Rayonier Advanced Materials Q4 2022 Earnings Call Transcript

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February 28, 2023

Key Takeaways

  • Adjusted EBITDA for 2022 rose 39% to $177 million on 22% revenue growth to $1.7 billion, driven by strong demand and higher selling prices across all product lines.
  • The High Purity Cellulose segment delivered $150 million in EBITDA (up 8%), Paperboard generated $53 million (up 89%), and High Yield Pulp contributed $19 million.
  • Net debt fell by $41 million in Q4 to $707 million, improving net leverage to 4× EBITDA and maintaining liquidity of $301 million, with plans to opportunistically refinance notes maturing in June 2024.
  • For 2023, the company targets $200–215 million EBITDA (13–21% growth) and $30–60 million of free cash flow, backed by high‐single‐digit price increases, reliability investments, and working capital improvements.
  • Key strategic investments include a $39 million Tardis bioethanol project (bringing 2nd‐gen bioethanol online in 2024), $14 million to debottleneck fluff capacity, and additional automation and ERP upgrades with rapid payback criteria.
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Earnings Conference Call
Rayonier Advanced Materials Q4 2022
00:00 / 00:00

There are 6 speakers on the call.

Operator

Morning. Welcome to the Ryom Fourth Quarter and Full Year 2022 Earnings Conference Call. During today's presentation, all parties will be in listen only mode. Following the presentation, the conference will be opened for questions with instructions to follow at that time. As a reminder, this conference is being recorded.

Operator

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 now begin.

Speaker 1

Thank you, and good morning, everyone. Welcome again to Ryan's 4th quarter and full year 2022 earnings conference call and webcast. Joining me on today's call are Dalil Bloomquist, our President and Chief Executive Officer and Marcus Moltner, Our earnings release and presentation materials were issued last evening and are available on our new 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 list some of the factors which may cause actual results to differ materially from the forward looking statements we may make.

Speaker 1

They are also referenced on Slides 23 of our presentation material. Today's presentation will also reference certain non GAAP financial measures as noted 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 27 of our presentation, I'd now like to turn the call over to Delisle.

Speaker 2

Thank you, Mickey, and good morning. I will start today with financial highlights for 2022 before turning the call to Marcus to provide additional details on each of our businesses. After market's update, I will provide an outlook and guidance for 2023 before opening up the call for questions. Let's start by turning to Slide 5. We finished 2022 with positive momentum on revenue and EBITDA.

Speaker 2

Revenues increased $309,000,000 or 22% from prior year to $1,700,000,000 Driven by strong demand and prices across all of our products, including Cellulose Specialties, which represent half of our revenue And a significant majority of our EBITDA. Adjusted EBITDA for the year increased $50,000,000 or 39 percent to $177,000,000 As the price increases realized more than offset extraordinary cost inflation. The increases from prior year were led by our high purity cellulose segment, We delivered $150,000,000 of adjusted EBITDA, up $11,000,000 or nearly 8% from the prior year. Paperboard delivered a solid $53,000,000 of EBITDA, up $25,000,000 or 89%, driven by strong demand for sustainable packaging and higher prices. High yield pulp contributed an additional $19,000,000 of EBITDA As we took advantage of high prices in the Q4 to capture significant value for this segment.

Speaker 2

Corporate expenses improved $5,000,000 from last year $45,000,000 for the full year driven by a change in the valuation of the Greenfirth shares and favorable currency impact, which were partially offset by higher variable compensation. Now I'd like to ask Marcus to take us through the financial details for 2022 Before I provide an outlook for 2023.

Speaker 3

Thank you, Dalil. Starting with the high purity cellulose segment on Slide 6, Sales for the year increased $245,000,000 or 22 percent to $1,300,000,000 driven by a 19% increase in sales Prices for both CS and non CS products. Sales volumes increased 4% to 918,000 metric tonnes, driven by improved reliability and logistics. As expected, sales volumes in the Q4 of 2022 We're 11% higher compared to the same period in 2021, driven by a greater mix of commodity products, which led to a 5% lower average selling price in the current quarter as compared to the Q3 of 2022. Net sales for the year included $115,000,000 of biomaterial sales, primarily from biomass energy and lignin.

Speaker 3

Overall, EBITDA for the segment improved $11,000,000 to $150,000,000 driven by higher prices and sales volumes, partially offset by the impact of significant cost inflation. Turning to Slide 7. Paperboard segment sales grew $42,000,000 driven by a 27% increase in sales prices, partially offset by a 6% decline in sales volumes. EBITDA for this segment grew 89% or 25,000,000 to $53,000,000 as higher sales prices more than offset increased costs for purchased pulp, chemicals, logistics and the impact of lower sales volumes. The slight decline in sales price in the 4th quarter from the 3rd quarter Was driven by a weaker sales mix.

Speaker 3

Turning to the High Yield Pulp segment on Slide 8. Sales Increased by $24,000,000 from prior year, driven by a 25% increase in sales prices, partially offset by a 3% decline in sales volumes. Sales volumes for the year were impacted by logistics and timing. However, as sales prices rose in the 4th quarter amid strong demand, We were able to increase volumes to deliver a strong quarter to finish the year. Overall, EBITDA for the segment improved $9,000,000 to $19,000,000 for the year, including $13,000,000 in the 4th quarter.

Speaker 3

Turning to slide 9. On a consolidated basis, 2022 operating income improved $36,000,000 from 20 21 to 26,000,000 Sales price improvements across each segment and volume improvements in HPC driven by strong demand for CS more than offset $258,000,000 of higher costs driven by persistent inflation throughout the year. SG and A and other expenses Increased $12,000,000 primarily driven by higher severance and variable stock compensation, partially offset by favorable FX rates. Turning to Slide 10. Net debt declined $41,000,000 in the quarter to $707,000,000 as we continue to repay debt.

Speaker 3

The company reduced gross debt by $73,000,000 in 2022, while still preserving solid liquidity. Liquidity ended the year at $301,000,000 including $152,000,000 of cash. In addition to debt repayments, capital allocation in 2022 focused on increased maintenance CapEx To improve reliability, after investments were reduced through the pandemic years, we also invested $34,000,000 on strategic capital, Primarily focused on high return projects, which will provide immediate benefits to the business. Net debt to EBITDA End of the year at 4 times, an improvement of nearly a turn and a half from 2021. With lower debt And improving credit metrics, we continue to monitor capital markets and are prepared to opportunistically refinance Our 5.5% senior unsecured notes, which mature in June of 2024.

Speaker 3

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

Speaker 2

Thank you, Marcus. Turning to Slide 11. Our top priority for 2023 is to opportunistically refinance our senior notes, Which mature in June 2024. As Marcus noted, our leverage declined to 4 times at the end of 2022 And we expect it to further decline to 3.5 times by the end of the Q1. This will position us as well to refinance our debt at more attractive than we saw earlier this year.

Speaker 2

Building on the momentum experienced in 2022, we will continue growing our EBITDA in 2023 through Two key areas. First, we have started to realize the benefits from our investments to improve reliability, including increased sales and lower unit Fixed cost. Currently, we are experiencing some pockets of softness in demand. And as a market leader, we are matching our production to meet market demand. While this may temporarily impact sales volumes, the improvement in reliability will allow us to better control our costs.

Speaker 2

2nd, we are capturing a higher value for our products. As a result of our negotiations, our 2023 cellulosepecialties prices are expected to increase by a high single digits percentage versus 2022 levels, inclusive of the cost surcharge. We also continue to capture value for our fluff and paperboard businesses as demand for sustainable solutions in these markets remain high. The new capacity that came into the viscose market in 20212022 impacted viscose pricing modestly in the Q4 of 2022, but given our minimal exposure to this market, we have not experienced a significant impact. The improved EBITDA for 2023 will convert to significantly improved free cash flow, which we forecast will be between $30,000,000 $60,000,000 Capital allocation of this free cash flow will be prioritized towards debt reduction and investments in high return strategic capital projects, which I will discuss in detail shortly.

Speaker 2

Our free cash flow guidance assumes a $45,000,000 benefit from working cash capital in 2023, which we intend to capture by achieving specific targets for inventory, receivable and payables. We also assume 2023 total CapEx to be in the range of $140,000,000 to $145,000,000 This includes $15,000,000 to $20,000,000 of catch up maintenance capital, which was deferred during the pandemic and $30,000,000 to $35,000,000 of discretionary strategic capital, Net of financing. On Slide 12, we graphically depict how our $200,000,000 to $215,000,000 of adjusted EBITDA guidance converts to free Cash flow and supports our capital allocation decisions to either repay debt and or invest in attractive strategic projects. Our capital allocation decisions will be based on available cash, debt repayment commitments and specific project returns. On Page 13, we summarize our key financial objectives and criteria for strategic projects.

Speaker 2

Our long term net leverage target remains at 2.5 times EBITDA, which we plan to attain by growing EBITDA and repaying debt. We also expect to allocate capital into attractive and high return strategic projects. We have 3 main criteria that we use to vet strategic projects. First, the payback period should be less than 3 years. 2nd, the return on equity needs to exceed 20%, Though this hurdle rate may be increased depending on the risk associated with the project.

Speaker 2

To increase a strategic project's ROE, we will look For low cost financing options, including low cost loans and grants. And 3, we review each project for the impact it would have on our sustainability Including improving the safety for our employees and the impact to our planet, specifically lowering our greenhouse gas emissions. For 2023, our strategic capital investments will be focused in 4 key areas. We have previously discussed the Tardis Bioethanol Project. This is an investment in a world class fermentation plant that will be initially purposed to produce 2nd generation bioethanol, which will be sold to a large petro Chemical company under a multiyear take or pay contract.

Speaker 2

This RED-two certified bioethanol will be used in automobiles To reduce greenhouse gas emissions and substitute for traditional ethanol produced from food sources such as corn. The total investment for this project is $39,000,000 with $28,000,000 financed by low cost green loans and $4,000,000 of grants. The bulk of the spending will be in 2023. The total cash investment from Ryam for this project from 2022 through 2024 is It's expected to be $7,000,000 and will provide an annual EBITDA benefit of $9,000,000 to $11,000,000 starting in early 2024. This project has already broken ground and is expected to be completed early next year.

Speaker 2

The 2nd large project will be debottlenecking Jesup's Fluff production and finishing capabilities. $10,000,000 of the $14,000,000 investment was made last year with the remainder being made in 2023. This investment will provide a $7,000,000 annualized benefit to the company starting later this year. We're also focusing Investments on production automation and other high investment return projects. This includes a number of smaller investments totaling between $6,000,000 to $11,000,000 That will provide very high returns on investment and expected $5,000,000 to $7,000,000 in annualized EBITDA.

Speaker 2

Lastly, we will continue investing in our business processes and data infrastructure to increase corporate efficiencies and effectiveness. In 2022, we started the process to get all of the facilities and key processes onto a common ERP platform. Next, I will provide an outlook on each of our businesses. Turning to Page 14, as a result of our negotiations, Our 2023 cellular specialty prices are expected to increase by high single digit percentages versus 2022. 2023 demand for our high purity business is currently forecasted to be mixed.

Speaker 2

We are seeing strength in acetate, casings, filtration and nitrocellulose, While there is softness for construction ethers, food additives in MCC and tire cord, fluff demand remains resilient. While fluff prices have fallen off their peak levels experienced in the Q4 of 2022, pricing has been slower to decline In the more commoditized pulp markets. Fiscal demand started the year soft, but which is up from 50% at the end of 2022. Cost deflation in our high purity segment has slowed, But our input prices are expected to remain at elevated levels for the near term. As I noted, high purity business We'll realize some uplift in 2023 and future EBITDA from the investment in strategic projects.

Speaker 2

Our Biomaterials business will benefit from our strategic investments that are focused on the increasing demand for sustainable products starting with our investment in the fermentation at Tardis that will initially produce RED-two certified bioethanol starting in 2024. As demand for sustainable products continues to grow, we will increase our capabilities to meet this global demand. In paperboard, prices are expected to increase from 2022 levels driven by strong demand for packaging and commercial print products. Volumes are expected to increase as a result of improved productivity and logistics, while costs are expected to improve as pulp prices decline. In high yield pulp, prices are expected to decline as the global economy slows.

Speaker 2

Sales volumes are expected to improve with improved logistics and productivity. A reopening of the Chinese economy may provide a catalyst for improved pricing later this year. Corporate expenses are expected to be higher than 20 Due to expenses associated with the ERP implementation and FX benefits that are not expected to repeat in 2023. Overall, we expect to deliver $200,000,000 to $215,000,000 of EBITDA in 2023, an increase of 13% to 21% over prior year. On Slide 15, we highlight the key sensitivities that can impact our EBITDA guidance.

Speaker 2

EBITDA is highly leveraged towards cellular specialty prices. However, these prices are mostly negotiated on an annual basis. In addition, we successfully negotiated pricing flexibility in our cellulose specialty contracts in the event of renewed cost inflation. Thus, we believe that pricing and cost risk in our Cellulose Specialty business should have little impact on the 2023 guidance. Pricing changes on non cellulose specialty products have a smaller impact on EBITDA for the same 1% change in price.

Speaker 2

Paperware products are sold under a mix of fixed prices and variable index pricing with approximately 2 thirds fixed for the year, thus providing further stability for the 2023 guidance. We believe our diverse exposure to end markets and strong linkage to the sustainability megatrends Such as paperboard for renewable packaging and fluff for the growing global middle class and aging populations, Coupled with our annual contracted business help insulate us from the impact of a possible recession. We also have opportunities to improve margins with improved productivity and sales volumes, which we would realize as we maintain our market share when demand growth resumes. Turning to Slide 16. Our outlook for 2023 reflects improved EBITDA margins to the 11% to 12% range As we capture both the improved value for our products and drive operational efficiencies and reliability, debt will continue to decline as we generate free cash flow and optimize our balance sheet.

Speaker 2

As a result, we expect net leverage to decline to approximately 3.5 times in 2023 and keep us on track toward our goal of 2.5 times over the next 3 to 5 years. And with that, operator, please open the call to questions.

Operator

Thank you. We'll now be conducting a question and answer Thank you. Thank you. And our first question is from the line of Roger Spitz with Bank of America. Please proceed with your questions.

Speaker 4

Thank you and good morning. So wanted to start, could you elaborate on the potential headwinds in Q1 'twenty three? You mentioned, I think, in the prepared Some pockets of softer demand and may have actually called out 1 or 2 areas, but I thought maybe you could delve into a little More. And also, what do you expect the cadence of the working capital inflow Over the year, in particular, in Q1.

Speaker 2

Hi, Roger. This is Delisle. To attack your question on demand first, What we're seeing I'll first talk a little bit about what's going on in Europe, which is really what's affecting our demand for our construction ethers And maybe a little bit of the food additive business on the MCC side. I think as everybody knows the macroeconomic conditions in Europe aren't great, though they are we do expect that they will improve through the year. Because we're seeing higher interest rates in Europe, that's obviously had an impact on the construction market and that's therefore had an impact on our demand for our We also saw with a couple of customers that we sell our ether grade products 2, that they are correcting their working capital.

Speaker 2

They may have over bought a little bit in 2022. And So they're going through a correction on their working capital. Again, I think that's going to be relatively short term issue. And we should see again, once we get past that correction, we should We'll start seeing demand normalize again probably in the second half of this year. With respect to the other areas in terms of softness, The can you help me on that a little bit?

Speaker 1

Yes, areas of softness, we had a little bit in tire quarter as well.

Speaker 2

Yes. So tire quarter It's tied to the automobile industry. And obviously, they continue to be a little afforded by the access To chips, but also I think just because the increase in interest rates is beginning to dampen the demand for automobiles as well. So that's something that we're a little concerned about. Otherwise, a lot of the other businesses that we are selling to seem to be holding in there at, I I recall very resilient levels of demand.

Speaker 2

The second question that we yes, the second question was on working capital. I think earlier your question was around How does that how is that going to calendarize through the year? Is that correct, Roger?

Speaker 4

That's right. Particularly the Q1, because Q1 is usually For most businesses, an outflow, but things are going on here. But so it's both particularly in Q1, but also how does the cadence go Getting that 45,000,000.

Speaker 3

Good morning, Roger. It's Marcus. So as you mentioned, the 45,000,000 that we set out as an objective, Certainly, Q1 is a use of working capital for us. So as we get through Q1 and then the balance of the year, We should start to realize that over 50% of that target is inventory related and then it's balanced across AR and AP. So as we execute through the year, we should start to harvest that working capital and realize that benefit.

Speaker 4

Thank you. I'll get back in queue. That's when I'll start the queue.

Speaker 2

Thank you, Roger.

Operator

Thank you. The next question comes from the line of Paul Quinn with RBC Capital Markets. Please proceed with your question.

Speaker 5

Yes, thanks much. Good morning, guys. I'm just trying to understand, it sounds like your cellulose specialty prices, you expect them to be up high single digit. Just Looking at the commodity side though, I'm trying to understand sort of your guidance, I guess, on fluff pulp. Do you expect fluff pulp to Stay in and viscose price weakening.

Speaker 5

Could you give us a little bit more color on what you're seeing in that market?

Speaker 2

Hi, Paul. This is Delisle. With respect to fluff pricing, again, we're assuming that they're going to follow generally with the indices that are out there on fluff. But what we're noticing is that it's going down slower than expected. And in fact, we've Seeing a couple of our competitors actually announced some recent price increases.

Speaker 2

So we think we may actually be dropping out here Relatively soon. VSCO's pricing, similar situation. Just as recently as the a couple of days ago, There was a slight uptick in the pricing for softwood going into the viscose market. Again, what we're forecasting is per the indices, but we're seeing that because of the increase in capacity utilization In China, that again, there may be some upside potential with respect to viscose pricing. But right now, the forecast and the guidance we've given It's essentially based on the indices that have been published.

Speaker 5

Okay. And then you guys mentioned higher corporate costs in 2023 here. That was $45,000,000 in 2022 or we tightened somewhere in the $50,000,000 to $55,000,000 range?

Speaker 2

Yes. Yes, that's correct, Paul. That's about the right range. Again, the increase in spending is tied to the ERP implementation and the fact that we don't think Right now, we're not forecasting anything any FX benefit this year.

Speaker 5

Okay. And then just earlier this year, you attempted to Refined the senior unsecured and didn't conclude that deal. Can you give us a little bit more color on that process and And the timing of when you expect that to try that again?

Speaker 2

Well, in January, it turned out that the Market conditions just weren't conducive for us to get a deal that we felt was one indicative of what we consider to be A fairly strong business. So looking forward, we think actually time is on our side in that we think our financial So metrics will improve with time. And so we're patient. And We want to get past at least Q1 earnings, because again, we think that will confirm the guidance we just gave you. And with that, we think we'll be looking at that point to look at the markets and possibly enter at that point.

Speaker 5

Okay. And then just lastly, just back on the debottlenecking project you've got adjusted To get more volume, I guess, on the fluff line. What's the volume increase you think you're going to get through that process? And what's involved?

Speaker 2

Yes. That's a great question. And I'm not an engineer, so I can't really get into the specifics about what we did. But at the end of the day, I believe the increase is 40,000 to 50,000 tons additional capacity that we get from that investment. And it really came down to essentially putting in additional dryer cans To allow us to speed up the line, while allowing it for enough drying capacity to get The right specifications on the product.

Speaker 2

So and then on the finishing side, we when you obviously Speed up the capability of the line, you've got to also increase the capability of the our ability to package it appropriately for our competitors or For our customers, and so we've put some investment also in the finishing line as well.

Speaker 5

All right. Thanks very much. That's all I had. Good luck.

Operator

Our next question is a follow-up from the line of Roger Spitz with Bank of America. Please proceed with your question.

Speaker 4

Thank you very much. A few others. So can you talk any more guidance on The Hyatt pulp segment in 2023, does that reverse back to the last few years kind of level? How should we think about that?

Speaker 2

That's a great question, Roger. It's obviously it's we're seeing pricing decline right now, but we're it's going to see some offset on that on the volumes in 2023, Given the increased productivity that we're expecting after the investments we made last year. So In terms of overall EBITDA for high purity, we're I'm looking at some numbers. I'm going to see if I can find the actual number for you here. It's going to be about the same as we experienced In 2022 versus 2023, even though we see lower pricing, but it should be offset By the increased productivity and the increased sales volumes later this year.

Speaker 4

Got it. And just to be clear, I was asking on high yield pulp and I think you were answering that, but you said high purity.

Speaker 2

I'm sorry. I meant high purity. Yes, high purity. I'm still new.

Speaker 4

Okay. And I was asking on high yield pulp. How do you see high yield pulp EBITDA in 2023 where you lower And that's

Speaker 2

what I was talking to you. High yield pulp should be equivalent to what we saw in 2022 right around that $15,000,000 level, dollars 16,000,000 level.

Speaker 3

Yes. And Roger, as you're following the market, high yield, think of If you look at it year over year, right, given where we are in the pricing cycle, it will probably be the reverse of last year where it's a stronger first half Then everybody's saying pricing is coming off over time for that product.

Speaker 4

Got it. And then in the press release, you talked about The strength in acetate CS, now is that are you looking at the culture there or you're looking at The whatever it is 20%, 25% of the specialty, I call it specialty acetate CS, the non filter toe Demand that you were pointing to.

Speaker 3

So Roger, just to reiterate your question, you're saying, are we seeing Strength in acetate in the toe and other applications, right? Plastics, you're saying?

Speaker 4

Right. Which areas which applications in acetate CS Did the press release refer to when it talked about strength in 2023 in acetate?

Speaker 2

Yes. Really, we're seeing it both in toe and plastics. Tow is being driven. We're seeing significant growth in the heap not burn applications And products that are being sold outside the United States, which require 2x the amount of tow that As used in a typical cigarette, and that's, I think, largely mitigated The decline in smoking in much of the developed world, I would say that tow applications or the use of Demand in China has been pretty darn steady. So and then on the plastic side, things continue to be very strong.

Speaker 4

Great. And then last one, and I want to talk about the 3 to 5 year target EBITDA margin going to 13% to 15%. You laid out on slide, I guess, 13, a number of projects and I presume that's 1 component of that. Is that the main component of that increase in the EBITDA margin? Or are there other big picture things, whether it be pricing or volumes Or a class savings that you're also looking to get that EBITDA margin up to 13% to 15% in 3 to 5 years?

Speaker 2

I'm going to use all the levers, Roger. So it's not going to just be The strategic projects, which at the end of the day is an important component of it, we see that there's significant value to be had in terms of becoming much more efficient and productive. And some of this can take some capital. But we also see that there's an opportunity to Continue to capture additional value for our products, and I call it fair value, getting it get the pricing up to a point that Would reward us to reinvest into new capacity as demand grows. And finally, the issues around just better efficiencies Logistics and maybe even some cost deflation sometime in the near future.

Speaker 4

Got it. Thank you very much.

Operator

Thank you. At this time, we've reached the end of our question and answer session. And I'll turn the floor back to D'Lyle Blomquist

Speaker 2

Well, again, thank you all for your time today. I'm very proud of the accomplishments that we have made and Very confident that we will continue to execute on our initiatives to improve the profitability of the business, reduce our debt and improve our leverage. And I look forward to our next update in the next few in the next couple of months. So if you have any questions or anything that we can help you out with, Please feel free to reach out to us.

Operator

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.

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