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Rayonier Advanced Materials Inc. (NYSE:RYAM) Q4 2023 Earnings Call Transcript

Rayonier Advanced Materials Inc. (NYSE:RYAM) Q4 2023 Earnings Call Transcript February 28, 2024

Rayonier Advanced Materials Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the RYAM Fourth Quarter and Full Year 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.

Mickey Walsh: Thank you. Good morning. Welcome again to RYAM's fourth quarter and full year 2023 earnings conference call and webcast. Joining me on today's call are De 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 Web site at 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 lists some of the factors which may cause actual results to differ materially from the forward-looking statements we may make.

They are also referenced on slide two of our presentation materials. Today's presentation will also reference certain non-GAAP financial measures, as noted on slide three of our presentation. We believe non-GAAP 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 slide 19 through slide 24 of our presentation. With that, like to turn the call over to De Lyle.

De Lyle Bloomquist: Well, thank you, Mickey and good morning. I'll begin with a financial overview for the fourth quarter of the full year 2023. Following that, I'll discuss recent company actions before handing over to Marcus for additional details on the business segments in our capital structure and liquidity. After Marcus's update, I will returned to offer further insights into our 2024 initiatives and guidance, including an update on the sales process for the Paperboard and high-yield pulp business, before opening the call for questions. Let's now turn to Slide 4 to review our performance in the fourth quarter and the full year of 2023. The results for both periods fell below expectations with EBITDA of $37 million for the fourth quarter and $130 million for the full year, reflecting declines of $18 million and $38 million versus 2022, respectively.

The fourth quarter shortfall can be attributed to weaker-than-expected demand for Paperboard, while the full year results were impacted by persistent weak demand across various product categories, notwithstanding the strong pricing observed in our CS segment. Despite the challenges stemming from the weak Paperboard results in Q4, I was encouraged by the rebound observed in our core Cellulose Specialty business. This was principally the result of increased market share accruing to us as a result of the closure of a competitor. As we noted on our previous calls, we focused our efforts on free cash flow generation in the second half of 2023, given these macro headwinds. These efforts resulted in $53 million of free cash flow, which was largely driven by a $93 million benefit in working capital.

We expect to maintain this benefit in 2024, and we think we can realize an additional $15 million in working capital monetization this year. The challenges encountered in our high-purity Cellulose Segments stem mainly from declining commodity pricing and decreased volumes in Cellulose Specialties, particularly in markets that are interest rate sensitive, like the construction ethers markets. Conversely, our Cellulose Specialty products maintained strong pricing, realizing 11% increase compared to 2022. This result reflects our focus on prioritizing value over volume for our specialized products. In the Paperboard segment, EBITDA decreased by $1 million compared to 2022, primarily due to lower sales volumes from customer destocking, partially offset by decreased purchase pulp, maintenance and logistics costs, along with market-driven downtime taken in response to the weak market conditions.

High-yield pulp EBITDA decreased by $20 million versus 2022, driven by lower sales volumes and prices amid weak market demand, increased wood cost and market-driven downtime taking in response to the weak market conditions. Corporate segment EBITDA declined by $11 million, primarily due to less favorable foreign exchange rates and discounting and financing fees incurred to support working capital enhancements. Next, I would like to offer some high-level commentary on a few significant events that occurred in the fourth quarter, each of which will be elaborated on by Marcus. First, the finance team secured a covenant amendment for our 2027 term loan facility. In January, we announced an amendment to expand the net secured debt covenant to 5.25x.

While we are confident in our ability to manage within the original covenant as evidenced by the results of a 4.2x for Q4, we wanted the operational flexibility that the expanded covenant and result in liquidity with grant us, so we could continue to execute on our strategic initiatives. We also believe that the enhanced flexibility will also reassure key stakeholders. Second, we conducted a review of our existing assets and determined that impairments were necessary for our Temiscaming HPC plant and the sea line at our Jesup plant. Regarding the Jesup sea line, we have made the strategic commitment to focus this capacity of fluff production going forward and conversely focus the Jesup specialty cellulose production on the A line and B lines.

The write-off related to the Temiscaming HPC plant reflects the transition of the Temiscaming HPC facility to viscose production, which we are doing to leverage its low unit variable costs. The total impact of these two non-cash write-offs is $62 million. With that, I'd like to pass the meeting over to Marcus to walk us through the financials for the year. Marcus?

Marcus Moeltner: Thank you, De Lyle. Beginning with our High Purity Cellulose segment on Slide 5. Sales for the year decreased by $23 million or 2% to $1.3 billion due to a higher mix of commodity sales and lower market demand in certain specialty markets. The decline was primarily driven by a 13% decrease in commodity sales prices, partially offset by an 11% increase in CS pricing, highlighting our commitment to securing fair value for our specialty offerings. Sales volumes increased by 4% to 955,000 metric tons, resulting from the increased sales in the commodity markets. Commodity sales volumes rose by 39% compared to the prior year, whereas CS volumes decreased by 18%. The decline was associated with lower market demand and substantial customer destocking, primarily in construction markets.

Other sales for the year were $98 million, which included $49 million of green energy sales. EBITDA for the segment decreased by $6 million to $144 million, primarily due to a less favorable sales mix, declining commodity prices and increased labor costs due to inflation. These impacts were partially offset by higher CS sales pricing. As De Lyle mentioned earlier, we undertook a review of our existing assets and concluded that impairments were necessary for our Temiscaming HPC plant and the Jesup sea line. The total non-cash impact on operating income amounts to $62 million. This will result in a lower annual depreciation expense of approximately $5 million. Turning to Slide 6. Sales in the Paperboard segment experienced a decline of $31 million, mainly due to a 13% reduction in sales volumes due to customer destocking.

Year-over-year sales price has improved slightly and EBITDA for the segment decreased by $1 million to $52 million, primarily due to lower sales volumes, which more than offset the benefits of reduced purchased pulp, maintenance and logistics costs. Turning to the high-yield pulp segment on Slide 7. Sales declined by $24 million in comparison to prior year, mainly due to a 12% drop in external sales prices and a 5% reduction in sales volumes. The reductions were a consequence of weaker market demand. Segment EBITDA stood at negative $1 million, in contrast to $19 million generated in the prior year. Transitioning to Slide 8. Our consolidated operating loss for the year amounted to $65 million, inclusive of the $62 million non-cash asset impairment charge recorded in the fourth quarter.

Sales price improvements in CS and Paperboard were more than offset by the impact of unfavorable HPC sales mix, lower sales prices in HPC commodities and high-yield pulp. Costs remained relatively stable compared to the previous year, with deflation in certain input costs being offset by increased labor expenses due to inflation. SG&A and other costs increased by $57 million, mainly due to the $62 million non-cash asset impairment charge, unfavorable foreign exchange rates, discounting and financing fees incurred to support working capital enhancements as well as higher ERP project costs and professional fees. These costs were partially offset by lower variable compensation and onetime severance expenses from the previous year. Now let's turn to Slide 9.

A forklift lifting a large stack of paperboards in a modern warehouse.
A forklift lifting a large stack of paperboards in a modern warehouse.

Total debt ended the year at $777 million, a reduction of $76 million from the same period in 2022. Net secured debt reflected in our financial covenant ratio associated with the term loan ended the year at $698 million. Our primary focus for 2023 was on free cash flow and debt management. Consequently, we executed opportunistic downtime at both Paperboard and high-yield pulp facilities as well as our Tartas HPC facility, all key factors in supporting the impressive $93 million working capital benefit generated during the year. In January, management took a prudent and proactive approach and successfully amended the covenant associated with the term loan. While we remain confident in our ability to navigate through the covenant, we believe it was important to ensure the company maintained operating flexibility to fully implement our strategic initiatives while alleviating any liquidity concerns.

Structurally, the amendment expands the adjusted net leverage test from 4.5 times to 5.25 times, gradually stepping down until 4.5 times is reached after Q4 of 2024. Net secured leverage closed the year at 4.2 times within the original covenant test. Liquidity ended the year at $199 million, reflecting $76 million of cash, $118 million available under our ABL facility and $5 million for our French factoring facility. We remain committed to adhering to the original 4.5 times covenant test and will focus on all levers at our disposal to maintain appropriate liquidity levels and execute the company's exciting growth opportunities. With that, I'd like to turn the call back over to De Lyle.

De Lyle Bloomquist: Thank you, Marcus. Let's now turn our attention to Slide 10, where I'll outline our key initiatives for 2024. Our top priority for the New Year is to refinance the 2026 senior notes before they go current in January 2025. To best position us to execute on this refinancing, we will continue to prioritize debt reduction. We are targeting a gross debt reduction of $70 million in 2024, financed through business generated free cash flows and a potential monetization of $35 million to $40 million in passive assets. Additionally, as announced last year, we are exploring the potential sale of our profitable Paperboard and high-yield pulp businesses to further reduce the debt before the refinancing. This sales process is being managed by Houlihan Lokey, and it remains on schedule.

We received expressions of interest from both strategic parties and financial sponsors, and we'll provide further updates on this project as it develops. We are working hard to implement our asset optimization strategies to address our HPC commodity exposure given the drag this exposure has on our profit margins and earnings stability. To highlight the importance of this effort, our non-fluff commodity sales had an EBITDA loss of minus $60 million in 2023. And currently, we project a minus $48 million EBITDA loss in 2024. Obviously, it's a strategic imperative to mitigate this exposure to non-fluff commodities. As you know, a key element of our strategy entails transferring a significant portion of our viscose production to our Temiscaming HPC facility, which benefits from the lowest variable cost among our HPC lines.

I'm pleased to announce the project is progressing according to our initial time line, and I will provide updates as we move forward. Our final and perhaps most compelling initiative is to continue realizing the exceptional opportunities within our biomaterials business. Our Tartas bioethanol plant is currently going through testing. And if all goes well, we expect to begin bioethanol production in March. This project is expected to generate $4 million in EBITDA this year as we ramp up production and then $8 million to $10 million in 2025 and thereafter when we achieve steady-state production. This project is the first of several biomaterial projects that we plan to launch over the next couple of years. As highlighted during our Investor Day, upcoming projects in the pipeline include a bioethanol plant at our Fernandina facility, the AGE project at our Jesup facility, which is the production of green energy for sale to Georgia Power, a prebiotics additive plant to also be located at our Jesup facility and crude tall oil projects in France and in the U.S. As previously disclosed, these projects will primarily be funded by low-cost green project capital and are expected to generate significant margin expansion due to co-product economics and economies of scale.

Last night, we announced an MOU with Verso Energy to explore e-fuels, specifically e-SAF from renewable resources, including biogenic CO2 at our Tartas plant, SAF or Sustainable Aviation Fuel would be used by the global airline industry as a drop in sustainable replacement for current Jet Fuel. We'll be working with Verso Energy to explore the feasibility of capturing the biogenic CO2 produced at the Tartas plant to produce the e-SAF in combination with green hydrogen. While we are still in the early stages of evaluating this opportunity, the potential impact to RYAM is substantial. We look forward to keeping you updated as this project progresses. Let's move to Slide 11, where I'll present our EBITDA and free cash flow projections for 2024.

We anticipate 2024 enterprise EBITDA to range between $180 million and $200 million for the year. Cash interest expense is expected to be in the $85 million range, which is inclusive of $14 million attributed to the timing of interest payments. On a normalized basis, the estimated annual interest expense would be around $70 million. Maintenance expense is set at $85 million, a figure we consider sufficient this year to maintain the reliability of our assets. We project a $15 million benefit from working capital, an additional $10 million benefit from tax receivables to be realized during the year. With some offsets related to deferred energy payments and other accrued liabilities, we expect adjusted free cash flow to range between $20 million to $40 million for the year, which will be used to reduce debt and invest in strategic capital projects.

Currently, we forecast such strategic CapEx spending of around $10 million in 2024, mainly to finance the ERP project and pursue high-return cost reduction projects at the plants. This guidance differs from the $225 million EBITDA estimate that I presented during the Investor Day, I believe it's important to emphasize the factors driving this experience. Since the Investor Day guidance, we realized a $14 million decrease in Paperboard EBITDA versus expectations due to unforeseen levels of destocking towards the end of the year. High-yield pulp experienced rapid price declines post Investor Day as pulp market has encountered weak demand, resulting in a $3 million impact versus expectations. We also now expect destocking at a couple of large acetate customers, which will impact EBITDA by $23 million in 2024.

Additionally, corporate charges were primarily affected by higher discounting and financing fees, encouraged to support working capital enhancements due in part to higher interest rates totaling approximately $5 million. On Slide 12, I delve deeper into the expected performance of each of our businesses. For 2024, we expect to achieve EBITDA in the range of $180 million to $190 million for our HPC segment. On average, Cellulose Specialty prices are expected to increase a low single-digit percentage as compared to 2023. Cellulose Specialty sales prices are expected to remain flat in 2024 with increased volumes from market share gain that accrued to us from a competitor's plant closure, offset principally by lower shipments due to the stocking to select acetate customers.

Demand for RYAM Cellulose Specialties is anticipated to be mixed with improved volumes in construction ethers albeit at lower than historical levels and relatively stable acetate markets. However, as noted, we expect acetate will undergo some level of destocking. We also anticipate strong demand in the other CS grades. Additionally, we expect resilient market demand for commodity products, the fluff and viscose price is expected to improve from Q4 2023. Moreover, we foresee modest tailwinds from eased raw material and logistics input costs in 2024. As part of our growth strategy, we are actively pursuing strategic investments in our biomaterials business to capitalize on the increasing demand for sustainable products. The Tartas bioethanol plant is set to begin commercial production in the first quarter of this year with an expected EBITDA contribution of $4 million in 2024, which is expected to reach $8 million to $10 million upon full production that is expected in 2025.

Regarding Paperboard, we expect to achieve EBITDA in the range of $50 million to $60 million in 2024. Prices are expected to decrease slightly as compared to 2023 Q4 levels, while sales volumes are expected to improve as destocking eases and production scales up to meet the improved demand. Raw material prices are expected to see a slight uptick as pulp markets rebound. We expect to achieve EBITDA in the range of $5 million to $10 million in 2024 for our high-yield pulp business. High-yield pulp prices are expected to increase in the first quarter as we realized higher index pricing observed in the later part of 2023 Q4. However, we are beginning to see pricing pressure related to the Chinese pulp markets, thus expect pricing pressure in late Q2 and possibly Q3.

We are diversifying our portfolio globally to mitigate this exposure. Additionally, sales volumes are projected to improve in Q1 as production ramps up to meet improved customer demand. For 2024, we expect corporate costs in the range of $55 million to $60 million, flat to up slightly versus 2023 as we are in the final year of our multiyear ERP implementation. As the ERP project concludes, we anticipate annual cost reductions of $3 million to $5 million starting in 2025. It's important to note that these costs may vary due to factors like currency fluctuations, environmental charges and other non-cash expenses. We illustrate the trajectory of our EBITDA margin growth and net leverage decline on Page 13. In 2024, we anticipate our margins to be in the 10% to 11% range, reflecting a weighted average of the strong margins in our Cellulose Specialty and Paperboard segments, counterbalanced by a low positive high-yield margins and the anticipated negative margins in our non-fluff commodity sales.

The forecast for net secured leverage at the end of the year stands at 3.3 times covenant EBITDA. Our commitment remains resolute in achieving our target net debt leverage ratio of 2.5 times by 2027. With that, operator, please open the call to questions.

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