Q1 2022 Rayonier Advanced Materials Inc Earnings Call

Good morning, welcome to the Rainier advanced materials first quarter 2022 earnings call.

During todays presentation, all parties will be in a listen only mode. Following the presentation. The conference will be opened for questions with instructions to follow at that time I was there.

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 for Rayonier advanced materials. Thank you. Mr. Bosch you may begin. Thank you operator, and good morning, everyone and welcome again to Rainier advanced materials first quarter 2022 earnings.

Conference call and webcast joining me on today's call our Vito can seek Leo our president and Chief Executive Officer, and Marcus Molnar, 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 rainy or a M dot 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, where 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 two and three.

<unk> of our presentation material today's presentation will also reference certain non-GAAP financial measures as noted on slide four 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.

Reconciliation of these measures to their most directly comparable GAAP financial measures are included on slides 16 through 20 of our presentation.

Now I'd like to turn the call over to Vito.

Thank you Mickey and good morning, everyone. I am pleased to report that we have significantly advanced our efforts to improve reliability and manage inflationary cost in order to position the business for EBITDA growth.

Starting on slide five sales for the quarter increased 10% to $352 million with price increases across all segments, driven by strong demand, including double digit price increases for our cellulose specialties products.

As previously communicated the EBITDA results started the year slowly as we focused on these historic maintenance outages and manage extraordinary inflationary cost.

Turning to slide six.

We made great progress on our Jesup and Fernandina maintenance outages with each facility coming back online at the beginning of the second quarter.

These outages, where some of the largest and longest outages that we have executed and our 95 year history of the company.

We made significant investments to increase productivity, including rebuilding a large recovery boiler.

To build on this momentum we recently made the strategic decision to accelerate Tartous is planned maintenance outage into the second quarter from the original plan in the fourth quarter.

This outage along with domestic amines second quarter planned outage will further position our assets to operate with greater reliability and productivity and help mitigate current impacts from supply chain disruptions.

Additionally, we are doing our best to absorb and mitigate the impacts of inflation and supply chain challenges.

We recently implemented a cost surcharge on all cellulose specialties products to help offset the inflationary cost.

These actions will allow us to better service, our customers and generate improved financial results.

As such we remain on track to deliver improved EBITDA in the second quarter, and we reaffirm our guidance to generate higher EBITDA in 2022.

Earlier. This week, we also announced the sale of our shares in Green first forest products for 43 million U S dollars.

This transaction represents the final consideration for the sale of the lumber and newsprint assets and the culmination of our portfolio optimization initiative.

It also represents a 26% premium above the original plan executed nearly a year ago.

The sale agreement contains a purchase price protection clause, whereby the company is entitled to participate in further stock price appreciation under certain circumstances.

Now I'd like to ask Markus to take us through the financial details for the quarter.

I will then come back to provide additional perspective on the business and our market outlook Marcus.

Thank you Vito.

Starting with high purity cellulose on slide seven first quarter sales increased 12% or 31 million to $281 million driven by a 17% increase in sales prices.

This reflected a double digit increase in C. S pricing per our negotiated contracts offset by a 4% decline in sales volumes driven by supply chain constraints lower production.

An improved mix towards C S.

Net sales also included 27 million of other sales.

Primarily from Biobased energy and lignin.

EBITDA for the segment declined $19 million.

To $16 million, driven by higher costs across key inputs, including wood chemicals energy and supply chain expenses.

Turning to slide eight paper.

Paperboard segment sales grew by $6 million driven by a 19% increase in sales prices.

Partially offset by a 5% decline in sales volumes.

EBITDA for the segment held flat at $10 million.

As higher sales prices were offset by increased costs for purchase pulp.

Turning to a high yield pulp segment on slide nine.

Sales declined 6 million from prior year, driven by a 32% decline in sales volumes, primarily due to supply chain and production constraints, while sales prices increased 17% driven.

Driven by strong demand for global market pulp.

EBITDA for the segment declined slightly to breakeven for the quarter as the price increases helped to offset the volume declines.

Turning to slide 10 on a consolidated basis.

Operating income declined 16 million from prior year to a $16 million loss as price improvements across each segment were impacted by higher input costs and supply chain constraints.

Lastly on slide 11, despite the increase in working capital and the elevated capex of 45 million in the quarter.

Both impacted by extensive planned maintenance outages and supply chain constraints.

The company maintained a solid 302 million of liquidity.

<unk> $179 million of cash.

With additional outages planned for the second quarter, we expect the majority of our annual $140 million to $150 million of Capex to be spent in the first half of the year.

After making these critical infrastructure investments in the first half of 2022.

We expect improved reliability, along with actions implemented to offset extraordinary inflationary class to drive improved cash flow in the balance of the year.

Lastly.

We continue to monitor capital markets and are prepared to Opportunistically refinance our 5.5% senior notes, which mature in June of 2024.

We expect to deliver improved results for the remainder of the year.

Which will further deleverage our balance sheet and improve the company's credit profile.

We are confident that the company will obtain an acceptable refinancing at the appropriate time.

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

Thank you Marcus.

Turning to page 12, I want to provide an update on each of our businesses and a market outlook.

We continue to see strong demand for our key cellulose specialty products the cost surcharge announced earlier this quarter has been successfully implemented as planned.

Customers are focusing on securing volume and passing on their own inflationary costs to the end users.

Additionally, we expect to realize higher prices for commodity high purity cellulose products in the coming quarter as demand for these products remained stable and supply for fluff products is constrained.

However, we remain cautious about supply chain constraints any uncertain outlook in China related to a resurgence of COVID-19.

As previously discussed we are executing our planned maintenance outages to drive improved reliability and productivity.

Overall, we expect H P see profitability to improve sequentially and produce significantly better results for the full year 2022 as we realize the benefits of our key initiatives.

In paperboard, we are also experiencing strong demand for packaging and commercial print products.

We expect to realize higher prices to outpace inflation in the coming quarter and generate improved EBITDA.

Similarly in high yield pulp, we expect to realize higher prices along with higher volumes to generate improved profitability from the most recent quarter.

However, there are greater risk in this segment related to supply chain disruptions and demand from China, which are currently uncertain.

On the corporate expenses, we expect an increase in the coming quarter before normalizing to around $50 million for the full year.

Given the nature of these corporate expenses, we expect continued volatility.

We remain focused on executing our planned outages within our $140 million to $150 million Capex guidance for the full year.

As noted we recently received $43 million related to the sale of our shares in Green first.

And we expect to receive $21 million of tax refunds within the year.

Lastly on slide 13, we're excited about the future of Ryan.

With our unique bio refinery assets and sustainable business model, we are embarking on a new journey into the bio future applying science to nature.

Coming very soon we will be rolling out a new brand that represents our vision to drive renewable two remarkable.

In the coming quarter expect an updated website and signage.

Going forward, we will refer to the company as Ryan to distinguish and simplify our image.

We will continue to build upon our 95 years of sustainable history, as we grow into the bio future.

With that operator, please open the call to questions.

If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.

You May press star two if he would like to remove your question from the queue.

And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from John Babcock with Bank of America. Please proceed.

Hey, good morning, and thanks for taking my questions I guess to start out I was wondering if you could review guidance ultimately how youre thinking about this relative to last quarter.

You know when you gave initial guidance for 2022 for growth overall wanted to get a sense I guess.

More specifically just around pricing, whether or not I assume you're probably having more pricing now than you had expected back then but at the same time costs are an offset so I was wondering if you might be able to just balance all that and also you know broadly if you are thinking about more growth in EBITDA. This year relative to last quarter or if it's largely in line just Kevin offsetting factors.

Well good morning, John I appreciate your participation and a great question I'll I'll highlight a couple of things and then I'll have mark is filling the blank sent a few of those items.

We have been seeing the pricing start to flow through in the first quarter and that was diluted a little bit because of the fact that we had some carryover from the prior year. So that's starting to come to realization, you'll see that come through more in the second quarter. Additionally.

Additionally, with the pricing surcharge and cost surcharge that we put into the marketplace. It is helping us to mitigate the extraordinary cost that we've incurred they came in very heavy in that first quarter so from that standpoint.

You should see some good growth as we had noted on our prior call in the second half of the year, which are really start to pick up here in the second quarter.

Yeah.

I'm not changing the outlook from our prior communications, we feel confident that we will be in a better position and we will deliver higher EBITDA. This year and I don't see anything that's impeding that right now.

And we're confident in our position in the market.

Marcus.

Yeah, just to build on view those comments are maybe just on the businesses such as paperboard in that business, John you've probably seen in the marketplace.

Some announced pricing, but by others. So certainly that's a business, where we're seeing good demand and further price increases.

And as well in the high yield pulp markets B U K has been seeing increases and we tend to move along with that product as well. So theres certainly some positive signs on pricing, but in the context of that inflationary environment that and Vito mentioned.

Got you.

And then next question is on the cellulose specialties side of things you mentioned that demand is broadly pretty strong I was wondering if you might be able to.

Delineate broadly across the different categories, how demand is faring right now.

Especially on the acetate tow side, just given your exposure there.

But then also if you could talk about about Europe the.

The impact you're seeing from the Russia, Ukraine conflict.

And also the broader economy in that in that market.

Particularly since the GDP numbers from the first quarter were probably a bit less robust I think than people had been expecting.

Yeah, John let me comment a little bit and again I'll have mark as Phil a couple of blanks in here specific to Europe . There has been an extraordinary challenges there in terms of securing materials to make sure that we're running smoothly and albeit you Havent asked yet. This is one of the reasons why we looked at the.

TARDIS opportunity.

Opportunistically right two key factors there some of the challenges that we're having in securing materials without interruption and more importantly, the successful shut downs, we've had in both jesup and fernandina, which really enable us to accelerate our support playing with additional in house experts. So I think we're doing a nice job of managing through that.

Overall, our demand is very strong within all of the segments right now I think the supply chain constraints are really driving an acceleration of that right now because there's significant delays in vessel deliveries through our customer base. So I think we've seen and will continue to encounter a strong demand through.

Out that portfolio.

<unk> yeah.

Yeah, but you know maybe touching on some of the manufacturing inputs John .

You know given where gas pricing has gone in Europe , certainly seeing that manifest in higher chemical cost inputs think of ammonia and again on the energy theme, given the trucking and logistics.

Matters that Vito mentioned, certainly diesel costs have an impact on that as well.

So yeah, certainly inflationary pressures.

Affecting some of the operating inputs.

Okay.

And then.

Last question, just before I turn it over.

That surcharge in cellulose specialties I don't know if you're able to provide some sense of the magnitude of that and then also when you say it was successful does that mean.

And went in and as as full and as announced.

Or were there any any challenges in getting that through.

Okay. John you know what I would say it is our customers understand the need for the surcharge and they all had been encountering similar inflationary impacts the.

The cost increases that we incurred are clearly evidenced in the chemical industry and witnessed by recent earnings releases and market indices.

We have a pretty strong partnerships with our customers and that's been instrumental in our alignment and our path forward. So from that perspective, we did implement on April 1st and we are happy with the results that we've we've realized so far and we're going to continue to grow upon that Marcus.

Yeah enjoying those.

That cost surcharge as you know the noted on her invoices separately. So it's very transparent and and as you mentioned are openly discussed with our customers.

Okay, great. Thanks for all the detail.

Thank you John .

Our next question is from per cash Misra with Baird. Please proceed.

Yeah.

Hey, guys. Good morning can you talk about.

Just your cellulose specialty pricing cellulose specialties pricing through.

For the year, how should we think about the quarterly progression and price at Q1 versus Q2 versus Q3 is Q2 is a price will reflect the all the price hikes that you have announced or some of that might get.

It gets pushed into Q3.

Good morning pair attach and thanks very much for your participation regarding the C S pricing.

You know you will we I don't know if we're going to get the full impact in Q2, but we should see a very strong acceleration of that we will see strong acceleration from a standpoint of the cost surcharge and Additionally, we talked earlier about the diluted kind of realization of pricing that was implemented.

Amended last year Theyre kind of Drizzled through on Q1. So I think you'll also see an acceleration of that as we begin to get through this quarter.

So from both standpoints I don't think you're going to see the full realization till you'll definitely see a full realization when you get into Q3 and Q4, but you will see evidence of that coming through the marketplace right now because we've been invoicing and receiving accordingly in terms of R. A R. So from that standpoint, I think we're in a pretty good position.

If you have any additional comments.

And Paradise.

We're actively watching this right. It's a very dynamic situation. It's this is all a call on how long inflation stays strong right. So we got to have a lens on how long. This is inflation continue but consistent with Vito his comments right.

Sequentially definitely pricing improvement due to the these initiatives.

Yeah.

Got it and on the commodity cellulose so for viscose and fluff.

You're expecting Q2 pricing could be higher than Q1, if I if the current market conditions hold right.

Yes, very much so we've seen the evidence in the marketplace and I think even this morning. It recently issued a report to the market are noting some of the increases that have been sustained out there. So we're seeing the same evidence of that Veritas yourselves.

Great. Thanks, and last one for me and I don't know if you covered that in your prepared remarks, but any update on terms silk and any what kind of opportunities you're seeing for that product.

Yeah.

We haven't made a lot of comments about that right. Now we are continuing to develop in and I'd say stay tuned to some of the feedback that we have there as you know some of the marketplace in order for us to do business right had been mitigated by some of the the pandemic situation. So that right now is not a.

An area that we've seen a tremendous amount of development and only because it's been subsidize or kind of mitigated by the conditions in the marketplace. So we will provide an update for you in the next Q I don't know if you have any additional comments on that Mark is.

No no no on that one but the paradox, maybe just to highlight back on your comments on pricing on fluff that is something you should take note of in your modeling given the recent.

Announcements by Ritchie the.

The April index for fluff in North America was just under $2000 a ton.

Just around $125 per metric ton increase again.

Well Ah interesting. Thanks, Thanks, guys, that's all I had.

Thank you Pere attack.

As a reminder, this star one on your telephone keypad, if he would like to have an ask a question. Our next question is from Richard Kus with Jefferies. Please proceed.

Taking my questions just a couple of quick ones here in terms of maintenance cost how much of that was in C. S. A in Q1 and then how much do you expect to impact EBITDA in Q2.

Good morning, Richard and Thanks for your question I really really appreciate your your participation I'm gonna volley that went over to markets because I know he's got the details on that so if you could mark is yes. Good morning, Richard So the you know the majority of our CSS maintenance activities were focused on our Jesup, Georgia facility.

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And those costs are actually are amortized over time, so we would have.

We deployed the cash to support those activities. So think of a number in the first quarter of around $30 million.

That would then be amortized over a 12 month period to the next shutdown.

And hit our P&L.

Got it so in truth, the EBITDA impact of the maintenance shuts that you guys had in Q1, the EBITDA impact there really wasn't that big it was really price cost that drove the year over year.

Very much a story of our manufacturing cost inputs wood chemicals energy and the logistic supply.

Supply chain costs, we mentioned yeah, absolutely, okay, I understand and that was on the bridge Richard If you look on page seven that's that $47 million cost.

Cost inputs.

Got it and then just in terms of Q2 compared to that $30 million that you had in Q1, what is the cost look like for Q2, yeah. So in Q2, it's to Michigan being has the major emphasis on yep.

Its a major outage and and that one will be a slightly less think of are in the range of 10 million that would be a cash disbursement and then amortized.

Got it understood and then maybe lastly for me.

How do you guys think about contingency plans for the cap structure. You know, let's say you don't get to your guide you know how are you thinking about addressing the cap structure as you look to the second half of the year.

Yeah.

So again, we're looking at it's really a key area of focus for us our capital structure Ah, It's something we're actively in a dialogue with with our advisors and staying close to developments.

We've said, we're going to be opportunistic.

Very focused on executing on our operational strategy to demonstrate improved results sequentially and we really feel this will further deleverage and improve our credit profile.

And then at the same time using you know Vito.

Vito mentioned the recent sale of the Green first forced block of shares and we mentioned tax refunds in the future.

That in sum total is call it close to $70 million, we would see ourselves right sizing. The next refinancing and then approaching the markets at.

The right time with that improved credit profile.

And you know that momentum with us.

Okay, I got it and at that time, Richard we're gonna be fully out of all of our shut downs and right now we're we've already got past that 60% homes. So we're in a real good position to continue on that momentum and you'll see that occurring and hitting us strongly in the second half of the year.

I see okay. Thank you for taking the questions I appreciate it.

Thank you very much for your participation.

Yeah.

Our next question is from Paul Quinn with RBC capital markets. Please proceed.

Yeah. Thanks, very much good morning, guys I'm just trying to clarify this cost surcharge. So that 146 is just on your.

Just on your high purity stuff like the 520000 tons or so by 'twenty 550, a year and for the nine months. So it should be somewhere in the $55 million range.

Good morning, Paul Oh, we figured that you'd you'd focus on that and we appreciate your appreciate your insight your questions here, yeah listen I'm not going to give specific guidance on exactly what that's going to amount to but in terms of where we're looking right now you're probably in the.

<unk> of the areas that we're focused on so if theres going to be a flux of what it's actually going to be coming through but we feel pretty strong in terms of our ability to implement which we've already executed upon and drive that through now listen if the market conditions change dynamically will have to make adjustments accordingly. So.

I would say that could be up or down and you have to consider that in terms of your modeling.

Okay, and then just on the specialties volume.

You mentioned that it's down 4% year over year, but the mix improves so.

You could split out that high purity cellulose when commodities are high purity with it I guess it was down less than the commodity volumes were down more.

Yeah, Marcus I'm, I think I'm going to you've got those details if you could provide that yeah. That's definitely the commodity volumes were down more Paul.

So you're you're spot on on your comments and see US was negligible, yes, yes. It was just a little bit I think what about 1%.

Okay. That's helpful. And then just to see somebody Youre seeing that I mean, you referenced really strike fluff pricing and which are I mean, I've never seen these kind of increases so it'll be interesting to see how sustainable that is but but there's a lot of volume coming in on the D. P side, just wondering what you're seeing in that market.

Yeah, It's a really good it's a really good point Paul you know the demand has been tremendous for US right now and I think that's exacerbated by the supply chain constraints. So for US we're in a really good position, we provide a high quality material into the marketplace and we see the band the demand extraordinary at this.

Point.

If we could make tremendously more I think we'd be in a better position.

So so on the dissolving pulp static, but he said you're not seeing any weakness because of the extra volume coming in from some of these new mills.

Uh huh.

Well, what we did see as you know you saw mention of the the flooding in South Africa, certainly affecting the hardwood supply.

You're probably reading the same materials ostracism due to start up again, so they're coming back into softwood.

And everything I've seen from Richie young on the New line in Brazil was mainly started up on VK and we're starting to see signs that they're producing DWP now.

Okay.

Good and then just trying to understand the AR like most people on maintenance they try to move these things out into a longer term schedule and you've moved up towards that so let's say that the.

Yeah trying to difficulty securing materials wasn't materials that you're having trouble securing and then additionally on that facility. I mean, you put in Green energy credit last year could you give us an idea of what the energy self sufficiency is they're just noting that European energy prices has gone up so much.

Sure Paul I'll make a couple of comments on that.

You know for us right now.

There's a great opportunity in the region.

To really take advantage of the situation says approaches on ammonia. That's one that has been difficult for us and to a point, where we were concerned about continuing and having the flux through for it to reach our customer demands we got through that but thought also now that we've got some great resources are available to execute we put it.

Has force team together that helps us during these shutdowns we had all the critical personnel available and the team members are available to take advantage of it and you can look at it from a standpoint is if we can execute this thing now you know we've got a greater advantage as we go through the year rather than delaying because some of these things are enhancements to the way that we're running right now so that's how we looked at.

At it and that's why we pulled it forward.

We are in a pretty good position from that standpoint, and it kind of it and it allowed us to address two birds with one stone. So that's why we took advantage of it.

Marcus.

Yeah, Paul maybe to your question you had on the on the energy side.

As far as electricity load.

You know a portion of that load is fixed based on the electrical rate in France, and the rest float. So we're not fully exposed to electricity rates.

And some exposure on the gas, where we use gas, but where were actually a net producer of electricity. So in totality. We certainly have the ability to mitigate some of these headwinds that we're seeing and then you saw us monetize a portion of our carbon credits this quarter as well right, which you really should look at that as an.

The whole energy offset right because they kind of moved together.

And as you've noted Paul we're going to continue to make investments in that area. So that's been also positive for us.

Okay.

Okay.

No.

Just so I understand that your net producer of energy at Tar test. So this this higher energy regime right now it should be a benefit to your right.

Aside from the floating rate and in France has increased right. So there is that exposure to any producer in the country.

Right, but you're right.

I'm still confused your your net producer of those that you're going to be a beneficiary of a higher.

Hi array remember all right well remember the the generation contracts tend to be fixed rate and an indexed and then you're going to have that exposure on the market right that might compress part of that but you're still okay right. Yeah, you're you're purchasing any are selling so that that's that's where it kind of mitigates one the other but we aren't impacted.

As much when you have extraordinary situations.

Okay, sorry, sorry for having trouble understanding it okay, that's probably our fault.

[laughter], the flexibility and in and Opportunistically repaying. This debt June 24 note what is your flexibility around that.

And my flexibility can can you clarify.

Sure well is there any restrictions at all on it.

Any any cash that you come in you know over the next two years can you can you apply that are on the dead right away.

Yes, certainly certainly we've always thought of doing something holistic so it's something to address a full refi.

Hum.

Other than the call ability at par in June there's nothing else.

Okay.

That's all I had thanks Scott.

Well. Thank you very much Paul we appreciate your participation again it was a great questions. Thank you so much.

We have reached the end of our question and answer session I would like to turn the conference back over to Vito for closing comments.

I would like to thank you again for your time today, we're confident in our ability to execute on our near term initiatives to drive improved profitability in 2022, and we're excited about the buyer future Brian . Thanks, So much.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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