Q4 2022 Rayonier Advanced Materials Inc Earnings Call
During today's presentation of all parties will be and listen only mode.
Following the presentations 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 Mister Mickey Walsh, Treasurer, and Vice President Investor Relations.
Thank you Mr. Walsh you may now begin.
Thank you and good morning, everyone. Welcome again to Ryan's fourth quarter and full year 2022 earnings conference call and webcast.
Joining me today's call, our Goliath Bloomquist, our president and Chief Executive Officer, and Marcus molten there are chief financial Officer, and senior Vice President of Finance.
Our earnings release and presentation materials were issued last evening and are available on our new website at <unk> Dot com.
I would 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 the actual results to differ materially from the forward looking statements. We may make they are also rare.
<unk> on slides, two and three 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 get measures reconciliation of these vendors to their most directly comparable GAAP financial measures are included on slides 18 through 27 of our presentation and now like to turn the call or.
[noise] awhile, thank you Mickey and good morning.
I will start today with financial highlights for 2022 before turning the call to Marcus to provide additional details on each of our businesses.
After marches this update I will provide it out looking guidance for 2023 before opening up the call for questions.
Let's start by turning to slide five.
We finished 2022 the positive momentum on revenue and EBITDA.
Revenues increased $309 million or 22% from prior year to $1.7 billion is driven by strong demand and prices across all of our products.
<unk> spelled cellulose specialties, which represent half of our revenue.
The majority of our EBITDA.
Adjusted EBITDA for the year increased $50 million or 39% to $177 million is the price increases we realize more than offset extraordinary cost inflation.
The increases from prior year were led by a high purity cellulose segment was delivered $150 million of adjusted EBITDA up $11 million or nearly 8% from the prior year.
Paperboard delivered a solid $53 million of EBITDA up $25 million or 89% driven by strong demand for sustainable packaging and higher prices.
Hi, Yo pulp contributed an additional $19 million of EBITDA as we took advantage of high prices in the fourth quarter to capture significant value for this segment.
Corporate expenses improved $5 million from last year to $45 million for the full year driven by a change in the valuation of the green for shares.
[noise] favourable currency impact, which were partially offset by higher variable compensation.
I would like to ask Mark is to take us through the financial details for 2022.
Before I provide an outlook for 2023.
Thank you dial.
Starting with the high period Acellular segment on slide six C.
Sales for the year increased $245 million or 22% to 1.3 billion driven.
Driven by a 19% increase in sales prices for both C S and non C S products.
Sales volumes increase 4% to.
To 918000 metric tons, driven by improved reliability and logistics.
As expected sales volumes in the fourth quarter of 2022, where 11% higher compared to the same period in 2021 drill.
Driven by a greater mix of commodity products, which led to a 5% lower average selling price in the current quarter as compared to the third quarter of 2022.
Net sales for the year included $115 million, a bio materials sales, primarily from biomass energy and malignant.
Overall EBITDA for this segment improved $11 million to $150 million driven by higher prices and sales volumes, partially offset by the impact of significant cost inflation.
Turning to slide seven paper.
Paperboard segment sales grew 42 million driven by a 27% increase in sales prices, partially offset by a 6% decline in sales volumes.
EBITDA for this segment grew 89% or $25 million to $53 million as higher sales prices more than offset increased cost or purchase pulp chemicals logistics and the impact of lower sales volumes.
The slight decline in sales price in the fourth quarter from the third quarter was driven by a weaker sales mix.
Turning to the high yield pulse segment on slide eight sales increased by $24 million from prior year, driven by a 25% increase in sales prices, partially offset by a 3% decline in sales volumes.
Sales volumes for the year were impacted by logistics and timing however.
However, as sales prices rose in the fourth quarter amid strong demand, we were able to increase volumes to deliver a strong quarter to finish the year overall.
Overall EBIT got for the segment improved $9 million to $19 million for the year, including $13 million in the fourth quarter.
Turning to slide nine on a consolidated basis 2022, operating income improved $36 million from 2021 $26 million.
Sales price improvements across each segment and volume improvements in H P. C driven by strong demand for C. S more than offset $258 million, a higher cost driven by persistent inflation throughout the year.
SG&A and other expenses increased 12 million, primarily driven by higher severance and variables stock compensation, partially offset by favorable FX rates.
Turning to slide 10, net debt declined $41 million in the quarter to 707 million as we continue to repay debt.
The company reduced gross debt by $73 million in 2022, while still preserving solid liquidity.
Liquidity ended the year at $301 million, including $152 million of cash.
In addition to debt repayments capital allocation in 2022 focused on increased maintenance capex to improve reliability after investments were reduced through the pandemic years.
We also invested 34 million on strategic capital.
Primarily focused on high return projects, which will <unk> will provide immediate benefits to the business.
Net debt to EBITDA ended the year at four times and improvement of nearly I turn and a half from 2021.
With lower debt and improving credit metrics, we continue to monitor capital markets.
And are prepared to opportunistically refinance our 5.5% senior unsecured notes, which mature in June of 2024.
With that I'd like to turn the call back over to the lab.
Thank you Marcus.
Turning to slide 11, our top priority for 2023 is to Opportunistically refinance our senior notes, which mature in June 2024.
It's Marcus noted are leveraged declined to four times at the end of 22 22, and we expect it to further declined to three and a half times, while the end of the first quarter.
This all physician as well to refinance our debt and more attractive terms than we saw earlier this year.
Building on the momentum experienced in 2022, we will continue growing or EBITDA in 2023 through two key areas first.
We have started to realize the benefits from our investments to improve reliability, including increased sales and lower unit fixed cost.
Currently we are experiencing some pockets of softness in demand and as the market leader, we're matching production to meet market demand. While this may temporarily temporarily impact sales volumes the improvement in reliability will allow us to better control our costs <unk>.
Second we are capturing a higher value for our products.
As a result of our negotiations are 2023 cellular specialties prices are expected to increase by a high single digit percentage versus 2022 levels inclusive of the cost surcharge.
We also continue to capture value for a fluff and paperboard businesses. This demand for sustainable solutions in these markets remain high.
The new capacity that came off into the viscose market in 2021 and 2022 <unk>.
Impacted viscose pricing modestly in the fourth quarter of 2022, but given are minimal exposure to this market.
I've not experienced a significant impact.
The improved EBITDA for 2023 will convert to significantly improve free cash flow, which we forecast will be between 30 and $60 million.
Capital allocation of this free cash flow will be prioritized towards debt reduction and investments in high return strategic capital projects.
Which I will discuss in detail shortly.
A free casual guidance assumes a 45 million dollar benefit from working cash capital in 2023, which.
Which we intend to capture by achieving specific targets for inventory receivable and payables.
We also assume 2023 total capex to be in the range of $140 million to $145 million.
This includes 15 million to $20 million, a catchup maintenance capital.
Which was deferred during the pandemic at $30 million to $35 million, just a discretionary strategic capital net a financing.
On slide 12, we graphically depict how are $200 million to $215 million of adjusted EBITDA guidance converted to free cash flow and supports our capital allocation decisions to either repaid debt and invest in attractive strategic projects are.
Capital allocation decisions will be based on available cash <unk>.
Yet repayment commitments and specific project returns.
On page 13, we summarize our key financial objectives and criteria for strategic projects.
Our long term net leverage target remains at two and a half times EBITDA, which we plan to attain by growing EBITDA and repaying debt.
We also expect to allocate capital into attractive and high return strategic projects we.
We have three main criteria that we used to vet strategic projects first.
Payback period should be less than three years.
Second the return on equity needs to exceed 20%, though this hurdle rate may be increased depending on the risk associated with the project.
Increase the strategic projects <unk>, we will look for a low cost financing options, including low cost loans and grants.
And three we review each project for the impact it would have on our sustainability commitments, including improving the safety for our employees and the impact of our planet, specifically lowering our greenhouse gas emissions.
For 2023, our strategic capital investments will be focused in four key areas.
Yeah previously discussed the TARDIS bio ethanol project.
This is an investment in a world class fermentation plant that will be initially purpose to produce second generation bioethanol, which will be sold to a large petrochemical company under a multiyear take or pay contract.
This red two certified bioethanol will be used in automobiles to reduce greenhouse gas emissions and substitute for traditional ethanol produced from food sources, such as corn.
The total investment for this project is $39 million with $28 million financed by low cost green loans and $4 million of grants.
The bulk of the spending will be in 2023.
Total cash investment from Roy M. For this project from 2022 through 2024 is expected to be $7 million and will provide an annual EBITDA benefit of $9 million to $11 million. Starting in early 2024. This project has already broken ground and is expected to be completed.
Next year.
The second large project will be Debottlenecking, jessops flip flop production and finishing capabilities.
10 of the 14 million dollar investment was made last year with the remainder being made in 2023.
This investment will provide a $7 million annualized benefit to the company's starting later this year.
We're also focusing investments on production automation and other high investment return projects.
It includes a number of smaller investments totalling between $6 million to $11 million that will provide very high returns on investment and expected $5 million to $7 million an annualized EBITDA [laughter].
Lastly, we will continue investing in our business processes and data infrastructure to increase corporate efficiencies and effectiveness.
In 2022, we started the process to get all of the facilities and key processes onto a common ERP platform.
Next I will provide an outlook on each of our businesses.
Turning to page 14, as a result of our negotiations.
2023, cellulose specialty prices are expected to increase by high single digit percentages versus 2022.
2023 demand for a high purity business is currently forecasted to be mixed in.
We are seeing strength, an acetate casings filtration and nitrocellulose, while their softness for construction ethers food additives MCC entire court.
Left demand remains resilient.
While fluff prices have fallen off their peak levels experienced in the fourth quarter of 2022 pricing has been slower decline than the more commoditize pulp markets.
Fiscal does demand started the year soft, but there are signs of improvement since the end of the Chinese new year.
Our customers, which are the fiscal staple fibre producers have increased their operating race back to the 80% range, which is up from 50% at the end of 2022.
Cost inflation in a high purity segment has slowed but our input prices are expected to remain at elevated levels for the near term.
As I noted high purity business will realize some uplift in 2023 and future EBITDA from the investment and strategic projects.
Ah Biomaterials business will benefit from our strategic investments that are focused on the increasing demand for sustainable products, starting with our investment in affirmative and plant a Tardis.
That will initially produced red to sort of be certified bioethanol starting in 2024.
As demand for sustainable products continues to grow we will increase our capabilities to meet this global demand.
And paperboard prices are expected to increase from 2022 levels driven by strong demand for packaging and commercial print products.
Volumes are expected to increase as a result of improved productivity and logistics, while costs are expected to improve as pulp prices decline.
And high yield pulp prices are expected decline as the global economy slows sales.
Sales volumes are expected to improve with improved logistics and productivity.
Reopening of the Chinese economy may provide a catalyst for improved pricing later this year.
Corporate expenses are expected to be higher than 2022 due to expenses associated with the ERP implementation and FX benefits that are not expected to repeat in 2023.
Overall, we expect to deliver $200 million to $215 million of EBITDA in 2023.
An increase of 13% to 21% over prior year.
On slide 15, we highlight the key sensitivities that can impact our EBITDA guidance.
EBITDA is highly leveraged towards cellular specialty prices. However, these prices are mostly negotiated on an annual basis.
In addition, we successfully negotiated pricing flex.
Flexibility in our cellulose specialty contracts.
In the event of renewed cost inflation.
Thus, we believe that pricing of cost risks and our civil specialty business should have little impact on the 2023 guidance.
Pricing changes on non cellulose specialty products have a smaller impact on EBITDA for the same 1% change in price.
Paperwork products are sold under a mix of fixed prices and variable indexed pricing with approximately two thirds fixed for the year, just providing further stability for the 2023 guidance.
We believe our diverse exposure to end markets and strong linkage to the sustainability mega trends such as paperboard for renewable packaging it.
Left with a growing global middle class and aging populations coupled.
Coupled with our annual contracted business help insulate us from the impact of a possible recession.
You'll also have opportunities to improve margins with improved productivity and sales volumes, which we would realize as we maintain our market share when demand growth resumes.
Turning to slide 16.
Our outlook for 2023 reflects improve EBITDA margins to the 11% to 12% range.
As we capture both the improved value for our products and drive operational efficiencies and reliability.
That will continue to decline as we generate free cash flow and optimize our balance sheet.
As a result, we expect net leverage to declined to approximately three and a half times in 2000, 2003, and keep us on track toward our goal of two and a half times over the next three to five years.
And with that operator, please open the call to questions.
Thank you whenever you're conducting a question and answer session.
If you'd like to ask a question today. Please press star one from your telephone keypad and a confirmation tone indicate your lines and the question queue you.
You mean fresh start too if you'd like to withdraw your question from the queue.
A participant using Chico equipment may be necessary to pick up your handset before pressing this darkies.
One moment. Please so we pull for questions. Once again it is star one thank you.
Thank you and our first question is from the lineup Roger Spits with Bank of America. Please proceed with your questions.
Thank you and good morning.
So why don't you start could you elaborate on the potential headlines in Q1 at 23, you mentioned the prepared remarks in Pakistan.
After demanding and May have actually call back one or two area. So I thought maybe you could delve into a little.
More and also what do you expect the cadence of the working capital inflow.
Over the year in particular.
Q1.
Hey, Roger this is delisle.
To attack your question on demand first what we're seeing first.
First talk a little bit about what's going on in Europe , which is really what's affecting our demand for our construction ethers.
Maybe a little bit of the food additives business on the Mcc's died.
I think as as everybody knows the macroeconomic conditions.
In Europe aren't great, though they are we do expect that they will improve through the year, but because we're seeing higher interest rates.
In Europe , that's obviously had an impact on the construction market and therefore had an impact on our demand for our construction ethers.
We also saw with a couple of customers that.
That that we still are Easter great products to that B R.
Correcting their working capital.
Overblown, maybe we'll over bought a little bit and 22 and so they are going through a correction on their working capital again, I think that's going to be relatively short term issue.
And we should see again once you get past that correction, we should start seeing demand normalize again, probably in the second half of this year.
With respect to the other areas in terms of softness.
The.
Can you help me on that a little bit.
Yeah areas of softness, we we had a little bit entire corridors Oh, yeah. So tire court, obviously is tied to the.
The automobile.
Industry and obviously they continue to be a little thwarted by the access to chips.
Trips.
But also I think just because of the increase in interest rates is beginning to dampen the demand for automobiles as well so that is something that we're a little concerned about.
Otherwise you know a lot of the other businesses that we that we are selling to seem to be holding in there at I would call very resilient levels of demand.
The second question that we that.
The second question was aren't working capital I think really your question was around how does that how's that gonna calendar is through the years that correct Roger.
That's right, particularly the Q1 Q1 easily.
Most businesses in alpha, but things are going on here.
Sandwich Pelican, particularly in Q1, but also had as a kid and skull forgetting that 40 $45 million good.
Good morning, Roger It's Marcus.
So as you mentioned.
The 45 that we set out as an objective.
Certainly Q1 is is a use of working capital for us so.
As as we get through queue line and then the balance of the year, we should start to realize that over 50% of that target is is inventory related and then it's balanced across arnt AP.
As we execute through the year.
We should start to to harvest that working capital and realize that benefit.
Thank you I'll get back in case that Simon said the cats.
Thank you Roger.
Thank you as a reminder, union star one to ask a question at this time.
The next question comes from the lineup Paul Quinn with RBC capital markets. Please proceed with your questions.
Yeah, Thanks, very much for bringing guys and just trying to understand.
Sounds like your cellular, especially prices you expect them to be up high single digit.
Just looking at the commodity side, though I'm trying to understand.
Sort of your guidance I guess on slept pulp you expect local stay in in <unk> weakening could you give us a little bit more color on what you're thinking in that market.
Hi, Paul this is delisle.
With respect to fluff pricing again, we're assuming that they're gonna follow generally with the indices that are out there on fluff, but what we're noticing is that it's going down slower than expected.
And.
In fact, we've seen a couple of our competitors actually announced some recent price increases. So we think we may actually be dropping out here relatively soon.
This goes pricing.
Similar situation just as.
Personally as the a couple of days ago.
There was a.
A slight uptick in the pricing for softwood going into the <unk> market.
Again, what we're what we're forecasting as per the indices, but but we're seeing that because of the increasing capacity utilization in China that again that there may be some upside potential with respect to vehicles pricing, but right now the forecasting the guide we've given is essentially based on the indices that that had been published.
Okay, and then you guys mentioned higher corporate cards in twenty-three here.
That was $45 million and 22, or we we tightened somewhere in the $50 million to $55 million right.
Yeah, Yeah. That's that's correct Paul it's that's about the right range again, the increase in spending is tied to the ERP implementation and.
And the fact that we don't think right now we're not forecasting leaving any FX benefit this year.
Okay and then just earlier this year you you attempted to revive the senior.
And your insecurity and and.
Conclude that deal can you give us a little bit more color on that process and.
When you expect it to try that again.
Well.
In January just see it turned out that the market market conditions, just weren't conducive for us to get a deal that we felt was one indicative of what we consider to be a.
A fairly strong business so.
Looking forward.
We think actually times on our side and that we think are our financial metrics will improve with time.
And.
So we're patient and.
We wanted to get past at least Q1 earnings because.
Cause we gave me think that will confirm the guidance. We just gave you and and with that we think will be looking at that point to to look at the market and possibly enter at that point.
Okay and then just lastly, just back in Debottlenecking project, you've Gotta Jessop to to get more volume I guess on the Plotline, what what's the volume increase you think you're gonna get.
That process and what's involved.
Yeah.
[laughter], that's a great question and I'm not an engineer so I can't really get into the specifics of what we did.
But at the end of the day I believe the increases 40 to 50000 tons additional capacity.
That we get from that investment.
And it really came down to essentially putting in additional driver cans to.
Allow us to dispute up the line while.
Allowing it for enough drawing capacity to get the the right.
The right the right specifications on the product so.
And then on the finishing side when you're obviously speeds speed up the capability of the line you've got US also increase the capability of the of the our ability to package it appropriately for a competitor offer for our customers.
And so we've put some investment also in the finishing line as well.
[noise] alright. Thank you very much that's all I had good luck.
Our next question is a follow up from the lineup Rogers fits with Bank of America. Please proceed with your questions or.
[noise], Okay. Thank you very much a few others.
So can you talk anymore guidance on.
Segment 2023 does that reversed back to the last.
Last few years kind of level.
How should we think about that.
Oh, that's a great question Roger.
It's obviously, it's we're.
We're seeing pricing decline right now, but we're going to see some offset on that on the the volumes in 2023, given the increased productivity that we're expecting after the investments we made last year. So in terms of.
Overall.
EBITDA for.
Four high purity, we're expecting it I'm looking at some numbers I'm seeing if I can find the actual number for you here.
Is going to be about the same as we experienced in 2022 versus 2023, even though we see <unk>.
Lower pricing, but it should be.
Offset.
By the increased productivity and the increased sales volumes leaders later this year.
Got it and just to be we are I was asking them.
Oh and I. Thank you for answering that like you said hi charity.
Sorry, I meant high purity, yeah high purity, I'm still new [laughter] [laughter].
Okay, and I was asking a high high yield Paul how do you see high yield Paul EBITDA in 2023 Williams lower.
And that's and that's what I was talking to a high yield pulps should be equivalent to what we saw on 22 right around that 15 million dollar level 16 million dollar level.
And Roger as as your fall in the market I yield think of if you look at it year over year.
Given where we are in the pricing cycle, it'll probably be the reverse of last year, where it's a stronger first half and then everybody, saying pricing is coming off off over time for that product.
Got it and then in the in the press release, you talk about the strengths and an advocate C. S. Now is that are you looking at what's your childhood, there or you're looking at the.
Whatever it is 20th 25 per cent.
The specialty.
Secondly, <unk>, Hi, Stacy S T. The nine filter.
<unk> <unk> <unk>.
<unk>.
Pointing to.
So Roger just to reiterate your question you are saying are we seeing strengthened acetate in the toe and other applications, right, plastics, right, which which areas, which applications and ask <unk>.
Did you read the press release refer to what I'm talking about strength in 2023 and agitate it really really we're seeing it both in total and plastics.
Toes being driven.
Seeing significant growth in the heat.
He not burn applications.
And products that are being sold outside the United States, which required to ask the amount of told that.
Is used in a typical cigarette.
And that's I think largely mitigated.
You know the decline in smoking in much of the developed world.
I would say that you know.
Total applications are they use <unk>.
Demand in China has been pretty darn steady.
So and then on the plastic side things continue to be very strong.
Right.
And then last one and I want to talk about the three to five year target EBITDA margins on the 13th of 15%.
Per cent.
Lay down on slide I guess 13, a number of projects and I presume that's that's weiner.
One component of that is that the main components of that increasingly EBITDA margin or or there are other big picture things.
Pricing our volumes.
Our class I didn't get your awesome looking to get.
E Mail that EBITDA March 13th.
<unk> three to five years.
I'm gonna use all the levers Roger.
So in fact can you just be you know.
The strategic projects at the end of the day is an important component of it let me see that there are significant value to be had in terms of becoming much more efficient.
And productive.
And some of us can see some capital.
But we also see that there is an opportunity to continue to capture additional value for our products.
And I call it fair about getting it get the pricing up to a point that.
Wood.
Reward us to reinvest into.
New capacity as demand grows.
And finally, you know the issues around.
Just better better efficiencies on logistics, and and maybe even some cost deflation sometime.
In the near future.
Hi, Thank you very much.
Thank you at this time you've reached the end of a question and answer session I'll turn the floor back to July of some quick for closing remarks.
Well again, thank you all for your time today.
I'm very proud of the accomplishes that we have made very confident that we will continue to execute on our initiatives to improve the profitability of the business.
Reduce our debt and improve our leverage.
And I look forward to our next update in the next few the next couple of months. So do you have any questions or anything that we can help you out with.
Please feel free to reach out to us.
This will conclude today's conference. Thank you for your participation you may now disconnect your lines at this time.