Title

Presentation

Rayonier Advanced Materials Inc. misses on earnings expectations. Reported EPS is $0.02 EPS, expectations were $0.06.

Operator: Good morning, and welcome to the RYAM First 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 first 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. They are available on our 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 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 Slides 2 and 3 of our presentation material. Today’s presentation will also reference certain non-GAAP financial measures, as noted on Slide 4 of our presentation. We believe non-GAAP 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 call over to De Lyle.

De Lyle Bloomquist: 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 Marcus’ 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. Revenue increased $115 million or 33% from prior year to $467 million, driven by solid price increases across all our products and overall stronger volumes, driven by improved operational productivity. Adjusted EBITDA increased $31 million or 155% versus prior year to $51 million 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 million of adjusted EBITDA, up $28 million or 175% from prior year. Paperboard delivered another solid quarter with $13 million of EBITDA and High-Yield Pulp contributed an additional $8 million of EBITDA as we realized higher prices in the quarter. Corporate expenses increased $8 million from last year due to $14 million 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 million to $215 million of EBITDA for the full year, and we are increasing our free cash flow guidance to $40 million to $65 billion. Now, 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 the High Purity Cellulose segment on Slide 6. Sales for the quarter increased $93 million or 33% to $374 million, 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 million of biomaterials sales, primarily from green energy and lignin. EBITDA for the segment improved $28 million to $44 million. 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 million, 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 time. EBITDA for the segment grew 30% or $3 million to $13 million as the higher sales prices more than offset the lower volumes and increased costs for chemicals and purchase pulp. Turning to the High-Yield Pulp segment on Slide 8. Sales increased by $20 million from prior year, reflecting a 39% increase in external sales prices and a 43% increase in sales volumes due to stronger demand and improved logistics. Cost increases were primarily related to higher chemicals and logistics. EBITDA for the segment improved $8 million as compared to breakeven in the prior year.

Turning to Slide 9. On a consolidated basis, operating income for the first quarter improved $33 million to $17 million. Sales price improvements across each segment and volume increases in HPC and High-Yield Pulp more than offset $59 million of higher costs for chemicals, purchase 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 first quarter of 2022 and essentially flat to the prior quarter. Turning to Slide 10. Net debt declined to $683 million, a reduction of $72 million from the same period in 2022. We continued to repay debt, including $5 million of senior unsecured notes in the first quarter and $10 million of senior secured notes in April.

As we continue to repay debt, we’re still preserving strong liquidity. Liquidity ended the quarter at $276 million, including $169 million of cash. We recently purchased trade credit insurance, which will increase liquidity by an additional $36 million. This excess liquidity provides flexibility for our upcoming refinancing activities. 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 million to $105 million, down from approximately $110 million in our original guidance. While we were able to reduce our maintenance CapEx, we still expect to invest $30 million to $35 million 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 3.3x, an improvement of 0.7x in the quarter and ahead of our initial expectations. With lower debt and improving credit metrics, we expect to refinance our 5.5% senior unsecured notes, which mature in June of 2024, at acceptable terms in the coming quarter. We recently engaged Goldman Sachs to help advise us on 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 De Lyle.

De Lyle Bloomquist: Thank you, Marcus. Turning to Slide 11, we are making solid progress on 2023 initiatives. With $51 million of EBITDA generated in the first quarter, we remain on track to deliver between $200 million to $215 million for the full year. Free cash flow generation was also strong with $36 million achieved in the quarter. $31 million of this free cash flow was generated from working capital initiatives, primarily from lower inventory while CapEx was managed to $21 million with the Tartas annual maintenance outage executed in the quarter. As we have realized to improve operational reliability, we now expect to reduce maintenance CapEx and increase our free cash flow guidance to $40 million to $65 million in 2023, an increase of $5 million to $10 million 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 second quarter. We increased cash balances to $169 million 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 that’s coming due in just over a year. 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 two key areas to drive value. First, we are realizing increased benefits from our investments to improve operational reliability, including increased production and sales volumes and lower unit fixed costs. 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 million, a total CapEx spent in the quarter, including $6 million of strategic capital.

However, we expect to reduce our normalized CapEx to approximately $90 million, while we continue to execute on $10 million to $15 million a catch-up CapEx in 2023. For the full year, we now expect to spend $100 million to a $105 million on custodial CapEx with a greater weighting of spend around our annual maintenance outages. Our two largest facilities in Jesup and Temiscaming will complete their annual outages in the second quarter. With demand from some products remaining soft, we will continue to operate our assets to match market demand. Second, we are capturing a higher-value for our products. Our cellular specialty prices are up 18% from the prior-year period, driven by our contractual negotiations in 2023, and we will continue to prioritize value of our cellulose specialty products over volumes.

The cellulose specialty markets is expected to remain balanced as the new hardware 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 but steady volumes. 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 million to $65 million. Notably, the significant improvement in free cash flow for the quarter includes $31 million of working capital benefits, offset by $14 million 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 first quarter. On Page 13, we provide additional color on each of our businesses. 2023 cellulose specialty prices are expected to increase by high-single digit percentages versus 2022. Demands for our high purity business remains mixed, with strength in acetate and many other CS grades offsetting softness in construction ethers and food additives. Fluff prices are expected to decline, but the industry forecasters have raised the price floor versus prior cycles. Viscose 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. We continue to make strategic investments in our biomaterials business, which we believe will provide incremental growth for the company. The bioethanol plant in Tartas remains on track to begin production in the first half of 2024. The second generation ethanol produced at this facility is expected to provide a $9 million to $11 million annual EBITDA benefit to the company. In Paperboard, prices are expected to moderate slightly over the balance of the year, but remain elevated as compared to 2022 levels. Volumes are expected to remain steady, while raw material prices will decline due to lower 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.

Sales volumes are expected to improve slightly with eased logistics and higher productivity. Corporate expenses are expected to be higher than 2022 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 second quarter to be in the low $40 million range due to our planned maintenance outages at our two largest facilities: a slower-than-anticipated restart from Tartas outage, and the calendarization of some customer annual outages. We believe that we remain on-track to deliver the $200 million to $215 million of EBITDA for the full year. Turning to Slide 14, we’ve depict the progression of our EBITDA margin growth and our net leverage decline. Margins are expected to continue to improve towards the 11% to 12% range for the full year, as we captured both the improved value from our products, realized operational efficiencies and reduce costs.

Net leverage is expected to hold relatively steady for the full year, including a slight benefit for the second quarter as we drive toward our target net leverage ratio of 2.5x over the next three to five years. With that, operator, please open the call to questions.

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

Operator: Thank you. [Operator Instructions] Our next question comes from Paul Quinn with RBC Capital Markets. Please proceed with your question.

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

Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to President and CEO, De Lyle Bloomquist, for closing comments.

De Lyle Bloomquist: 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.