Rayonier Advanced Materials Inc. (RYAM) Q1 2015 Earnings Report, Transcript and Summary

Good morning, welcome and thank you for joining Rayonier Advanced Materials First Quarter 2015 Teleconference Call. At this time, all participants are in listen-only mode. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Ms. Beth Johnson, Vice President of Investor Relations and Planning. Ma'am, you may now begin.

Thank you and good morning. This is Beth Johnson, Vice President of Investor Relations and Planning. Welcome to Rayonier Advanced Materials' 2015 first quarter earnings call and webcast. Joining me on today's call are Paul Boynton, our Chairman, President and Chief Executive Officer; and Frank Ruperto, our Chief Financial Officer. Our earnings release and presentation materials were issued this morning and are available on our website at rayonieram.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 lists 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 Slide 2 of our presentation material. At this time, I would like to turn the call over to Paul for his opening remarks. Paul?

Hey, thanks Beth. Good morning everyone. I am going to start with a few brief comments about the quarter before turning it over to Frank to review our financial results. This morning, we reported first quarter earnings of $11 million or $0.25 per share and EBITDA of $46 million on sale of $221 million, in line with our expectations for the quarter. During the first quarter, we made significant progress on our $40 million cost reduction initiative and we are on track to realize this substantial portion of the targeted cost savings in 2015. Additionally, we are benefitting from lower than anticipated chemical and energy costs. As a result of our initiatives and lower costs, we expect to exceed the mid-point of our previously announced full-year EBITDA guidance of $200 million to (sic) $220 million. As a consequence, we are raising our EBITDA guidance to $210 million to $225 million for 2015. With that as a backdrop, let me turn it over to Frank for review of the financials.

Thanks, Paul. Let's look at Slide 3 to review our financial highlights for the first quarter. Sales totaled $220 million for first quarter 2015, 11% below fourth quarter 2014 and 9% below first quarter of 2014. Operating income was $24 million for first quarter 2015 compared to pro forma operating income of $47 million and $46 million for the fourth quarter and first quarter of 2014, respectively. The 2014 pro forma adjustments exclude one-time separation and legal costs. Fourth quarter 2014 also excludes environmental charges discussed in the last earnings call. There were no pro forma adjustments for the first quarter of 2015. Our variance analysis for operating income relative to the fourth quarter and first quarters of 2014 are provided on slides four and five of the financial presentation material. As you can see on Slide 4, for the sequential quarter comparison, first quarter 2015 was negatively impacted by $7 million, due to lower prices. As expected, cellulose especially prices were down approximately $68 per ton or 4% from the prior quarter. For the year, cellulose especially price are expected to be 7% to 8% below 2014 levels, reflecting the full impact of 2015 price negotiations. Aggregate prices for commodity products were relatively unchanged between the periods, and unfavorable sales mix and lower cellulose especially sales volumes reduced operating income by $15 million from the fourth quarter of 2014. First quarter cellulose specialty sales volume declined 16,000 tons to 107,000 tons; typically sales volumes of cellulose specialties in the first half of the year are lower than the second half, due to the timing of customer orders and our annual maintenance outages. This quarter was further impacted by fewer operating days and the inventory destocking and acetate tow, which is expected to be completed by Q3. Commodity volume for the first quarter increased 12,000 tons to 58,000 tons over the fourth quarter, due to strong production at the end of 2014 and our planned increase of commodity sales. It is important to note that most of our estimated full-year 2015 cellulose specialty sales volume is contracted. Therefore, while the timing of our cellular especially the sales may be impacted by seasonal order patterns and inventory destocking, our full-year sales volume is largely known and expected to be comparable to 2014 and 2013 levels, as previously guided. Costs for Q1 were up slightly from the prior quarter, reflecting lower fixed cost absorption as production rates declined primarily due to lower operating efficiencies and fewer production days, which include the impact from Fernandina's first quarter annual maintenance outage. Slide 5 shows the pro forma operating income variance from Q1 2014 to Q1 2015. As you recall, Q1 '14 is reflective of carve-out accounting treatment. As such, the overall results may not be indicative of the standalone company. However, sales and production costs are comparable between the periods. Operating income declined $22 million, primarily driven by lower cellulose specialty sales prices. As anticipated, CS prices were down and $156 per ton or 8.5% from the prior year due to the outcome of 2015 negotiations and the mix of cellulose specialties products in the quarter versus the previous year's Q1. Again, average CS prices for full-year 2015 are expected to be 7% to 8% below 2014. Cellulose specialty sales volume was possibly 6,000 tons or 5% below the previous year's first quarter. This was offset by 8,000 tons or 16% increase in commodity volume and improved commodity profitability. Costs increased approximately $5 million from the prior year period, primarily due to higher SG&A expense as a result of being an independent public company and higher professional fees. Recall that Q1 2014 SG&A expense was down on an allocated basis and is not comparable to 2015. Now, let me switch to our 2015 outlook and guidance. As shown on Slide 6, we expect CS sales volume to remain comparable to 2014 and 2013 levels, with prices down 7% to 8%. However, we have raised our guidance for 2015 EBITDA to $210 million to $225 million, reflecting lower full-year cost. As a reminder, in our Q4 earnings call, we announced the plan to achieve approximately $20 million to $40 million of cost savings in 2015.These initiatives cut across all functions of the organization, including contractor costs supply chain savings and headcount reductions amongst others, with no one activity accounting for the lion share of the expected saving. The estimated range of savings reflected the uncertainty around the timing of the implementation of some initiatives. To-date, we have realized approximately $6 million in operational savings in the quarter, the benefit of which is largely capitalized in our inventory. Based on our performance to-date, we believe we are on track to capture a significant portion of our targeted savings in 2015. Additionally, we continue to see opportunities from declining chemical and energy prices, which in the aggregate could provide incremental benefit to 2015 EBITDA if these trends continue. However, factors such as longer than forecasted energy curtailments or increased wood cost due to significant weather events could offset a portion of these benefits. In addition to cost savings, one of our top priorities in 2015 is to prudently invest our cash. We remain focused on driving efficiencies throughout all levels of our operation, including working capital in which we are targeting $15 million of improvement by year-end. As shown on Slide 7, in the first quarter of 2015, we generated $46 million of EBITDA, $32 million of adjusted free cash flow. As a result, net debt was reduced by $32 million. We ended the quarter with $300 million of liquidity, including $222 million available under our revolving credit facility after taking into account outstanding letters of credit. As shown on Slide 8, our capital allocation strategies remain as previously communicated. Our first goal is to preserve and improve our financial flexibility by reducing our debt. Next, we will invest in the business through a prudent capital expenditure program set at levels to optimize profitability and return on capital. We have stated that we expect to spend $75 million to $80 million in capital expenditures in 2015. Of that $15 million to $20 million is for the boiler MACT project with the remainder being allocated to maintenance and high return cost reduction projects. Finally, we intend to fund the modest return of capital through our quarterly dividend. At this point, let me turn the call back over to Paul.

Thanks, Frank. As you just heard, our first quarter performance was in line with our expectation. The progress we have made our cost initiatives as well as certain lower raw material costs allow us to raise our previous EBITDA guidance. However, the overall market dynamic remains consistent with what we communicated on our fourth quarter call. As a result, our priorities in the near long-term remain the same as shown on Slide 9. In review, we will continue to move aggressively on cost reduction and continuous improvement initiatives across all aspects of our business. For example, in our wood procurement group, we recently announced a realignment of the organization with the closure of our chipping facility in Jarratt, Virginia and reductions in the size of our management team. With these changes, we will save approximately $1.4 million of expense annually. Beyond 2015, our goal is to hold cost flat by continuing to identify and implement savings to offset typical cost inflation. In anticipation of this, we have already begun to size up additional cost-saving opportunities required for 2016 and 2017. For example, in April, we celebrated the groundbreaking of a combined heat and power plant to be built by Chesapeake Utilities, adjacent to our Fernandina plant. As previously discussed, this partnership will provide our business with up to $2 million of annual savings through lower cost theme [ph] beginning in 2016. Second, we are reviewing our assets to be sure we are leveraging them to the greatest value given today's market condition. As such, we have entered into multi-year commodity contract for a substantial portion of our capacity [ph], until the cellulose specialty markets regain momentum. We will decide if any further changes in manufacturing strategy are warranted as market conditions change. Additionally, we are making good progress on identifying co-product opportunity that might yield higher returns than our current value as a source of energy in our recovery boiler. While it is too really to provide the size or the timing of benefits that might be realized, we can share that where in active talks with several potential partners for our co-products. Finally, we are reinvigorating our product innovation process with a focus on driving greater value with enhanced product and improve customer performance as well as new product to help us serve additional market. For example, one breakthrough that we are particularly excited about is a new product to increase customer productivity which builds on a leading expertise in cellulose technology. Early results with a significant customer demonstrate the product allows them to achieve throughput well above normal levels and providing them with a potential for both greatly reduced costs and future capital avoidance. Additionally, we have recently filed several new patent applications for products outside our existing market, with plans to file more through the balance of the year. We share this progress with you not because we expect to commercial value for many of them in the near-term, but rather to demonstrate our renewed R&D effort and our commitment to have 20% of our revenues derived from new products within the decade. In summary, we continue to take actions that are necessary to compete effectively and position ourselves for the near-term and long-term success. Now, I would like open up the call for questions. Operator, if you can open up the call for questions that would be great.

Thank you. We will begin the question and answer session. [Operator Instructions] Our first question comes from the line of Mr. Chip Dillon from Vertical Research Partners.

Chip? Operator, we seem to lost chip, there.

All right, Mr. Dillon, your line is now open.

Hi, guys. Can you hear me?

Yes.

Hi, Chip. Good morning.

This is actually Bryan Lynch, filling in for Chip. I just have one quick question. It is regarding the fluff pulp market. Given the recent activities you have seen from Domtar and then a recent conversion by International Paper, I was curious about what you guys have planned for the left over fluff capacity at the Jesup Mill and kind of how you guys see that in your long-term strategy.

Yes. Hey, Bryan, thank you for your question. As we commented, we have got our products placed for the year and our new C line, majority of that contracted into the commodity markets. If the question is about this new capacity coming on, I think the perspective here that we take is that it is a 5 million ton market for fluff pulp and therefore our sales into it are very small, so we do not see the additions that we sort of announced coming in on in 2016 that changes our thoughts or our plans in any way. It is certainly has a potential to affect pricing in some way, but we will see and we will make those decisions on how we run our facilities accordingly at that time, but overall we are very small player in a 5 million ton market.

Thank you. That is helpful.

Thanks, Bryan.

Thank you. Our next question is coming from the line of Roger Spitz from Bank of America. Sir, your line is now open.

Thank you. Good morning. Regarding the CS volumes under contract 2015, can you say how the contracts typically work? Are the volumes set for the year and the customers can take volumes during the year as they seem fit or the volumes that quarterly or they were [ph] contracts by customer facility?

Yes. Hey, Roger. Good morning. Let me just say generally that first of all, our CS volume is largely contracted for the year and they are typically our contract are volume contract over many years and then pricing is negotiated on an annual basis and that is we have disclosed that before. Again, for 2015, our volumes are largely locked in and contracted.

Okay. the reason I was asking the question or I did is, I am trying to figure out is whether they have flexibility to push lost volumes during the course of the year and only have to make up the volume for the full year.

We often move volumes around quarter-to-quarter based on our production, based on our customer needs. We got to make sure we are flexible to match their needs, but overall for the year as we have communicated, our volumes are largely contracted, and in this case they are going to be largely comparable with the prior 2014 and 2013 years.

Thank you. Regarding the Jesup C line contracts, were those contracts recently - as you mentioned earlier on call, were those contracts recently entered into? Are they volume contracts, are they all in fluff pulp?

Again, on the C line, we commented on multi-year commodity contracts. Those were largely contracted at the end of 2014 for the 2015 and beyond years. They are both, in some cases, they are certainly they are volume contracts and they have different pricing aspects to them.

Okay. Last question is, SG&A was $12 million in Q1 '14. Should we think about that being the run rate for the year or perhaps some of the cost saving initiatives produces that? Thank you.

Yes. That's a reasonable. We would think it would be somewhere in that range, plus or minus, obviously the cost savings as we get those into the hopper should help minimize that to some extent, but that's a reasonable run rate.

Thank you very much. Thanks, Roger.

Thank you. [Operator Instructions] Our next question is coming from the line of Mr. George Staphos from Bank of America Merrill Lynch. Sir, your line is now open.

Hi, guys. This is actually, John [ph] sitting in for John. How is everything going today?

Good, John. How are you?

Good morning, John.

Good. I just want to quickly ask you, clearly with commodity volumes increasing, but I was just wondering if you could provide an update on the market conditions you are seeing in those markets for both, off and also commodity?

We have reported that is relatively steady. We have talked about, for us we have got the ability to move fairly flexibly into the either market. We have talked to the probably the majority of our volume at the current time is going to the fluff market, so both markets are relatively stable with stable pricing, if not slight price increases that we can see out there, but you can look at our data that we have provided. You can see it is on the pricing per ton side has been pretty consistent over the last year and for everything you see, you can see that going forward as well.

Okay. Thank you. Then, also with regards to the latest guidance there, I mean, you talked about a couple of kind of items there. Is there anything more substantial that also might be driving your guidance revision at this point in time and also any sort of color you could provide on your comfort level for achieving those, that $40 million of cost savings or rather the majority of it by the end of the year would be helpful.

Yes. I think, we feel very good, I think the two things that are driving the increase is that we are making very good progress against the cost-saving initiatives, so that if you remember we were originally out with the $20 million to $40 million range and we will be well - I think, we have said significant portion of that could be realized this year, so we feel good about that. That has been very good progress. Then I think the other thing that we have noted is the better energy and chemical costs. Now, there are some offsets to those like usage and curtailments that we have seen on the energy side, but in general they have given us a little bit more confidence as well in regards to raising that guidance range, so we feel very good about the guidance range that we put out there.

Got you. Okay. Great. Then another question I had in had it pertains to the movement in the U.S. dollar. Clearly, we have seen a strengthening over the last couple of months or so, I just want to get a sense of the impact that will have on your business, particularly from a cost perspective.

John, so sell in dollars and our costs are largely in dollars, so we do not see that having an effect on us in any way. Obviously, it's a component for our competitors that is our global competitors, but it is one of many factors that we will look at and that will go into the - and potentially impact the CS market both, positively and negatively in the coming year. For 2015, we do not see any impact with the change in currency.

Okay. Then quickly just to tag onto Bryan's question earlier on the fluff pulp market, do you guys sell into different channels than the companies you mentioned or are you targeting, I guess, just any sort of color you can provide there just to give us some sense as far as you know what those markets look like?

No. We sell, and I would say relatively similar market as everybody in this segment of fluff market segment. Keep in mind, John, we pioneered this 45 years ago, so we know the markets really well, we know the customers really well, so we decreased our emphasis in that as we kind of brought up our C line and then we said, look, we are going to maintain a position in those markets going forward. It is with good relationships that we have had with existing customers for decades and they are across the board in different aspects, whether they are diapers or feminine napkins or adult incontinence so it's across the board, so again very similar channels to everybody else.

Okay, so are those customers, I think, is that more spot tons that you guys are selling or is that going to be contracted tons?

Yes, so we saw the majority of that now is contracted and that is one of the things that we did do and dedicated a good portion of that C line in a multi-year contracted way and we think that pricing is better than the spot market pricing out there, so we thought there was a bit of a benefit to us to go ahead and do that as well as go ahead and dedicate that volume on our new C line.

Okay, so, these are not by any means customers that you deal with in the specialties or commodity-based customer. Is that correct?

Yes. Totally separate.

Okay. Great. Then just a last question before I turn it over. Clearly, there was a little bit of a negative trend from the destocking in acetate, just wondering how that can impacts your comps as the year progresses and some of that starts to back off.

Yes. I will take a stab at this. I think, Frank is going to have some comments too. First of all that de-stockings is what we talked about last year and the beginning of this year. It is well anticipated and it is already into our plan, so again our volumes for 2015 will be comparable to '14 and '13, so we do not think it has an impact in any way other than a bit around the timing of orders. Again, I think, we see a little bit light in the first quarter, but we have guided for the full-year in terms of our CS volume and we should we should hold consistent to that guidance.

Okay. Great. Thanks for the help guys.

Yes. Sure. Thank you.

Thank you. [Operator Instructions] Our next question will be coming from the line of Mr. Paul Quinn from RBC capital Markets. Sir, your line is now open.

Yes. Thanks very much. Good morning guys.

Good morning, Paul. Early morning for you?

Yes. Just has been an interesting one. Just if you could give us some volume guidance, so what you expect to do on the commodity side in 2015?

Yes. I think what we said last called was that, obviously that commodity runs at a higher rate than our cellulose specialty lines from that perspective. If we just took our 675 guidance or capacity stated in CS that alone would have added roughly 50,000 tons of commodity volume. Our commodities are running very well, we are getting a lot of efficiency. That is part of our cost initiative, so we see at least that if not more commodity volumes coming out for the rest of this year.

Okay. In terms of the $40 million cost-savings initiative in your statement that you expect the majority of that to be realized, what are we talking in terms of majority 50? When are talking 80 or?

I am hoping it is materially higher than 51, so it is real early in the year, Paul, and we have got a lot of work to do, but I think we want to get a significant portion of that this year and as much of that 40 as we possibly can. Again, significantly higher than the 51.

Okay. Then last year you renewed a multi-year contract for another year or I guess extended it for a year. When did discussions around the contract come up and when do you expect to be able to report on that?

Yes, so that is the contract you are referring to in CFC that's the public information there, Paul, we have those discussions with them in the back half of this year in finalizing at the end of the year, I am sure, so likely we will give the color on that not till the January timeframe. As we have the information as timely, we will give you update on it.

Okay. Last question, just on the cost side, you have stated lower chemical and energy costs. Just wondering which chemicals are lower and then also what you are seeing on the fiber side?

Yes. Well, our biggest chemical as you know is caustic and that is we have seen lower pricing on that in particular, but there is some other chemicals that we are getting a little bit lower prices on as well.

Any expectation on the fiber side going forward?

The fiber side, the fiber cost have been running relatively stable to where we budgeted them. As you well know, they are very susceptible to weather and those types of things, so we are always cautious on the outlook for fiber, because it you can change on a week-to-week basis, but right now we have seen them relatively stable.

Okay. That is all I had. Best of luck.

Thank you.

Thanks, Paul.

Thank you. [Operator Instructions] Our next question will be coming from the line of Mr. Steve Chercover from D.A. Davidson. Sir, your line is now open.

Thanks. Good morning everyone.

Good morning.

Good morning, Steve.

A couple of quick questions, the volume that you replaced on the specialty side, I mean, that is encouraging. Do you feel that you are going to be establishing new long-term relationships based on quality and service?

Yes. If I understand your question right, Steve, certainly again our volume this year, we feel that is very solid 2015 relative to 2014 and comparable in that regard. Most of our volume I would say is currently committed in the long-term contracts. We think that is going to continue. Of course, we always compete out there. The way we look at it in kind of total value and use and so that takes regard to our quality, to our consistency, to our multiple lines that we have, they can produce CS volume, so all that into the same equation combined with prices how we are out there competing in the marketplace and we expect that to continue.

Yes. Because I think it is notable. It is well known that you lost significant customer, yet the volumes are the same, so you have replace that. I am just hoping that is going to be stable not annuity, but long-term business. Okay, also, I thought it was interesting that you are applying for patents for some of your new products. That is a bit of a departure, because I thought you are part of the attraction to the specialty cellulose, so it was not patented but the business was won on purity and collaboration so, are these altogether different products than what you make now?

Yes. I think that is a great distinction, so I talked about some breakthroughs that we are having right now on some new products that we are working with customers on and really we are seeing a remarkable difference in their performance. Those who aren't likely to be patented in anyway, we do not believe we will see. What we talked about on patents are outside of our existing markets today. Again, what we will be looking at patented applications for those and those have been filed and we have more to file, so again that different applications altogether to help us branch out from where our core markets are today.

I am no genius, but if you are patenting that means no one else was doing it, right?

Yes. That is right. Again, Steve, our focus over the last handful of years as you are well aware has been just to help serve the market with our products and it was really tight there for a while, so we shifted all of our focus due to throughput to serve our customers. As the market has shifted here a bit, we talked a lot about that. We said look, we are going back in reinvigorated our R&D engine and we got a lot of good ideas. We are waiting and reallocating time now and making that a greater priority and we have already seen the benefits from some of the prior work that we had sitting there and we have reprioritized, we started filing this patents. Again, it is more about longer-term story here, but we just want to let everybody know that we are having a near-term progress.

That is good. Well, I think one of your initiatives was to kind of grow your share ethers, because you have become very focused on acetate. I guess pulled into acetate, so how is that initiative going? Are you makings some traction?

Yes. We did not disclose kind of the different positions on our share for acetate, ethers and others and I would say right now it is relatively consistent to the prior year, probably a little bit less into acetate and more onto ethers and others, but we still maintain our focus in that direction certainly.

What is going on with smoking in China? Do you have any observations? Inventory stocking and destocking is one thing, but has there been any change in terms of attitude towards actual consumption of cigarette?

Certainly, we are monitoring that. Certainly, I think we discussed in the past there is a far greater awareness in China as well as the rest of the world on the ill effects of smoking, so we are watching those trends, but overall we believe and I think most of our customers would also say it is consistent. We think global acetate demand is relatively flat to slightly up, so we say 0% to 1%, and our belief on an ongoing basis at least our perspective this time is that China is at least at the high end of that or a little bit above.

Okay. One last one perhaps it is for Frank. Q1 is your seasonally weakest quarter for EBITDA, and I assume also for free cash flow, because you are presumably building log [ph] for you mills, so is that accurate. If so, can we expect even more free cash flow dedicated to de-levering in the next three quarters?

Yes. I guess, I would say that you are correct that it is a lower quarter for cash flow typically from an operating perspective. We actually have more tax payment and interest payments in Q2, and then interest payments in Q4. From a financing perspective, we will have slightly lower cash flow from that piece of it, but the operating cash flow should pick up throughout the year.

The priorities for the deployment of that free cash flow remains debt repayment?

Absolutely.

Okie-doke . All right, thank you very much.

Thank you.

Thanks, Steve.

Thank you. [Operator Instructions]

I think, we can assume there's no further question, so I would like to thank everybody for joining us today. Again, in summary, I think we are off to a good start in an environment that remains challenging. We are aggressively addressing the immediate priorities of maximizing profitability and cash flow and we remain vigilant in providing long-term value creation for our stock holders. We look forward to updating you on our progress in a timely manner as we move forward. Again, thank you and good morning.

This is Beth Johnson. I would like to thank everyone for joining us. Please contact me with any further question. Thank you.

Thank you. That concludes this conference. Thank you all for participating. You may now disconnect.