Rayonier Advanced Materials Inc. Q1 2023 Earnings Call
Good morning, and welcome to the Ryan first quarter 2023 earnings conference 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.
As a reminder, this conference is being recorded.
I would now like to turn the call over to your host Mr. Mickey Walsh, Treasurer, and Vice President of Investor Relations.
Thank you Mr. Walsh you may begin.
Thank you and good morning, welcome again to Ryan's first quarter 2023 earnings conference call and webcast.
Joining me on today's call are the Lyle Bloomquist, 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 <unk> 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 are.
Our earnings release as well as our filings with the SEC list. Some of the factors, which may cause actual results to differ materially from the forward looking statements. We may make they're also referenced 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 measures should provide useful information for management and investors, but non-GAAP measures should not be considered an alternative to GAAP measures.
A reconciliation of these measures to their most directly comparable GAAP financial measures are included on slides 17 through 25 of our presentation.
Now I'll turn the call over to Doyle.
Mickey and good morning.
I will start this call with a review of the financial highlights from the quarter before turning the call the markets to provide additional details on each business segment and provide an update on our capital structure and liquidity.
After Mark says update I will provide an update on our key 2023 initiatives and guidance before opening up the call for questions.
Let's now turn to slide five.
He started 2023 with continued positive momentum on revenue EBITDA and cash flow.
Revenue increased $115 million or 33% from prior year to $467 million driven by solid price increases across all our products.
And overall stronger volumes driven by improved operational productivity.
Adjusted EBITDA increased $31 million or 155% versus prior year to $51 million as the price and volume increases more than offset the higher costs.
Largest EBITDA gain from prior year was led by our high purity cellulose segment.
Which delivered $44 million of adjusted EBITDA of $28 million or 175% from prior year.
Paperboard delivered another solid quarter with $13 million of EBITDA.
High yield pulp contributed an additional $8 million EBITDA as we realized higher prices in the quarter.
Corporate expenses increased $8 million from last year due to $14 million.
From a prior year period gain of the sale of our green for shares.
But delivering on these positive results, we remain on track to deliver our $200 million to $215 million of EBITDA for the full year, and we are increasing our free cash flow guidance to $40 million to $65 million.
Now I'd like to turn the meeting over to Marcus to take us through the financial details for the quarter.
Thank you Doyle.
Starting with the high purity cellulose segment on slide six sales for the quarter increased 93 million or 33% to $374 million.
Driven by an 8% increase in sales prices.
Including an 18% increase in C S prices.
Sales volumes increased 27% to 265000 metric tons due to improved product production, a higher mix of commodity sales and enhanced customer contract terms.
Sales for the quarter also included $23 million a biomaterial sales.
Merely from Green energy in lignin.
EBITDA for this segment improved 28 million to $44 million.
The impact of higher prices and volumes was partially offset by higher chemical and logistics costs, along with the impact of annual maintenance expenses in the prior year.
Turning to slide seven.
<unk> segment sales grew $5 million, an 18% increase in sales prices due to demand for packaging grades, which was partially offset by a 7% decline in sales volumes as a result of sales time.
EBITDA for the segment grew 30% or 3 million to $13 million as the higher sales prices more than offset the lower volumes and increased costs for chemicals and purchase pulp.
Turning to the high yield pulp segment on slide eight.
Sales increased by $20 million from prior year, reflecting a 39% increase in external sales prices.
And a 43% increase in sales volumes due to stronger demand and improved logistics.
Cost increases were primarily related to higher chemicals and logistics.
EBITDA for the segment improved 8 million as compared to breakeven in the prior year.
Turning to slide nine on a consolidated basis operating income for the first quarter improved 33 million to $17 million.
Sales price improvements across each segment and volume increases in H P. C. In high yield pulp more than offset 59 million of higher cost for chemicals purchase pulp and logistics expense along with the impact of annual maintenance expense in the prior year.
EBITDA margins for the quarter were nearly 11%, which is up over 500 basis points from the first quarter of 2022, and essentially flat to the prior quarter.
Turning to slide 10, net debt declined to 683 million a reduction of $72 million from the same period in 2022.
We continue to repay debt, including $5 million of senior unsecured notes in the first quarter and 10 million of senior secured notes in April .
As we continue to repay debt, we are still preserving strong liquidity.
Liquidity ended the quarter at $276 million, including $169 million of cash.
We recently purchased trade credit insurance, which will increase liquidity by an additional $36 million.
This excess liquidity provides flexibility for upcoming refinancing activities.
Given our recent focus on increased maintenance capex to improve reliability. We are now capturing the benefits of the improved production.
As a result, we are lowering our capex outlook for 2023 to a range of $100 million to $105 million.
Down from approximately 110 million in our original guidance.
While we were able to reduce our maintenance capex, we still expect to invest 30 to 35 million of strategic capital.
Primarily focused on high return projects, which will provide immediate and incremental benefits to the business.
Net leverage ended the quarter at three three times.
An improvement of <unk> seven times in the quarter and ahead of our initial expectations.
With lower debt and an improving credit metrics, we expect to refinance our five 5% senior unsecured notes, which mature in June of 2024 at acceptable terms in the coming quarter.
We recently engaged Goldman Sachs to help advise us on the best structure for our refinancing including high yield notes syndicated loans and privately placed loans.
Our existing cash balances and expected free cash flow will allow us to further reduce gross debt and minimize the impact of higher interest expense with that I'd like to turn the call back over to Doyle.
Thank you Marcus.
Turning to slide 11, we are making solid progress our 2023 initiatives.
With $51 million of EBITDA generated in the first quarter.
We remain on track to deliver between $200 million to $215 million for the full year.
Free cash flow generation was also strong with $36 million achieved in the quarter.
$31 million of this free cash flow was generated from working capital initiatives, primarily from lower inventory.
Capex was managed to $21 million worth of tourists annual maintenance outage executed in the quarter.
Because we have realized improve operational reliability.
We now expect to reduce maintenance capex and increase our free cash flow guidance to $40 million to $65 million in 2023.
An increase of $5 million to $10 million from our initial estimate.
The strong quarter financial results helped drive down our net leverage to three three times.
We expect further improvement in the second quarter.
We increased cash balances to $169 million, while continuing to reduce debt.
As Marcus noted.
This strong cash balance coupled with the significantly improved credit metrics.
We'll increase our flexibility with our refinancing efforts.
The maturity of the senior unsecured notes coming due in just over a year.
Consequently, we are keenly focused on refinancing this debt in the coming quarter.
The underlying interest rates have continued to increase with the recent federal reserve actions, but markets are currently open and active.
We are very flexible on the type of debt and expect to utilize our strong liquidity position helped minimize the impact to interest expense.
Yeah.
Operationally.
We remain focused on two key areas to drive value.
First we are realizing increased benefits from our investments to improve operational reliability.
Including increased production and sales volumes and lower unit fixed costs.
Our total sales volumes for the H P. C business increased 26, 7% from prior year.
Well a significant portion of this increase relates to the timing of annual maintenance outages.
We are realizing a significant increase in overall operational efficiency.
If we normalize for the annual maintenance outages production volumes increased 8% during the quarter versus prior year, even as we reduced finished goods inventories.
We continue to invest in our assets were $21 million of total capex spent in the quarter, including $6 million of strategic capital.
However, we expect to reduce our normalized capex to approximately $90 million, while we continue to execute on $10 million to $15 million of catch up Capex in 'twenty two 'twenty three.
For the full year, we now expect to spend $100 million to $105 million on custodial capex with a greater weighting of spend around our annual maintenance outages.
Our two largest facilities and just up into misgiving will complete their annual outages in the second quarter.
With demand from some products remaining soft we will continue to operate our assets to match market demand.
Second we are capturing higher value for our products.
Our cellulose specialty prices are up 18% from the prior year period.
Driven by our contractual negotiations in 2023.
And we will continue to prioritize value of our cellulose specialty products over volumes.
The cellulose specialty markets is expected to remain balanced as the new hardware viscose pulp supply coming online will not impact the cellulose specialty grades.
The fluff and viscose markets, we capture 6% higher prices from prior year.
We also realized 18% increases in paperboard prices and 39% increases in high yield pulp in the quarter.
While prices are expected to decline for commodity products in the coming quarter.
Paperboard prices are expected to remain elevated but steady volumes.
Turning to slide 12.
We present, our progress against our 'twenty to 'twenty three guidance for EBITDA and free cash flow.
Note that waterfall chart reflects the updated guidance for a higher target for free cash flow of $40 million to $65 million.
Notably the significant improvement in free cash flow for the quarter includes $31 million working capital benefits offset by $14 million payments made against our France <unk>.
<unk> liability.
As we discussed.
Our free cash flow will be used to either repay debt and we're investing in attractive strategic projects, which were both accomplished in the first quarter.
Yeah.
On page 13, we provide additional color on each of our businesses.
2023, cellulose specialty prices are expected to increase by high single digit percentages versus 2022.
Demand for our high purity business remains mixed with strength in acetate and many other see us grades.
Setting softness in construction ethers and food additives.
Fluff prices are expected to decline.
But the industry forecasters have raised the price four versus prior cycles.
Viscose prices have stabilized and are expected to increase slightly in the second half.
Buddy H P. C sales volumes are expected to increase as we realize further productivity gains and he's logistic constraints.
Certain input costs are moderating, but we expect these will remain at elevated levels.
We continue to make strategic investments in our biomaterials business, which we believe will provide incremental growth for the company.
The bioethanol plant, it's hardest remains on track to begin production in the first half of 'twenty 'twenty four.
The second generation ethanol produced at this facility is expected to provide a $9 million to $11 million annual EBITDA benefit to the company.
And paperboard prices are expected to moderate slightly over the balance of the year, but remained elevated as compared to 2022 levels.
Volumes are expected to remain steady while raw material prices will decline due to lower pulp purchase prices.
In high yield pulp.
Prices are expected to be impacted by both the global economic slowdown and new capacity coming into the market.
Sales volumes are expected to improve slightly with east logistics and higher productivity.
Corporate expenses are expected to be higher than 2022 due to expenses associated with the ERP implementation and.
In 2022 FX benefits that are not expected to repeat in 2023.
Overall, we expect EBITDA for the second quarter to be in the low $40 million range due to our planned maintenance outages at our two largest facilities.
Slower than anticipated restart from the TARDIS outage.
And the colorization of some customer annual outages.
We believe that we remain on track to deliver the $200 million to $215 million of EBITDA for the full year.
Turning to slide 14, we depict the progression of our EBITDA margin growth and our net leverage declined.
Margins are expected to continue to improve towards the 11% to 12% range for the full year.
As we capture both the improved value from our products realize operational efficiencies and reduce costs.
Net leverage is expected to hold relatively steady for the full year, including a slight benefit.
Second quarter as we drive towards our target net leverage ratio of two five times over the next three to five years.
With that operator, please open the call to questions.
Thank you we.
We will now be conducting a question and answer session if.
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Okay.
Thank you. Our first question comes from George Staphos with Bank of America. Please proceed with your question.
Good morning, everybody. Thanks for the details.
I guess the first question I had you mentioned a I think it was a seven or 8 million dollar impact from sales timing and paperboard as I recall can you talk about what that was and do you I I presume get that benefit in <unk>.
And then relatedly.
Yeah, Marcus into while you're talking about a low forty's million in EBITDA for the quarter are one of the things you mentioned I think it was a slower startup and hardest if I heard correctly can you go through the other factors there and.
Cadence, we should expect an earnings once you to <unk> across the segments towards that that low 40 EBITDA range.
Good morning, Georgia. This is a while.
Yeah.
The first question on the the paperboard in the the lower sales in the first quarter of $7 million to $8 million. It's it's a probably a story you've heard many times from us on a number of calls which is really around just stocking okay.
And we expected that just stocking is probably going to wane as we as we get it you don't go further into Q2 and then we believe that we'll start seeing the you know some growth picking up around historical levels as we get into the second half.
Okay. So it was really.
Is it fair sorry about that is it fair that you'd get some of that back in Q2 sequentially versus <unk> in terms of your projections or you're not assuming that in terms of how you build up to the 40.
The low forties excuse me.
Where we're expecting yes that we're gonna have a little bit of a pick up in Q2 versus Q1, but again I would say I don't think the hope that the stocking thing is has played as self completely out so we're going to see a little bit of that in Q2, but.
But we'll see an uptick we believe in volume versus relative to Q1, and then you'll start seeing stronger volumes in the second half okay.
And broadly just in terms of the cadence of <unk> or for a trend we should expect sequentially across the segments. If we've already covered paperboard. The other segments would be great. Yeah high yield them again, the same the same type of impact that we saw with paperboard. Some de stocking, but also I think there was some.
Demand issues, principally in China at the first part of the first quarter.
For the first quarter was quite light, we do expect that the volumes will pick up in Q2 for the same reasons outlined for paperboard and then going forward again, we think that I won't be able to fill out our capacity and seller to sell our production for the rest of the year.
And George just on high yield.
As you know the U K is trading down in paper pulp so high yield.
Does follow that pricing cadence, yeah, so expect sequential price erosion, yeah, and then on C. S volume.
Again.
Q1 was actually a halfway decent quarter for us again as it tastes whether it was was very robust for us as well as some of the other specialty applications around filtration and casings and Nitro cellulose.
Q2 will be light because we're taking down two of our plants, including just up the largest so facility with that we bake or see us from so that'll be light in Q2.
And then it'll pick back up to close to what we were experienced in Q1 for Q2 Q3 and Q4.
With respect to the commodity high purity business.
This is and this is relating to viscose in our fluff again Q2 will be lower than Q1, and then you'll see a little bit of a pick up but we're gonna see as sales mix change we believe in.
In the second half as we see increased demands in the ether business around construction activity improving in the second half in Europe .
We see increase in demand in.
Some of the other see us specialty grades.
You're going to lower our production and our sales volumes on the commodities side to make room for or make room in our production wheel for these higher value products.
Understood.
Already kind of covered this I will turn it over after this one can you I know it's difficult to talk about pricing expectations on a on a on a call but.
What's embedded Directionally qualitatively. However, you want to provide it in terms of your commodity businesses.
Whether it's you know fluff viscose or or high yield.
Hum.
As you've mentioned it I mean prices for the commodity grades.
<unk> hardware to China's dropped over 300 Bucks a ton.
How does that sort of filter into your guidance for the year. Thank you.
Yeah.
And I'll I'll I'll give oh.
Primarily qualitative guidance on that if I, if I could start with the high yield and we expect it to go down and fairly substantially as you allude I mean, the the pricing coming out of Q1 was in the seven hundreds.
We're expecting that on an average that our pricing will be in the mid six hundreds for on average for Q2 and you've got to remember that you know our sales is it's got a one month lag roughly gaffney stores picking up some of the sales pricing in Q1.
And then we see it dropping further through Q3.
Roughly let's say, 10% and then get to Q4, we see it leveling and actually increasing as we think that the market the market demand in China will pick up in and support prices a little bit.
And and Paperboard again, we think paperboard is going to be relatively static we had mentioned in the last.
Earnings call that you know roughly two thirds of our business there is under contract.
We are seeing some softness on the spot business that we have there.
So we expect that pricing will decline relative to what we experienced in Q1 and in the in the second half, but what's offsetting that and this is important to note.
Is that a our paperboard business will benefit from the lower pulp prices and so we expect it to see the earnings potential for that business will will continue to be strong.
On the cellulose business the C. S side of it is very strong.
We've noted that we expect the pricing in 'twenty three to be up.
Relative to 'twenty, two and we will stay strong in the high single digits throughout the year on the commodity business, we expect at the low point on pricing around.
The fluff and around the viscose will probably be Q3.
Before we start seeing a fluff pricing stabilize and start to improve into Q4.
Okay. Thank you so much for the color.
Yep.
Thank you.
As a reminder, if you would like to ask a question. It is star one on your telephone keypad.
Our next question comes from Paul Quinn with RBC capital markets. Please proceed with your question.
Yeah. Thanks, guys good morning.
You reference a holistic refinancing and you're at.
In your press release, just wondering what that means to you and whether you are looking for in a refinancing any component of equity.
Hey, Paul this is a while get right to the first the second part of your question, which is if we're looking at using equity in the up the answer is absolutely not and that is not something that we're interested in doing.
We believe that the the markets are or are open and and and given our improved credit metrics.
We believe that we'll be able to find that at a reasonable price obviously in a market that that is at a higher level than we were just three months ago, but.
Our our tact here is that because of our recruit credit metrics and we as a result of where we are we actually believe that Oh.
Our credit metrics are indicative of a of a b credit.
And as a consequence, or we're going to be looking at all kinds of different debt structures, whether it's a high yield I'm looking at syndicated loans or whether it's.
Private privately placed loans, but through because we have those those options we'd be able to strongly believe that we'll be able to refinance this debt with debt.
And Paul to your comment on holistic you mean as you know we've been consciously operating our business currently with a higher cash balance.
Such that we have flexibility as we approach this refinancing.
So stay committed to our messaging has been we're going to look to resize. The next refinancing so that we can manage the interest rate environment that we're in.
No.
Yeah, I think there's something smaller on the refi right thing that the thing to note is that.
Given the amount of cash we have but more importantly, the capacity on our ABL.
We have $70 million on the balance sheet that we can use to rights to downsize the debt offering or use it as a other wait another other ways to get to a proper conclusion here. So we believe we have sufficient liquidity and much better credit position.
Then we had even just three months ago.
Yeah.
Okay. So that assumes that you'll do the refinancing somewhere around $250 million.
Well I don't again, I'm, not going to I'm, not going to commit to what level, but directionally, if if that's what's needed them to.
Go out and refinance at a lower level to downsize. It that is certainly one of the options group we will consider.
Okay I got it I'm, just turning over to a high yield and I really appreciate all the color on your specific end.
In markets that are high yield looks particularly difficult here just wondering when the when did you scale back production.
You know at some escalated and just basically Britney operation for the paperboard.
Does that.
Closed out Q2, and that's been in and you raised a very hard questions.
But obviously, if if the pricing that we realised gets down to our cash variable cost we will look to.
<unk>.
Reduce our production may be shut down a line or two is as you know in intimates I mean, we have two lines of a high yield.
But one of those lines you can assume that feeds our paperboard business right. So we'll probably keep one line open to continue to defeat paperboard business and and shut the other line down if we if we find that pricing gets down near or below our variable cost.
Got it thanks for the color best of luck.
Thank you. Our next question comes from George Staphos with Bank of America. Please proceed with your question.
Hey, guys a couple from me to finish up here. So I mean to the extent that you've been obviously talking with customers and alike.
As you normally would but certainly given the market volatility.
What are you finding in terms of customers' expectations for usage of your products and maybe whether that's improving over time are you getting any benefit I mean, the pulp companies all frequently talk about this I'm not sure how directed it affects business near term but.
Plastic to fiber substitution anything that you're seeing that's changed in the lab.
Asked a quarter in terms of the outlook for for demand. That's number one number two can you tell me a little bit about what this credit insurance purchase means what flexibility. It gives your why why do you have to do it and then I had a couple of follow ons.
Okay with respect to the called the sustainability demand story of whether we've heard of any changes on that you know, replacing a fossil fuel based products with our fiber based products I would say that the story has only strengthened.
Particularly around bioenergy.
As a as the world and particularly you know the United States and Europe moves away from fossil fuels and toward more sustainable fuel sources, and we believe again, we're well positioned with that and are getting into that arena with our bio worth.
And I'll and the so we we think that that story is only strengthening now is.
Is that going to translate into more sales in 2020 three.
Maybe particularly around acetate plastics and and some of the other applications around that with.
Our customers at Eastman and also with some pull through from some from other customers who are developing those type of products.
But I think youre going to really start seeing the impact in 'twenty four.
Particularly when we bring the bioethanol plant on in toward Us.
The second question I can take that George so the the trade credit insurance effect effectively expands our advance rates on receivables for foreign foreign customers. So with that trade credit insurance I think of a of an expansion of $35 million to $40 million.
Our ABL on a comparable basis to where we ended this quarter I see I see.
And then two last questions from me.
First of all on the bio ethanol projects and I think the $9 million to $11 million youre expecting to generate.
How sensitive is that to overall levels of.
Energy pricing so to the extent that.
Okay. We are in you know, whether it's a global slowdown or recession or what have you. We are generally seeing energy prices coming under some pressure does that affect at all your return on that project is the 9% to 11, you know moved down a couple million dollars on some.
Energy price scenario that slower higher or is it relatively unaffected.
You know by the energy outlook and then.
Just can you sort of update us on what.
You know to the extent it has any impact on the increase that we're seeing in capacity recognizing it's mostly pay for great hardwood, but you are seeing projects swing projects and dissolving whether youre seeing any encroachment into any of your markets from this new capacity. Thanks, guys and good luck in the quarter.
Thank you, yeah, Georgia with respect to the bioethanol business.
First off as we got a five year contract with a multinational major.
Corporation to Dubai to buy our bio ethanol on got it essentially it's a fun are essentially under take or pay but the basis and the second point to make on the bioethanol plant is that its making a second generation bioethanol and what that means is that it's the bio ethanol is being produced from our non food source.
And this is actually mandated the use of this is actually mandated by the E U.
And so when you see look at the pricing of second generation Bioethanol.
It's at a significant premium relative to.
What I would call it call generation, one bioethanol and in fact that pricing is relatively stable if not increasing as the mandates of them get a tighter and tighter. So we still think that the business will continue to generate the $9 million to $11 million of EBITDA on an annualized basis.
What was the second part of your question, Yeah, sorry about that the other it's just hey, listen there's lots of capacity coming in yes, it's mostly paper grade, but you do have a fair amount of swing dissolving hardwood capacity does any of that start to.
And crunch on your markets and that that's all I had thank you guys.
Yeah, we're not we're not foreseeing that George we don't think that we're going to see any of that swing capacity come over into a market set.
Where we are or looking to gain the best value for our products and it really comes down to the fact that it that the products. We make are very customized and I'm actually very technically difficult to make and so it's just a matter of saying hey, I want to be in the acetate market in the asset.
The plastic market and I'm going to move it from paper pulp up to that up to that are there.
Into that business and in our product and production just because I think.
I don't think the knowledge and the capabilities there.
George maybe just to highlight as you know viscose think of 5% of our enterprise sales. So small in comparison and we differentiate ourselves on softwood versus hardwood capacity as well.
Very good guys. Thank you and good luck in the quarter.
Thank you.
Okay.
Thank you there are no further questions at this time I would like to turn the floor back over to president and CEO .
Bloom quest for closing comments.
Well. Thank you all for your time today as noted we started the year on the right path to achieving our strategic and financial goals.
I'm proud of all of our efforts within the company and confident that we will continue to improve our profitability and reduce our leverage and I look forward to our next update coming in in August . So between here and then if there's any questions feel free to reach out to us.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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