Rayonier Advanced Materials Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are to periods ended September 24, 2022. Amounts below are in U.S. dollars unless stated otherwise.
Business context
RYAM produces high-purity cellulose, paperboard and high-yield pulp. Its largest segment, High Purity Cellulose, includes cellulose specialties and commodity products. Lumber and newsprint operations sold in 2021 are reported as discontinued operations.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $368.7M | $466.3M | $1,220.8M | $1,217.3M |
| Gross margin | $8.7M (2.4%) | $46.5M (10.1%) | $60.8M (5.0%) | $79.2M (6.5%) |
| Operating income (loss) | $(14.4)M | $28.5M | $(4.3)M | $9.8M |
| Continuing operations net income (loss) | $(26.5)M | $18.4M | $(40.6)M | $(31.0)M |
| Net income (loss), including discontinued operations | $(25.1)M | $29.6M | $(40.2)M | $(18.5)M |
| Adjusted EBITDA from continuing operations | $24M | $68M | $102M | $122M |
Q3 sales fell 21%, primarily on lower commodity product prices, weaker cellulose-specialties volumes and lower Paperboard and High-Yield Pulp sales. Nine-month sales were essentially flat. Q3 operating performance deteriorated across High Purity Cellulose and High-Yield Pulp; Paperboard operating income improved slightly to $13M. Higher input, logistics and maintenance costs were lower in some areas, but did not offset demand, price and volume pressure. Interest expense rose $5M in Q3 and $3M year to date, mainly due to higher average borrowing rates.
Cash flow and liquidity: Nine-month operating cash flow was $82.1M, versus $7.4M; capital expenditures were $95.2M. Company-defined adjusted free cash flow was $27M versus $(85)M, reflecting working-capital changes and lower capital spending. Cash declined to $27.1M from $151.8M at year-end 2022. At September 30, debt was $749.1M, down from $853.1M; net ABL availability was $112M, with another $8M available under a French factoring line. Debt-to-capital was 49%, versus 51% at year-end.
Debt and balance sheet: In July, RYAM issued a $250M variable-rate term loan due 2027, bearing three-month Term SOFR (subject to a 3% floor) plus 8%, and used proceeds with cash to redeem its 2024 notes. The term loan rate was 13.33% at quarter-end. The loan requires quarterly principal payments and includes a secured net leverage covenant of no more than 4.50:1. The company reported covenant compliance. Current liabilities were $334M and stockholders’ equity was $786M.
Outlook, management commentary and material items
- Management described continued customer destocking and market-driven weakness, particularly in cellulose specialties and construction-related demand. Cellulose-specialties 2023 average prices were expected to exceed 2022, while volumes were expected to decline. Commodity-product volumes were expected to rise through year-end; commodity pricing was expected to stabilize or improve slightly in Q4.
- RYAM expected market-related downtime in late 2023 at Tartas and at Paperboard and High-Yield Pulp operations, partly to improve working capital. It began planning a High Purity Cellulose production-mix realignment, including consolidating commodity production at Temiscaming; financial impacts were still being evaluated.
- In October, the company said it had engaged a financial advisor to explore a potential sale of its Paperboard and High-Yield Pulp assets at Temiscaming. No transaction outcome or terms were provided.
- The Tartas second-generation bioethanol project was near completion and expected to operate in Q1 2024. Estimated project cost was approximately $40M; management expected $8M–$10M of incremental annual EBITDA beginning in 2025, subject to exchange rates. Planned funding included green loans and grants.
- Softwood-duty administrative reviews produced a $2M Q3 pretax gain and a $40M long-term receivable at September 30. Collection remains contingent on final resolution of the dispute and legal challenges; estimated interest on duties paid was approximately $6M.
- Environmental liabilities totaled $169.6M. The company estimated reasonably possible additional exposure of up to approximately $85M, excluding amounts not currently estimable. A $19M deferred CEWS balance remained subject to mandatory audit and potential repayment.
- RYAM reported $34M of net exposure under standby letters of credit and $90M of surety bonds, principally related to environmental, energy and insurance obligations. Its proportional guarantee of LTF financing was $29M.
- No formal consolidated earnings or cash-flow guidance was provided. Management said operating cash flows, ABL availability and potential capital-market access were expected to fund operations and anticipated long-term needs.
Important facts for investors to verify
- Whether weaker cellulose-specialties demand, commodity prices and planned downtime persist, and how they affect segment margins and cash generation.
- Progress, costs, financing and expected returns for the Tartas bioethanol project and the High Purity Cellulose realignment.
- Any outcome or updated timetable from the Temiscaming asset-sale exploration.
- Liquidity and covenant headroom under the high-cost 2027 Term Loan, including sensitivity to variable interest rates; a 1% rate change was estimated to affect annual interest expense by about $2M.
- Timing and recoverability of the $40M softwood-duty receivable, the environmental exposure estimate and the CEWS claim audit.