Rayonier Advanced Materials Inc. — Q1 2023 Form 10-Q
Business context and period. The company makes specialty cellulose, paperboard and high-yield pulp. This unaudited report covers the three months ended April 1, 2023, compared with the three months ended March 26, 2022. All amounts below are U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q1 2023 | Prior-year quarter |
|---|---|---|
| Net sales | $466.8 million | $351.7 million |
| Gross margin | $37.4 million; 8.0% | $5.9 million; 1.7% |
| Operating income (loss) | $16.6 million | $(15.8) million |
| Net income (loss) | $1.6 million; $0.02 diluted EPS | $(24.9) million; $(0.39) diluted EPS |
| Adjusted EBITDA, continuing operations (non-GAAP) | $51 million | $20 million |
| Cash from operating activities | $51.4 million | $(23.5) million |
| Cash and cash equivalents at period end | $169.4 million | $151.8 million at Dec. 31, 2022 |
| Total debt, carrying value | $845.7 million | $853.1 million at Dec. 31, 2022 |
Quarterly capital expenditures were $21.2 million. Adjusted free cash flow, a non-GAAP measure, was $36 million; the company’s calculation excludes $6 million of strategic capital expenditures. Debt to capital was 50%. ABL availability was $100 million net of letters of credit; the company estimated that recently purchased credit insurance would raise pro forma net availability to $136 million. It also reported $7 million available under a French factoring line.
Material changes versus the prior-year quarter
- Sales grew 33%, driven mainly by higher prices across segments and higher volumes in High Purity Cellulose and High-Yield Pulp.
- High Purity Cellulose sales rose to $374 million from $281 million; segment operating income was $12.9 million versus a $7.8 million loss. High-Yield Pulp sales rose to $41.9 million from $22.1 million, and operating income was $7.3 million versus a $0.4 million loss.
- Paperboard sales increased to $59.0 million from $54.2 million, with segment operating income of $9.7 million versus $5.8 million. Higher prices were partly offset by lower volume and higher input costs.
- Operating cash flow improved by $75 million, primarily because of working-capital movements. Adjusted free cash flow improved from a $59 million outflow to $36 million positive.
- The prior-year quarter included a $8.9 million unrealized gain on GreenFirst shares and a loss from discontinued operations; neither was recorded in Q1 2023. Q1 2023 included a $2.3 million pension settlement loss.
Outlook, management commentary and risks
- High Purity Cellulose: Management expects 2023 cellulose-specialties average prices to be high-single-digit percentages above 2022, but volumes to decline amid mixed demand. Commodity volumes are expected to increase as production and logistics improve; commodity pricing outlook varies by product.
- Operations and costs: The Tartas maintenance outage took longer than expected to return to production and is expected to affect Q2; management anticipates making up production during the rest of the year. Annual outages at Jesup and Temiscaming were planned for Q2. Certain input and energy prices have eased from 2022 highs but are expected to remain elevated versus pre-pandemic levels.
- Other segments: Paperboard prices are expected to moderate slightly but remain above 2022 levels, with volumes expected to remain steady. High-Yield Pulp prices are expected to decline in 2023; volumes are expected to improve slightly.
- Bioethanol project: Construction at Tartas is expected to finish for operation in the first half of 2024. Estimated project cost is about $41 million, including $29 million planned for 2023. Management expects $9–$11 million of annual incremental EBITDA beginning in 2024. Funding plans include green loans and grants; these are expectations, not guaranteed outcomes.
- Debt refinancing: The next significant maturity is in June 2024. The company said it was preparing to refinance its senior unsecured notes and considering using cash to repay debt or support a broader refinancing. It reported compliance with debt covenants at quarter end. In March it repurchased and retired $5 million of senior unsecured notes; in April, after quarter end, it repurchased $10 million of senior secured notes for $9 million cash.
- Contingencies: Recorded environmental liabilities were $170.2 million. The company estimated reasonably possible additional exposure of up to approximately $85 million, which could be exceeded. It also reported a $38 million long-term receivable for Canadian softwood-lumber duties; recovery timing depends on final resolution of the dispute and administrative reviews, and cash is not expected before final resolution.
- Other risks: CEWS claims remain subject to mandatory audit; $18 million (USD) remained deferred pending sufficient evidence that repayment would not be required. A collective bargaining agreement covering approximately 575 unionized employees had expired, with negotiations ongoing; a work stoppage could materially affect operations. Commodity prices, demand, energy and raw-material costs, foreign exchange, and logistics remain important sensitivities.
The filing provides no single consolidated full-year earnings or revenue guidance. Management’s segment outlook and project estimates are forward-looking and subject to risks. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and terms of the 2024 debt refinancing, including the maturity schedule and available liquidity.
- Whether Q2 maintenance outages and the Tartas restart affect production, cash generation or the expected full-year volume recovery.
- Realized prices, volumes and input costs versus management’s segment outlook, particularly for cellulose specialties and high-yield pulp.
- Timing and ultimate recovery of the $38 million softwood-duty receivable, and any outcome affecting the estimated environmental exposure.
- Bioethanol project spending, funding, start-up timing and whether expected incremental EBITDA is achieved.