Q3 2019 Earnings Call
Good morning, and welcome to the rainy advanced materials third quarter 2019 earnings conference call.
During today's presentation, all parties would be any listen only mode.
Presentation. The conference will be open for questions with instructions will follow at that time.
As a reminder, this cost if we ever recorded.
Now I'd like to turn the conference with the host Mr., Mickey Walsh, Treasurer, and Vice President of Investor Relations for Rayonier advanced materials.
Thank you you may begin Mr. Walsh.
Thank you operator, and good morning, everyone. Welcome again to Rayonier advanced materials third quarter 2019 earnings conference call at work.
Joining me on todays call, our Paul Boynton, our chairman President and Chief Executive Officer, Barcas Miller, our Chief Financial Officer in Senior Vice President Finance and Frank refer to our senior Vice President of high purity and high yield cellulose businesses.
Our earnings release and presentation materials were issued last evening and are available on our website.
Ryanair am dot com.
Back to remind you that in todays 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 FCC with some of the factors, which may cause actual results to differ materially from the forward looking statements we make.
They're also referenced on slide two of the presentation materials.
Today's presentation will also reference certain non-GAAP financial measures as noted on slide three of our presentation. We believe nongaap financial measures provide useful information for management and investors, but non-GAAP measure should not be considered an alternative to GAAP measures reconciliation of these measures to their most directly comparable GAAP.
Actual measures are included on slide 14 through 19 of our presentation.
I'll now turn the call over to Paul.
Hey, 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 announcement.
First on September Thirtyth, 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 Metanor facility.
Purchase price of $175 million.
Resulting in a net proceeds to the company of approximately $150 million.
This sale represents a major achievement in executing our portfolio strategy.
It reduces future earnings variability by minimizing exposure to volatile commodity pulp market.
It also provides an infusion of cash to both reduced debt.
And enhanced liquidity.
Lastly, it allows us to more narrowly focused on our core high purity Cellulaze segment.
Well these two events were important.
We remain focused on delivering improved result.
In the third quarter, we generated $35 million of adjusted EBITDA versus $21 million in the second quarter.
Sure it on a comparable basis.
Importantly high purity cellulose results improved as greater operational reliability and efforts to lower cost helped offset weakness in somebody, especially as volumes and commodity pricing.
The other business segments taken together also deliver better results as we continue to take actions to reduce costs, including curtailing certain lumber assets and managing production and pumping assets to partially offset weaker commodity prices.
Aftermarkets reviews, the third quarter results in more detail I'll provide an update on our strategy and how we plan to continue to improve our performance.
Now, let me turn the call over to Marcus.
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 attends operations have now been classified to discontent discontinued operations and are no longer included in operating result.
Starting with high purity cellulose on slide five sales decreased by $40 million driven by a 1% decline in cellulose specialties sales price due to Chinese tariffs any 16% decline in CS volumes.
The comparative prior year period benefited from the timing of shipments, which accounted for about one half of the <unk> 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 5% decline in commodity sales prices due to weaker markets offset by 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.
The change was largely influenced by declines in C S price and volumes.
Upset by improvements in operating costs, notably from improved reliability, and lower chemical pricing compared to the prior year period.
For 2019, we continue to do 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 NPAC price by approximately 1%.
Sales volumes are expected to declined 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 Michigan and flow. We now expect full year adjusted EBITDA for the HPC segment to be a crop approximately $140 million.
Turning to slide six sales in our forest product segment declined by $21 million from the prior year period, largely driven by 25% price decline for lumber products any 5% decline in volumes due to our curtailments to reduce costs.
EBITDA for this segment fell $13 million, two or 3 million dollar loss driven by lower sales prices and volumes.
Partially offset by improved costs include including favorable would yield lower duties and the reversal of an inventory write down.
Also keep in mind.
The 3 million dollar EBITDA loss in the quarter includes $5 million up duties.
Since the start of the softwood lumber duties on shipments into the U.S. in 2017.
We have paid a total of $53 million of duties.
Based on results of prior trade disputes Canadian producers have historically recovered all or a vast majority of these duties upon resolution.
Looking forward U.S. housing starts and remodeling activity are the key drivers for lumber demand.
You as housing starts a remained relatively stable on an annual basis and low interest rates, providing positive market environment.
Industry country, curtailments should reduce supply and improved pricing once these inventory levels are drawn down.
In the third quarter, we also temporarily idled some of our assets.
We continue to manage our assets in the future to help minimize losses.
Turning to slide seven pulp segment sales decreased $20 million, which drove EBITDA down by $50 million to roughly breakeven.
Results were driven by 32% decline in prices any 24% reduction in volumes for high yield pulp off prior historical highs due to softening demand from export markets.
Looking forward, we believe high yield pulp prices have bottomed in China in the third quarter as we began realizing modest price increases in the region in the quarter.
European market prices continued to decline as they move closer to alignment with Chinese pricing.
Turning to our paper segment on slide eight sales decreased $4 million, primarily due to a 16% decline in newsprint prices any 13% reduction in volumes due to lower production.
Paperboard sales increased modestly due to a 9% increase involved volumes, partially offset by 2% declining prices.
EBITDA for the segment decreased by $13 million to $7 million driven by lower newsprint production in 2019, plus a 5 million dollar benefit included in 2018 due to the reversal of newsprint duties.
Looking forward paperboard prices are likely to remain under pressure due to increased competition.
Newsprint demand can to continues its steady decline while industry production capacity remains constant resulting in ongoing pricing pressure.
Turning to slide nine on a consolidated basis.
Third quarter operating income declined $51 million from the comparable prior year period.
The impact from commodity sales price declines and reliability issues earlier in the year can continue to overshadow the benefits from our cost transformation at actions.
A majority of the decline from prior year or $39 million was driven by sales price declines primarily from commodity markets.
Additionally volumes were also impacted primarily by weak demand in our high purity cellulose and pulp segments compared to the stronger results in 2018.
Lower operating costs due to improved production and operational reliability as well as lower maintenance and chemical prices helped offset some of the pricing decline.
Additionally, SGN he was an improved by lower incentive compensation severance costs and environmental expenses in 2019.
Turning to slide 10 sales for the quarter came in at 100 at $416 million down $85 million from the year ago quarter even.
EBITDA for the third quarter was $35 million, a decrease of $51 million from prior year, primarily driven by lower commodity prices and volumes, partially offset by improved cost.
Adjusted net debt increased slightly to 1.2 billion and cash finished at $63 million.
Based on the September Thirtyth amendment to our credit facilities. Our net secured leverage ratio ended at 4.0 times compared to a covenant required of not more than 4.95 times.
Additionally, the net proceeds from the my 10 sale will be used to further decrease our debt and increase liquidity.
Next I want to provide a bit more detail on the outcome of our recent credit agreement Amendment.
As detailed on slide 11, we believe the amendment provides us with the financial flexibility and operational runway to manage our business through these challenging commodity markets.
Both the net secured leverage ratio.
And interest coverage ratio, we're relaxed through the fourth quarter of 2021.
Covenant levels continue to increase in the fourth quarter as we anniversary stronger prior year results.
We then expect improved year over year financial performance and improved ratios beginning in the first quarter of 2020.
We also retained adequate liquidity to maintain or assets and service our customers and work with our key suppliers.
Most importantly, it allows us to execute on our strategic objectives.
In return for this flexibility we were required to pay a slightly higher interest rate 125 basis points above prior which is based on a grid that provides for lower rates as our leverage improves.
We also provided lenders with additional collateral, including mortgages and guarantees from certain of our Canadian subsidiaries.
We also agreed to restrict our ability to make certain expenditures and investments, including dividends and acquisitions, which will require us to how the greater focus on reducing debt.
Lastly, we are required to maintain a certain amount of minimum liquidity over the life of the agreement.
Full details of the amendment can be found in our 8-K filed on October 2nd.
Overall I am pleased with the outcome of the amendment as we are now able to focus on executing our business plan and emerging stronger more resilient company.
With that.
I'd now like to turn the call back over to Paul [noise].
Hey, Thank you Mark Yes, yes. The amendment was an important step for us and we believe it gives us the runway to both whether the challenging global commodity market 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.
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 cellulose specialties. So we can maintain and invest in our facilities and best serve our customers.
Last quarter, we discuss two new important contracts and cellulose specialties that yielded positive outcomes.
Earlier this month, we announced a price increase on cellulose specialties products effective immediately or as contracts allow.
Well we are currently in negotiations with many customers for 2020, we're 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 [noise].
[noise] next we remain on track to deliver upon the benefits of our four strategic pillars cost transformation market optimization, new products and investment.
These financial improvements have been overshadowed primarily by the steep decline in commodity prices and additionally by some operational issues most of which occurred earlier in the year.
We are focused on operating our assets safely and reliably and recognize the importance of driving the benefits or the strategic pillars to the bottom line.
Regarding our portfolio valuation as we already discussed the sale them attend facility for $175 million.
Provides us with approximately $150 million of cash, which will allow us to reduce debt by $100 million and increase liquidity.
It also dampens earnings volatility as we reduce exposure to commodity pulp markets by 270000 metric tons.
The closing of this transaction concludes the formal process of our portfolio valuation.
Naturally we will continue to opportunistically evaluate alternatives for non core assets.
Lastly capital allocation.
With the downturn in the commodity markets, our capital allocation remains focused on maintaining our assets and reducing debt.
In that regard management has recommended and our board of directors has elected to suspend our dividend preserving $18 million of additional cash flow per year.
We have already we already reduced our capex guidance for 2019 by $10 million and we expect to reduce this run rate even further for 2020.
Additionally, as noted $100 million of net proceeds from the sale in the 10 will be used to repay debt.
We're confident in our ability to mantra managed through these difficult commodity markets and execute on our strategy.
We've seen these cycles in the past and we know what it takes to manage through them.
We have implemented measures to minimize cost preserve cash increased liquidity and reduce volatility.
We have the right people and partners in place that not only allow us to manage through the cycle, but also position us to capture significant value as we emerged stronger and more resilient as our markets improve.
With that operator, please open the call for questions.
Thank you at this time, we will conduct a question answer session. If you would like to ask a question. Please press star one on the telephone keypad.
Information tone indicate your line is in a question Q.
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Once again that start one to ask a question at this time.
One moment, while we pull for questions.
Our first question comes from Paul Quinn with RBC capital markets. Please proceed with your question.
Yeah, Thanks, very much morning, guys.
Morning.
Congratulations on the completion of the met TEMCELL I'm, just wondering what the Delta like 25 million between the gross sale price of 175 of them 150.
Can you give us some details of what the differences.
Yeah sure Paul Good morning.
Okay. The key elements of the change or that would reconcile that is a one there's a there's a pension adjustment given sappy retain the a defined benefit plan.
In addition, we're covering closing costs so.
Fees for our bankers and and lawyers that were engaged and estimated tax leakage related to the transaction.
Okay. That's helpful and then.
Just on that portfolio a valuation you say that the process is completed can you tell us what what I said, she you consider noncore and.
Yes, Hi, how are these going to be looked at going for it.
Yeah, Paul So yeah, we considered a completed and he said we started that process earlier in the years of return to try and wrap up by midyear took us a little bit longer than we originally planned and obviously concluded with the maintained sale look as you can imagine we're at right now with the commodity markets. It's not the best time to capture all the value that we see.
I think our inherent to these assets so we'd much rather continue operate them and invested on the mixture that theyre going to produced 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 or we think that's that's vital to our future and that's important to it. So that's what we'll consider our.
Core everything else that we consider a good viable part of the business unless again somebody comes along and and decides there's more value in it than what we assigned to it.
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 <unk>.
Or is that weakness going to continue through the year.
Yeah. 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.
Consumer companies are very focused on working capital management. So we think that that played a piece of the role when that in regard to.
The overall outlook for 2020, we don't give forecast for 2020 at this point as you know where over the next few months really in the midst of negotiations and conversations with all of our customers about price and volume for next year, So well have a better outlook on that when we get to up the fourth quarter earnings call.
Alright fair enough that still ahead.
Good luck.
Thanks, Paul.
Our next question comes from John back with Bank of America. Please proceed with your question.
Good morning, actually just one quick one on the bottom for Saudi is there a way you could give us some sense as to what the EBITDA was for that business during the quarter.
Yes for the quarter or the middle generated.
35 million in sales and EBITDA of 3.3 million.
Okay.
That's helpful. And then the next question just on the high, especially price and because it sounds like that the guidance for down one or 2% excludes the impact on sales prices from the duties and I guess my question is really just what is what did the exact thing that's actually impacting the price from those duties as as Ryan I'm offering discounts or is there something else I Miss.
Yeah.
No I think as we said before going into China, we're covering the duties for those customers and that flows through to the sale price.
So that's where you're seeing that that 1% decline or otherwise that prices are relatively stable to our guidance and until last year.
Okay and went and when did those judy's going places you can just kind of Miami.
September up 2018.
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.
Yes.
Okay.
And then kind of next question you know just with regards to that kind of price negotiations I mean, what are the key factors that are coming into play. This year. So as 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 next negotiations.
Yes, I think the major factor that we always talk to customers about and we talked about is really that the value and use that our products provide.
Despite the fact that there are competing products in certain of the key areas.
You know the products are fairly unique and depending on the end use its even you know it could be more unique in certain.
Pieces of the segments more or less so really what we talk about is the uniqueness in the value and use of those products and the fact that with our larger facilities with our more lines. We offer a security of 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 they make sure we continue to provide them the value.
That they need.
These more difficult economic times.
Okay. Thanks, and then working capital I was just was wondering what was what drove the increase during the quarter.
Yes, we you know as you know we made progress on the last quarter, a the quarter before on drawing inventories given some of the comments that Frank made on 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.
Okay and then just last question before I turn it over just just on lumber did you guys mentioned that you took downtime and if so about how much market related downtime to do take.
So it.
Paul here, we did take some some temporary curtailments at several different facilities and they range, maybe two to three weeks at a at those facility. So not a substantial amount. If you keep in mind were integrated back in our chip supply from our to Miss screen 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.
Produces a study product.
We focused 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 different the three different stub mills that we have.
Thank you.
Sure.
Our next question comes from Steve Chercover with D.A. Davidson. Please proceed with your question.
Thanks, Good morning, everyone.
Once the.
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 adults with some of the other pressures around automotive and construction.
Yes, Oh, sorry, sorry, yeah, absolutely I think so Steve I mean, if it wouldn't turn on a time here at all but it's certainly a major backdrop into how our business is performing 'cause it's put pressure on almost every single segment commodity side of our segments and pricing.
And.
And having that resolved and products moving more freely I think is absolutely would improve our situation. That's why we think at some point. This does get resolved and as an all cyclical businesses, we'll see those come back around but that would be the primary driver. We believe in resolving it is just getting back to this though a little bit.
Improved economic trading situation.
Okay, and then I was wondering if you had any update whatsoever on the softwood lumber file we normally the software 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 is.
Just kind of lost in the noise.
Yes, Steve I think we'd agree that the other trade issues global trade issues are taking the priority in the dialogue.
With the United States for certain U_s_m_c, a former NAFTA as well as China trade and I think from what we hear Theres theres not a lot of conversation going on on resolving the softwood lumber agreement at this point in time, So I think it is relatively quiet.
Sure it'd be nice to have that 53 million Bucks. Okay. And then finally, Paul you said that you've got the right team did move raise your advanced forward and please no. One take this question the wrong way, but it's kind of for Frank what skill sets do bring to specialty cellulose as a former banker and CFO is it like a negotiation.
And ability and do you have strong relationships with the customers.
Yeah, 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 a strategic perspective.
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 and 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 yeah.
Continuing to 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 then how we're taking that to market as we go forward. So that's what I would would say you have going forward.
Push it to call the say white put me in the job.
No I think that's absolutely right and think Frank answered it well right. One is it just a strategic perspective on what drives value on what what doesn't drive value and making sure. The organization has aligned in that regard second on Frank hit on it first which is you know Frank as being 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 on what he writes due to the to the team. So we're in good hands and good position with Franken in this role <unk>.
Terrific, Okay, Im sorry, just kind of would add on.
We wish you all the best in getting through these price hikes, because you don't 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 you'll have how's that going and how did your customers react to that element to this trial.
Energy.
So look at its 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 under and appreciate it and again I think they are they appreciate the fact that we still have multiple lines that add the redundancy that Frank talked about earlier. So we are on track for that Steve. There are some grade some products that will take a little bit longer as we indicated in march to move over to.
A different lines because either the 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.
Okay. Thank you.
Sure. Thank you see.
Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad. Our next question a follow up from Roger Spitz with Bank of America. Please proceed with your question.
Thanks, very much and I was just jumping around call 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 next does that mean, you're shifting Additionally, <unk> HPC volumes for especially silos to discuss in fluff, Although you indicated.
Obviously, the outlooks are weak.
Yeah.
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 for as many.
Of those grades as we can to those those facilities that allows us to have less less downtime at how Laos has to have less off grade as we transition from grade to grade.
So there's 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.
Very high quality products that our customers need and Raj to add to data. We communicated in March that will we will focus in on higher value business and Thats cellulose specialties area right and that if there is some parts of that business that doesn't provide the value that we think it provides an to investors into our assets that we will shed some of that business right. So that will.
Create some some more commodity.
Volume as we go forward, but that's by design.
Got it and then on working capital.
Any guidance you can provide on on.
Q4, and 2020 in terms of inflow alpha.
Good morning, its Marcus.
You know 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 unfinished product inventories, but we see ourselves regaining that going into the fourth quarter.
So.
You could look for for a better better management of our inventory line item.
I think it's going be a key focus obviously it is now and well through 2020 as we look at inventories I'm finished goods as wells in our storerooms accounts payable accounts receivable well have that focus but I don't have any guidance at this point in time for for 2020.
Alright, Thank you very much.
Thanks.
Thank you at this time I would like to turn the call to Mr. Paul Boynton.
Comments.
Great. Thanks, everybody for your time today, we appreciate you listening and we appreciate the fact that you know were tough markets, where we're doing everything we can to the managed 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.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time and have a great.