Rayonier Advanced Materials Reports First Quarter 2019 Results
-Significant increase in hardwood costs at Jesup plant coupled with unplanned downtime at Temiscaming plant led to operating loss in High Purity Cellulose segment
-Expect to improve financial performance ultimately returning EBITDA margins to high teens in the back half of 2019, subject to fluctuations in commodity prices and tariffs
-Cellulose specialties prices and volumes for full year 2019 are expected to remain stable versus 2018; commodity product volumes are expected to be modestly lower compared to guidance
-Weaker than anticipated lumber, pulp and paperboard markets impacted results in Forest Products, Pulp, and Paper
-Previously announced review of strategic alternatives for certain commodity assets ongoing; process conclusion anticipated by end of second quarter
Rayonier Advanced Materials Inc. (the “Company”) (NYSE:RYAM) reported first quarter 2019 net loss of $22 million, or $(0.52) per diluted common share, compared to net income of $24 million, or $0.38 per diluted common share for the same prior year quarter ended 2018. The decrease in net income is due primarily to lower commodity sales prices, higher hardwood costs, and operational issues in High Purity Cellulose.
“Our first quarter operating and financial results were disappointing and not reflective of the earnings potential of the Company. With unplanned production downtime in Temiscaming due to unforeseen boiler issues and higher hardwood costs in Jesup resulting from extreme periods of prolonged rainfall in the U.S. Southeast, the High Purity Cellulose segment significantly underperformed expectations in the quarter. Additionally, weaker lumber, pulp, and paperboard markets negatively impacted our results,” said Paul Boynton (photo), Chairman, President and Chief Executive Officer. “We are actively addressing the High Purity Cellulose issues, which we believe will improve financial performance building sequentially through the remainder of 2019.”
High Purity Cellulose
Operating income decreased $24 million compared to March 31, 2018 resulting in a $3 million operating loss for the three month period ended March 30, 2019. The decrease was driven by a 7 percent decline in cellulose specialties sales prices as a result of duties on products sold into China and higher average prices in the 2018 comparable quarter due to higher priced 2017 shipments which were recognized as sales in the 2018 quarter. Additionally, higher costs, driven by unexpected production reliability issues predominantly at the Temiscaming plant and higher hardwood costs at the Jesup plant, negatively impacted results. These two factors alone accounted for $21 million or 88 percent of the comparable period decline. The Company is actively addressing these issues with repairs to the Temiscaming boiler completed in the second quarter and the restoration of hardwood inventories in Jesup to target levels. These actions are expected to improve financial performance building sequentially through the remainder of the year.
The three month period ended March 30, 2019 was also negatively impacted by a $1 million loss associated with the lignin joint venture that began operations in the second half of 2018. Additionally, the 2018 period includes operating income of $2 million from the resins business, which was sold in September of 2018.
Operating income decreased $15 million compared to the March 31, 2018 period resulting in a $5 million operating loss for the three month period ended March 30, 2019. The decrease was driven by lower lumber sales prices and reduced volumes due to weather conditions and difficult transportation and logistics issues.
Compared to the fourth quarter of 2018, the operating loss improved $5 million, as expected. The improvement was primarily driven by higher lumber sales prices and the reversal of a portion of the inventory valuation reserve taken in the fourth quarter of 2018.
Operating income decreased $10 million and $13 million compared to the previous period and March 31, 2018 period, respectively, resulting in operating income of $10 million for the three month period ended March 30, 2019. As expected, the decreases were driven by lower high-yield pulp sales prices due to weaker export markets and reduced sales volumes due to market production downtime and timing of shipments in the quarter.
Operating income decreased $4 million compared to the March 31, 2018 period resulting in an operating loss of $1 million for the three month period ended March 30, 2019. The decrease was primarily driven by higher costs due to production issues at the Kapuskasing plant, as a result of an energy curtailment program and corresponding start-up issues, and lower newsprint sales volumes due to the production issues, as well as logistics issues in Canada. These negative factors were partially offset by higher newsprint sales prices from imports to the United States.
Compared to the previous period, operating income decreased $9 million due to lower sales prices for paperboard and newsprint, as expected, higher input costs and reduced newsprint sales volumes due to production and logistics issues in Canada.
The operating loss increased $8 million compared to the March 31, 2018 period, resulting in an operating loss of $19 million for the three month period ended March 30, 2019. The increase was driven by higher long term incentive compensation and foreign exchange losses.
Compared to the previous period, the operating loss increased $1 million. The increase was driven by higher long term incentive compensation and foreign exchange losses, partially offset by lower disposed operations expenses and the timing of corporate expenses.
Interest expense was $15 million for each of the first quarters ended 2019 and 2018. Interest expense was consistent quarter over quarter as slightly lower debt levels during the three months ended March 30, 2019, were partially offset by higher interest rates on variable debt.
Income Tax (Expense) Benefit
The first quarter 2019 effective tax rate was a benefit of (29) percent compared to an expense of 29 percent for the same period in 2018. The first quarter 2019 effective tax rate differs from the federal statutory rate of 21 percent primarily due to tax credits and excess tax deductions on vested stock compensation, partially offset by different statutory tax rates of foreign operations and nondeductible executive compensation.
Cash Flows and Liquidity
In the first quarter of 2019, the Company’s operations used cash flows of $27 million. Working capital used $37 million of cash as higher inventories, primarily from the seasonal wood harvest in Canada, and lower accounts payable and accrued liabilities, from the timing of payments, were partially offset by lower accounts receivable.
In the first quarter of 2019, the Company invested $31 million in capital expenditures, which included approximately $4 million of strategic capital.
The Company incurred net borrowings of $33 million to fund its operations and ended the quarter with adjusted net debt of $1,159 million and $250 million of total liquidity, including $68 million of cash and $182 million available under the revolving credit facility after taking into account outstanding letters of credit. The Company also returned $14 million of capital to stockholders through dividends and stock repurchases year-to-date.
The Company maintains a disciplined capital allocation strategy focused on maintaining its manufacturing assets, followed by reducing debt levels to a targeted 2.5 times net debt to EBITDA leverage ratio. Adjusted free cash flow is then deployed opportunistically between strategic capital investment, external investments and returning capital to stockholders through dividends and stock buybacks. Given the recent increase in leverage, the Company expects to focus on reducing debt levels in the near-term.
High Purity Cellulose
The operational issues affecting High Purity Cellulose in the first quarter negatively impacts the Company’s previous guidance and therefore, such guidance should no longer be relied upon. However, the Company anticipates stronger performance building sequentially through the remainder of the year as the Temiscaming boiler and hardwood supply issues are addressed. Ultimately, EBITDA margins are expected to return to the high teens for the back half of 2019, subject to fluctuations in commodity prices. For full year 2019, the Company still expects stability in its cellulose specialties prices and volumes with each anticipated to be slightly lower by approximately 1 to 2 percent from 2018, excluding the impact of any Chinese duties on sales price. Commodity product sales volumes are expected to be modestly lower than the original forecast of a 75,000 metric ton increase over 2018 volumes.
Lumber prices declined during the second half of the first quarter and are expected to remain low in the second quarter, although recently announced capacity curtailments in British Columbia are expected to provide some recovery in prices during the back half of the second quarter. Longer-term, the stable U.S. housing market, both new starts and remodeling driven by resales, remains a key driver of lumber sales prices. The Company is well positioned to benefit from these long-term conditions. In addition, softwood lumber duties of approximately 20 percent on sales to the U.S. are expected to continue throughout 2019. Benefits from capital investments and cost reductions are also expected to provide incremental profitability in 2019 and beyond.
High-yield pulp prices are expected to remain solid albeit lower for the remainder of 2019 compared to 2018 due to weaker demand. Over the medium-term, solid global demand for pulp, reduced recycled fiber imports to China, and global industry production at or near capacity continue to support pulp prices above historical levels. With no significant new capacity expected in the pulp markets until 2021, supply-demand dynamics should continue to yield positive market conditions and historically strong segment results in 2019.
In 2019, paperboard prices may experience pressure from increased competition in the U.S., while newsprint sales prices are expected to decline due to demand weakness and the reversal of duties in 2018.
Capital Allocation and Investment
The Company anticipates that it will spend approximately $100 million in maintenance capital expenditures across all segments in 2019. In addition, the Company anticipates spending approximately $30 million on high-return strategic projects in 2019.
The Company expects to increase the percentage of its cash flow directed toward debt repayment in 2019. The Company expects to continue a return of capital to stockholders through its common stock dividend and the opportunistic repurchase of common shares as cash flow improves.
“Despite a difficult quarter, we remain confident about the stability of our cellulose specialties markets and our opportunities to drive EBITDA growth and stockholder value by executing on our Go-to-Market Strategy and Strategic Pillars in the High Purity Cellulose segment,” concluded Boynton. “Additionally, we are nearing the end of our market test on certain non-strategic commodity assets and expect to have plans finalized by the end of the second quarter.”
(Rayonier Advanced Materials Inc.)