Rayonier Advanced Materials Inc. (NYSE:RYAM) Q3 2023 Earnings Call Transcript
Rayonier Advanced Materials Inc. (NYSE:RYAM) Q3 2023 Earnings Call Transcript November 8, 2023
Operator: Good morning, and welcome to the RYAM Third 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.
Mickey Walsh: Thank you, and good morning. Welcome again to RYAM's Third Quarter 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 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 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 17 through 26 of our presentation. I would now like to turn the call over to De Lyle.
De Lyle Bloomquist: Thank you, Mickey, and good morning. I will start with the financial overview of the quarter, and then provide an update on our progress in executing our strategic priorities, before turning the call over to Marcus to provide additional details on the business segments and our capital structure and liquidity. Following Marcus' update, I will come back and provide further details on our 2023 initiatives and guidance before opening up the call to questions. Let's now turn to slide four to review our performance in the third quarter of 2023. Results for the third quarter were disappointing, with EBITDA of $24 million, a decline of $44 million or 65% compared to the prior year. The poor results were a consequence of persistent weak demand across many product categories, which overshadowed the strong pricing recognized in our CS segment.
While we expect that some level of demand weakness will persist, we do have high confidence that the fourth quarter will be notably stronger due to the full realization of the cost reduction initiatives and stronger CS shipments due, in part, to the increased market share resulting from the closure of the GP facility. The challenges that we experienced in our High Purity Cellulose segment were primarily due to the declining commodity prices and lower cellulose specialty volumes. However, prices for our Cellulose Specialty products remained strong with a year-to-date increase of 12% as compared to the prior year period as a result of us prioritizing value over volume for our highly specialized product mix. The Paperboard segment saw a $2 million improvement versus the prior year period, primarily driven by cost reductions resulting from lower purchased pulp prices, which more than offset the impact of reduced prices and sales volumes.
High-yield pulp EBITDA decreased $11 million versus the prior year driven by lower sales prices and volumes due to weak market demand and an opportunistic production shutdown in July that we took in response to this market weakness. Corporate expenses increased $9 million attributed to less favorable foreign exchange rates compared to the prior-year period. In light of the weaker quarter results and the expected ongoing demand weakness in specific end markets, we are revising our adjusted EBITDA guidance to approximately $150 million. It's worth mentioning that the majority of our Cellulose Specialty end markets have remained stable, and our Paperboard business continues to perform well. Also, the pricing for commodity products have rebounded from the lower pricing seen in the third quarter.
We are having success in keeping the business cash flow positive. Therefore, we are increasing our adjusted free cash flow guidance to a range of $65 million to $75 million driven by better-than-expected working capital monetization, reduced cash expense, and lower capital expenditures. I will provide some details of our efforts later on. Turning to slide five, as mentioned during our Investor Day, we recognize that we have a challenging balance sheet that must be fixed. To that end, we are targeting debt reduction of $70 million over the course of the next year. This will be achieved through the sale of passive assets and free cash flows from the business. Also, we are exploring the opportunity to further accelerate the de-leveraging of our balance sheet through the sale of our Paperboard and High-Yield Pulp assets.
These assets enjoy strong tailwinds from the global move to more sustainable packaging. This business also generates strong cash flows due to healthy profit margins and low custodial CapEx requirements, [but we expect impressive] (ph) premium on the market. We're actively working with our advisor and making good progress on this front, and expect that we will announce a sales transaction in the first-half of 2024 if our value expectations are met. We believe that this further de-leveraging will set us up well to deal with the refinancing of our 2026 senior notes in the second-half of 2024. I feel confident we will have this issue addressed in the coming year. The next issue we are dealing with is reducing our exposure to high-purity commodities, and the volatility it adds to our earnings.
The market share that we will gain from the closure of the GP Foley facility will make a significant impact on reducing this commodity exposure. We believe that we will add a minimum realized $35 million in EBITDA improvement from the improved sales mix in 2024. We are also working with our customers to quantify or to qualify current CS production at Temiscaming, and our other CS product lines so we can begin to consolidate our commodity viscose production at Temiscaming, which houses our lowest variable cost High Purity Cellulose line. Lastly, with a robust balance sheet and a core solid business, RYAM will be able to fully realize the promising plan of our Biomaterials business. As discussed during our recent Investor Day, the initial phase of this plan is forecasted to yield over $100 million of revenue and $42 million in EBITDA annually within the next five years.
Our first project, the bioethanol plant in France, is progressing well. We expect that construction will be completed near this year's end, and commercial production should start in Q1 of 2024. We're also advancing a couple of other biomaterial projects. We're working on the permitting and engineering of our second bioethanol plant to be located in Florida. And our bid to generate bioelectricity in Georgia has advanced to the next round. All in all, our strategic vision sets RYAM up well to achieve $325 million in annual EBITDA in 2027. We are confident that we will overcome the near-term issues, positioning us to successfully realize the significant opportunities ahead. We will keep you updated as we progress forward. With that, I'd like to turn the meeting over to Marcus to take us through the financial details for the quarter.
Marcus Moeltner: Thank you, De Lyle. Starting with our High Purity Cellulose segment on slide six, sales for the quarter decreased by $77 million or 21% to $292 million as a result of a 13% decrease in sales prices, the decline was primarily related to reduced pricing in commodity markets whereas our CS product saw a 6% price increase, underscoring our commitment to securing fair value for our specialty offerings. Sales volumes decreased by 10% to 217,000 metric tons due to weaker market demand for both specialty and commodity products. Commodity sales volumes rosed by 37% compared to the previous year whereas CS volumes decreased by 36%. This drop was attributed to market driven declines in demand, mainly due to substantial customer destocking, specifically in construction markets.
Sales for the quarter included $28 million of biomaterial sales, primarily from green energy and lignin. EBITDA for the segment declined $26 million to $27 million. The impact of higher sales prices for CS and the reduction of input cost was more than offset by a less favorable sales mix and decrease in commodity prices. Turning to slide seven, sales in the paperboard segment saw a decrease of $9 million resulting from a 5% reduction in sales volumes and an 8% decline in sales prices, reflecting weaker than expected market demand. EBITDA for the segment increased $2 million to $17 million driven by reduced purchase pulp cost, partially offset by the impact of lower sales prices and volumes. Turning to the high-yield pulp segment on slide eight; sales declined by $15 million in comparison to prior year, mainly due to a 31% drop in external sales prices and a 13% reduction in sales volumes.
The reductions were a consequence of weaker demand and opportunistic downtime taken in response to market conditions. The segment's EBITDA stood at negative $5 million for the quarter in contrast to $6 million recorded in the previous year. Turning to slide nine, on a consolidated basis, we had an operating loss for the quarter of $14 million. Sales price improvements in CS were more than offset by $35 million of unfavorable mix in HPC and lower prices for HPC commodities, paperboard, and high-yield pulp. Cost decreased by $28 million as a result of disinflation for certain input cost. It is worth noting that approximately $12 million of the cost improvements resulted from cost mitigation initiatives outlined during our previous earnings call.
SG&A and other costs increased $5 million due to less favorable foreign exchange rates compared to the prior year period. On slide 10, net debt ended the quarter at $743 million, a reduction of $5 million from the same period in 2022. Sequentially, our net debt increased due to an expected increase in working capital, primarily related to finished goods inventories. The build-up in inventory level was in preparation for the annual maintenance shutdown at our Fernandina plant. Our primary focus for 2023 continues to be cash flow and debt management. Consequently, we have executed opportunistic downtime for both our paperboard and high-yield pulp facilities. And we intend to implement similar downtime strategy at our Tartas facility, all aimed at optimizing working capital allocation.
Liquidity ended the quarter at $147 million including $27 million of cash, $112 million available under our ABL facility and $8 million for our French factory and facility. Covenant adjusted net leverage ended the quarter at 4.4 times, higher than our initial expectations. This increase is attributed to the lower EBITDA and weaker demand experienced during the past two quarters. We are committed to maintaining compliance with our 4.5 times covenant test linked to our 2027 term loan facility, and are actively managing cash flow and net debt levels to ensure the ongoing maintenance of our covenant cushion. I will provide additional details regarding our plan to address the covenant in the slides that follow. As part of our continued effort to reduce debt, during our Investor Day we outlined our objective to retire an additional $70 million in debt within the next year.
We plan to achieve this through free cash flow and possible divestiture of passive assets. By further lowering our debt and strengthening our balance sheet, we believe the company will be well positioned for the refinancing of the 2026 senior notes in 2024. Furthermore, we have recently confirmed our intention to explore the potential sale of our paperboard and high yield pulp assets. We believe these assets offer a compelling value proposition in the market. And we have engaged Houlihan Lokey to formalize this process. It is important to emphasize that we see these assets as valuable. And we will only pursue monetization if it aligns with the best interests of both the company and our stakeholders. Any proceeds from the sale of these assets would be utilized to accelerate the reduction of debt and further de leverage our balance sheet.
So, now let's shift to focus on slide 11, which sets out a bridge illustrating how we expect to achieve EBITDA increase from Q3 to Q4. To begin, we'll revisit the mitigation measures we discussed during our previous call last quarter. The additional $14 million you see here is primarily related to lower fixed costs, including maintenance and supplies. We also expect benefits from reduced chemical and wood usage in Q4. And furthermore, we anticipate an improvement in price and product mix in our HPC segment. As the Q4 order book is more weighted towards higher margin CS products compared to Q3. Over 90% of the CS orders are confirmed and planned to ship in the quarter. Additionally, we expect both paperboard prices and volumes to experience an increase in Q4 as destocking wanes, and market demand improves.
High yield pulp prices have rebounded from their lows and are projected to increase slightly in Q4. And lastly, Q4 HPC production volume is expected to remain roughly flat compared to Q3. But an unfavorable mix shift in production is anticipated. Driven by opportunistic market downtime in December, we have a high level of confidence in achieving this guidance and remain focused on execution as quarter four progresses. Let's now review how the guidance aligns with our ability to meet our debt covenants, as shown on slide 12. In Q3, our LTM covenant EBITDA stands at approximately $170 million, indicating that we have approximately $12 million to $14 million in add backs available on a normalized basis. We closed Q3 with a net debt of $743 million.
And we maintained net covenant leverage at 4.4x below the 4.5x covenant test. Looking ahead to Q4, we anticipate covenant EBITDA of $160 million based on our guidance, and we are targeting net debt of $700 million, keeping the net covenant leverage flat at 4.4x. Our strategy for achieving the net debt target comprises several components, including $40 million to $50 million of free cash flow, including $15 million to $25 million of working capital. Ongoing mitigation actions, addressing costs, capital expenditures, and other discretionary items will also provide benefits. Additionally, we are actively negotiating potential monetization of passive assets, amounting to $35 million to $40 million. I have full confidence in our approach to manage the covenant cushion and believe we have a well defined plan in place.
If any problems arise in the upcoming quarter, we are fully dedicated to utilizing all available means to meet the covenant requirements. With that, I'd like to turn the call back over to De Lyle.
De Lyle Bloomquist: Thank you, Marcus. Now let's shift our focus to slide 13. We'll all update you on our 2023 initiatives. As Marcus and I mentioned earlier we faced sustained weakness in demand across multiple end markets. This has led us to reduce our 2023 EBITDA guidance, which is now set at $150 million. Building upon our previous discussion in the second quarter earnings call, we've made substantial efforts to address the impact of the challenging market conditions we have encountered. Specifically, our management team took proactive steps to reduce expenses in the second-half of the year, totaling nearly $40 million. These measures included various actions like reducing contractors' services, implementing a hiring freeze, scaling back on over time, trimming expenditures on wood, caustic and freight while also boosting productivity and capitalizing on higher power sales prices.
However, the impact of these cost-saving measures took longer to manifest in our financials than initially expected, primarily due to a slower inventory turnover rate in the third quarter. Nevertheless, as we enter the fourth quarter, we are beginning to witness the tangible benefits of these efforts, and we anticipate that we will recognize the approximate $40 million in savings by the year's end. It's important to note that we now believe that approximately 40% of these savings are forecasted to reoccur in 2024, in line with our ongoing initiatives to enhance process efficiency and our commitment to further cost-saving measures. Although our 2023 EBITDA outlook is less favorable, we are increasing our guidance for 2023 free cash flow to a range of $65 million to $75 million.
In the third quarter, we witnessed a temporary decrease of $25 million in free cash flow as working capital expanded. This was largely due to an increase in inventories in preparation for the fourth quarter plan shutdown at our Fernandina facility, as well as lower off-take for ethers into the construction markets. We anticipate a substantial working capital benefit for the full-year in Q4, as we aggressively manage inventories by implementing opportunistic production down time across our paperboard, high-yield pulp, and Tartas HPC businesses. Furthermore, we have lowered our full-year total CapEx projection to $120 million, inclusive of $35 million in strategic CapEx net of financing. In the current environment, adaptability is essential, and we are prepared to scale back strategic capital investments if required.
We are maintaining our focus on capturing higher value for our cellulose specialty products. Year-to-date, we've achieved an impressive 12% price increase for cellulose specialties compared to the prior year period. Moving forward, we will continue to prioritize the value of our cellulose specialties, ensuring a strategic approach to better optimize profitability across the cycle. Our commercial team is currently working hard discussing contract terms for the coming year, and I am optimistic about the outcomes of these discussions as we approach 2024. Finally, I'd like to provide further details regarding our viscose and paper pulp businesses. As discussed in our previous earnings call, these businesses are expected to incur an estimated EBITDA loss of $50 million this year due to the prevailing low sales prices, with a significant portion of these losses concentrated in our North American sulfide plants.
Traditionally, we have used the production and sale of commodity products to maintain high utilization rates for our six high-purity production lines, thereby maximizing fixed cost absorption. In challenging market conditions like the present, it has become evident that this strategy offers only marginal financial benefits. Consequently, we recognize the need for a strategic shift. We have initiated the process of consolidating viscose production to our to Temiscaming facility. We are in the process of qualifying the cellulose specialty grades currently produced Temiscaming within our remaining cellulose specialty facilities. Once these qualifications with our customers are successfully completed, we will transition these grades to the other facilities and backfill Temiscaming with viscose production.
Now let's turn to slide 14, where we will assess our progress against our 2023 EBITDA and free cash flow guidance. The waterfall chart illustrates our plan to realize free cash flow within the $65 million to $75 million range. Anticipating EBITDA of $150 million for the year, we have reduced cash outflows, effectively more than offsetting the lower EBITDA. These adjustments encompass lower cash interest, CapEx, and other obligations while increasing working capital monetization. The lower interest expense is largely attributable to the timing of payments related to the recent refinancing. Our custodial CapEx has been reduced to $85 million, and we have also eliminated the catch-up capital in 2023. We believe that our current operating levels can be sustained at this CapEx level.
However, we will likely need to spend this deferred capital in the next couple years to maintain reliability going forward. Expanding on the $71 million in working capital benefits realized during the initial nine months. We have revised our year-end target to $85 million to $95 million, given our confidence that further enhancements in Q4 will be realized as inventory balances are optimized. Furthermore, we have reached on an understanding with our government partners in France regarding the deferred energy liabilities, which will not necessitate further payments in 2023. Reflected in this chart for the quarter, includes the category for miscellaneous accrued liabilities, which encompasses items like property taxes, customer rebates, accrued interest, and so on.
We incorporate this as a reconciliation element to connect our guidance with our actual figures. As we've previously discussed, our free cash flow will be allocated strategically, directed toward either debt repayment or investments in appealing strategic projects. Turning to slide 15, we depict the progress or our EBITDA margin growth and our net leverage decline. For 2023, we anticipate our margins to land in the 9% range, which as noted, is a weighted average of the strong margins we enjoy in the Cellulose Specialty and Paperboard segments, and the negative margins expected in the viscose and other commodity businesses. Net debt leverage is expected to hold steady at 4.4 times covenant EBITDA for the full-year. However, we remain committed to drive towards our target net debt leverage ratio of 2.5 times in 2027.
I'm confident that the fourth quarter results would be stronger than Q2 and Q3. The demand for many of our CS products has remained resilient. And we do expect to see an uplift in CS demand in Q4 due to the closure of competitive capacity. Paperboard sales volumes are showing signs of normalizing, and I believe that our businesses that are more GDP-sensitive will pick up in the second-half as evidenced by our recent viscose, fluff, high-yield pulp price increases. All of our scheduled plant outages are now behind us, so we will see improved productivity and lower spending as we execute the nearly $40 million in expense reductions, and the $10 million to $15 million in CapEx curtailments. With that, operator, please open the call to questions.
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matthew McKellar with RBC Capital Markets. Please proceed with your question.
Matthew McKellar: Hi, good morning. Thanks for taking my questions. Maybe first, it looks like CS volumes were down 6% quarter-over-quarter. And you called out weakness in ethers related to construction markets. Can you give any more color on what's going on in that market? And then maybe call out any other pockets of relative strength and weakness in demand, either by product or end markets? And then maybe last, is there any other color you can provide on what the drivers are of the stronger mix you anticipate in that business in Q4?
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