Good morning, and welcome to the Rayonier Advanced Materials Fourth Quarter 2019 Earnings Conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Mickey Walsh, Treasurer and Vice President of Investor Relations for Rayonier Advanced Materials. Thank you. Mr. Walsh, you may begin.

Thank you, operator, and good morning, everyone. Welcome again to Rayonier Advanced Materials fourth quarter 2019 earnings conference call and webcast. Joining me on today’s call are Paul Boynton, our Chairman, President and Chief Executive Officer; Marcus Moeltner, our Chief Financial Officer and Senior Vice President of Finance, and Frank Ruperto, our Executive Vice President of High Purity Cellulose & High Yield Cellulose Businesses. Our earnings release and presentation materials were issued last evening and are available on our website at rayonieram.com. I’d like to remind you that in today’s presentation, we will include forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Our earnings release as well as our filings with the SEC list some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on Slide 2 of our presentation material. Today’s presentation will also reference certain non-GAAP financial measures, as noted on Slide 3 of our presentation. We believe non-GAAP financial measures provide useful information for management and investors but non-GAAP measures should not be considered an alternative to GAAP measures. A reconciliation of these measures to their most directly comparable GAAP financial measures are included on Slides 16 through 19 of our presentation. I’ll now turn the call over to Paul.

Thank you, Mickey and good morning everyone. 2019 was a very challenging year for Rayonier Advanced Materials. As noted on Slide 4, we delivered $76 million of EBITDA for the year, which was an unacceptable result. We faced a number of challenges as the impact of global trade disputes and tariffs led to a general collapse in the pricing from our commodity products, including high yield pulp, lumber, fluff and viscose. As a result, year-over-year price declines accumulated to $162 million EBITDA impact. We also managed through some difficult operational issues in the first half of the year and these challenges resulted in underwhelming financial performance and it reflected severely on our stock price. While I’m disappointed in our 2019 results, I am proud of the team and how they managed these very difficult business conditions and acted decisively to respond to them. We commenced a portfolio evaluation process that ultimately resulted in the sale of our Matane high-yield pulp facility for net proceeds of $158 million, representing more than 10x valuation for a commodity mill through the cycle. We also reduced capital spending by $26 million or 20% below plan by focusing primarily on asset maintenance and reducing strategic capital. Knowing the challenges might worsen before they improve, we engaged with our lenders in a renegotiated covenant relief to provide us with a financial flexibility necessary to manage through the cycle. Concurrently, we also unfortunately had to suspend the common stock dividend saving $18 million of cash per year on a go forward basis. Today, we announced additional actions that will further reduce costs and improve cash flow, which I will discuss in more detail later. Now I want to provide you with an update on some recent events as noted on Page 5. First, while we see challenges…

Thank you, Paul. Starting with Slide 6. On a consolidated basis operating income declined $231 million with price declined accounting for $162 million or 70% of the decline. Additionally, volumes and sales mix impacted results a further $37 million or 16%, driven by weaker High Purity Cellulose markets and softness in newsprint markets. Operational issues primarily in the first half of the year were also a significant contributor to the $83 million loss from operations. It is worth noting that corporate costs include $4 million of expense related to our loan amendment and a $17 million non-cash environmental reserve charge. Turning to High Purity Cellulose on Slide 7. Full year 2019 sales decreased by $65 million, driven by a 2% decline in CS sales price and a 6% decline in CS volumes, both of which were in line with our previous guidance. Additionally, commodity prices declined from prior year as price declines accelerated in the fourth quarter, including a 25% reduction in the quarter due to weaker demand. EBITDA for the segment was $127 million compared to $233 million a year ago. The change was largely driven by price declines for commodity products at increased volumes. Lastly, increased costs from the reliability issues from earlier in 2019 had a meaningful impact on operating results. Turning to Slide 8. Sales in our Forest Products segment declined by $57 million from 2018 driven by a 21% decline for lumber products. EBITDA for this segment fell $53 million to a $22 million loss driven by lower sales pricing, partially offset by improved costs, including favorable wood yield, lower duties and the reversal of an inventory write-down. Also keep in mind that the EBITDA loss includes $22 million of duties in 2019. Since the start of the softwood lumber duties on shipments into the…

Thanks, Marcus. Look, we know our business is in the midst of a downcycle. We also know that cycles turn. I’m proud of how our team is managing the business to ensure survival in the downturn, while being well positioned to capture value on the upswing. Our primary goal is to ensure that we remain in compliance with our financial covenants regardless of what market conditions we face. To that end, we are announcing a number of actions. As noted on Slide 13 that we have identified to reduce costs and improve cash flow in 2020. In total, we are targeting $60 million to $70 million of benefits from these programs. These actions include: first, reducing our operational cost by $15 million, primarily through improved efficiencies in the supply chain and continuous improvements in our operations; second, we expect to reduce corporate costs by $10 million to $15 million from the 2019 levels. These cost reductions will come from a combination of headcount reductions implemented in late 2019 and reduction of external services. Next, we will further reduce CapEx from $103 million in 2019, by an additional $10 million to $15 million. This is in addition to the $26 million reduction that we put in place in 2019. CapEx will primarily focus on maintaining our high-purity cellulose assets plus some of very selective strategic capital projects with near-term or certain paybacks. Lastly, we’re targeting an additional $25 million reduction in working capital, primarily from reducing inventory levels and improving upon our payment terms, both with vendors and customers. Additionally, we are identifying incremental opportunities to help drive further improvements. These include asset sales, which, as we’ve discussed previously, we will execute opportunistically at the right price and structure. We also look at additional workforce reductions, curtailment of production or even permanent site closures if we don’t see market conditions improve. Down market cycles have always returned to the positive, and we have some signs recently that we may be close to a recovery. We are taking the necessary action to reduce costs, preserve cash and improve reliability that will allow us to both manage the business through the cycle and to capture value as the market cycle improves. We will emerge stronger and more resilient as a company. With that, operator, please open up the call to questions.

Thank you. [Operator Instructions] Our first question comes from the line of Paul Quinn of RBC Capital Markets. Please proceed with your question.

Thanks very much. Good morning, guys.

Good morning, Paul.

Just a question on the guidance going forward, the 2% increase in High Purity Cellulose. I mean, one of the things we’re doing is getting rid of the lower-volume – lower-margin business, and that mix improvement should cut because your prices will move up alone. So I’m just wondering, is it – is that 2% just all the effective mix? Or is there actually a price increase in there as well?

Yes, Paul, there’s actually a material price increase in some of our segments within the CS sales piece of this. And as you know, the focus of our strategy going forward, from last – first quarter 2019 was, we need to stabilize this market, and we need to start putting it on a firmer ground going forward. So that was the goal of that. And so we pushed very hard to get those price increases throughout the year. We were able to do so in the face of an incredibly difficult viscose market, which I think was a very positive outcome, and I think that signals a better market dynamic going forward.

Okay. And then, I guess, moving on to lumber, just so I understand the $400 net breakeven sort of brings you up including duties with that 20% right now, somewhere around, I guess it would be $475 to be able to breakeven and current prices are well above that. So 2020 is looking reasonable?

Yes, let me take the first part of that, Paul, just on what we just commented. And if you look at today’s prices, yes, we should be in positive EBITDA ground. And of course, last year, I think we posted a $23 million loss, EBITDA loss, in that business. So we’re expecting at least that improvement. That’s not including the duty that we think should be reduced from 20% to 8% in the August time frame and that will contribute another $4 million to $5 million, I think, Marcus, for the balance of the year. So yes, we were anticipating a good improvement there just based on today’s prices. I think you’ve got even more positive prices going forward in your models.

Great. Okay. And then just lastly, just, I guess, back to your High Purity markets. Just on the volumes between specialty and viscose, I’m kind of confused, it sounds like there will be equal volumes. Maybe that question, and then just also, what are you seeing in the viscose market right now because I’m not seeing very much price recovery. So maybe you guys are – you obviously are a lot closer to the market than I am.

Yes, Paul. So when you think about the volumes, think about two things, right? We said we’re about 50-50 here. We said that we’re going to have a – CS volumes will be down. They will be down roughly 7% to 8% on a contracted basis. Two-thirds of that was anticipated as we went into the strategy to better align our product mix with the overall market and get out of some of those lower-margin businesses. And in fact, some of the historical impact contracts, which we did not think were very attractive in fact didn’t go well. About a third of the volume loss in CS really was about weaker markets, particularly in the automotive end markets, which we talked about throughout the second half of last year. So we’re looking at that but what we really have is operational improvements as well. And so if you think about it, there’s two things going on from a volume perspective on the commodities: one is we’ve got the shift from some of these lower CS volumes going into commodity volumes; and then we’ve got the improved operations. If you recall, operations in the first quarter of last year and second quarter were pretty weak, and so we’ve got a significant increase just in productivity of our mill assets. And as we switch to the strategy of making fluff pulp on sealine as well that just has better machine productivity as well. So that’s what’s really driving the 50-50 split between the two. If for not the CS mix, that’s about 50% of the increased commodity production and the other 50% is roughly the improved efficiencies on our facilities.

That was helpful. Thanks so much guys.

Okay. And Paul, I think you also asked about viscose prices and what we’re seeing in that market? So what we’re seeing in the viscose market is the viscose market is heavily influenced by China, and it’s just been very quiet over there. So we haven’t seen any material improvements in pricing on the viscose market just because the market has been more quiet. Our volumes have held up very well in the viscose market, specifically going into China. I think that’s in part because our customers tend to be some of the larger, better funded businesses over there. So that’s gone very well. So that’s been a positive. We’re keeping our eye on, though, given some of the coronavirus issues, et cetera. What’s going on downstream from our customers, with the spinners, who tend to be a little bit smaller and more labor-intensive. So we haven’t seen that started back up yet, but we’re keeping a close eye on that piece of it. But again, on the viscose side, we haven’t seen pricing move, plus or minus. The tariff going away, in March, our customers are applying for those to go away. And if they do, then we’ll see the benefit of that pricing increase in viscose as they no longer need to pay the tariff to some extent. I’d also reference the fluff pulp market, where we actually have seen some modest price increases going into March, I think, driven in part by some of the big guys making price announcements and pushing for higher prices in those markets.

All right. Thanks, again.

Our next question is from Steve Chercover from D.A. Davidson. Please proceed with your question.

Thanks. Good morning, everyone. So yes, my first couple of questions are, I suppose, a follow on to Paul Quinn. On High Purity Cellulose, the 2% price hike, which is the first in seven years, is that – the 6% hike that you announced last fall, I recognize there’s some contractual elements to it. So will there be more trickle in from the fall 2019 price hike into 2021?

So Steve, let me back it up a little bit. So the 2% hike, and I think you pointed out something that’s important. We did have certain contracts which had pricing set between 2019 and 2020 at relatively flat levels. So the 2% takes that into account when we look at some of those issues. The 6% was a price increase that we announced there. I think the way to think about it is, we realized roughly 2% of it. We realized it stronger in certain markets and not as strong in others. So if you think about how weak the automotive and filtration sectors were last year, we found that more difficult to push pricing through. In some of the more stable and growing sectors, we saw a better pricing improvement.

So there’s still struggle or you’ll be pushing on that. Okay. And then secondly, again, I hope it’s not redundant. But the segment EBITDA up slightly for cellulose specialties, does that explicitly include the non-repeated Temiscaming boiler in the southern wood price spike?

Yes.

Okay. So – got it. And then in Paperboard, does your flat guidance reflect the $30 per ton SBS price decline that VC printed last Friday?

Yes, that guidance just came out, like you said, last Friday. And I would not say that, that number is fully baked into our number. But keep in mind a couple of things: one, a lot of our pricing isn’t directly hinged to any kind of VC index out there. So I’d say it’s not fully connected in that way. I think it will be a pull on the EBITDA for that business in a negative way, Steve. At the same time, I also know that the team is working hard on increasing volumes as well. So right now, I’d say, if it has an impact, it’s not a very significant one, and I’m pretty confident that the team’s got some plans already in place to offset that with some positive mix and volume. So I think our overall EBITDA guidance is still good, although the pricing is, as you said, maybe a little bit pulled down, but not by that $30 in our case. Marcus, is there anything you’d add to that?

No, that’s a good characterization of our sales portfolio.

Great, thanks. And then with respect to the Canadian rail blockades, obviously, lumber is the most impacted, but is it also impacting your ability to ship high-yield pulp in Paperboard & Newsprint?

Yes. I think a lot of our products out of Canada get kind of caught up into this recent issue, and that’s why we thought we should mention it. Just for everybody’s benefit, rail lines in the country are being blockaded in different spots set up by the First Nations people in protest of British Columbia LNG pipeline construction project. So that’s kind of the underlying issue. Our major concern is just the rail line between Toronto and Montreal. We move a lot of product in that corridor. And if there’s some positive news, we saw that the Ontario Provincial Police took some aggressive action this week and started opening that up. And so we’re seeing some product flow, but it’s tenuous, and it needs to be a permanently opened pathway and not just a temporary. So we see some positive developments, but again, it’s a concern and we’re monitoring it. And I said, we’re working on other pathways through trucking and everything else. But we do need to have, like most companies in China, the railways open and just – even in passenger flow, back and forth needs to be open. So I think we’ll continue to see a lot of focus on that from all governments in Canada to make sure that, that happens. But we’re monitoring it, Steve.

Yes. I know it’s an interesting situation. And then Marcus articulated, I guess, the historical precedents with respect to lumber duties. And the 60% reduction in duties that we’re expecting this August. It’s fair to interpret that as a partial admission that the U.S. was wrong on these duties, right? And by extension, the Canadian case once again should prevail. Is that how you interpret it?

Yes, Steve, I think you’re correct. Like past lumber files, over time, you see these preliminary determinations come out into the market, and they tend to confirm lower rates. And then as the file evolves further, you might see an adjustment. But this is a good sign, and it’s very much aligned with prior lumber files.

Okay. And then I’m still going to call it NAFTA. I don’t care what they call it. Now that, that’s signed, to your knowledge, are they working on the lumber file, between Washington and Ottawa?

Well, I think it certainly opens and shifts the focus to that, but you do need to have cooperative parties to be a part of that discussion. So everybody’s got to say, hey, I’m in to talk about it. I do know the focus has shifted to that, Steve. I don’t know that any progress has been made.

Okay. And one last one, with all the moving parts, you do expect free cash flow to be better. Do you want to hazard a guess on where that might land? Or what your minimum – I guess, your minimum that you’ll be satisfied with and then your stretch goal might be?

Well, Steve, maybe I’ll just cover some of the cash flow items. Obviously, you could see from our filing that CapEx was around $103 million. And in our slide deck on Page 13, you can see we’re targeting a reduction of $10 million to $15 million. So certainly, those fixed charges will be lower in the business and should help our cash flow. In addition, another important lever is the working capital improvement of $25 million, and it’s very targeted on finished products, inventories and some on payment terms. So as you can see, there was another $25 million there. And then Paul mentioned it in his comments, we’re continuing to see – operationally, we’ve got the boiler issue in Temiscaming and the hardwood fiber issues we saw this year are behind us. And in addition, we’re further making further strides on our three-year synergy targets as far as our global improvement team goes, so those things together should help us in this market to keep our cash flow in the right direction.

Yes. I mean, sorry, I promise this is my last comment. Between the hardwood and Temiscaming boiler, that was like $30 million, wasn’t it? And now you’re going for $15 million in savings, but that sure doesn’t sound like it’s going to be a $45 million benefit to the specialty cellulose business.

The other thing – look, the specialty cellulose business as well in the context of global GDP chemical pricing is another favorable theme within our business, caustic pricing. We use a lot of caustic throughout our HPC operations. That’s obviously another element that’s going to show up year-over-year as an improvement.

Yes. The one thing I’d also point out, Steve, is remember that viscose prices dropped dramatically in the fourth quarter – second half and really in the fourth quarter. And so we’re starting the year off on viscose and fluff below, well below where the average prices were last year. So that’s a bit of a headwind that we’re going to have to fight through and see how those markets develop.

All right. Thanks, Frank. Thanks everyone.

[Operator Instructions] Our next questions come from the line of Sandy Burns of Stifel. Please proceed with your question.

Good morning, everyone. Just discussing on the commodity cellulose side, given how weak pricing was in 4Q, would you be able to comment – I mean, is it below cost of production for a small segment of the industry, a large segment of the industry. Has pricing gotten that bad? Or is it still cash flow – EBITDA positive for the company and/or most in the industry?

So what we’ve heard and specifically in China, is that these viscose prices and the viscose staple fiber prices, the downstream prices, are at levels that are not conducive for all of the capacity to stay online, specifically in China. So either those prices will rise or we will see some facility closures and a tightening of the supply side as we look at that. In regards to our own business, we can look at that. We are positive – contributing positively to our fixed costs, but we’re not making EBITDA at these levels, which is not – should not be surprising.

Right. So the expectation for higher prices in 2020, it sounds like it’s more just driven by capacity coming out or prices rising to start improving profitability for the industry as a whole, not so much on the hindsight?

That will be one factor of it. I think the other piece of this and what’s really impacted the viscose cycle and the supply has been the 25% tariff of textiles from China into the U.S. So any relief there would see a better demand pickup from our perspective. We did see some demand growth even in the weak market, but it’s the supply side that’s been the biggest issue, and that’s where we’d expect to see some of the recovery earlier rather than later.

Okay. And then on the cellulose specialties side, could you comment how much of your volume in that – on that side is under contract versus how much, if any, is sold under more spot business?

We typically don’t sell under spot business. So we will have predominantly most of our volumes under either contract or arrangements for the year. And so we’re pretty good, plus or minus, depending on market demand with being at those guidance levels that we typically give on volumes there. So you don’t really see very much of a spot business in the cellulose specialties side because it is a critical raw material and people want to make sure that they’re covered going into it.

And so I would add to it, that we probably have, Sandy, one, two, three, four-year type contracts, in that cellulose specialties business.

Yes. Got you. Thanks. And last question for me. On the corporate expense side, it did spike up a bit in 4Q versus kind of what you’ve been running in the first three quarters of the year. It looks like $4 million of that was the cost of the bank amendment. Any other one-time costs in there that we should think about that won’t be repeated in 2020?

Yes, it’s Marcus here. At the end, just to put it in context, our corporate segment includes one-time items, as you mentioned, the loan amendment. We had some other professional fees to support our portfolio work. Gains and losses on our FX hedging program run through there as well. But one of the larger charges is obviously the environmental charge on our reserves that we mentioned in our disclosure, that goes through there as well. And the other key item that’s in there is variable compensation, so that can change, obviously, year-to-year. And that’s why if you look at the $63 million this year, we said we’re targeting $50 million, it’s taking all those items altogether in balance. There will be trade-offs, but we’re targeting that $50 million target.

Okay, great. Thank you and good luck with everything.

Sandy, I’m just going to add and maybe it goes to some other folks with the same question. I think as you look at our disappointing results and coming in with a $76 million EBITDA for 2019. And then we said, look, our primary goal is to ensure that we remain in compliance with our financial covenants regardless of these markets. The question’s got to be, well, guys, is that all manageable? And we’ve thrown out a lot of different numbers here on the positive and some on the negative. And I thought it’s probably just worthwhile, and maybe, Marcus, if you can just kind of tick along with me here on these numbers. But I do want to kind of help build the numbers up a little bit so that you have them. Because, again, I think you’ll see it’s a very straightforward path to compliance in 2020, but let’s just start and just kind of recap on some of these, right? One, we have some market help, right? We talked about the Forest Products, right? That’s, at current pricing, will be EBITDA-positive. We’ve got some cost benefit, right, so we’ve got reduced chemicals and as well as fiber costs, certainly in our Paperboard business, that is significantly a benefit to us. We also have, as we mentioned, duties in two different areas, right? We just – and Frank talked about it. China tier is coming off on March 2. We should get the benefit of it into this quarter or beginning of next quarter, and that’s a substantial benefit to us. If again, if you consider, we’ve got $230 million of product coming from the U.S. going to China. And the other duties that we talked about and we talked about with Steve there. 20% Forest Products, lumber…

Yes. Thanks, Paul. As you mentioned, perhaps, to put some context on the various moving parts that Paul mentioned. If I look at our Forest Products segment, the loss of $22 million last year and our comments regarding pricing in the current marketplace, given that pricing, that could be a $20 million swing. On the chemical and fiber cost side is our Paperboard operation is benefiting from lower pulp prices and our HPC and high-yield business are getting some favorable chemical pricing. So that could be another $20 million there. So those two together, call it, $40 million. We mentioned the duties. We’re estimating that the drop to 8% versus the 20% rate for our lumber business is around a $5 million impact in the back end of this year. And the China tariffs that we have been covering in the pricing is the equivalent of around $8 million for 2020, given the new exemption process that Frank mentioned in his comments. We mentioned the poor performance in our HPC business, the boiler and the wood cost issues in the U.S. south. If you recall, we mentioned that was around $25 million last year through our various disclosures. We continue to make progress on our three-year synergy targets. And we’re hoping to achieve another $15 million this year in that area. We mentioned our corporate costs. We’re really focused on reducing that to the $50 million range. That would be approximately $15 million in reduction. And Paul mentioned in the back end of the year, where we’re targeting to realize the benefits of a new product introduction, and that’s in the range of $4 million. If you take all those, call them positive opportunities, you quickly get in the range of $110 million that you could normalize the $76 million…

Thanks, Marcus. And again, we’ve tried to just add a lot more transparency to these numbers because I know you guys are sitting there looking at your model, you’re looking at a starting point of $76 million, and you say, oh, how does all this math work? And again, I want you to be confident as we are that we’ll manage through this well. $76 million, Marcus tallied up about $110 million of improvement, and then you got some offsets, with viscose and fluff pulp pricing and newsprint taking that back down a bit. And then any further actions we have that we hope will provide additional buffer there, gives us confidence that we’re in a good position. So if there’s no more questions, I appreciate that. I want to thank everybody for their time today. These are challenging markets. But we’re confident that our aggressive actions will see us through the cycle and emerge as a much stronger company. So thank you for your time this morning.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.