Rayonier Advanced Materials Inc.
Q3 2019 Earnings Call Transcript

Published: 5 Nov 2019

[Operator:]

Good morning, and welcome to the Rayonier Advanced Materials Third Quarter 2019 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions with instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mickey Walsh, Treasurer and Vice President of Investor Relations for Rayonier Advanced Materials. Thank you. You may begin Mr. Walsh.

[Mickey Walsh:]

Thank you, operator, and good morning, everyone. Welcome again to Rayonier Advanced Materials third quarter 2019 earnings conference call and webcast. Joining me on today's call are Paul Boynton, our Chairman, President and Chief Executive Officer; Marcus Moeltner, our Chief Financial Officer and Senior Vice President of Finance; and Frank Ruperto, our Senior Vice President of High Purity & High Yield Cellulose Businesses. Our earnings release and presentation materials were issued last evening and are available on our website at rayonieram.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 2 of the presentation material. Today's presentation will also reference certain non-GAAP financial measures as noted on Slide 3 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 14 through 19 of our presentation. I'll now turn the call over to Paul.

[Paul Boynton:]

Thank you, Mickey, and good morning everyone. We've accomplished some key milestones since our last quarterly call and I want to provide you with an update on two recent announcements. First on September 30, we successfully renegotiated our senior secured credit agreement to provide a more flexible covenant package through 2021. The amendment to the agreement provides us the runway we need to navigate the ongoing challenge of the commodity markets. We believe we now have a covenant package that positions us to both execute successfully in the current market environment and position the company for long-term value creation. Secondly, yesterday, we announced the completion of the sale of the Matane facility for a purchase price of $175 million, resulting in net proceeds to the company of approximately $150 million. This sale represents a major achievement in executing our portfolio of strategy. It reduces future earnings variability by minimizing exposure to a volatile commodity pulp market. It also provides an infusion of cash to both reduce debt and enhance liquidity. Lastly, it allows us to more narrowly focus on our core high purity cellulose segment.

[Marcus Moeltner:]

Thank you, Paul. I will provide an overview of our third quarter results focusing on net sales and EBITDA compared to the prior year third quarter and an outlook for each of our business segments. Please note that results from Matane’s operations have now been classified to discontinued operations and are no longer included in operating results. Starting with high purity cellulose, on Slide 5, sales decreased by $40 million, driven by 1% decline in cellulose specialties sales price due to Chinese tariffs and 16% decline in CS volumes. The comparative prior year period benefited from the timing of shipments, which accounted for about one half of the volume impact, the remaining impact was driven by weakening in the acetate, automotive and construction end markets driven by slowing global economics and customers aggressively managing inventories. Sales were also impacted by a 5% decline in commodity sales prices due to weaker markets offset by a 26% increase in commodity production as productivity improved. EBITDA for the segment was $41 million compared to $63 million in the quarter a year ago. That change was largely influenced by declines in CS price and volumes offset by improvements in operating costs, notably from improved reliability and lower chemical pricing compared to the prior year period. For 2019, we continue to expect CS prices to be down approximately 1% to 2% from 2018 excluding the impact of Chinese tariffs, as previously guided. Chinese tariffs are expected to impact price by approximately 1%. Sales volumes are expected to decline 6% due to factors stated earlier. Commodity viscose and fluff products are also experiencing continuing pressure as global trade disputes have significantly impacted demand and pricing for these products and we expect additional price declines in the fourth quarter. With this continuing market pressure, primarily in viscose and fluff, we now expect full year adjusted EBITDA for the HPC segment to be approximately $140 million.

[Paul Boynton:]

Hey, thank you, Marcus. Yes, the amendment was an important step for us and we believe it gives us the runway to both weather the challenging global commodity markets and execute our business strategy. Turning to Page 12, I want to provide you with an update on our four key areas of strategic focus to drive growth and value for the business. As a reminder, these are the four areas we originally detailed in March at our Investor Day. I'll start with our go-to-market strategy, which is focused on increasing prices and margins in cellular specialties so we can maintain and invest in our facilities and best serve our customers. Last quarter we discussed two new important contracts in cellular specialties that yielded positive outcomes. Earlier this month we announced a price increase on cellular specialties products effective immediately or as contracts allow. While we are currently in negotiations with many customers for 2020 we are seeing positive developments even in the challenging economic conditions. We will provide a more fulsome update on our next earnings call with regards to our expectations for 2020. Next, we remain on track to deliver upon the benefits of our four strategic pillars

[Operator:]

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

[Paul Quinn:]

Yes, thanks very much and good morning guys.

[Paul Boynton:]

Good morning, Paul.

[Marcus Moeltner:]

Good morning.

[Paul Quinn:]

Congratulations on the completion of the Matane sale. Just wondering what the delta, that $25 million between the gross sale price of $175 million and $150 million, what – can you give us some details of what the difference is?

[Paul Boynton:]

Yes. Sure, Paul, good morning. The key elements of the change that would reconcile that is one, there's a pension adjustment given Sappi retain the defined benefit plan. In addition, we're covering closing costs, so fees for our bankers and lawyers that were engaged and estimated tax leakage related to the transaction.

[Paul Quinn:]

Okay, that’s helpful. And then just on the portfolio evaluation, you say that the process is completed. Can you tell us what assets you consider noncore and yes, how are these going to be looking at going forward?

[Paul Boynton:]

Yes. Paul, so yes, we considered it completed. And we said we started that process earlier in the year, so we're going to try and wrap up by midyear. It took us a little bit longer than we originally planned and obviously, concluded with the Matane sale. Look, as you can imagine, where we're at right now with the commodity markets, it's not the best time to capture all the value that we think are inherent to these assets. So we'd much rather continue operate them and invest in them and make sure that they're going to produce good results for our investors. As you look at our business though, and you know well that we're really focused around our High Purity Cellulose business. We think that's vital to our future and that's important to it. So that's what we'll consider are core. Everything else though, we consider a good viable part of the business, unless again, someone comes along and decides there's more value in it than what we assign to it.

[Paul Quinn:]

Okay. And then just turning to the High Purity Cellulose business itself, volumes were down 6%. Do you see those volumes coming back in 2020? Or is that weakness going to continue through the year?

[Frank Ruperto:]

Yes. Paul, this is Frank. What I would tell you is that two things. One is the volume weakness that we've seen this year, especially in the third quarter, is exacerbated a bit by inventory management by our key customers. I think in this economic environment, most industrial companies are very focused on working capital management. So we think that, that played a piece of the role in that. In regards to the overall outlook for 202, we don't give forecast for 2020 at this point. As you know, we're over the next two months, really in the midst of negotiations and conversations with all of our customers about price and volume for next year. So we'll have a better outlook on that when we get to the fourth quarter earnings call.

[Paul Quinn:]

All right. Fair enough. That’s all I have. Good luck.

[Paul Boynton:]

Thanks, Paul.

[Operator:]

Our next question comes from John Babcock with Bank of America. Please proceed with your question.

[John Babcock:]

Good morning. Actually just one quick one on the Matane facility, is there a way you could give us some sense as to what the EBITDA was for that business during the quarter?

[Marcus Moeltner:]

Yes. For the quarter, the mill generated $35 million in sales and an EBITDA of about $3.3 million.

[John Babcock:]

Okay. That’s helpful. And then the next question, just on the cellulose specialty pricing, because it sounds like that the guidance were down 1% to 2%, excludes the impact of sales prices from the duties. And I guess my question is really, just what is the exact thing that's actually impacting the price from those duties? Is RYAM offering discounts? Or is there something else that I'm missing here?

[Paul Boynton:]

No. I think as we said before, going into China, we are covering the duties for those customers, and that flows through to the sale price. So that's where you're seeing that 1% decline. Otherwise, prices are relatively stable to our guidance and into last year.

[John Babcock:]

Okay. And when do those duties go in place? If you can just kind of remind me?

[Paul Boynton:]

September of 2018.

[John Babcock:]

Okay. And so have you seen – so some of the pricing that we've seen so far this year already includes that. Is that fair?

[Paul Boynton:]

Yes.

[John Babcock:]

Okay. And then kind of the next question, just with regards to the kind of price negotiations. I mean, what are the key factors that are coming into play this year? So realizing you probably won't be giving us any sense as to whether or not pricing will be positive or negative next year, what factors are kind of customers bringing up in those negotiations?

[Frank Ruperto:]

Yes. I think the major factor that we always talk to customers about and we talk about is really the value in use that our products provide despite the fact that there are competing products in certain of the key areas, the products are fairly unique. And depending on the end use, it's even – it could be more unique in certain pieces of the segments or less. So really, what we talk about is the uniqueness and the value and use of those products. And the fact that with our larger facilities, with our more lines, we offer a security supply that no other company in the industry can offer. So that's really where we're talking about things. Obviously, the economic backdrop always comes into play in these discussions. And that's really the other piece of the puzzle that we need to talk to customers about and make sure we continue to provide them the value that they need in these more difficult economic times.

[John Babcock:]

Okay. Thanks. And then working capital, I just was wondering what was – what drove the increase during the quarter?

[Marcus Moeltner:]

Yes. We – as you know, we made progress on the last quarter, the quarter before on drawing inventories, given some of the comments that Frank made on active inventory management by our customers. We had a bit of an offset there, but we're looking to draw that back down as we go into year-end.

[John Babcock:]

Okay. And then just last question before I turn it over. Just on lumber, did you guys mention that you took downtime? And if so, about how much market-related downtime did you take?

[Paul Boynton:]

So it – John, Paul here. We did take some temporary curtailments at several different facilities. And they range maybe two to three weeks at those facilities. So not a substantial amount. If you keep in mind, we're integrated back in our chip supply from our Temiscaming operations into these lumber mills. And so it's important for us to keep those chips flowing, at the same time and particularly at our facilities that produce a stud product, we focus in on them and taking those down as we could and still maintain that chip supply. So again, it's usually – has been two to three weeks, kind of rolling through – the three different stud mills that we have.

[John Babcock:]

Okay. Thank you.

[Paul Boynton:]

Sure.

[Operator:]

Our next question comes from Steve Chercover with D.A. Davidson. Please proceed with your question.

[Steve Chercover:]

Thanks. Good morning, everyone.

[Paul Boynton:]

Good morning, Steve.

[Steve Chercover:]

So my first question is just if the global trade issues were resolved, do you think it would address not only the pricing pressure to China but also some of the other pressures around automotive and construction?

[Paul Boynton:]

I’m sorry. Yes, absolutely, I think so, Steve. I mean, it wouldn't turn on a dime here at all, but it's certainly a major backdrop into how our business is performing, because it's put pressure on almost every single segment, commodity side of our segment and pricing. And having that resolved and products moving more freely I think it absolutely would improve our situation. That's why we think at some point this does get resolved. And in all cyclical businesses, we'll see this come back around. But that would be the primary driver we believe in resolving. It’s just getting back to – this is a little bit improved economic trading situation.

[Steve Chercover:]

Okay. And then I was wondering if you had any updates whatsoever on the softwood lumber file. I mean, normally, the softwood lumber disputes are a big deal at least in our world, but with NAFTA or whatever the hell they want to call it. And China, it seems like it's not getting much attention. So is there stuff going on behind the scenes that it’s just kind of lost in the noise?

[Paul Boynton:]

Yes, Steve, I think we'd agree that other trade issues, global trade issues are taking the priority and the dialogue with the United States for certain USMCA former NAFTA as well as the China trade. And I think from what we hear, there's not a lot of conversation going on resolving the softwood lumber agreement at this point in time. So, I think, it is relatively quiet.

[Steve Chercover:]

Sure. It would be nice to have that $53 million. Okay. And then finally, Paul, you said that you've got the right team to move Rayonier Advanced forward and please no one take this question the wrong way, but it's kind of for Frank. What skill sets do you bring to specialty cellulose as a former banker and CFO? Is it like a negotiation ability and do you have strong relationships with the customers?

[Frank Ruperto:]

Yes, so I'd say a couple of things, Steve. I've been meeting with customers since I got here almost six years ago. So, most of our major customers I've met with multiple times in discussions and participated in key negotiations from the time that I've gotten here. So that's been going on for a while. The other thing I'd say is just the strategic perspective of where we need to take the business and really being able to convey that to the customer base in a way that is constructive from their perspective, really selling the value of our products in use and making sure that that we do that appropriately. So, I think, all of those things are important. I think the last thing is just continuing to organize the team and make sure we're focused on all of the right priorities in the business whether it's on the commercial side or more broadly on the product offering and how we're taking that to market as we go forward. So that's what I would say going forward. I push it to Paul to say why you put me in the job.

[Paul Boynton:]

No, I think that's absolutely right. And I think Frank answered it well, right. One is, it’s just a strategic perspective on what drives value and what doesn't drive value and making sure the organization is aligned in that regard. Second of all, and Frank hit on it first, which is Frank has been meeting and knows and understands our customers around the globe very well. He has been traveling independently or with me or with the team for his whole duration here. So he's got a very good set of relationships out there that – and our customers have a great respect for Frank and what he provides to the team. So we're in good hands and good position with Frank in this role.

[Steve Chercover:]

Terrific. Okay, and sorry, just kind of an add-on. We wish you all the best in getting through these price hikes because you need them. And I'm just wondering, it's now six or eight months since you discussed the realignment of the assets, so certain facilities would produce certain grades. And how is that going and how did your customers react to that element of the strategy?

[Paul Boynton:]

So, look, it's progressing to plan. It's going well. We are realigning and moving volumes to different assets as we talked about at that March investor presentation. So I think very well, I think the customers have certainly understood it and appreciate it. And again, I think, they appreciate the fact that we still have multiple lines that add the redundancy that Frank talked about earlier. So we are on track with that. Steve, there are some grades, some products that will take a little bit longer as we indicated in March to move over two different lines because either they're regulated in some way or fashion. So those will be the slower part, but for the most part we're moving exactly to the plan.

[Steve Chercover:]

Okay, thank you.

[Paul Boynton:]

Sure, thank you, Steve.

[Operator:]

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

[Roger Spitz:]

Thanks very much and I was just jumping around calls, sorry about this if it's been asked. But on your strategic upside – update slide, you mentioned the asset realignment to meet the market needs and sales mix. Does that mean you're shifting additional HPC volumes from specially cellulose to viscose and fluff although you’ve indicated obviously the outlooks are weak?

[Paul Boynton:]

Yes. Roger, what we're doing really is shifting the products to where they are best made. So this isn't a mix shift between commodity and HPC when we talk about asset realignment. It's really trying to take the facilities with the lowest cost positions for each grade where we can and move all of those grades or as many of those grades as can to those facilities. That allows us to have less downtime. It allows us to have less off-grade as we transition from grade to grade. And so there's a real benefit from a savings perspective. And it may be in the production side, it might be in the logistics side, et cetera. But it's something that I think we can do really well, which is really concentrate these grades and similar grades in key assets, so that we can reduce operating cost over the longer term, but still provide the very high quality products that our customers need.

[Frank Ruperto:]

And Roger to add to that, we communicated in March that we will focus in on higher value business in that cellular specialties area, right. And that if there is parts of that business that doesn't provide the value that we think could provide to investors and to our assets that we will shed some of that business, right. So that will create some more commodity volume as we go forward, but that's by design.

[Roger Spitz:]

Got it. And then on working capital, any guidance you can provide on Q4 and 2020 in terms of inflow outflow?

[Marcus Moeltner:]

Yes, good morning. It's Marcus. As Frank alluded to his comments on some of the weakness in our volumes due to active management by our customers, we lost some ground this quarter certainly on finished product inventories, but we see ourselves regaining that going into the fourth quarter. So you could look for a better management of our inventory line item. I think it's going to be a key focus. Obviously, it is now and will through 2020 as we look at inventories and finished goods as well as in our store rooms, accounts payable, accounts receivable. We'll have that focus, but I don't think we have any guidance at this point in time for 2020.

[Roger Spitz:]

All right. Thank you very much.

[Paul Boynton:]

Thanks, Roger.

[Operator:]

Thank you. At this time, I would like to turn the call to Mr. Paul Boynton for closing comments.

[Paul Boynton:]

Great. Thanks everybody for your time today. We appreciate you listening and we appreciate the fact that we're in tough markets, but we're doing everything we can to manage through it and we know these markets will turn back at some point in time as we move forward. So thank you for your time today.

[Operator:]

Thank you. This does concludes today's teleconference. You may disconnect your lines at this time and have a great day.