Rayonier Advanced Materials Inc. (RYAM) Earnings Call Transcript & Summary

Joining me today, please welcome Joshua Hicks. He's the Senior Vice President of High Purity Cellulose business at Rayonier Advanced Materials, the company's largest business unit, focusing on specialty cellulosic products and markets. The company stock trades in the New York Stock Exchange under the ticker RYAM. You can learn more about the company by visiting www.ryam.com. Welcome, Joshua.

Thanks, Dmitry. Thanks for having me.

It's my pleasure. Joshua, why don't we start by having you tell us and our audience a little bit about your background and the high-purity cellulosics business you're running at RYAM.

Sure. Yes, you bet. And again, thanks for having me. Welcome to Jacksonville, Florida. That's where I'm at right now today, in our headquarters here. So yes, as Dmitry mentioned, I'm Senior Vice President of our High Purity Cellulose Strategic Business Unit, which is, from a revenue and EBITDA standpoint is, roughly 75% to 80% of RYAM's enterprise. So it's really our core business. I joined the company about 2.5 years ago. Prior to that, I spent my entire career in the specialty chemical and ingredients industries running various different businesses. I joined RYAM really for 2 main reasons. One is, I saw the opportunity to really help change the way the company was operated and perceived externally as a commodity pulp manufacturer and really move into a true specialty materials manufacturing company. And I'm sure we'll talk a little bit more about that. And the other big reason was I saw an opportunity to drive significant shareholder value. And so that's really why I joined RYAM, and it's been a good ride so far.

Can you discuss RYAM's strategy and the vision to transform? You mentioned you started out as more of a pulp and paper type of a company before you joined, but now you're trying to pivot into a higher-value specialty cellulosics company with a more stable and growing markets. Can you talk about some of the factors behind that decision and how the process is going to date?

Sure. Yes. I mean, so first, let me sort of unpack and explain the HPC SPU, high purity cellulose SPU. So we're made up of 3 different businesses. So our cellulose specialties business, we call it CS, our fluff business and our non-fluff commodities business. So those are the three. If you look at our CS business, our Specialties business, it's a wonderful business that we have. I would tell you, we're not being recognized for that business from an external market valuation standpoint, right? But in that business, just to unpack that a little bit. We're the market leader in CS. We estimate currently to have anywhere from, call it, 39% to 40% of the market. Our EBITDA margins in that business are very healthy. So I think mid-20s plus percent is where that business is today. I refer to it as a very sticky business. What I mean by that is it requires significant R&D resources on our side and the customer's side and long customer qualification times to get our products into the applications, our customers use them for us. So with many of our products and the applications that go into, it has taken years and years to develop those in partnership with our customers. And so you can imagine, this really creates a strong competitive moat around this business, the high barrier to entry business, new capacity is expensive and the expertise needed to enter that business is challenging because of the involved chemical process and process equipment and systems that you need to do in order to have to develop those products. So that's our specialties business. Our fluff business is -- we have a really nice fluff business Dmitry. I mean, we're a boutique supplier in this space. So I think we're 3% to 4% of that market in any given year. But we target higher value areas in fluff, in growth areas like adult incontinence, for example, which obviously aligns well with the megatrends of aging population and things like that. We're focused on emerging geographies around the globe in that business to target sort of outsized growth and look to grow our business north of market a little bit. So the fluff business is also a solid business. If you go to the third part of the business, this non-fluff commodities, this is where you've seen us talk about it externally a little bit. Our EBITDA margins are negative into the space. So I think 15% to 20% negative, right? So not immaterial. And here recently, as the Street has seen, we've announced an indefinite suspension of our high purity cellulose line in Temiscaming, Canada, which, by doing that, that's going to continue to reduce our exposure to this space. So we're really looking to reduce our exposure. By the end of the year, we expect this to cut our exposure for about half. So there's still more work to do, but good progress. So I hope that gives a little bit of color there for you.

It does. But I was also wondering if you can outline some of the trends. You mentioned the closure of the Temiscaming plant. But some of the -- sort of what drove you to pivot to this business and start working on improving the profitability by getting rid of some of the more commodity parts of the business. When did this process begin? Prior to the Temiscaming closure, what were some of the accomplishments and maybe talk about the impetus for RYAM to go in this direction after being a more of a pulp and paper company and paperboard company for most of its existence.

Yes. I mean, good question. I mean, I think it's -- I guess what I'd tell you is fresh set of eyes, right? I mean I joined the company in December 2021. I'm a value guy. Obviously, my diligence on the company, I saw there was an opportunity really to capture more value for the very valuable products that we manufacture. And so as we've been open about value over volume from a commercial standpoint, I have helped drive that. Being the market leader in specialties, we believe in being strong price stewards, obviously. And so we are disciplined about not chasing volume with price and being careful, methodical about business that we go after. We price our products based on the value they provide to our customers. So not how much we can produce, but what are they worth to the customer, which is not dissimilar from other specialty materials companies out there that you may follow, Dmitry or others that may be listening to. So I would say that, that fresh set of eyes really started to drive that commercial excellence change, if you will. Then De Lyle joined as CEO in May 2022 and obviously started driving additional change, which was good. And the whole management team, the whole leadership team, De Lyle [indiscernible], have really worked well to find opportunities to continue to drive value. And so one of those areas is, I think if you look historically, just if I'm candid with you, I think RYAM has had an opportunity to probably better manage production capacity across different economic cycles over the years. And so what I mean by that, I mean, I think -- again, we take our role as a market leader seriously, which means that you need to manage excess capacity reasonably and responsibly. And so we're really running our assets to match capacity to market demand now, which is, again, a departure from historical cycles. And if you look at us , and I'm sure I can talk a little bit more later about our capabilities. But if you look at us, we have 6 production lines globally, right? And all of our competitors have one line. And so by definition, we're the ones that have the majority of the excess capacity. And so that went into the very difficult decision to indefinitely suspend that Temiscaming HPC liner that I just talked about. And there are various reasons that kind of went into making that decision, market conditions and other things. So that whole topic of managing excess capacity has been one that we've really been working on diligently. And then the other thing you've seen us talk about, I'll touch on briefly, is we've launched a new strategic business unit called Biomaterials. And the purpose of that is really to capture the remaining value from our wood inputs. So today, my business, the HPC business, is using roughly 40% of the wood, the tree inputs. And the balance of that is primarily being used for BTU value in our boilers. And so we are going to be -- made great progress already, a lot of exciting prospects in that business to further monetize and commercialize and value up the remaining part of that tree. And we've been open about saying, by 2027, we expect to deliver a little over $40 million in EBITDA from that SPU.

Thank you, Joshua. That's a very good background information on where the company has been and where it's going. So let's dive into the HPC business and products in a little bit more detail. What are some of the end markets you products go into? What does the competitive landscape look like? And what have been some of the recent actions taken by the company to improve its competitive position in the market as well as improve the business operations and financial performance?

Yes. I mean, I love talking about where our products are used. I guess the short answer is we're in all sorts of areas. I mean, we are in a very, very diverse applications and end markets. To give you a feel, we're in over 100 different end market applications. But let me give you kind of some examples to give your audience a feel for where we're at. So we're in pharmaceutical applications. So think medicine, capsules and tablets. We're in food, think protein shakes and plant based meat substitutes, things like that. We're in cosmetics and shampoos. You look at passenger cars and engines and industrial engines, we're in the filtration -- air filters, oil filters, cabin air filters. We're in electronics. So we are -- the TV that you and I are looking at has our product in it. We're in LCD screens, computer screens, tablet screens, et cetera. High-end eyeglass frames is another area for us. High-performance tires. We're in tire cord there. We're in construction applications, so tile adhesives [indiscernible]. We're in paints. A lot of our applications are sort of higher-end applications, if you will. So those are -- that gives you hopefully a little bit of flavor of where we are, how our products are used. On your competition question, so this is an interesting market, Dmitry, which as you know, but it's a pretty duopolistic market. And what I mean by that is, within each of our major market segments, it's really RYAM and one other player for the most part. And if you look at the top 3 producers in CS globally, those top 3 make up about 80% of the market. So quite concentrated. But if you look at our -- we classify our business into 3 main areas. We call our acetate business, and in that area, it's primarily ourselves and a company called Bracell out of Brazil. Another segment is our ethers business. In ethers, it's primarily ourselves and Borregaard out of Norway. And then we have sort of a catch-all category called other CS, not the most creative name for it, Dmitry, but other CS is really RYAM and either a competing technology, which should be cotton linter pulp, which I could unpack that a little bit more for your audience, if you'd like, or you see Borregaard or you see Bracell in some of those markets within other CS. So that's a little bit about the competitive landscape. Cotton Linter by the way is, some of your listeners may already know a decent amount about that chemistry, but it's sort of a niche area, but it's not immaterial. I mean you're talking 250,000 to 300,000 tons market. We obviously sell against CLP because it doesn't have the best environmental profile. It's a heavy water consumer. It's dependent on how harvest go every single year. So supply reliability and product quality can be a little bit hit-or-miss. And obviously, those are things that we're selling against in CLP. So let me pause there. I don't know if I hit everything on your question, Dmitry.

I think you hit most of it. Let me just follow up with a quick question about -- you mentioned that this is a, let's call it oligopolistic, if not outright duopolistic markets in most of your segments. Other CS seems to be a market where there is a little bit more capacity or competition. There has been some capacity rationalizations, both by yourself and the other market participants. Can you talk about that and what the impact of that would be or can be on the performance of these businesses going forward?

Yes. You bet. I mean, that's a good question because as I -- again, I was talking about the sort of managing capacity, responsibility. So if you look at, again, our CS business, from a capacity standpoint, we're about 2x the size of the next largest competitor. And we estimate we have, from a capacity standpoint, about 55% of the CS industry capacity, right? It's been busy out there lately. So let me kind of share a little bit what's going on. So one of our competitors, Georgia Pacific Foley Plants, which is not that far from where I sit today, just a couple of hours from us here in Florida. They shut down last year. And that represented about 10% of that CS capacity. That is very much -- almost a sister plant, if you will, to our Jesup, Georgia plant, which is also a couple of hours away. So they were a kraft process. We both had similar fiber basket. So that plant has shut down due to really what as they cited, inability to be profitable. Then our Temiscaming HPC line, as we've just talked about, we've announced indefinite suspension effective here in a couple of weeks. And that represents about 4% to 5% of the CS capacity. So obviously, we're looking and are working to retain as much of that volume as we can and move that to other facilities and keep our customers qualified and all sorts of things. So Foley closing, Temiscaming suspending operations -- Temiscaming, we believe, is the most economically viable capacity to come online if needed, right? So we -- that's a line that we're going to keep in good shape and rotate equipment and those sorts of things in the event that we need to turn it back on, we can. You look at some of the other suspensions or outright closures in the case of Foley or others, they've gone to the point of demolishing and things like that, which is not what we're going to do with Temiscaming, that's a key point I want to make. But if you look at supply and demand in the market, the industry consultants have sort of supply-demand ratio that they look at. And right now, they estimate around more about 87% with that growing to low 90s in the next few years which is a good sign. I mean, so I would tell you right now, it feels -- and our analysis shows a relatively balanced but we're getting more snug. And one of the big drivers there is going to be as the users market in construction rebounds, we anticipate to see some additional entitlements. So hopefully, that helps.

Thank you, Joshua, that does. One thing I want to touch on is something you mentioned at the beginning of our conversation, talking about the moat or the stickiness of the business and the heavy R&D capabilities that are required to be a dependable supplier to your customers. Can you talk about RYAM's history of innovation, focusing on your R&D capabilities as well as the variety of both hardwood and softwood products that you can bring to the market to develop new products.

Sure. Yes. I mean, I think -- so the number [indiscernible] sort of the key selling points for us, our R&D capabilities are -- we have the broadest product portfolio in the market and security of supply -- because again, we have 6 large production lines around the globe, 5 now where we operating here. Shortly, one will be idle. But if you look at our R&D capabilities, RYAM is known for high quality, extremely high purity product consistency. And a lot of that is born from our R&D efforts in a couple of areas. So we have 2 R&D centers, one in Bordeaux, France and one in Jesup, Georgia, here in the U.S. And both of those are staffed with teams of PhD chemist, their primary role is to really match our customers' unique needs in their manufacturing process to our capabilities at our plants and developing bespoke or customized solutions for the customer. So we -- again, your listeners should think of this as almost very close to kind of a one customer, one SKU kind of business because we're so customized. So we are changing our products for our customers and things like the viscosity they need or the sheet thickness or the density or the color, product dimensions, I mean, we're doing a lot to customize for customers' needs. So you can imagine our customer is seeing a lot of value in this as we offer these solutions to them. And you obviously have to be an innovator in order to do this. RYAM has been around almost 100 years. And from the beginning, we've always been a strong innovator, I would tell you. And if you go way back, we helped or developed rayon from wood cellulose in partnership with DuPont, right, back in the 30s and in the 40s, we helped develop a nitrocellulose technology for energetics, which was going on, obviously, at that time around the world. But in more recent times, we've done a number of new product developments and innovation. We've come up with ultra high viscosity cellulose applications for ethers, construction, food, pharma, things like that, protective and polarizing films and LCD screens. So I mean, we've done a lot of innovation over the years. We have an odor control fluff that we've launched here recently. So I generally believe that specialties commoditize over time, over some period of time. And so as a result, you got to have a strong pipeline of specialties, right? So that you can -- which means obviously, you're going to have to innovate. So I think the market values -- I'm talking about the customers, primarily the customers value that capability we bring. And it's our lifeblood. It's something we obviously need to continue to do. I think you asked a little bit about sulfide and kraft, which probably due to time, I don't even unpack that too much, but I guess suffice it to say, we have both technologies in our plants. We have kraft technology, we've sulfide technology depending on which plant we're talking about. And that helps us to have the broadest product portfolio is what that's all about. Portfolio -- you get many different product options from a different fiber basket or wood fiber that you bring in as well as your manufacturing process, sulfide or kraft. And so that goes back to our broad product portfolio.

That's very helpful, Joshua. Let's kind of maybe take a step back or maybe a follow-up would be the more appropriate tactic here on what you just said. Many people, when they hear chemicals, automatically think of products made from either petrochemical feedstocks, like oil and natural gas, or from metals and minerals that have to be mined and processed. Understandably, there may be a preconception that these products and the raw materials extract a heavy environmental toll when it comes to their production. You've mentioned that you use wood as your starting point for your raw material supply. Can you please talk about what RYAM's products and raw material supply chain and how it's different from what typical, if you will, chemical company would be when it comes to environmental impact and sustainability?

Yes. I mean you bet and this is, again, a story I love telling because I think it's a story, we, as RYAM probably haven't told enough. We need to continue to tell externally. And that is, we're as renewable and as green as you get. And what do I mean by that? So our raw materials, as you say, is wood. But where we're bringing our wood is from tree farms. These are farms dedicated to growing pine trees to be harvested and growing again and every time you cut one down, you're planting another 2 or 3 in its place. We're not cutting down 1,000-year-old sequoias out of California, right? I mean, we're not going after old growth. And if you look at the U.S. South or some of these areas where we source our trees from, our wood chips from, I should say, the number of trees in these states is actually growing every year, not shrinking because of these tree farms I'm talking about. So very renewable, we call working forests, that's what it's known for in the industry, renewable working forests or inputs. If you look at energy in our process, so about 80% of all the energy we use as a company, obviously, we use a lot of energy, is produced ourselves with biomass materials being burned in our boilers. So bark and things like that. So very green way to produce electricity, so much so that there are times we even sell that into the grid, which obviously is a good thing. And then water, we do use a lot of water, but close to almost 100%, I think the stat is 98%, 99% of all the water we use is recycled and then returned into its natural environment. So very conscientious about the environment. Obviously, to your point, we're sort of in this chemicals and materials space. Many of our customers, by the way, are heavily hydrocarbon-based enterprises, right? And so they look to RYAM, and in many cases, rely on RYAM to help them sell their sustainability story as they take our products and in some cases, react them with chemicals and things to make products used in the marketplace. And the key in all of this, by the way, is, yes, sustainable but a high performance. I mean my whole career at Dow Chemical, Nexeo, and Univar was -- that was always the Holy Grail was finding products that were sustainable or environmentally friendly, but also performed well in their application. And that's sometimes going to be hard to find. But in our case, obviously, we're known for our performance and how our products are used.

That's very helpful. And I think it does -- it is important for investors and stakeholders to understand that no manufacturing processes completely environmentally inert, if you will. But given your raw material source and given the energy usage and the water usage that you've mentioned, this is probably as close to a sustainable manufacturing as we get in the chemicals industry. Before we turn to Q&A, would you please summarize RYAM's value proposition and near-term goals? Perhaps discuss the future direction of the core HPC business that you're running and outline future direction of the business unit and anticipated developments that investors and other stakeholders can look forward to, including perhaps on financial goals.

Yes, sure. I mean, obviously, due to the size of the HPC business unit, we're a key part of RYAM delivering on its goals overall, right? And so the way I think about the HPC business, Dmitry, is success to me is delivering at least minimum 10% year-over-year EBITDA growth. To me, that's a measure of success. How do you achieve that? There's obviously a couple of different levers that we need to continue to pull. One, I've touched on, is disciplined commercial excellence, making sure we're capturing the fair value for our products. The other key part is cost out at our plants through automation and plant efficiency projects. Although you've heard me talk a lot about being a value guy and pricing our products appropriately, low cost, I believe, should always be a part of any strategy. Low cost always supplements any strategy, right? And so we constantly have focus on driving cost out. We are a culture of continuous improvement. I would tell you from a manufacturing standpoint. We've been pretty open about -- I think we shared the figure that we're looking to drive about $20 million of cost out of our Fernandina plant. So -- for example, our other plants have other plant efficiency projects that we're all working on. And what I'd tell you, one of the things that I've been really pleased with here at the company and with our team is what I'd describe as the creativeness and strength of our engineering teams and our plans. We have really, really strong engineers who are bringing forth tremendous high-returning projects for us to consider. And our hurdle rates as a company are not all that easy for the space, right? We've set hurdle rates at a minimum. We're not going to consider projects unless they're at least a 2-year payback or less and a minimum 30% IRR. But that hasn't stifled the project flow at all. I continue to see projects come across my desk that are very nice returning projects that our engineering teams have developed, which is great. And so we're going to continue to review those. And obviously, as a shareholder or a prospective shareholder whoever is listening, this is what you want, right? You want to know that we have opportunities within our company with those sort of returns and that we'd much rather invest in those than -- even though our cost of debt is quite high right now, by the way, we'd much rather invest in those high-returning projects than somewhere else. So I'm encouraged by the project flow of opportunities.

It sounds like you've done a lot of work and continue to have opportunities to do even more to improve the operations of your business, and that's good to hear. Let's turn to the Q&A here from our audience. Let's take one of the questions here. How is RYAM addressing the reporting requirements of the European Deforestation Regulations and how can this affect sales of U.S. cellulosics into the EU market?

Yes. So EUDR -- for those who don't know, it's been in play for some time now. It's picked up steam here sort of year-to-date, but it was really started discussing a year or so ago, a little over a year or so ago. I'm not going to take time to kind of explain exactly what that means. Your listeners can Google it and understand it, if they don't know about it already. But there is some legislation that is likely going to go in effect the end of this year for products that are wood sourced that are ultimately going into Europe, okay, in the European countries. We're taking this very seriously. We have a whole project team working on this right now to develop a solution where we can be compliant with this for our customers. In the case of our Tartas, France facility, EUDR would actually classify that as an operator as their term, right? So the requirements within Tartas is itself is a particular work stream for us as well as materials that we're producing elsewhere, U.S. and Canada, that will go into Europe. So it's dynamic right now. There's a lot of moving pieces. We've invested moneys into ensuring that we get this right as a company, and we're committed to being with our customers hand-in-hand as this goes in effect at the end of the year.

Let's take another question. Talking about the ethers market, which as much of the industry has been down a little bit recently, but seems to be recovering or at least stabilizing. So the question is, will the ethers market rebound in the near future? And if so, when and how will this impact RYAM's results and the financial performance?

Yes. I guess let me give a little bit of background context on ethers, right? So in 2023 -- throughout '22 and '23, the ethers market, in particular construction, has been in the downturn. Our analysis shows that in '23, we conscientiously ceded share to a competitor, okay? Because we weren't chasing price. And [indiscernible] Borregaard, just deal with it. I think in the past several quarters, Borregaard has disclosed openly that they've sold more volume than they've produced. You heard me already talk about the capacity versus market demand balance. We obviously believe that RYAM is really the only producer that has meaningful capacity available for ethers as that market rebounds. It's hard for me to tell you when, Dmitry, I would tell you there are some green shoots and pockets of our business that we're getting from our customers, which is great. But one thing we know in that space is, can be interest rate sensitive and it does go through some cycles, but it comes back. And so I think we're positioned very, very well for when that market rebounds to pick up that additional business.

And then to follow up on your other business, the acetate business, is the destocking in your acetate market or end markets mostly played out? Or do you expect to see impact into the second half of this year?

Yes. I mean, we've talked about that in a couple of our earnings calls, right? So the short answer is, we're still living it right now, but it's mostly -- we expect to really be played out by the end of the year. So for those who don't have that context as well, right, our acetate customer is primarily in Asia and wasn't just unique to RYAM, by the way, it was everyone in the space. They mostly move from a sort of a just-in-time inventory model to a just-in-case model, just to ensure they didn't run out of product with all the logistics constraints with ocean-going containers over the past couple of years, which obviously has gotten better now. But as a result, they have a lot of inventory. I was in Asia just recently, and I saw elevated inventory levels firsthand myself. Customers have been great partners with us and collaborating on sort of order timing this year throughout 2024. But we think the majority of that overstocking or overpurchasing issue will be resolved by the end of the year. And by the way, our guidance, which we've given most recently reflects that, by the way.

And then let's take one more question. It looks like you've made significant progress in reducing your exposure to commodity production associated with your non-CS part of the business. And consequently, hopefully reduce some of the volatility associated with these businesses. You mentioned going from about 15% that this business represented for you down to about 8%. So are the plans in place to eliminate the remaining 8% of the commodity revenue? Or are you always going to maintain some level of commodity production just not as big as before?

Yes, great question. I mean, I think wave a magic wand, I'd love for that to go to zero, right? Just to be brutally honest. For practical reasons though, it's not going to go to zero. So we're going to always have some level of commodity production for practical matters. So when you're grade changing on specialties, for example, you'll produce some commodities here and there or you may run some as you have excess capacity to help absorb fixed costs. So I think, yes, we'll continue to whittle that down. But I don't see it going all the way to zero. How much it goes down further is going to be highly dependent on the CS market demand, as we just talked about, right? So as ethers rebounds, that percentage is going to come down because we're going to naturally replace commodity production with more ethers or CS production.

Thank you, Joshua. That's very helpful. This is all the time we have today for our fireside chat. Joshua, thank you very much for joining us. This has been a very informative discussion. And I hope shareholders and other stakeholders have gotten information that we're looking for and then learned something new, I know I have. Thank you very much for joining us.

You bet. Thank you, Dmitry, thanks for having me, I appreciate it.

Thank you. If you would like to learn more about the company, again, please visit their website, www.ryam.com. And if you want to watch previous episodes of this program, please visit watertowerresearch.com. Thank you very much, and have a good day.