Rayonier Advanced Materials Announces Positive Third Quarter Results on Higher Lumber Prices and Lower Costs
Rayonier Advanced Materials, Inc., (the “Company”) reported income from continuing operations for the quarter ended September 26, 2020 of $29 million or $0.45 per diluted share, compared to a loss from continuing operations of $14 million or $0.29 per diluted share for the same prior year quarter.
Year-to-date net loss from continuing operations for the nine months ended September 26, 2020 was $9 million, or $0.14 per diluted common share, compared to a net loss of $62 million, or $1.36 per diluted common share for the same prior year period. The decrease in the diluted loss per share was due to the significant improvements in Forest Products as well as from the conversion of the Company’s preferred stock into approximately 13 million shares of common stock in August of 2019.
“Driven by strong lumber prices, better reliability in High Purity Cellulose and an ongoing focus of reducing costs, third quarter results were positive,” said Paul Boynton, President and Chief Executive Officer. “Despite the challenges brought on by COVID-19, the organization capitalized on near-term opportunities and is starting to see signs of an economic recovery in viscose and high-yield pulp markets.”
Third Quarter 2020 Highlights
– Third quarter income from continuing operations was $29 million, $43 million better than comparable quarter in 2019
– Third quarter Adjusted EBITDA of $55 million, up $19 million from comparable quarter in 2019 primarily driven by higher lumber prices, improved reliability in High Purity Cellulose operations and lower costs
– Generated $34 million of Free Cash Flow through the third quarter driven by reduced capital expenditures and improved working capital
– Improved liquidity of $196 million, excluding a $33 million cash tax refund expected in fourth quarter plus an additional $22 million expected over the next twelve months
Third Quarter 2020 Operating Results
High Purity Cellulose
Operating results for the three and nine month periods ended September 26, 2020 were up $1 million and down $1 million, respectively, to the comparable prior year periods. Higher commodity product sales volumes and lower costs, primarily driven by lower wood and chemical prices, were offset by a decrease of 9 percent and 14 percent in cellulose specialties sales volumes for the three and nine month periods, respectively. Additionally, improved productivity and higher cellulose specialties sales prices provided benefits to the current three and nine-month periods. Sales volumes for the current nine month period remain below original expectations primarily due to COVID-19 related demand weakness. Commodity product sales prices decreased 19 percent and 24 percent for the three and nine month periods, respectively, driven by COVID-19 and China trade dispute related demand impacts on the larger commodity pulp and textile markets
Compared to the second quarter of 2020, operating income improved $1 million due to improved costs and higher sales prices partially offset by lower commodity volumes.
The operating results for the three and nine months ended September 26, 2020 improved $30 million and $47 million, respectively, when compared to the same prior year periods. The improvements were primarily due to increases in lumber prices of 62 percent and 25 percent, respectively, and lower costs driven by the curtailments of production earlier in the year. Sales volumes during the three months ended September 26, 2020 increased 7 percent from strong demand and increased productivity. Sales volumes for the nine months ended September 26, 2020 were lower than in the prior year as a result of market downtime taken in the first half of the year due to lower demand driven by the COVID-19 pandemic. The Company incurred $20 million and $16 million of duties in the nine months ended September 26, 2020 and September 28, 2019, respectively.
Compared to the second quarter of 2020, the operating results improved by $29 million. The improvement was driven by a 51 percent increase in lumber prices partially offset by higher lumber duties driven by the higher prices and higher labor costs incurred during the period.
Operating income improved $1 million and $14 million for the three and nine months ended September 26, 2020, respectively, when compared to the same prior year periods primarily due to lower raw material pulp prices.
Compared to the second quarter of 2020, operating income declined $3 million primarily due to sales mix, lower pricing and higher manufacturing costs driven by lower production, partially offset higher sales volumes.
Pulp & Newsprint
Operating income for the three and nine months ended September 26, 2020 declined $2 million and $21 million, respectively, when compared to the same prior year periods. The decline was primarily driven by lower newsprint sales prices and volumes during both the three and nine month periods ended September 26, 2020 compared to the same prior year periods. Additionally, pulp prices were lower for the current nine months period compared to prior year period. These declines in Pulp and Newsprint were due to weak demand and market-related downtime resulting from the COVID-19 pandemic. Pulp sales volumes increased during the three and nine months ended September 26, 2020 compared to the same prior year periods.
The operating loss was similar to the second quarter of 2020, with lower newsprint and pulp sales volumes offset by lower transportation costs due to the lower volumes.
The operating loss for the three months ended September 26, 2020 increased by $5 million when compared to the same prior year quarter primarily from the impact of an insurance recovery in the prior year and unfavorable foreign currency impacts, partially offset by lower costs in the current period. The operating loss for the nine months ended September 26, 2020, improved $3 million when compared to the same prior year period primarily due to overall reduced spending and a favorable change in the foreign exchange rates, partially offset by higher non-cash amortization of technology costs in the current period and the impact of an insurance recovery in the prior year.
Compared to the second quarter of 2020, the operating loss improved by $6 million during the third quarter ended September 26, 2020. This was primarily driven by favorable changes in foreign exchange rates to the remeasurement of certain Canadian liabilities and lower stock-based compensation expenses.
Interest expense for the three and nine months ended September 26, 2020, increased $1 million and $4 million, respectively, when compared to the same prior year periods, principally driven by increased interest margin related to the amendments to the credit facilities, partially offset by slightly lower debt levels.
As a result of the Company’s operating results combined with certain tax adjustments recorded during the period, the effective tax rate percent for the third quarter of 2020 is not meaningful. The 2020 effective tax rate benefit differs from the federal statutory rate of 21 percent primarily due to the release of certain valuation allowances related to nondeductible interest expense, benefits from the CARES Act, tax return to accrual adjustments, and tax credits, partially offset by nondeductible interest expense in the U.S., taxable income generated from the 2020 credit agreement amendment, increases to uncertain tax position reserves, nondeductible executive compensation, and lower tax deductions on vested stock compensation. The third quarter of 2019 effective tax rate from continuing operations was a benefit of 24 percent.
Cash Flows & Liquidity
For the nine months ended September 26, 2020, the Company’s operations provided cash flows of $63 million. Year-to-date working capital increased $56 million, primarily due to an increase in the income tax receivable as a result of the CARES Act.
For the nine months ended September 26, 2020, the Company invested $43 million in capital expenditures, which included approximately $14 million of strategic capital year-to-date.
The Company ended the third quarter of 2020 with $196 million of liquidity globally, including $83 million of cash, $97 million revolver availability in the U.S. and $16 million of availability on a factoring facility in France. Liquidity for the quarter improved $30 million, due to an increase in cash driven by positive operational results.
The Company remains well within compliance with its third quarter covenants, including a Gross Secured Leverage Ratio of 4.0 times compared to a requirement of less than 6.65 times and an Interest Coverage Ratio of 2.4 times compared to a requirement of 1.4 times.
The full year outlook for each of the Company’s segments remains difficult to provide due to the uncertainty of the magnitude and timing of economic recovery due to the COVID-19 pandemic and the risk of supply chain disruptions beyond the control of the Company. As such, the Company has determined to suspend its guidance. The market assessment represents the Company’s best current estimate of each business in this environment.
High Purity Cellulose
During the third quarter, the Company experienced a reduction in overall sales volumes for its cellulose specialties products driven by weakness in the industrial, automotive and construction markets. The Company believes its diversified end-markets, and its customers’ focus on security of supply, provide greater earnings stability but does not eliminate the risk associated with the demand impact of COVID-19 on its end markets. The outlook for sales of cellulose specialties is highly dependent on the global economic recovery, which will likely continue to be impacted by the pandemic for the foreseeable future. For its commodity products, viscose prices have improved from lows and are expected to continue into the fourth quarter, with price increases for both October and November, marking the first increase in two years. Meanwhile, fluff pulp prices have declined modestly. Overall, the Company expects higher commodity sales in the fourth quarter due to shipping delays and strong production in the third quarter.
Certain costs, including wood, energy and commodity chemical prices have declined from prior year levels due to both market conditions and strategic actions. However, future input prices and availability of these inputs are difficult to predict due to the current unprecedented economic conditions.
Late in the second quarter, lumber sales prices surged on the back of strong repair and remodel activity with high demand for stud lumber. U.S. housing starts in September 2020 were approximately 1.4 million units, seasonally adjusted, which is an improvement from lows in April of 0.9 million units. Market prices reached all-time highs in September before trailing off in October. The Company expects strong volumes in the fourth quarter with historically high sales prices.
As announced in February by the U.S. Department of Commerce, the Company expects duties on softwood lumber imported into the U.S. to be reduced from 20 percent to 8 percent in late 2020. Since 2017, the Company has paid approximately $80 million in duties.
COVID-19 has had a modest impact on Paperboard sales while profitability has benefited from lower input costs offset by sales and mix impact declines. Paperboard for packaging and lottery markets have been generally resilient, while commercial printing has shown weakness.
Pulp & Newsprint
After significant improvements in high-yield pulp demand and pricing at the beginning of the year, the weakness in the broader paper pulp market caused by the COVID-19 pandemic has negatively impacted pricing of high-yield pulp products. Prices have recently increased, while overall input costs have remained stable and the Company expects to produce at normal levels for the near future with elevated sales volumes in the fourth quarter due to improved logistics.
Demand for newsprint products has declined approximately 31 percent since the beginning of the year, primarily due to COVID-19, resulting in reduced sales prices and volumes. In response, North American producers have announced production downtime, resulting in a temporary reduction of newsprint production capacity of approximately one third. The Company is managing its production to maximize profitability and optimize cash flows until the market stabilizes, including reducing capacity to run only one of its two production lines. Late in the third quarter, the Company launched the Envirosmart™ food service bag targeting the quick service restaurant end-market and used for sandwiches and to-go orders, which have grown in the post COVID-19 environment.
“The strong quarterly results driven by record lumber prices and reduced costs provide incremental financial flexibility to the organization. We expect solid profitability in lumber for the fourth quarter and we are starting to see signs of a recovery in viscose and high-yield pulp prices. As a result, we are generating improved cash flows and are encouraged by the positive movement in commodity markets.” concluded Mr. Boynton.
For the full third quarter results, click here.
About Rayonier Advanced Materials
Rayonier Advanced Materials is a global leader of cellulose-based technologies, including high purity cellulose specialties, a natural polymer commonly found in filters, food, pharmaceuticals and other industrial applications. The Company also manufactures products for lumber, paper and packaging markets. With manufacturing operations in the U.S., Canada and France, Rayonier Advanced Materials employs approximately 4,000 people and generates approximately $1.8 billion of revenues. More information is available at www.rayonieram.com.
Ryan Houck – Media Contact – (904) 357-9134
Source: Rayonier Advanced Materials, Inc.