we believe, in the second half as we see increased demands in the ether business around construction activity improving in the second half in Europe as we see increase in demand in some of the other specialty grades, we're actually going to lower our production in our sales volumes on the commodity side to make room for -- or make proven our production wheel for these higher-value products.

Understood. And you already kind of covered this. I'll turn it over after this one. Can you -- I know it's difficult to talk about pricing expectations on a call, but what's embedded directionally, qualitatively, however you want to provide it, in terms of your commodity businesses, whether it's fluff, viscose or high yield because you mentioned it, I mean, prices for the commodity grades, hardwood at China has dropped over $300 a ton. How does that sort of filter into your guidance for the year?

Yes. And I'll give a primarily qualitative guidance on that. If I start with the high yield, we expect it to go down and fairly substantially as you [alluded], I mean, the pricing coming out of Q1 was -- we're expecting on average that our pricing will be in the mid-600s for on average for Q2. And you got to remember that our sales is has got a 1-month lag roughly there picking up some of the sales pricing in Q1. And then we see it dropping further through Q3 roughly, let's say, 10%. And then you get to Q4, we see it leveling and actually increasing as we think that the market demand in China will pick up and support prices a little bit.

In paperboard, again, we think [paperboard] is going to be relatively static. We had mentioned in the last earnings call that roughly 2/3 of our business there is under contract. We are seeing some softness on the spot business that we have there. So, we expect that pricing will decline relative to what we experienced in Q1 in the second half. But what's offsetting that, and this is important to note is that our paperware business will benefit from the lower pulp prices. And so, we expect that the earnings potential for that business will continue to be strong.

On the cellulose business, the CS side of it is very strong. As we've noted it, we expect the pricing in '23 to be up relative to '22 and will stay strong in the high single digits throughout the year. On the commodity business, we expect that the low point on pricing around the fluff and around the viscose will probably be before we start seeing food pricing stabilize and start to improve into Q4.

Thank you. (Operator Instructions) Our next question comes from Paul Quinn with RBC Capital Markets.

You referenced holistic refinancing in your press release. Just wondering what that means to you and whether you're looking for in the refinancing any component of equity.

Paul, this is De Lyle. I'll get right to the first -- the second part of your question, which is that we're looking at using equity. The answer is absolutely not. That is not something that we're interested in doing. We believe that the markets are open and given our improved credit metrics, we believe that we'll be able to find debt at a reasonable price, obviously, in a market that is at a higher level than we were just 3 months ago. But our tack here is that because of our recruited credit metrics, and we -- as a result of where we are, we actually believe that our credit metrics are indicative of a B credit. And as a consequence, we're going to be looking at all kinds of different debt structures, whether it's high yield, looking at syndicated loans or whether it's privately placed loans. But through -- because we have those options, we'll be able -- we strongly believe that we'll be able to refinance this debt with debt.

And Paul, to your comment on holistic. Again, as you know, we've been consciously operating our business currently with a higher cash balance such that we have flexibility as we approach this refinancing to stay committed to -- our messaging has been, we're going to look to resize the next refinancing, so we can manage the interest rate environment that we're in. So, I think it's something smaller on the [refi].

Right. I think the thing to note is that given the amount of cash we have, but more importantly, the capacity on our ABL, we probably have $70 million on the balance sheet that we can use to right to downsize the debt offering or use it as other way -- other ways to get to a proper conclusion here. So, we believe we have sufficient liquidity, a much better credit position than we had even just 3 months ago.

Okay. So that assumes that you'll do the refinancing somewhere around $250 million?

Well, I don't -- again, I'm not going to commit to what level. But directionally, if that's what's needed to go out and refinance at a lower level to downsize it, that is certainly one of the options we will consider.

Okay. I get it. Just turning over to high yield, and I really appreciate all the color on your specific end markets, but high yield looks particularly difficult here. Just wondering when the decision to scale back production at Temiscaming and just basically run the operation for the paperboard. Is that to close in Q2?

And you raised a very hard questions. But obviously, if pricing that we realize gets down to our cash variable cost, we will look to reduce our production, maybe shut down a line or 2. As you know, in Temiscaming, we have 2 lines of high yield. But one of those lines we can assume that feeds our paperboard business, right? So, we'll probably keep one line open to continue to see paperboard business and shut the other line down if we find that pricing gets down near or below our variable costs.

Got it. Thanks for that color (inaudible).

Thanks you. Our next question comes from George Staphos with Bank of America.

A couple for me to finish up here. So, I mean, to the extent that you've been obviously talking with customers and the like, as you normally would, but certainly given the market volatility. What are you finding in terms of customers' expectations for usage of your products and maybe whether that's improving over time? Are you getting any benefit? I mean, the pulp companies all frequently talk about this. I'm not sure how direct it affects business near term, but plastic to fiber substitution, anything that you're seeing that's changed in the last quarter in terms of the outlook for demand. That's number one. Number two, can you tell me a little bit about what this credit insurance purchase means what flexibility it gives you? Why did you have to do it? And then I have a couple follow-ons.

Okay. With respect to the call the sustainability demand story and whether we've heard any changes on that, replacing fossil fuel-based products with fiber-based products. I would say that the story has only strengthened, particularly around bioenergy as the world and particularly the United States and Europe moves away from fossil fuels and towards more sustainable fuel sources. And we believe, again, we're well positioned with that and are getting into that arena with bioethanol. And the -- so we think that story is only strengthening. Now -- is that going to translate into more sales in 2023, maybe particularly around acetate plastics and some of the other applications around that with our customers at [Eastman] and also with some pull-through from other customers who are developing those type of products. But I think you're going to really start seeing the impact in '24, particularly when we're bringing the bioethanol plant on in Tartas. The second question...

I can take that, George. So, the trade credit insurance effectively expands our advance rates on receivables for foreign customers. So, with that trade credit insurance, I think of an expansion of $35 million to $40 million in our ABL on a comparable basis to where we ended this quarter.

I see, I see. And then 2 last questions for me. First of all, on the bioethanol projects and I think the $9 million to $11 million you're expecting to generate, how sensitive is that to overall levels of energy pricing. So, to the extent that Okay. We are in -- whether it's a global slowdown or recession, what have you, we are generally seeing energy prices coming under some pressure, does that affect at all your return on that project is the 9% to 11% move down a couple of million dollars on some energy price scenario that's lower or higher? Or is it relatively unaffected by the energy outlook? And then just can you sort of update us on what -- to the extent it has any impact, the increase that we're seeing in capacity, recognizing it's mostly paper-grade hardwood, but you are seeing project swing projects in dissolving whether you're seeing any encroachment into any of your markets from this new capacity.

All right. Thank you. Yes, George, with respect to the bioethanol business, -- the first off is we got a 5-year contract with a multinational major corporation to buy our bioethanol essentially on a take-or-pay basis. The second point to make on the bioethanol plant is that it's making a second-generation bioethanol. What that means is that it's the bioethanol is being produced from a nonfood source. And this is actually mandated. The use of this is actually mandated by the EU. And so, when you see -- you look at the pricing of second-generation bioethanol, it's at a significant premium relative to what I would call generation 1 bioethanol. And in fact, the pricing is relatively stable, if not increasing. -- as the mandates get tighter and tighter. So, we still think that the business [Bill] will continue to generate the $9 million to $11 million of EBITDA on an annualized basis -- what was the second part of your question?

Yes. Sorry about that. The other is just hey, listen, there's lots of capacity coming in. Yes, it's mostly paper grade, but you do have a fair amount of swing dissolving hardwood capacity. Does any of that start to encroach on your markets? And that's all I had.

Yes. We're not foreseeing that, George. We don't think that we're going to see any of that swing capacity come over into a market that where we are looking to gain the best value for our products. And it really comes down to the fact that the products we make are very customized and are actually very technically difficult to make. And so it's just not a matter of saying, "Hey, I want to be in the acetate market and the acetate plastic market, and I'm going to move it from paper pulp up to that -- into that business and that product in production just because I don't think the knowledge and the capability is there.

George, maybe just to highlight, as you know, Viscose I think of 5% of our enterprise sales, so small in comparison. And we differentiate ourselves on softwood versus this hardwood capacity as well. Very good, guys. And good luck in the quarter. Thank you...

There are no further questions at this time. I would like to turn the floor back over to President and CEO, to De Lyle Bloomquist, for closing comments.

Well, thank you all for your time today. As noted, we started the year on the right path to achieving our strategic and our financial goals. I am proud of all of our efforts within the company and confident that we will continue to improve our profitability and reduce our leverage. And I look forward to our next update coming in August. So, between here and then, if there's any questions, feel free to reach out to us.

Thank you this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.