Good morning, and welcome to Rayonier Advanced Materials Second Quarter 2021 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference is being recorded. I would now like to turn this 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 your presentation.

Thank you, operator, and good morning, everyone. Welcome again to Rayonier Advanced Materials second quarter 2021 earnings conference call and webcast. Joining me on today's call are Paul Boynton, our President and Chief Executive Officer; and Marcus Moeltner, our Chief Financial Officer and Senior Vice President of Finance. 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 Slides 2 and 3 of our presentation material. Today's presentation will also reference certain non-GAAP financial measures, as noted on Slide 4 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 GAAP comparable financial measures are included on Slides 17 through 25 of our presentation. I'll now turn the call over to Paul.

Thank you, Mickey and good morning, everyone. I'm pleased to report second quarter results were significantly favorable to both the prior year and sequential quarter. We also made substantial progress on our strategic initiatives. Let's start by looking at Slide 5. The total company EBITDA improved by $130 million from prior year to $149 million driven by continued momentum in High Purity Cellulose commodity products prices. Essentially this goes in fluff pulps and solid demand for cellulose specialty products, as well as of course, our ability to capture the record lumber prices in our Forest Products segment prior to their divestiture. Additionally, we saw higher prices and volumes in the Paperboard and High-Yield Pulp segments. With the strong EBITDA results, we have generated $141 million of free cash flow year-to-date, including $120 million in the second quarter. In addition to the exceptional financial results, we progressed towards successful closing on the sale of our lumber and newsprint assets to GreenFirst Forest Products, which is expected to occur on August 28. This sale will complete the strategic portfolio optimization plan that commenced with our 2017 acquisition of Tembec and has included the divestiture of the resins business, the Matane high-yield pulp mill, the Huntsville hardwood sawmill and now in this sale the six Quebec and Ontario softwood sawmills and the newsprint mill in Kapuskasing. Each sale was well timed to optimize the value to our shareholders. Now with the lumber and newsprint asset sale, the company is well positioned for the future as we will use the cash flow and the proceeds to reduce leverage and support disciplined investments in our core High Purity Cellulose business, including investments in green energy and our BioFuture. We also expect the sale to reduce the volatility and the cyclicality of our future earnings as we focus on our core High Purity Cellulose business, along with the integrated paperboard and High-Yield Pulp business segments. Now I'd like to ask Marcus to take us through the numbers for the quarter and discuss our capital allocation priorities in more detail. I'll come back and provide additional perspective on our markets. Marcus?

Thank you, Paul. Please note that the company's lumber and newsprint operations have now been classified as discontinued operations, given the upcoming sale of these assets. I will review each of our business segments, including the discontinued operations, beginning first with continuing operations. Starting with High Purity Cellulose on Slide 6. Second quarter sales held flat at $255 million, driven by a 17% increase in sales pricing, offset by 17% decline in sales volumes. As expected, CS prices were down slightly, while higher commodity prices drove the combined increase. CS sales volumes increased 6%, driven by strong demand for construction, automotive and natural plastics applications. Commodity volume declines were driven by a more favorable mix shift toward CS, which has lower production yields and by logistic constraints and the extended planned outage at our Jesup, Georgia facility. EBITDA for this segment improved $7 million to $38 million, driven by the pricing improvements and more favorable mix of CS. Looking forward to the third quarter, we expect to benefit further from significantly increased pricing for commodity products in continuation of recent trends, while CS prices are expected to be slightly below prior year, supported by strong demand as we fulfill our annual contract commitments. Total High Purity Cellulose volumes are expected to be slightly below prior year, and we expect a very favorable mix toward CS. As is typical, we do anticipate significantly higher CS volumes in the second half of 2021 as compared to the first half of the year. Next, turning to Slide 7. Paperboard segment sales improved $14 million, driven by a 23% increase in sales volumes and a 5% increase in sales pricing. EBITDA for the segment declined $3 million to $7 million as the sales price increases were more than offset by higher raw material costs…

Thanks, Marcus. As noted on Page 13, we are experiencing higher prices across all of our key commodity segments. We captured some of the benefits in our second quarter earnings but anticipate higher prices in High-yield Pulp and Paperboard in the third quarter as well as much improved selling prices for HPC, viscose and fluff pulps in the coming quarters as actual company sale prices lag the market indices. Additionally, the robust viscose market, particularly softwood viscose pulp, which is commanding a substantial premium over the index provides a strong backdrop as we begin our 2022 cellulose specialties negotiations. Referencing Page 14, a we see demand for our cellulose specialty products strengthening, specifically in construction, automotive and acetate plastic end markets. Prices for cotton lint, a competitive substitute product for many of our cellulose specialty grades, have also increased substantially from 2020. We are also seeing supply disruptions in the industry and market participants have looked to us as a backstop, given the size, scale, redundancy advantages of our five cellulose specialty manufacturing lines. We are managing contracts with existing customers. But given the level of demand and our extended outages in Jesup both in 2021 as well as now in Q1 of 2022, we are not able to address most of the additional volume requests. We do expect substantially higher volumes of High Purity Cellulose in the back half of this year with a stronger mix of cellulose specialties as compared to the first half of the year. Also in the back half of 2021, we anticipate significantly higher costs for our key inputs including wood, chemicals and transportation, and we anticipate these costs remaining elevated through 2022. However, in spite of such inflationary pressures, we intend to use every tool available to us to maintain or improve CS…

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

Yes. Thanks so much. Good morning guys.

Good morning Paul.

Maybe we can start on the Paperboard side. That cost increase, it looks like $12 million in your graph, and I just can't understand the magnitude of that, but what happened at Temiscaming to increase the cost for that much?

Yes, good morning Paul, it's Marcus. The majority of that increase is the purchase pulp component of the market pulp to support that business. As you know, we're 80,000 tons on the open market to support the business. In addition, we saw some chemicals. And the other theme is, again, logistics the impact of transportation on those products.

Okay. And then you guys have signaled out these higher costs in the back half of the year, especially wood chemicals and other. How material is that? Like what kind of delta are we seeing on the cost increase from H2 from H1?

Again, it's Marcus again, Paul. So if you look at the inflationary pressures we're speaking to they are in a couple of areas, right? Chemicals, we mentioned, wood and logistics and then your normal inflation on your labor contracts? If you're looking for an order of magnitude, these are approaching double-digit levels.

On an ongoing run rate. Marcus is right. So yes, it's real, Paul, we're not alone, obviously, three inset and we're seeing it. But again, it's across the board, transportation being as large as any of the others as well, right? So wood chemicals, transportation and the more muted on kind of the labor side of things. And ramping up hard into the fourth quarter and we think continuing obviously into 2022.

Okay. And then just on High-Yield Pulp, I mean you've referenced that prices are expected to decline later in the year. I would say global market prices – pulp prices have rolled over in China and does that bode difficult negotiations coming up for your CS 2022 contracts?

No. So they were referencing the high-yield pulp. So that segment which again, is going up against BEK and kind of the market pulp. And so that's already kind of softening out there if you look at the indices. Our comments there is that we really just kind of lag that market with our sales prices. So our prices in Q3 were messaging in high-yield pulp are going up. But I don't think we'll tie that into in any way, our cellulose specialty prices. The robust viscose market continues. And particularly, as you know, Paul, we're a softwood viscose pulp producer, and we continue to see that differentiation between that and the hardwood increase, maybe a year ago is probably $50. Now we're sitting probably $150 on softwood viscose pulp going into the market because it's a relatively limited supply. And in fact, if anything, it's a declining supply, and we continue to pick up more supply on the hardwood side, but most producers need a nice mix of softwood into their operations, and that helps support the pricing we're seeing out there. And that's going to help our conversation because we're not alone in that a lot of our competitors are in the same way. And that's the backdrop and the alternative to see us out there, so.

Okay. Then just lastly on the, I guess, discontinued operations. I mean it looks like you've got quite a bit of softwood lumber deposits that are yours $108 million plus, I guess, August – sorry, July and August. So probably it would be up in the – sounds like with interest, it might even be $120 million. Any plan to monetize that in the near-term?

Paul, as far as prioritizing that is monetization, given the prior reference that was in the market, that wouldn't be that attractive in through our lens, given the liquidity profile that we have currently. We'll continue to monitor developments and discussions on the softwood lumber pile. I think given rates are projected to go up, deposit rates, maybe that's a catalyst for some discussions, and we'll see what happens.

Okay. Thanks very much guys. I'll go ahead.

Thanks Paul.

Our next question comes from the line of Roger Spitz with Bank of America. You may proceed with your question.

Hi. Thank you very much and good morning. Can you give an update on for CapEx for 2021? What's your report on a continuing basis and the full amount of CapEx that you'll spend, including the lumber and newsprint through in the broadest?

Yes. Good morning Roger, it's Marcus. In the six month period, as you saw in our disclosures, around $47 million for continuing operations. And that was including about $4 million for strategic capital. I would say for the full 2021 fiscal year in the range on a net basis of $95 million – $90 million to $95 million would be a good number for everything.

And is that $90 million, $95 million just on a continuing basis? Or does that include lumber, newsprint through August?

Yes, there would have been some allocated to lumber and newsprint. If you look at our – go ahead, sorry.

No, please.

If you looked at prior actuals that footprint used to be in the range of $9 million to $12 million depending on the year for lumber, newsprint and the road network.

Got it. And how should we think about maintenance CapEx going forward on an annual basis?

So we had indicated – you can see on our capital allocation in the range of $100 million for custodial capital to reinforce reliability across our operating footprint. And Roger, if you look back historically, 2018, if you normalize the spending level there, in that year, we were around $127 million after normalizing for the disposed ops, we were just over $100 million. So you're into a situation where you've got a higher weighting to this custodial to drive reliability.

Got it. And lastly, any tax on the cash proceeds in August that we should think about? And can you comment on your intent to put that August cash, for instance, perhaps taking out $150 million of the $75 million base at $103 million for some other use of proceeds.

I'll take the first question. We have indicated in our disclosures in the range of $5 million as a placeholder for any tax leakage related to the transaction. And again, we'll look to do better than that, but that's our estimate. And we have set out in our capital allocation framework in that disciplined and balanced approach. We are certainly prioritizing the $150 million pay down, strongly committed to taking those proceeds and paying down debt.

Thank you very much.

Thanks Roger.

Our next question comes from the line of John Babcock with Bank of America. You may proceed with your question.

All right. Good morning and thanks for taking my question. I guess I just wanted to talk about High Purity Cellulose. You mentioned some margin improvement opportunities there for next year to offset some of this inflation. Can you give some detail on that? And then also, as it pertains to the roughly $10 million in savings that you expect from the Tartas mill, how much of that is part of that or incremental? And then how should we see that generally owned earnings?

Yes. So John, yes, just kind of maybe just as a reference point, again, we talked about inflation and the question has already come up, we're seeing a lot of it, right? So we see in the U.S. Southeast would quite considerably here and really ramping up into the fourth quarter, probably beyond anybody's original predictions even just as of one or two months ago. So that's ramping up. Chemicals, as every knows are very well elevated and continue to be rising. So we have that going against us. And then I think everybody is experiencing logistics. So we've got a lot of pressure out there on the business. But look, we will do what we've always done, which is look at everything we can to protect our margins and if not improve them. So certainly, cost takeout is an important component of that, working on our operational efficiencies and making some investments in operational efficiencies. And certainly making sure we're getting fair value when it comes to our products for our customers, right? So we got to look at all those components. And we think with the backdrop that we're sitting at today, which, again, as we've already referenced, we've got strong demand for our products. We've got limited supply ourselves, right, even just to get out of this year, let alone in 2022. We've got supply disruptions sitting out there with some of our competitors for a variety of different reasons. And so that's tightening the market as well. And so again, these inflationary pressures. So they're all part of the conversation that we have out there, and that's how we're looking at it. We just got to look at every angle and see if we can improve our margins. And that's what we'll do, and we feel confident we can get there.

Okay. Thanks for that. And then any update on TemSilk, any opportunity you see there?

Look, that's going very well. We've got – TemSilk is mainly being – is being sourced out of our Temiscaming facility. We continue to slide product into key customers in China and the acceptance is excellent. So we feel good about that. We're really just kind of waiting on that market in China to kind of heat up the way it should expect we expected to heat up. But – and we fully anticipate as our customers will tell us that business could be the 300,000 to 500,000 tons in terms of the total market size in a five-year period. So we're anxious to see it get there. Right now, we've got plenty of alternatives to supply in other areas in terms of demand. But we will continue to monitor that. And again, our product is already well accepted into the marketplace. Marcus?

Go ahead.

Yes. You referenced a question related to the Tartas investment.

Yes.

So that's a very good example of the kind of green energy investment that on a risk-adjusted basis exceeds our cost of capital, really positions the Tartas mill well. That project was started up through the first quarter. And we have included in our disclosure there, a $10 million run rate improvement for that project. So again, exporting green energy to the grid and driving further green energy production.

Yes. That will be very helpful. John, that may be part of the equation, these are things we're going to continue to look at. But again, as we message here, we're approaching double-digit inflation there for cost in 2022. So there is a lot of work to be done ahead of us.

Okay. But back to TemSilk, could you provide any sense in terms of like what sort of volumes you might have there, whether that's kind of like a couple of thousand tons or maybe more meaningful than that? And also generally, how we should think about the run rates as we get kind of over the next couple of years, basically?

Yes. I'd say right now, it's very light just based on how most of the lyocell customers are running today. We fully anticipate that would ramp up. And again, we are a long ways away from where we could potentially be in terms of our supply of that into the market. But out of Temiscaming alone, that's a 140,000, 150,000-ton facility, you could easily see the majority of that volume being consumed into TemSilk when we get to kind of what we would think kind of targeted run rate. So large opportunity sitting up there and again, we'll look at the opportunity as it involves our other facilities going forward once we reach where we think we're at capacity in Temiscaming. We're a long ways from that right now. No question, John.

Okay. And then I also wanted to ask because I think you made a kind of passing reference to eventually having a dividend and/or looking at share repurchases. What's the trigger to get to that point where you'd consider instituting a dividend or pursuing share repurchases?

Yes, I'll start, Marcus, I'm sure will jump in. It goes to that capital allocation on Page 12, right. John, we want to make sure we're comfortable in our net leverage, and we're not there yet. And Marcus talked about our commitment to taking that first $150 million and bringing that down. So we've got that near-term target of $650 million. And then we think the next best use of capital right now is investing back into the business. So we're going to look at very – in a very disciplined way to see what is out there that really drives EBITDA growth. And if it drives EBITDA growth, I think that will be the next best use for our capital, and I think our shareholders like that. And then we go beyond that. We get back into our target net leverage range and then we'll look at the other alternatives. So I don't see that in any way near in the immediate future. Obviously, it's something our Board talks about regularly and consistently. But I think that's out there a little bit. And I think we want to bring that debt down and our leverage where it should be for the size of our company.

Okay. Great. And sorry, just last question before I pass it on. I just want to ask about the offtake agreements that you have regarding like some of the wood chips that will come from like the lumber operations after sale in to Temiscaming. Is there going to be any change in the rate for that? So will you see any cost increase because of the sale of the lumber newsprint assets?

Yes, it's Marcus. So the residual fiber supply agreement reflects offtake of the residuals from the mills that we currently source our operation in Temiscaming from. The mechanism in that agreement is that annually, there will be a discussion on pricing. And as we've always done, it's a market-based price. So that will be part of the negotiation. But the great thing about this agreement is access to an FSC certified fiber supply, along with the residual bark. So we'll cover both our production of high-purity pulp and the green energy investment in Temiscaming but there will be a negotiation annually, yes.

Sure, which is basically what we do now, Marcus. And Marcus is the length of that agreement, which I think we found very attractive.

20-year agreement. Yes.

Right. So 20 years out there, which, again, really put us as the right partner with GreenFirst Forest Products.

Okay. Thanks for all the details.

Sure John.

Our next question comes from the line of Paretosh Misra with Berenberg Capital Markets. You may proceed with your question.

Hey. Good morning guys. This is Jared on for Paretosh. First question for me, is there any color you could provide on the supply demand balance across your different geographies? Or are you kind of seeing the same trends globally?

And again, on cellulose specialties – sorry, Jared, just want to make sure I...

Yes. Sorry, it was just generally speaking, for all products across our geographies.

Okay, across the geography. So look, we'll start at the ones that are most commodity-like, which is obviously our high-yield pulp. And if you're tracking out indices out there, certainly, China has led the way in some of the recent slowdown. Europe is still relatively strong and lagged China on the prices going up and will lag on the prices going down. And that's what we referenced. The indices show them going down a bit. We'll still have an increase in our pricing in the third quarter, but we expect that to kind of decline. And I think the forecasters have it ramping back up then shortly thereafter and early 2022. Paperboard, as Marcus noted there, is very strong. And for us, that's a North American and predominantly really a U.S. market that's very strong. And I think it's a parallel to the economy. But also, there's been some supply disruptions in that as well here in the U.S. in terms of fellow suppliers so that has been strong. On viscose pulp, that's mainly, largely, kind of for us anyway, an Asian set of markets, they've been strong and robust since really last all almost coming up in the year and remain so in that regard. So good strength out of Asia. We expect that to continue, fluff pulp is global. We see the strength globally. Prices are up real strong. And as mentioned, we expect even substantial increases, both viscose and fluff pulp coming into the final quarter of this year. And cellulose specialties, it's a global market, and we indicated where the strength is coming from. It's coming out of construction markets, which for us is largely ethers, right. We're the leading supplier of ethers. A lot of that is Europe. So we see some really good strength there. Automotive is strong globally, right. And for us, that's engine filtration, that's products going into tire cord, that acetate plastics going into automotive paints. So a lot of different applications there that we benefit from in the automotive area and again, just broadly in plastics. We see also just a good strength out of ethers in the nutrient area and some of the other areas there. So again, I would not say that it's regional for the most part, it's just really global. Outside of that construction market for ethers, which is always traditionally a large – largely influenced into the European area.

Okay. That's great. Thanks. And then second question, just kind of looking out at the horizon, are there any near to midterm peaks that you guys are seeing for costs and particularly materials, but also, any color you can provide on logistics and labor as far as peaks or even slowdowns in inflation.

Yes. Look, again, when you say peak, I guess the question is, do you see it getting to a point where it's going to start coming back down. Right now, they're all still elevating out as we look into our future, I mean we said we expect it to be – remain elevated for 2022. That's obviously, wood, chemicals, certainly, they continue to rise. Our largest expense in chemicals is in the caustic area and that continues to climb here. And transportation, everybody is facing this. And certainly, we are. We're seeing substantial constraints and expenses in transportation. We don't see that leveling out or declining anytime soon. And there's a host of issues there, right. In trucking, it's a lot of around drivers and driver availability and programs that government programs that may limit their availability right now. So maybe that's a benefit at some point in time if those come off. Vessels are tight. We are one of the largest users of vessels on the Eastern Seaboard and particularly out of the Port of Savannah, which is an excellent port. But they've been backlogged since weather conditions in the February time frame. I think today, we've got 16 vessels sitting off the coast waiting to come into the port. And that slows everything down. Some of our carriers actually skipped the port that creates constraints for our customers. So we don't see that leveling out anytime soon, although we hope that's going to get to resolution, and we'll be looking at other solutions ourselves. And then, of course, just containers continue to be tight. They're trying to get all the containers, empty containers back to Asia as soon as possible, and that doesn't help the situation at all. So logistics are going to be an ongoing issue, and I can't say when that's going to break at all. So again, we add it all up, these are not insignificant. We've got a lot of conversations early with customers. We're seeing the same things, certainly in logistics and chemicals, not most of our customers aren't directly involved in the purchase of wood. So across the board, we've got this inflationary pressure. And again, it's going to be back to us to look at what are the alternatives to maintain our margins, improve our margins in tight market. We'll be having that dialogue with our customers coming up.

That's great. Thanks very much.

[Operator Instructions] Our next question comes from the line of Paul Quinn with RBC Capital Markets. You may proceed with your question.

Yes. Thanks guys. Just following up on the Tartas Green Energy. What – if you could give some more details around that project. Just wondering why it came around today, I mean, investing $15 million for a $10 million annual benefit is in no-brainer right. So you'd be doing that all the time. Just wondering if there's anything that changed to allow that to happen and what that exactly is the project.

Yes. Paul, the – we had a stream of energy, and the government had a program where we could increase the amount of green energy component versus brown energy. So basically, you're just – you're expanding the – so we expanded the capability of the boiler and in addition, got that higher rate. So it's, again, leveraging programs that are available in the space there.

All right. That’s helpful. Thanks.

Yes, a great example of high-return projects, right. So when we talk about our capital allocation and what we're going to do with past kind of some of these investments to bring our leverage back down. That's a great example of high-return projects, particularly going to the green energy space. We'll be continuing to look at that. There's a strong demand out there for biofuels and particularly bioethanol, that's nonfood source, right. And we've got assets in these biorefineries. We've got four biorefineries essentially, right. And these assets can produce bioethanols and of course, they're nonfood sourced. And there's programs in the centers out there to make sure we look in that direction. So we will do that. So those are great, I think, examples of our BioFuture and really leveraging the products we have. We've also talked to you a lot about in the past and we'll continue to as growth in cellulose-based BioFuture opportunities, right. TemSilk is a good example. Anomera is another good example when we talk about that. Those are going out there to replace plastic micro petroleum based, right versus we're going to be supplying a natural base. So these are the things that we look at and we look at what the world is demanding right now, and I think will continue to demand, which is more environmentally friendly products. And we just happen to be a company that's based on natural feedstock, renewable, sustainable natural feedstock. So we think it's a great platform for growth. So we're glad to have our portfolio optimization kind of concluding here as we focus in on these high-purity assets. And we think it's a perfect time as we look at what the future will hold for us.

Great. Thanks guys.

Thanks Paul.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back to Mr. Paul Boynton for closing remarks.

Yes. Thanks, Laura. Again, thanks, everybody, for your time today. With the current market tailwinds and significant opportunities to reinvest in our business, we're excited about the future we have in front of us at BioFuture and we're excited about Rayonier Advanced Materials. So thank you for your time. We look forward to giving you update next quarter.

Thank you for joining us today. This concludes today’s conference. You may disconnect your lines at this time.