Rayonier Advanced Materials Inc.

Good morning. Welcome again to RIAM's third quarter 2023 earnings conference call and webcast. Joining me on today's call are Delisle Blomquist, our President and Chief Executive Officer, and Marcus Maltner, 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 RIAM.com. I'd like to remind you that in today's presentation, we will include forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Our earnings release as well as our filings with the SEC list 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 two of our presentation materials. Today's presentation will also reference certain non-GAAP financial measures as noted on slide three of our presentation. We believe non-GAAP measures 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 26 of our presentation. I'll now like to turn the call over to Delisle.

Thank you, Mickey, and good morning. I will start with the financial overview of the quarter and then provide an update on our progress in executing our strategic priorities before turning the call over to Marcus to provide additional details on the business segments in our capital structure and liquidity. Following Marcus's update, I will come back and provide further details on our 2023 initiatives and guidance before opening up the call to questions. Let's now turn to slide four to review our performance in the third quarter of 2023. Results for the third quarter were disappointing with EBITDA of $24 million, a decline of $44 million of 65% compared to the prior year. The poor results were a consequence of persistent weak demand across many product categories, which overshadowed the strong pricing recognized in our CS segment. While we expect that some level of demand weakness will persist, we do have high confidence that the fourth quarter will be notably stronger due to the full realization of the cost reduction initiatives and stronger CS shipments due in part to the increased market share resulting from the closure of the GP facility. The challenges that we experienced in our high-purity cellulose segment were primarily due to the declining commodity prices and lower cellulose specialty volumes. However, prices for our cellulose specialty products remained strong, with a year-to-date increase of 12% as compared to the prior year period, as a result of us prioritizing value over volume for our highly specialized products. The paperboard segment saw a $2 million improvement versus the prior year period. primarily driven by cost reductions resulting from lower purchased pulp prices, which more than offset the impact of reduced prices and sales volumes. Yield pulp EBITDA decreased $11 million versus prior year, driven by lower sales prices and volumes due to weak market demand and an opportunistic production shutdown in July that we took in response to this market weakness. Corporate expenses increased $9 million attributed to less favorable foreign exchange rates compared to the prior year period. In light of the weak third quarter results and the expected ongoing demand weakness in specific end markets, we are revising our adjusted EBITDA guidance to approximately $150 million. It's worth mentioning that the majority of our cellular specialty end markets have remained stable and our paper board business continues to perform well. Also, the pricing for commodity products have rebounded from the lower pricing seen in the third quarter. We are having success in keeping the business cash flow positive. Therefore, we are increasing our adjusted free cash flow guidance to a range of $65 to $75 million driven by better than expected working capital monetization, reduced cash expense, and lower capital expenditures. I will provide some details of our efforts later on. Turning to slide five, as mentioned during our investor day, we recognize that we have a challenging balance sheet that must be fixed. To that end, we are targeting debt reduction of $70 million over the course of the next year. This will be achieved through the sale of passive assets and free cash flows from the business. Also, we are exploring the opportunity to further accelerate the deleveraging of our balance sheet through the sale of our paper board and high yield pulp assets. These assets enjoy strong tailwinds from the global move to more sustainable packaging. This business also generates strong cash flows due to healthy profit margins and low custodial capex requirements. What do we expect? They will fetch an impressive premium on the market. We're actively working with our advisor and making good progress on this front and expect that we will announce a sales transaction in the first half of 2024 if our value expectations are met. We believe that this further deleveraging will set us up well to deal with the refinancing of our 2026 senior notes in the second half of 2024. I feel confident we will have this issue addressed in the coming year. The next issue we are dealing with is reducing our exposure to high purity commodities and the volatility adds to our earnings. The market share that we will gain from the closure of the GP Foley facility will make a significant impact on reducing this commodity exposure. We believe that we will, at a minimum, realize $35 million in EBITDA improvement from the improved sales mix in 2024. We are also working with our customers to quantify or to qualify current CS production at Temiscamingue at our other CS product lines so we can begin to consolidate our commodity of viscose production at Temiscamingue. which houses our lowest variable cost high purity cellulose line. Lastly, with a robust balance sheet and a core solid business, Ryan will be able to fully realize the promising plan of our biomaterials business. As discussed during our recent investor day, the initial phase of this plan is forecasted to yield over $100 million in revenue and $42 million in EBITDA annually within the next five years. Our first project, the bioethanol plant in France, is progressing well. We expect that construction will be completed near this year's end, and commercial production should start in Q1 of 2024. We're also advancing a couple of other biomaterial projects. We're working on the permitting and engineering of our second bioethanol plant to be located in Florida, and our bid to generate bioelectricity in Georgia has advanced to the next round. All in all, our strategic vision sets Ryan up well to achieve $325 million in annual EBITDA in 2027. We are confident that we will overcome the near-term issues, positioning us to successfully realize the significant opportunities ahead. We will keep you updated as we progress forward. With that, I'd like to turn the meeting over to Marcus to take us through the financial details for the quarter.

Thank you, Delisle. Starting with our high purity cellulose segment on slide six, sales for the quarter decreased by $77 million, or 21%, to $292 million, as a result of a 13% decrease in sales prices. The decline was primarily related to reduced pricing in commodity markets, whereas our CS products saw a 6% price increase, underscoring our commitment to securing fair value for our specialty offerings. Sales volumes decreased by 10%, to 217,000 metric tons due to weaker market demand for both specialty and commodity products. Commodity sales volumes rose by 37% compared to the previous year, whereas CS volumes decreased by 36%. This drop was attributed to market-driven declines in demand, mainly due to substantial customer destocking, specifically in construction markets. Sales for the quarter included $28 million of biomaterial sales, primarily from green energy and lignin. EBITDA for the segment declined $26 million to $27 million. The impact of higher sales prices for CS and the reduction of input costs was more than offset by a less favorable sales mix and decreasing commodity prices. Turning to slide seven. Sales in the paperboard segment saw a decrease of $9 million, resulting from a 5% reduction in sales volumes and an 8% decline in sales prices, reflecting weaker-than-expected market demand. EBITDA for the segment increased $2 million to $17 million, driven by reduced purchase pulp costs, partially offset by the impact of lower sales prices and volumes. Turning to the high-yield pulp segment on slide 8, Sales declined by $15 million in comparison to prior year, mainly due to a 31% drop in external sales prices and a 13% reduction in sales volumes. The reductions were a consequence of weaker demand and opportunistic downtime taken in response to market conditions. The segments EBITDA stood at negative $5 million for the quarter, in contrast to $6 million recorded in the previous year. Turning to slide 9, on a consolidated basis, we had an operating loss for the quarter of $14 million. Sales price improvements in CS were more than offset by $35 million of unfavourable mix in HPC and lower prices for HPC commodities, paperboard and high yield foam. Costs decreased by $28 million as a result of disinflation for certain input costs. It is worth noting that approximately 12 million of the cost improvements resulted from cost mitigation initiatives outlined during our previous earnings call sgna and other costs increased 5 million due to less favorable foreign exchange rates compared to the prior year period on slide 10 net debt ended the quarter at 743 million a reduction of 5 million from the same period in 2022. Sequentially, our net debt increased due to an expected increase in working capital, primarily related to finished goods inventories. The build-up in inventory levels was in preparation for the annual maintenance shutdown at our Fernandina plant. Our primary focus for 2023 continues to be cash flow and debt management. Consequently, we have executed opportunistic downtime for both our paperboard and high-yield pole facilities. and we intend to implement similar downtime strategy at our Tartash facility, all aimed at optimizing working capital levels. Liquidity ended the quarter at $147 million, including $27 million of cash, $112 million available under our ABL facility, and $8 million for our French factoring facility. Covenant adjusted net leverage ended the quarter at 4.4 times, higher than our initial expectations. This increase is attributed to the lower EBITDA and weaker demand experienced during the past two quarters. We are committed to maintaining compliance with our 4.5 times covenant test linked to our 2027 term loan facility and are actively managing cash flow and net debt levels to ensure the ongoing maintenance of our covenant cushion. I will provide additional details regarding our plan to address the covenant in the slides that follow. As part of our continued effort to reduce debt, during our investor day, we outlined our objective to retire an additional $70 million in debt within the next year. We intend to achieve this through free cash flow and possible divestiture of passive assets. By further lowering our debt and strengthening our balance sheet, We believe the company will be well positioned for the refinancing of the 2026 senior notes in 2024. Furthermore, we have recently confirmed our intention to explore the potential sale of our paperboard and high-yield pulp assets. We believe these assets offer a compelling value proposition in the market, and we have engaged Houlihan Boki to formalize this process. It is important to emphasize that we see these assets as valuable and we will only pursue monetization if it aligns with the best interests of both the company and our stakeholders. Any proceeds from the sale of these assets would be utilized to accelerate the reduction of debt and further deleverage our balance sheet. So now let's shift to focus on slide 11, which sets out a bridge illustrating how we expect to achieve EBITDA increase from Q3 to Q4. To begin, we'll revisit the mitigation measures we discussed during our previous call last quarter. The additional $14 million you see here is primarily related to lower fixed costs, including maintenance and supplies. We also expect benefits from reduced chemical and wood usage in Q4. And furthermore, we anticipate an improvement in price and product mix in our HPC segment. as the Q4 order book is more weighted towards higher margin CS products compared to Q3. Over 90% of these CS orders are confirmed and planned to ship in the quarter. Additionally, we expect both paperboard prices and volumes to experience an increase in Q4 as destocking wanes and market demand improves. High yield pulp prices have rebounded from their lows and are projected to increase slightly in Q4. And lastly, Q4 HPC production volume is expected to remain roughly flat compared to Q3, but an unfavorable mix shift in production is anticipated, driven by opportunistic market downtime at TARTAS in December. We have a high level of confidence in achieving this guidance and remain focused on execution as Q4 progresses. Let's now review how the guidance aligns with our ability to meet our debt covenant as shown on slide 12. In Q3, our LTM covenant EBITDA stands at approximately $170 million, indicating that we have approximately $12 to $14 million in add-backs available on a normalized basis. We closed Q3 with a net debt of $743 million, and we maintained net covenant leverage at 4.4 times, below the 4.5 times covenant test. Looking ahead to Q4, We anticipate covenant EBITDA of $160 million based on our guidance, and we are targeting net debt of $700 million, keeping the net covenant leverage flat at 4.4 times. Our strategy for achieving the net debt target comprises several components, including $40 to $50 million of free cash flow, including $15 to $25 million of working capital. Ongoing mitigation actions addressing costs, capital expenditures, and other discretionary items will also provide benefits. Additionally, we are actively negotiating the potential monetization of passive assets amounting to $35 to $40 million. I have full confidence in our approach to manage the covenant cushion and believe we have a well-defined plan in place. If any problems arise in the upcoming quarter, we are fully dedicated to utilizing all available means to meet the covenant requirements. With that, I'd like to turn the call back over to Delisle.