RAYONIER ADVANCED MATERIALS INC. Q3 FY2024 earnings call

• Q3 2024 adjusted EBITDA reached $51 million, a $27 million or 113% increase from last year, with margins at 12.7%. Year-to-date adjusted free cash flow is $99 million. • Shifted product mix towards specialty production and sales while focusing on cost reductions. • On October 11th, an isolated fire at the Jesup, Georgia facility was managed, with minimal long-term impact. • Successfully refinanced debt on October 29th, providing flexibility for long-term strategy.

In the High Purity Cellulose segment, EBITDA rose by $32 million or 119%, driven by higher cellulose specialty prices and volumes and decreased costs for key inputs. Non-fluff commodity exposure dropped to 4% of revenue. The Paperboard segment saw a $6 million EBITDA decline due to reduced sales prices and increased pulp costs. The High-Yield Pulp segment showed a $6 million EBITDA improvement due to higher prices and productivity, though partially offset by sales volume decreases.

• Reiterates adjusted EBITDA guidance for 2024 at $205 million to $215 million. • Increases adjusted free cash flow guidance to $115 million to $125 million for the year. • Pro forma for new term loan, annual cash expense will be just over $80 million. • Maintenance CapEx estimated at $78 million, including $3 million related to the fire.

• Isolated fire at Jesup, Georgia facility in October, expected to impact EBITDA by $10 million in 2024, with additional $3 million in capital repairs over the next couple of years. • Exposure to China's market conditions affecting certain product segments like High-Yield Pulp and ethers.

Q: Good morning, and congrats on another great quarter. Obviously, in recent weeks, we've seen your equity appear to be quite sensitive to what's going on in China. And I was just hoping if you could maybe clarify your exposure to that slowing market and any benefit you see from government stimulus in the country? And then, maybe just a quick update on what you're seeing in end-market demand for construction in Europe since that's been coming up over the last six months or so?

A: Good morning, Daniel. This is De Lyle. Taking your first part of the question, which is around our equity sensitivity to China, I would agree with your comments, it does seem to be that there's some concern about what our exposure would be to China, but a couple of points I'd make to that. First, just a couple of facts. Roughly about 20% of our total enterprise sales is exposed to China. I mean, this is primarily around acetate, but also around some of our commodities like viscose and so forth. And also our High-Yield Pulp has some exposure there as well. Talking about each one of those pieces, with respect to acetate, acetate is very stable with respect to what goes on in China, whether -- so there's a disconnect between what's going on with GDP in China and our asset demand. And that makes some sense. I mean, at the end of the day, most of our acetate going into China really goes into tow production and is tied to obviously cigarette consumption. So you'd expect that to be -- that to be stable. With respect to viscose, as I mentioned already, our strategy is to reduce our exposure there. And so, we've seen a significant reduction versus last year. And as we see continued growth in CS production going forward, we'll see that decrease going forward as well. But it's already down to somewhere around very low-single digits in terms of our revenue. And then finally, with respect to -- I just mentioned High-Yield Pulp, this is one area of concern, given the exposure we have with respect to, call the stranded pulp capacity that is in China and the impact it has on High-Yield Pulp pricing. And what we're doing there is we're trying to move and extract value for our Maple 80 product that we sell globally and trying to get -- and we've been successful getting increased distance between our Maple product and our competitive Aspen products that are out there. One other area I would say in terms of exposure is kind of indirect through our ethers. When the Chinese domestic market is weak, we do see some ethers coming out of China into some of our more important markets, principally Europe. So there's a little bit of pressure on that. And it's -- but we're fighting back by getting to maintain market share in Europe as well as some of our other markets, but we do see a little bit of the impact of some of the exports out of China into the ethers market as well. But right now, we've been very successful in defending our share there. Marcus Moeltner: And Daniel, it's Marcus. As De Lyle highlighted, acetate is very stable, and that's 40% of our exposure, that he highlighted. So, just so that it's pretty sticky. De Lyle Bloomquist: Daniel, can you remind me what your second part of your question was? Daniel Harriman: It was just a quick one, if you could just update what you're seeing in the ethers market in Europe and the construction end-market there? De Lyle Bloomquist: All right. We're seeing a little bit of uptick in demand for ethers. And I think that can be put into two different buckets. One is, I think a rebound in restocking. So, we're seeing a build in the inventories there. I think the destocking activity we saw in '23 was probably overdone. And as a consequence, our customers are restocking the shelf, so to speak. But we're also, I think, seeing an increase in underlying demand, but it's modest. We're hopeful that as interest rates continue to decline, that demand -- the underlying demand will increase. And one, just to point out activity that I saw this morning, the German economic -- the German manufacturing index in terms of production was up, surprised on the upside this morning. And again, that would be very favorable for us if that continued. But again, right now, we're seeing modest demand improvement and expect that will continue to improve as we go into '25.

Q: Hi, good morning. Thanks for taking my questions. I just wanted to follow on Daniel's question there. You talked about ethers and around China, but maybe just a little bit more holistically, could you provide some color on what you're seeing in the demand environment, I guess, particularly for acetates and other CS heading into 2025?

A: Hey, good morning, Matthew. I know it's early for you. Thanks for joining the call. With respect to acetates and other CS -- and other CS was generally filtration, [entire cord] (ph), MCC, and so forth. Acetate, let me answer that one first. Again, it's generally along the same themes as I talked about earlier with respect to acetate in China, relatively stable. And we expect that will be relatively stable going forward. Not a real growth engine for us, more of a cash cow business for us, but it's a business that we rely on to be stable, and we expect that to be the case going into '25. Other CS, a little bit more economic sensitivity there. And we expect that in '25 that demand will continue to improve. Little weak -- I wouldn't say weak, but there's some softness here or there for other CS, but one of the things that's offsetting that is obviously the shutdown of capacity at one of our competitors in Q4 '23. And as a result, we were able to gain a lot of additional sales and production as a result of that shutdown. So, we -- in '24 versus '23, obviously, we're going to see an increase in demand and in production and sales as a result of that shutdown.

Q: Great. Thanks for the color. I guess next, I'd like to ask about the price increases you've messaged for CS. Can you talk about how implementation has gone across volumes that are exposed to the increases so far? And then, looking into '25 and across the CS portfolio, are you able to speak to what you expect in terms of a weighted average net price increase for '25 and how that may compare to how you're thinking about inflation across your cost structure next year?

A: I'm going to disappoint you, Matthew. Way early in the process, but as stated already that value over volume is our strategy. So, we'll continue to press our advantages there where we can. It will be a product grade sensitive. So there'll be different prices relative -- increases relative to the different grades, but we are working our angle there. Marcus Moeltner: Matt, as you know, a lot of those discussions culminate in London Pulp Week, so that's coming soon.

Q: Okay. That's fair enough. And then, if I could just sneak one last one in. It sounds like you're expecting a little bit more spending to repair Jesup over the next couple of years. It sounds like that will be capitalized, but could you just give a sense of kind of magnitude there? What kind of we should be thinking of around spend levels in the next couple of years at Jesup, specifically?

A: Really can't. We're obviously going through quite a bit of investigation and engineering. And then obviously, once that's done, then we'll have to cost it out. So, it's a little early to give you an estimate on that, and how much we would spend in '25 versus '26 is something we still need to figure out. But it doesn't mean that we can operate the plant safely and effectively in '25. These are issues that we feel that can be deferred and we want to just make sure we do it right. So, we're taking our time doing the investigation and the due diligence on it.

Q: Good morning, guys, and thank you for taking my question. A couple of questions, if I may. First of all, just to sort of circle back on the Temiscaming plant closure, you talked about bridge sales as you're getting ready to shutdown the plant, helping you during the quarter. Is that going to continue in the fourth quarter, or is that pretty much run its course and we should be thinking about a little bit bigger step-down in revenue as we look into the fourth quarter?

A: It will help us a little bit since July shutdown, the benefit has diminished as time has gone on as we've sold the, call it, the bridge volume through the year. But so there'll be a little uplift in Q4 as a result, but not as significant as it was in Q3. Marcus Moeltner: And the bigger impact there is obviously the working capital effect on activities up in Temiscaming for the quarter... De Lyle Bloomquist: As we liquidate the -- yeah, right, as we liquidate the inventories, that's right.

Q: Okay. So, you'll get a little bit of bump in your...

A: In cash flow.

Q: Generation from drawing down your working capital. Got it. How should we think about the commodity volumes in your HPC business in the fourth quarter? You did about 90 million ton -- or 90,000 tons in the third quarter. Is that the run rate we should expect for the fourth quarter and into 2025, or is there going to be a little bit more declines before we stabilize?

A: It's likely to go up a little bit in Q4 versus Q3, and that is somewhat impact -- it's being driven by both seasonality and demand for CS. CS -- the fourth quarter tends to be our lowest quarter or our slowest quarter with respect to demand for our CS products. And also, I would say that the Jesup fire may have also had some impact given that Jesup is primarily focused, almost 100%, not a whole 100%, but A and B mills are specifically dedicated to CS production. So, the impact of the fire was greater on CS than it was on the commodities.

Q: Okay. Thank you for that color. And then finally, you've mentioned several times in this presentation, De Lyle, the growth in biomaterials and how important that business is for you. How does the growth in that business contribute to the achievement of the goals that you've highlighted in your sustainability report that you published last week? And what market factors are driving that growth? I mean, you're entering markets that have other participants in it already, but you're obviously doing very well with the bioethanol plant production. So, what gives you confidence that as these products are approved and enter the market that they'll be able to deliver the growth that you're looking for and help you with your sustainability goals?

A: Okay. Great question. And I could probably talk for an hour on it, but I'll try to be very brief. With respect to the centrality of the biomaterials relative to our overall strategy, I would say that it's key to meeting our ESG objectives. It really goes around to the fact that, as we -- our current core business, our HPC business uses about 40% of the wood that we bring into the plant to make those products. The biomaterials business uses the other 60% of the wood. And so that just leverages off the circular processes and increases the renewable story that we have. And as a result of that, we believe that that will make -- that feeds into existing markets where currently those markets are being supply by-products that are based on non-renewable resources, whether it's hydrocarbons or whatever it may be. So, that -- we believe that's where our comparative advantage is, is that we're going to be able to make products out of the resources we're already bringing in the plants, and we leverage off of the capabilities that we have within our facilities already. And it's going to go into markets where customers -- end-use customers are looking for more sustainable products, products that come from renewable resources versus non-renewables resources. And that's really the megatrend that we think is going to drive the continued growth of not just biomaterials, but all of our businesses, our core businesses going forward. So, that's where we think we're going to get the growth. And I would say that we're demonstrating that with our Tartas bioethanol plant today. And we believe that that is a good example of the demand for renewable products that have historically been produced by non-renewable resources. Marcus Moeltner: And Dmitry, we're looking-forward to the call you're hosting with Ben Chambers on 13th November. De Lyle Bloomquist: It certainly gives you a lot more color on that.