Rayonier Advanced Materials Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 10, 2023

There are 6 speakers on the call.

Operator

Good morning, and welcome to the Ryan First Quarter 2023 Earnings Conference Call. During today's presentation, all parties will be in a listen only mode. 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.

Operator

Thank you, Mr. Walsh. You may begin.

Speaker 1

Thank you, and good morning. Welcome again to Ryan's Q1 2023 earnings conference call and webcast. Joining me on today's call are Dalyle Blomquist, our President and Chief Executive Officer and Marcus Moltner, 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 riam .com. I'd like to remind you that in today's presentation, we will include forward looking statements made pursuant to Safe Harbor provisions of federal securities laws.

Speaker 1

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 23 of our presentation material. Today's presentation will also reference certain non GAAP financial measures As noted on Slide 4 of our presentation, we believe non GAAP measures should provide useful information for management and investors, But non GAAP measures should not be considered an alternative to GAAP measures. A reconciliation of these measures to their most directly comparable GAAP financial measures are included on Slide 17 through 25 of our presentation. I'll now turn the

Speaker 2

call over to Dalyle. Thank you, Mickey, and good morning. I will start this call with a review of the financial highlights from the quarter Before turning the call to Marcus to provide additional details on each business segment and provide an update on our capital structure and liquidity, After Mark's update, I will provide an update on our key 2023 initiatives and guidance before opening up the call for questions. Let's now turn to Slide 5. We started 2023 with continued positive momentum on revenue, EBITDA and cash flow.

Speaker 2

Revenue increased $115,000,000 or 33 percent from prior year to $467,000,000 driven by solid price increases across all our products and overall stronger volumes driven by improved operational productivity. Adjusted EBITDA increased $31,000,000 or 155 percent versus prior year to $51,000,000 As the price and volume increases more than offset the higher costs, largest EBITDA gain from prior year was led by our High Purity Cellulose segment, This delivered $44,000,000 of adjusted EBITDA, up $28,000,000 or 175 percent from prior year. Paperboard delivered another solid quarter with $13,000,000 of EBITDA and high yield pulp contributed an additional $8,000,000 of EBITDA as we realized higher prices in the quarter. Corporate expenses increased $8,000,000 from last year due to $14,000,000 from a prior year period gain of the sale of our GreenFirst shares. By delivering on these positive results, we remain on track to deliver our $200,000,000 to $215,000,000 of EBITDA for the full year, and We are increasing our free cash flow guidance to $40,000,000 to $65,000,000 Now I'd like to turn the meeting over to Marcus to take us through the financial details for the quarter.

Speaker 3

Thank you, Dalal. Starting with the high purity cellulose segment on Slide 6. Sales for the quarter increased $93,000,000 or 33% to $374,000,000 driven by an 8% increase in sales prices, including an 18% increase in CS prices. Sales volumes increased 27% to 265,000 metric tons due to improved production, a higher mix of commodity sales and enhanced customer contract terms. Sales for the quarter also included $23,000,000 of biomaterial sales, primarily from Green Energy and Lignan.

Speaker 3

EBITDA for the segment improved $28,000,000 to $44,000,000 The impact of higher prices and volumes was partially offset by higher chemical and logistics costs, along with the impact of annual maintenance expenses in the prior year. Turning to Slide 7. Paperboard segment sales grew 5,000,000 An 18% increase in sales prices due to demand for packaging grades, which was partially offset by a 7% decline in sales volumes as a result of sales timing. EBITDA for the segment grew 30% or $3,000,000 to $13,000,000 As the higher sales prices more than offset the lower volumes and increased costs for chemicals and purchased pulp. Turning to the High Yield Hope segment on Slide 8.

Speaker 3

Sales increased by $20,000,000 from prior Due to stronger demand and improved logistics, cost increases were primarily related to higher chemicals and logistics. EBITDA for the segment improved $8,000,000 as compared to breakeven in the prior year. Turning to Slide 9. On a consolidated basis, Operating income for the Q1 improved $33,000,000 to $17,000,000 Sales price improvements Across each segment and volume increases in HPC and high yield pulp more than offset $59,000,000 of higher costs for chemicals, purchased pulp and logistics expense, along with the impact of annual maintenance expense in the prior year. EBITDA margins for the quarter were nearly 11%, which is up over 500 basis points from the Q1 of 2022 and essentially flat to the prior quarter.

Speaker 3

Turning to Slide 10, net debt declined to $683,000,000 A reduction of $72,000,000 from the same period in 2022. We continue to repay debt, including $5,000,000 of senior unsecured notes in the Q1 and $10,000,000 of senior secured notes in April. As we continue to repay debt, we are still preserving strong liquidity. Liquidity ended the quarter at $276,000,000 including $169,000,000 of cash. We recently purchased Trade Credit Insurance, which will increase liquidity by an additional $36,000,000 This excess liquidity provides flexibility for our upcoming refinancing activities.

Speaker 3

Given our recent focus on increased maintenance CapEx to improve reliability, we are now capturing the benefits of the improved production. As a result, we are lowering our CapEx outlook for 2023 to a range of $100,000,000 to $105,000,000 down from approximately $110,000,000 in our original guidance. While we were able to reduce our maintenance CapEx, still expect to invest $30,000,000 to $35,000,000 of strategic capital, primarily focused on high return projects, which will provide immediate and incremental benefits to the business. Net leverage ended the quarter at 3.3 times, An improvement of 0.7 times in the quarter and ahead of our initial expectations. With lower debt and an improving credit metrics, We expect to refinance our 5.5 percent senior unsecured notes, which mature in June of 2024 at acceptable terms in the coming quarter.

Speaker 3

We recently engaged Goldman Sachs to help advise us and the best structure for our refinancing, including high yield notes, syndicated loans and privately placed loans. Our existing cash balances and expected free cash flow will allow us to further reduce gross debt and minimize the impact of higher interest expense. With that, I'd like to turn the call back over to Delisle.

Speaker 2

Thank you, Marcus. Turning to Slide 11, are making solid progress on our 2023 initiatives. With $51,000,000 of EBITDA generated in the Q1, We remain on track to deliver between $200,000,000 to $215,000,000 for the full year. Free cash flow generation was also strong with $1,000,000 achieved in the quarter. Dollars 31,000,000 of this free cash flow was generated from working capital initiatives, primarily from lower inventory, while CapEx was managed to $21,000,000 with the Tardis annual maintenance outage executed in the quarter.

Speaker 2

As we have realized improved operational reliability, we now expect to reduce maintenance CapEx and increase our free cash flow guidance to $40,000,000 to $65,000,000 in 2023, an increase of $5,000,000 to $10,000,000 from our initial estimate. The strong quarter financial results helped drive down our net leverage to 3.3x, and we expect further improvement in the 2nd quarter. We increased cash balances to $169,000,000 while continuing to reduce debt. As Marcus noted, This strong cash balance coupled with a significantly improved credit metrics will increase our flexibility with the refinancing efforts. The maturity of the senior unsecured notes is coming due in just over a year.

Speaker 2

Consequently, we are keenly focused on refinancing this debt in the coming quarter. The underlying interest rates have continued to increase with the recent Federal Reserve actions, but markets are currently open and active. We remain flexible on the type of debt and expect to utilize our strong liquidity position to help minimize the impact to interest expense. Operationally, we remain focused on 2 key areas to drive value. First, we are realizing and lower unit fixed cost.

Speaker 2

Our total sales volumes for the HPC business increased 27% from prior year. While a significant portion of this increase relates to the timing of annual maintenance outages, we are realizing a significant increase in overall operational efficiency. If we normalize for the annual maintenance outages, production volumes increased 8% during the quarter versus prior year even as we reduced finished goods inventories. We continue to invest in our assets with $21,000,000 of total CapEx spent in the quarter, including $6,000,000 of strategic capital. However, we expect to reduce our normalized CapEx to approximately $90,000,000 while we continue to execute on $10,000,000 to $15,000,000 of Jeff, CapEx in 2023.

Speaker 2

For the full year, we now expect to spend $100,000,000 to $105,000,000 on custodial CapEx With a greater weighting of spend around our annual maintenance outages. Our 2 largest facilities in Jesup and Temiscaming We'll complete their annual outages in the Q2. With demand from some products remaining soft, we will continue to operate our assets to match market demand. 2nd, we are capturing higher value for our products. Our cellulose specialty prices are up 18% from the prior year period, driven by our contractual negotiations in 2023.

Speaker 2

And we will continue to prioritize value of our cellulose specialty products over volumes. The cellulose specialty market is expected to remain balanced As the new hardwood viscose pulp supply coming online will not impact the cellulose specialty grades. In the fluff and viscose markets, we captured 6% higher prices from prior year. We also realized 18% increases in paperboard prices and 39% increases in high yield pulp in the quarter. While prices are expected to decline for commodity products in the coming quarter, paperboard prices are expected to remain elevated with steady volumes.

Speaker 2

Turning to Slide 12. We present our progress against our 2023 guidance for EBITDA and free cash flow. Note that waterfall chart reflects the updated guidance for our higher target for free cash flow of $40,000,000 to $65,000,000 Notably, the significant improvement in free cash flow for the quarter includes $31,000,000 working capital benefits, offset by $14,000,000 payments made against our France energy liability. As we discussed, Our free cash flow will be used to either repay debt and or invest in attractive strategic projects, which were both accomplished in the Q1. On Page 13, we provide additional color on each of our businesses.

Speaker 2

2023 cellular specialty prices are expected to increase by high single digit percentages versus 2022. Demand for our high purity business remains mixed with strength in acetate in many other CS grades, Offsetting softness in construction ethers include additives. Fluff prices are expected to decline, but industry forecasts have raised the price floor This goes prices have stabilized and are expected to increase slightly in the second half. Commodity HPC sales volumes are expected to increase as we realize further productivity gains and ease logistic constraints. Certain input costs are moderating, but we expect these will remain at elevated levels.

Speaker 2

We continue to make strategic investments in our Biomaterials business, which we believe will provide incremental growth for the company. The bioethanol plant in Tardis remains on track to begin production in the first half of twenty twenty four. The 2nd generation ethanol produced at this facility is expected to provide a $9,000,000 to $11,000,000 annual EBITDA benefit to the company. In paperboard, prices are expected to moderate slightly over While raw material prices will decline due to lower pulp purchase prices. In high yield pulp, Prices are expected to be impacted by both the global economic slowdown and new capacity coming into the market.

Speaker 2

Sales volumes are expected to improve slightly with the EASE Logistics and higher productivity. Corporate expenses are expected to be higher than 22 due to expenses associated with the ERP implementation and 2022 FX benefits that are not expected to repeat in 2023. Overall, we expect EBITDA for the 2nd quarter to be in the low $40,000,000 range due to our planned maintenance Outages at our 2 largest facilities, a slower than anticipated restart from the Tardis outage and the calendarization of some customer annual outages. We believe that we remain on track to deliver the $200,000,000 to $215,000,000 of EBITDA for the full year. Turning to Slide 14, we depict the progression of our EBITDA margin growth and our net leverage decline.

Speaker 2

Margins are expected to continue to improve toward the 11% to 12% range for the full year as we capture both the improved value from our products, Realize operational efficiencies and reduce costs. Net leverage is expected to hold relatively steady for the full year, including a slight benefit For the Q2, as we drive our target net leverage ratio of 2.5 times over the next 3 to 5 years. With that, operator, please open the call to questions.

Operator

Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from George Staphos with Bank of America. Please proceed with your question.

Speaker 4

Good morning, everybody. Thanks for the details. I guess the first question I had, You mentioned a I think it was a $7,000,000 or $8,000,000 impact from sales timing in paperboard as I recall. Can you talk about what that was? And do you, I presume, get that benefit in 2Q?

Speaker 4

And then relatedly, Marcus and Delisle, you talked about a low 40s $1,000,000 in EBITDA for the quarter. One of the things you mentioned, I think, was a slower start up in Tardis, if I heard correctly. Can you go through the other factors there and The cadence we should expect in earnings 1Q to 2Q across the segments towards that low 40 EBITDA range?

Speaker 2

Good morning, George. This is Delisle. Hey, Delisle. The first question on the paperboard And the lower sales in the Q1 of $7,000,000 $8,000,000 it's probably a story you've heard many times from on a number of calls, which is really around the Stocking of our customers. And we expected that destocking is probably going to wane as we go further into Q2.

Speaker 2

And then we believe that we'll start seeing some growth picking up around historical levels as we get into second half.

Speaker 3

Okay. So is it fair sorry about

Speaker 4

that, Dilo. Is it fair that you get some of that back in 2Q sequentially versus 1Q in terms of Your projections or you're not assuming that in terms of how you build up to the 40% the low 40% excuse me?

Speaker 2

We're expecting, yes, that we're going to have a little bit of a pickup in Q2 versus Q1. Again, as I would say, I don't think the whole destocking thing has played itself completely out. So we're going to see a little bit of that in Q2. But we'll see an uptick, we believe in volume versus relative to Q1 and then you'll start seeing stronger volumes in the second half.

Speaker 4

Okay. And broadly just in terms of the cadence 1Q to 2Q or trends we should Expect sequentially across the segments, if we've already covered paperboard, the other segments would be great?

Speaker 2

Yes. High yield, again, the same type of impact that we saw with paperboard, Some destocking, but also, I think there were some demand issues, principally in China, the first Part of the Q1. So the Q1 was quite light. We do expect that the volumes will pick up in Q2 For the same reasons I outlined for paperboard. And then going forward again, we think that we'll be able to fill out our capacity and Sell our production for the rest of the year.

Speaker 3

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

Speaker 2

Yes. And then on CS volume, again, Q1 was actually a halfway decent quarter for us. Again, acetate was very robust for us as well as some of the other specialty applications around Filtration and Casings and Nitrocellulose. Q2 will be light because we're taking down 2 of our plants, Including Jessup, the largest facility that we make our CS from. So that will be light in Q2.

Speaker 2

And then it will pick back up to close to what we were experiencing in Q1 for Q3 and Q4. With respect to the commodity high purity business, and this is relating to viscose and our fluff. Again, Q2 will be lower than Q1, and then you'll see a little bit of a pickup, but we're going to see a sales mix change, we believe, In the second half, as we see increased demands in the ether business around construction actually going to lower our production and our sales volumes on the commodity side to make room for our make room in our production wheel for these higher value products.

Speaker 4

Understood. And then you already kind of covered this. I'll turn it over after this one. Can you I know it's difficult to talk about pricing expectations on a call, but What's embedded directionally, qualitatively, however you want to provide it? In terms of your commodity businesses, Whether it's fluff, viscose or high yield, Because you've mentioned it, I mean prices for the commodity grades, hardwood of China has dropped over $300 a ton.

Speaker 4

Yes. How does that sort of filter into your guidance for the year? Thank you.

Speaker 2

Yes. And I'll give a primarily qualitative guidance on that. If I start with the high yield, we expect it to go down And fairly substantially as you allude, I mean the pricing coming out of Q1 is in the 700s. We're expecting on average that our pricing will be in the mid-600s for on average for Q2. And you got to remember that Our sales has got a 1 month lag roughly.

Speaker 2

So we're picking up some of the sales pricing in Q1. And then we see a dropping further through Q3, roughly, let's say 10%. And then it gets to Q4, we see it leveling and actually increasing as we think that the market demand in China will pick up And support prices a little bit. In paperboard, again, we think paperboard is going to be relatively static. We had mentioned in the last earnings call that roughly 2 thirds of our business there is under contract.

Speaker 2

We are seeing some softness on the spot business that we have there. So we expect that pricing will decline relative to what we experienced in Q1 in the second half. But what's offsetting that, This is important to note is that our Paperwork business will benefit from the lower pulp prices. And so we expect that The earnings potential for that business will continue to be strong. On the cellulose business, the CS side of it is very strong.

Speaker 2

As we've noted, we expect the pricing in 'twenty three to be up relative to 'twenty two and will stay strong in the high single digits throughout the year. On the commodity business, we expect that the low point on pricing around the fluff And around the viscose will probably be Q3, before we start seeing a flood pricing stabilize and start to improve into Q4.

Speaker 4

Okay. Thank you so much for the color.

Operator

Thank you. Our next question comes from Paul Quinn with RBC Capital Markets. Please proceed with your question.

Speaker 5

Yes. Thanks, guys. Good morning. You referenced holistic refinancing in your press release. Just wondering what that means to you and

Speaker 2

Hey, Paul, this is Delisle. I'll get right to the first the second part of your question, which is that we're looking at using equity and the answer is absolutely not. That is not something that we're interested in doing. We believe that the markets Are open and given our improved credit metrics, we believe that we'll be able to find debt at A reasonable price, obviously, in a market that is at a higher level than we were just 3 months ago. But Our tact here is that because of our accrued credit metrics and we as a result of where we are, we actually believe Our credit metrics are indicative of a beat credit.

Speaker 2

And as a consequence, we're going to be looking at all kinds of different debt Structures, whether it's high yield, looking at syndicated loans or whether it's privately placed loans, But through because we have those options, we will be able we strongly believe that we'll be able to refinance this debt with debt.

Speaker 3

And, Paul, to your comment on Holistic. Again, as you know, we've been consciously operating our business currently with a higher cash balance, Such that we have flexibility as we approach this refinancing to stay committed to Our messaging has been, we're going to look to resize the next refinancing so that we can manage the interest rate environment that we're in. So Yes.

Speaker 2

I think of something smaller on the refi. Right. The thing to note is that Given the amount of cash we have, but more importantly, the capacity on our ABL, we probably have $70,000,000 on the balance sheet that we can use to downsize the debt offering or use it as Other way another way is to get to a proper conclusion here. So we believe we have sufficient liquidity, A much better credit position than we had even just 3 months ago.

Speaker 5

Okay. So that assumes that you'll do the refinancing somewhere around Somewhere around $250,000,000

Speaker 2

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

Speaker 5

Okay. I get it. Just turning over to high yield, and I really appreciate all

Speaker 3

the color on your It's like

Speaker 5

end markets, but high yield looks particularly difficult here. Just wondering when the decision of scale back production At Temiscaming and just basically run the operation for the paperwork?

Speaker 2

Is that closing in Q2? And you raised a very hard question. But obviously, if The pricing that we realized gets down to our cash variable cost. We will look to Reduce our production, maybe shut down a line or 2. As you know, in Temiscaming, we have two lines of high yield.

Speaker 2

But one of those lines, you can assume feeds our paperboard business, right? So, we'll probably keep one line open to continue to The paperboard business and shut the other line down if we find that pricing gets down near or below our variable cost.

Speaker 3

Got it. Thanks for that color. Best of luck.

Operator

Thank you. Our next question comes from George Staphos with Bank of America. Please proceed with your question.

Speaker 4

Hey, guys. A couple for me to finish up here. So I mean to the extent that you've been obviously talking with customers and the like, As you normally would, but certainly given the market volatility, what are you finding in terms of customers' Expectations for usage of your products and maybe whether that's improving over time, are you getting any benefit? I mean, the pulp companies I'll frequently talk about this. I'm not sure how direct it affects business near term, but plastic to fiber Substitution, anything that you're seeing that's changed in the last quarter in terms of the outlook for demand?

Speaker 4

That's number 1. Number 2, can you tell me a little bit about what this credit insurance purchase means, what flexibility it gives you, Why do you have to do it and then how to follow on it?

Speaker 2

Okay. With respect to the Call the sustainability demand story and whether it referred to any changes on that, replacing fossil fuel based Products with fiber based products. I would say that the story has only strengthened, Particularly, the United States and Europe moves away from fossil fuels and toward more sustainable fuel sources. And we believe, again, we're well positioned with that and are getting into that arena with bioethanol. And the so we think that story is only strengthening.

Speaker 2

Now is that going to translate into more sales in 2023? Maybe, particularly around acetate plastics and some of the other applications around that with Our customers at Eastman and also with some pull through from other customers who are developing those type of products. But I think you're going to really start seeing the impact in 2024, basically when we bring the bioethanol plant on in Tardis.

Speaker 3

The second question, I can take that George. So the trade credit insurance effectively expands Our advance rates on receivables for foreign customers. So with that trade credit insurance, think of an expansion of $35,000,000 to $40,000,000 in our ABL on a comparable basis to where we ended this quarter.

Speaker 4

I see. I see. And then two last questions from me. First of all, on the bioethanol projects and I think the $9,000,000 $11,000,000 you're expecting to generate, how sensitive is that to overall Levels of energy pricing. So to the extent that, okay, we are in Whether it's a global slowdown or recession, what have you, we are generally seeing energy prices coming under some pressure.

Speaker 4

Does that affect at all your return on that project? Is the $9,000,000 to $11,000,000 move down a couple of $1,000,000 On some energy price scenario that's lower, higher or is it relatively unaffected By the energy outlook. And then just can you sort of update us on what to the extent it has any impact, The increase that we're seeing in capacity, recognizing it's mostly paper grade hardwood, but you are seeing project swing projects And dissolving, whether you're seeing any encroachment into any of your markets from this new capacity? Thanks, guys, and good luck in the quarter.

Speaker 2

All right. Thank you. Yes, George, with respect to the bioethanol business, the First off is we got a 5 year contract with a multinational major corporation To buy our bioethanol. Got it. Essentially on a take or basis.

Speaker 2

The second point to make on the bioethanol plant It's making a 2nd generation bioethanol. What that means is that bioethanol is being produced from a non food source. And this is actually mandated. The use of this is actually mandated by the EU. And so when you see you look at the pricing of 2nd generation bioethanol, It's at a significant premium relative to what I would call Generation 1 Bioethanol.

Speaker 2

And in fact, the pricing is relatively stable, if not increasing, as the mandates get tighter and tighter. So we still think that the business, Phil, will continue to generate the $9,000,000 to $11,000,000 of EBITDA on an annualized basis. What was the second part of your question?

Speaker 4

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

Speaker 4

You, guys.

Speaker 2

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

Speaker 2

And George,

Speaker 3

maybe just to highlight, as you know, viscose think of 5% of our enterprise sales, so small In comparison and we differentiate ourselves on softwood versus this hardwood capacity as well.

Speaker 4

Very good guys. Thank you and good luck in the quarter.

Speaker 2

Thank

Speaker 4

you.

Operator

Thank you. There are no further questions at this time. Would like to turn the floor back over to President and CEO, Dwyal Bloomquist for closing comments.

Speaker 2

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

Operator

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

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Rayonier Advanced Materials Q1 2023
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