Rayonier Advanced Materials Inc (RYAM) 2021 Q3 法說會逐字稿

Good morning, and welcome to the Rayonier Advanced Materials Third Quarter 2021 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, Mr. Mickey Walsh, Treasurer and Vice President of Investor Relations for Rayonier Advanced Materials. Thank you. Mr. Walsh, you may begin.

Thank you, operator, and good morning, everyone. Welcome again to Rayonier Advanced Materials Third Quarter 2021 Earnings Conference Call and Webcast. Joining me on today's call are Paul Boynton, our President and Chief Executive Officer; and Marcus Moeltner, our Chief Financial Officer and Senior Vice President of Finance. Our earnings release and presentation materials were issued last evening and are available on our website at rayonieram.com.

I'd like to remind you that in today's presentation, we will include forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Our earnings release as well as our filings with the SEC list some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on Slides 2 and 3 of our presentation material.

Today's presentation will also reference certain non-GAAP financial measures as noted on Slide 4 of our presentation. We believe non-GAAP financial measures provide useful information for management and investors, but non-GAAP measures should not be considered an alternative to GAAP measures. A reconciliation of these measures to their most directly comparable GAAP financial measures are included on Slides 18 through 23 of our presentation.

I would now like to turn the call over to Paul.

Thank you, Mickey, and good morning, everyone. Today, I would like to hit some of the highlights for the quarter before turning the call over to Marcus to review the detailed financials. After Marcus' update, I will discuss our strategic outlook for the business.

Starting on Slide 5. EBITDA from continuing operations improved by $3 million from prior year to $35 million, driven by continued momentum in commodity product prices, including high-yield, viscose and fluff pulps as well as solid demand for cellulose specialties.

In addition to the improved financial results, we have executed on several key strategic initiatives. On August 28, we successfully closed the sale of our lumber and newsprint assets for approximately $232 million including $185 million in cash, with the remainder consisting primarily of shares of GreenFirst Forest Products. Additionally, year-to-date, we captured $192 million of EBITDA from these businesses prior to the sale.

The company also repaid over $150 million of debt, including $127 million of its senior notes due in 2024 and $25 million of the senior secured notes. We also significantly increased cash on the balance sheet. This cash, along with future cash flow, driven by the announced price increases for cellulose specialties as well as cash returns from our investments in reliability, cost reduction and new bio products, will provide a catalyst to grow EBITDA margins, further rightsize our balance sheet and drive value to our shareholders.

I'll provide a further perspective on our current markets as well as on our longer-term strategy shortly.

Now I'll ask Marcus to take us through the financial details for the quarter. Marcus?

Thank you, Paul.

Starting with High Purity Cellulose on Slide 6. Third quarter sales increased $35 million or 14% to $288 million driven by a 14% increase in sales prices, offset by a slight 2% decline in sales volumes. As expected, CS prices were down from prior year per contract negotiations from late 2020, while the higher commodity prices drove the combined increase. Overall, sales volumes remained nearly flat at 225,000 metric tons with a stronger mix of CS sales volumes. CS sales volumes remain very strong driven by demand across almost all end markets, including food, pharma, casings, construction, automotive filtration and tire cord and acetate bioplastics.

Commodity volumes declined by a more favorable mix shift towards CS, which has lower production yields, a reliability issue with our lime kiln at Jesup facility and continued logistic challenges, specifically for oceangoing sales. Overall, EBITDA for the segment declined $4 million to $32 million. Costs were impacted by significant inflation in key input materials, higher logistics expense related to trucking and ocean freight as well as higher maintenance costs and production downtime related to the reliability issue in Jesup. This resulted in lower production of approximately 10,000 tons.

Turning to Slide 7. Paperboard segment sales improved $5 million, driven by a 13% increase in sales price, resulting from strong demand for our 3-ply Kallima brand partially driven by competitor supply constraints, offset by logistic challenges. EBITDA for the segment declined $1 million to $6 million as the sales price increases were more than offset by higher raw material pulp and cost inflation in the operation.

Turning to our high-yield pulp segment on Slide 8. Sales increased $12 million from prior year to $42 million, driven by a 27% improvement in sales price and a 12% improvement in volumes. EBITDA for the segment grew $6 million to $9 million as sales improvements were partially offset by higher operational costs and the impact of logistic challenges.

Turning to Slide 9 on a consolidated basis. Operating income from continuing operations improved $4 million from prior year. The company experienced price increases across all segments and volume improvements driven by mix improvement in high-purity sales. Costs were significantly impacted by higher inflation costs, particularly with respect to chemicals, wood fiber and energy as well as reliability and maintenance costs in our high-purity segment. Higher raw material costs in paperboard and overall higher logistic costs also impacted results. Additionally, corporate and SG&A costs improved $5 million, primarily driven by favorable FX.

With the sale of the lumber and newsprint, the company credit profile has improved. We ended the quarter with $279 million of cash and liquidity of $373 million, including availability on our ABL and the French factoring facility. In early October, we repaid a further $25 million of senior secured notes, and we still expect $29 million of tax refunds by the end of 2022. With the sale of the lumber and newsprint assets, we also have 28 million shares of GreenFirst Forest Products valued at approximately $34 million as of the end of the quarter, and the rights to $112 million of softwood lumber duties.

Given uncertainty related to inflation and logistics, along with significant amount of investment opportunities, we are currently carrying higher cash balances for the short-term. Overall, we remain well positioned to prudently invest in our assets and generate greater margins.

With that, I'd now like to turn the call back over to Paul.

Thank you, Marcus. As noted on Page 10, we are seeing the dynamics of uncertain markets. First, commodity benchmark prices are moderating in some of our key segments, specifically BEK or bleached eucalyptus kraft pulp, a proxy for our high-yield pulp business has fallen sharply driven by the decreased demand from China amid the governmental policy to reduce energy and emissions output.

Viscose pulp prices have also receded recently although prices remained significantly higher than the prior year. The strength of the viscose market rebounding significantly off the lows of 2020 provides a strong backdrop for our 2022 cellulose specialties price negotiations.

Meanwhile, fluff and paperboard indices have remained resilient with sequential increases from the second quarter into the third quarter, which should provide higher fourth quarter prices for these products, given the pricing lag we experienced relative to these indices.

Turning to Page 11. We see demand for our cellulose specialty products strengthening across almost all end markets, including food and pharma, casings, construction, automotive filtration and tire cord and acetate bioplastic end markets. Interestingly, prices for cotton lint in Asia, a competitive substitute product for many of our cellulose specialty grades, have also increased substantially from 2020, creating additional interest in our product offerings. We have seen supply disruptions with some of our high-purity industry competitors, leaving many of our customers looking for us -- to us as a backstop, given the size, scale and redundancy advantages of our 5 cellulose specialties manufacturing lines.

We are fulfilling agreed demand with customers but given our extended outages at Jesup in both 2021 and 2022, we are not able to accommodate most requests for incremental volume for the balance of the year and well into 2022. We, like all producers, are also seeing a significant rise in input costs and challenges in our supply chain. So with all these dynamics, strong demand, restricted supply and escalating input costs, we expect significant price increases for the majority of our cellulose specialties in 2022. Overall, we are focused on protecting or improving margins in our CS business for the coming year.

In our paperboard segment, we're also seeing stronger demand from the return of the commercial print market, along with ongoing strength in the packaging market. This demand, in addition to the continued industry supply disruptions, are driving prices higher. Our unique 3-ply Kallima brand paperboard continues to grow in share in higher end markets as customers value the comparable surface area to weight ratio of our offerings. With raw material costs shrinking as pulp prices decline, we expect expanded margins for this segment in the coming quarter.

In high-yield pulp, we expect to recognize lower prices in the fourth quarter due to the lower demand for pulp from China and increased supply from the South American mills, while costs are expected to increase and logistic challenges are likely to persist.

So now let's take a longer view on our strategic outlook for the business. With the sale of lumber and newsprint businesses complete, we target to drive both improved costs and margins through our core businesses.

Turning to Slide 12. Year-to-date EBITDA margins are roughly 10%. For a capital-intensive business such as our high-purity cellulose operations, we would expect to generate EBITDA margins at a much higher level than our current conditions have allowed. Given our specialized asset base, unique product offerings, security of supply and technical leadership, we aim to improve our cost position and generate at least 20% EBITDA margins in this business.

To achieve this goal, we have developed a plan focused on a few key initiatives. First, we've already discussed price improvements for our cellulose specialty products. With the majority of our cellulose specialty contracts open for negotiation in 2022, we expect to capture significant price increases for these products in the next year. Additionally, we expect to utilize a significant portion of the proceeds from our asset sale to invest in and improve reliability and drive costs down at our 4 high-purity cellulose facilities.

In 2022, we expect to spend approximately $100 million on custodial capital expenditures. However, with inflationary pressures on the cost of materials and challenges with labor availability, we will appropriately modulate CapEx on a real-time basis. We know that having reliable assets, lower costs increases sales volumes and drives efficiencies. As such, we have planned extended outages at 3 of our 4 facilities in the first half of next year, with a focus on improving reliability.

Beyond investments in reliability, we also expect to increase our strategic investments in 2022. We are currently evaluating approximately $50 million of high-return projects for next year, including Green Bioenergy, cost reduction and productivity enhancement initiatives. We've had success with these types of strategic investments, including the recent $15 million investment in green energy at our Tartas, France facility. This investment went online in the second quarter and is expected to generate $10 million of incremental earnings annually.

Another potential project in Tartas that is part of our green energy BioFuture currently under evaluation is the production of bioethanol, a high demand additive to gasoline required in Europe as consumers and governments seek to use greater natural energy to power vehicles and industry. These investments provide returns well above the company's cost of capital and will drive incremental margins over the medium term.

Lastly, we'll continue to increase our investment in R&D and innovation-driven projects. An example includes our investment in TemSilk, a product used in the production of lyocell, a natural fiber produced in an environmentally friendly method. This year, our R&D team, working with innovation trend experts, has identified areas for accelerated natural cellulose and biomaterials growth. We will be sharing more details of these focused initiatives over time. But 2 of the most immediate initiatives, however, are in bioplastics and prebiotics.

In bioplastics, we are looking at a broad set of opportunities to replace petrochemicals in many applications, including single-use plastics. We are currently working in collaboration with several leading global research universities as well as current customers and new commercial partners to capitalize on this opportunity. In prebiotics, we have partnered with the State of Georgia Center for Innovation at the University of Georgia and the Saunders Research Institute to develop nutritional supplements for the poultry industry.

Additionally, we will be looking at other growth opportunities outside of our core R&D and process expertise, but closely related to our strengths. An example is our investment in Anomera Incorporated, which has led us into the emerging opportunity for carboxylated nanocellulose with performance-enhancing attributes for cosmetics, paints, coatings and concrete. Anomera is ramping up the production in its newly constructed Temiscaming plant and is looking to capture near-term sales in the cosmetics segments through its distribution agreement with Croda, one of the world's leading cosmetic and personal care formulators.

As global demand for more environmentally friendly products continues to evolve, we are working to offer solutions from both our existing natural products as well as developing new offerings to meet growing needs. Combined, we expect these actions to drive significantly higher EBITDA to provide positive returns for our investors. As we previously have stated, our goal is to reduce net debt 2.5x EBITDA.

Turning to Slide 13. Our net debt stands at $676 million as of the end of the quarter, including $279 million of cash. Our near-term goal is to drive this towards $625 million with cash tax refunds and proceeds from the GreenFirst shares. With our targeted margin growth and right-sized balance sheet, our goal of 2.5x leverage is within range over the next 3 to 5 years.

And finally, turning to Slide 14. Our reputation as a market leader in cellulose specialties with differentiated commodities within fluff and viscose markets positions us well for the future. We have diverse biorefinery assets and redundancy that allows us to service all of the cellulose specialty market segments while providing security of supply to our customers and offers tremendous growth opportunities into the future.

The security of supply has come into play recently as many of our customers were able to rely on us to meet the strength of their markets. A strong cash position allows us to invest in reliability and cost reduction, strategic projects and leading R&D platforms as we work with new and existing customers to develop natural-based solutions which will further broaden our offerings into our BioFuture.

We have a proven track record in controlling costs and managing cash to drive stronger liquidity and a more stable balance sheet. We look forward to executing on our plan to invest prudently to expand EBITDA margins, and we're excited about the BioFuture of the company.

With that, operator, please open up the call to questions.

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

I guess, first of all, just on the cost side, how are you thinking about the cost pressures across energy, wood, chemicals and logistics for the balance of 2021 and into 2022?

John, I'll turn that over to Marcus.

Yes, as you saw in our bridge on Page 9, we were indicating that inflationary pressures were accelerating through the year. And you can see on the bridge close to $50 million in costs. There's certainly some impacts of the Jesup impact in there. And as you know, pulp for -- the pulp cost for paperboard is really transitory as that will come down in price. But we certainly saw inflation on chemicals, wood and energy, a slight amount on logistics as well. And I would say on an annualized basis, we're in the high single digits for inflationary pressures. And our lens, assuming these conditions remain, the same type of percentage increase next year.

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

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

And John, this issue, and Marcus mentioned in his prepared comments, lime kiln, it's run very reliable -- reliably for us for the last 10 years. We didn't expect it. We're going to go ahead and make some changes to it at the upcoming shutdown to make sure that, that doesn't reoccur. But as we also noted, we've got 3 of our 4 facilities with the shutdowns in the first half of 2022. And our goal, of course, is to focus in on reliability and particularly our operational efficiencies, and we can improve upon it, in particularly in the areas of our evaporators in each of our facilities. So we'll be doing a lot of focus on reliability in early 2022 to help improve our overall throughput and production rates.

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

That's a bit high, John. Again. you're probably assuming some lost sales. We would just quantify the fixed cost absorption impact.

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

Yes. So our shutdown schedule again is front-end loaded next year. So first out of the gate will be Jesup up in February. And that's 14 days, except it's extended for the #5 recovery boiler there. So it will extend in the 50 days on that boiler vessel. And that's the reason we built inventories consciously here in anticipation of that. Fernandina is a 20-day outage in March. That's followed by Temiscaming, another 30 days in May. And as Paul mentioned, again, our focus there is on reliability. At Fernandina, it's working on the recovery boiler again. And in Temiscaming, it's the #10 power boiler, the economizer that we're focused on. And Tartas is in the back end of the year in October for 14 days. Remember, it's on an 18-month cycle.

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

Yes. So look, as we came out and discussed and put out there in a release earlier, we're targeting price increases, 15% to 30% minimum. But that's on contracted where contracts allowed. So we said that that's the majority. So we're going out. We're having those discussions now. A lot of it is focused around our raw material cost increases. Marcus just shared what we think those are for us this year and next year. We share that with our customers.

And John, we went out there as early as the June time frame and started talking to our customers because we don't want this to be a burden on them. We want them to have the communication with their customers about this should be a pass-through all the way that we're all going to experience this. And those conversations have actually been very productive. And so we feel confident that we're going to get these increases.

And again, I said I'm pointedly on the majority. So that means we have also a minority that probably would be a sign is just because the contracts won't allow that. But overall, we feel good about the conversations. And we feel good that our customers are able to pass that on to their customers as well, because we know that they're having that dialogue. And again, we gave them plenty heads up, and that's important to us because this is not just shifting it to our customers. It's really kind of sharing the load across the supply chain.

Our next question comes from the line of Paul Quinn with RBC Capital Markets.

Just trying to understand the price increase on the cellulose specialties business. What percentage of your contracts are up for price negotiation this year?

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

Okay. And then just not beating it to death, but the one-off on the lime kiln for the quarter, if I'm looking at that 10,000 tons on fixed cost absorption plus, probably what you bought on fresh lime. I'm somewhere in the $5 million range hit for the quarter that shouldn't repeat next quarter. Is that in line?

More in the range, I'd say, Paul.

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

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

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

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

You're talking on paperboard or back to CS?

Paperboard, yes. Sorry to confuse you, paperboard.

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

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

Okay. And then just lastly on your GreenFirst shares. So just maybe you can share your forecast on lumber prices or the value of GreenFirst shares going forward. Do you see that being something you're going to monetize in the short-term or in the long-term? How should we look at that?

Yes, Paul. So as you know, you follow the market well. As we closed in August, prices dropped pretty sharply in September. But I think they've recovered pretty nicely. Everything that I'm looking at as a reference points to a favorable market looking ahead. So we'll certainly stay close to that situation. We have the 6-month views on our shares. And certainly, we'll get smart on how to best monetize that position when the time is right. But I think the fundamentals for lumber is still very, very positive.

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

So for those turnaround maintenance outages in 2022, can you give us some -- any guidance or steer on what is the full year EBITDA impact, if any, from those outages?

So again, Roger, we -- as you know, we amortized these costs over the periods. So it tends to smooth those out. So on a yearly basis, you always have maintenance costs in your P&L. But we don't give specific guidance on those exact amounts.

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

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

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

That would be a combination of anything, custodial and strategic.

Okay. And any steer for 2022 now that you're out of a number? I know that's not a big CapEx number.

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

Got it. Sorry, I missed that. And then lastly, in the press release, you talked about related to the lumber sales, some cash outflows, de minimis, maybe $3 million to $4 million, including tax adjustments, et cetera, of $1 million, I guess. Do those all show up in Q4? Or are they in Q1 next year? Or when might those hit your cash flow statement?

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

(Operator Instructions) Our next question comes from the line of Paretosh Misra with Berenberg.

Just wanted to go back to that 15%, 30% price increase that you announced a couple of months ago. So is that your asking price for that 50% plus volumes in CS that are up for repricing next year? Or those are not the same things?

Paretosh, I make sure I understand your question. Let me answer the question how I think your median answer if I don't answer, just correct me. But Paretosh, we have the majority of our volume and think of 50% plus that is open for price discussions. And in that, we are depending on the grade and as those contracts allow are having conversations around the minimum of 15% to 30% type of range of moving pricing up. So you have the balance of that. So the minority of that, that there is either price caps or there is no price allowed to move. And again, we're still having dialogue with those customers.

But if that answers your question, hopefully, it does. And again, I know it's a little bit difficult to model. We're in the middle of all those discussions right now. But I can say that they've been very productive, because we started having these discussions in the second quarter and letting customers know that we're seeing a lot of inflation, and we can't be trapped with it.

So our goal is, as noted, that we want to mitigate the impact of inflation on our business. And if we can, obviously, in these type of markets where demand is tight is actually improved on those margins. So that's what we're out there trying to do is, again, we can't take the load of this on our backs. And so we've asked our customers to work with us and to work with their customers to distribute this across the supply chain.

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

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

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

Yes, sure. So 2 different stories here. One, the reception for our products has been very positive. We've been working with all the key customers out there. They like our product. It's qualified. So we're -- we feel good about it. We're ready to go. I think the second part of that story is that market, the market for lyocell, has been fairly muted through these COVID times. And so I think everybody on our customer side of the equation is really waiting for the market rebound to happen here and for that to take hold.

There's no one that's backed off of the potential for that to be an incremental 500,000 tons in the next 3 to 5 years. But we've yet to see that happen. And the good news is we're in very good position to take advantage of that market when it's ready to go. And that's what we wanted to do. We want to be -- make sure we're in a position, and we are and we could be there to support our customers when their markets develop.

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

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

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

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

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