Good morning, and welcome to the RYAM Third Quarter 2022 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 RYAM. Thank you. Mr. Walsh, you may begin.

Welcome again to RYAM's Third Quarter 2022 Earnings Conference Call and Webcast. Joining me on today's call are De Lyle Bloomquist, 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 ryamglobal.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 materially differ 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 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 18 through 23 of our presentation. I'll now turn the call over to De Lyle.

Thank you, Mickey, and good morning. I would like to start today by providing an update on our near-term initiatives as well as some financial highlights for the third quarter before turning the call to Marcus to provide additional details on each of our businesses. After Marcus' update, I will come back and provide additional perspectives on the business and a market outlook before opening the call for questions. Let's start by turning to Slide 5. We have made very good progress against our near-term initiatives. Our top priority remains the refinancing of our senior notes, which, as you probably know, mature in June 2024, put us in the best possible position to accomplish this objective. We are working to improve our credit metrics via EBITDA growth and debt reduction. I am pleased to report that we have improved our net leverage to 5.1x by reducing net debt by $16 million and growing EBITDA by $35 million in the third quarter. We will maintain an intense focus on improving our net leverage metric in order to give us the best opportunity to refinance our debt prior to these notes becoming current in 2023. Our EBITDA growth has been driven by success in three areas: First, as we discussed in our last update, we completed extensive planned maintenance outages at all of our facilities in the first half of this year. As a result, we're now realizing improved productivity and reliability, leading to lower unit fixed costs. We believe that we have further opportunities to improve the performance of our facilities, which will likely generate even better results in the future. Our next area of focus is capturing fair value for our unique product offerings. Generally, demand for our products remains strong. We are capturing value for our commodity products from…

Thank you, De Lyle. Starting with the company's High Purity Cellulose segment on Slide 7. Third quarter sales increased $81 million or 28% to $369 million, driven by 21% increase in total sales prices, which includes a 25% increase in CS prices from prior year. Sales volumes increased 7% to 240,000 metric tons for the quarter, driven by improved productivity and logistics. Net sales also included $33 million of other sales, primarily from bio-based energy and lignin. EBITDA for the segment improved $21 million to $53 million, driven by higher prices and volumes, which were partially offset by the impact of significant cost inflation. Turning to Slide 8. Our Paperboard segment sales grew $14 million driven by a 34% increase in sales prices, partially offset by a 7% decline in sales volumes. EBITDA for the segment grew by $9 million to $15 million as higher pricing more than offset increased costs for purchased pulp, chemicals and logistics as well as the impact of lower sales volumes. Turning to our high-yield Pulp segment on Slide 9. Sales declined by $2 million from prior year, driven by an 18% decrease in sales volume as a result of productivity challenges in the quarter and supply chain congestion. Sales prices increased 15% due to strong demand for global market pulp. EBITDA for the segment declined $3 million to $6 million for the quarter as the higher prices only partially offset lower volumes and cost increases for chemicals and logistics due to inflation. Turning to Slide 10. On a consolidated basis, operating income improved $26 million from prior year to $29 million. Sales price increases across each segment and volume improvements in HPC more than offset $63 million of higher costs driven by persistent inflation on key cost inputs and logistic constraints. SG&A and other expenses increased $2 million, primarily driven by higher variable stock compensation. Turning to Slide 11. Our net debt declined $16 million to $748 million as we continue to repay debt. Through October, the company has reduced debt by $59 million, while still preserving adequate liquidity. Liquidity ended the quarter at $283 million, including $132 million of cash. We continue to make solid progress towards our stated goal of $725 million of net debt. With lower debt and improving credit metrics, we continue to monitor capital markets and are prepared to opportunistically refinance our 5.5% senior notes, which mature in June of 2024. We remain confident that the company will obtain an acceptable refinancing at the appropriate time and prior to the notes becoming current in mid-2023. With that, I'd like to turn the call back over to De Lyle.

Thank you, Marcus. Expanding on Marcus' point about reducing debt, we have a target to achieve 2.5x net debt-to-EBITDA leverage in the next 3 to 5 years. We have made significant progress towards this goal. Turning to Slide 12. We can see that we reduced our leverage from 10x at the end of 2020 to 5.1x as of the third quarter of this year by reducing our debt balance by $215 million and increasing our adjusted EBITDA margin from 7.4% to 10%. We expect that we will achieve a net leverage ratio of 4.1x by year-end 2022. To get to our 2.5 leverage ratio goal, we will focus on further increasing our EBITDA margins while also continuing to pay down our debt. Our objective over the next 3 to 5 years, is to increase EBITDA margins into the 13% to 15% range and reduce debt by another $100 million. Let's now turn to Slide 13. We plan to deliver our EBITDA margin goal by addressing 4 drivers of total shareholder return. First, we are focused on capturing the fair value for our products. As mentioned earlier, we have already taken positive actions towards this objective. Specifically, we negotiated double-digit price increases for our cellulose specialty products coming into 2022. Then as we saw inflation accelerate, we led the market with a cost surcharge on all our cellulose specialty products. And to top it off, we recently implemented a 20% increase for noncontract cellulose specialty business. Beyond our core cellulose specialty products, we have also led price increases for our paperboard and high-yield pulp products. As for 2023, our objective is to realize further price increases. We will also plan in the years ahead on improving our mix of cellulose specialties and capturing additional value as market demand for sustainable and…

[Operator Instructions] And we'll take our first question from George Staphos from Bank of America.

A couple of questions, and I'll turn it over. First of all, to the extent that you can comment, how are your customer negotiations and discussions going this year? I realize there's not much perhaps you can say, but where you can what are kind of the key issues that you're reviewing? How might they vary from past negotiations that you had this time of year going back?

George, this is De Lyle. I really can't say much given that discussions have just started, but we do believe that the momentum that we have experienced in 2022 will be sustained as we go into 2023 because the drivers really aren't changing much, other than we're starting to see some softening in the economy. But at the end of the day, we still got to cover inflation. We still believe that many of our products are such that there is a few substitutes for them. And we believe that we still got some room to go before we capture full fair value for them. So we will continue to be pressing for some price increases in '23.

Understood. On the capturing a fair value, and again, I realize there's not much you really will say on live mic call, but what are you trying to illustrate to your customers in terms of where you feel there's a gap to fair value? How are you demonstrating that? Are you demonstrating that in terms of the value of their product? In the final market relative to the cost of your product, how are you doing that? And then a couple of quick follow-ups.

Well, primarily, the way I look at it is I just look at my EBITDA margin and compare that to the rest of the world. And right now, I believe that there is room to go with respect to that. So that's my principal metric.

Okay. We wish you well in that effort. And then just CS volumes increased 7%. How do you feel about that continuing at that pace recognizing we're seeing a bit of a slowing economy, as you pointed out? Would there be any situation where there might be some pre-buying ahead of next round of pricing that you're talking about now that would have driven that 7%? How should we think about the sustainability of that growth rate?

With respect to prebuying, I don't think we've seen that as of yet through the end of the third quarter. There may be some of that in Q4, although I would suspect that folks are probably trying to conserve cash, so they probably wouldn't want to build much inventory. So I don't think that's going to be a big play this year going into '23. With respect to the impact of the economy and general GDP on our business going forward. With respect to cellulose specialty demand, I would say that a good 2/3 of our demand is largely recession-resistant. For example, one of our largest segments is going to acetate that goes into tow applications. And I don't see that, that demand is going to be much impacted by what's going on with respect to the economies right now. And there's a number of other applications, particularly with our ethers and that go into food and pharmaceutical applications. And even in our fluff products, I don't expect that there will be a lot of impact with respect to any decline in the economy. That being said, there's roughly 1/3 of our business that will be. And so we're not immune to what's going on. But fortunately, I would say that a good chunk of our business is somewhat resistant.

Understood. Just a quick and I'll turn it over. On acetates and screen sales, technology sales, are you seeing any kind of negative effect in your business relative to what we might have seen in headlines?

That's a great question, but I would suspect very little right now. So again, it's a small portion of our business. So a small change in that demand is going to be relatively de minimis.

And we'll take our next question from Paul Quinn from RBC Capital.

Just a follow-up on George's question on the 1/3 of HPC, where you're sensitive, what are those products? And what are you seeing on the demand side for those products?

Okay. You're talking about the 1/3 that's exposed or possibly in recession. Yes. So construction ethers, particularly in Europe, as we're seeing exposure there right now. So we're seeing some softness in construction ethers. And now anything that's related to automotive end markets, including tire cord and filtration, we're seeing some softness and expect that, that would be highly correlated to the GDP activity. And then, obviously, viscose right now and the very low operating rates that we're seeing in China is having some impact on demand as well as on pricing. So those are probably the big areas that I would suggest that we're seeing some exposure.

Okay. And then just on the volumes. Last year, you were kind of up in the 913,000 tons on HPC volumes. It's been a [ 654 ] year-to-date, which -- last year, it's kind of [ 359 ] for the quarter. Is that something that you're capable of doing? And how weak is the mix shift going to be in Q4?

Well, again, we think for the full year, in terms of HPC demand, we should make 930 -- you said 913, right?

Yes, that's what you did last year.

Right, right. In fact, I think we'll exceed that number this year. And with respect to Q4, we're not expecting a significant drop-off in demand in Q4 versus Q3. The issue around the change in EBITDA really would be a change in mix versus our cellulose specialty business in our commodity business.

Okay. That's good. And then just wanted some background on the refi potential. I'm sure you're talking to that group quite extensively, based off your expectation of where your leverage -- where your net debt is going to be -- do you foresee any issues? Or are they saying, yes, if you get there, you're good? Or can you just help us try to understand the potential of that refi?

Well, our strategy all along has been to improve our credit metrics this year. And so we believe that we're going to go out of this year at a 4x leverage ratio. And I think we believe that, that puts us in a pretty good position to go into the credit markets to refinance the 24 unsecured notes. But I'll tell you -- obviously, the credit markets are fragile right now. So -- and we recognize that. So we're keeping all of our options open and having discussions with a number of parties looking at different possibilities of what we can do there. We're very confident we'll be able to refinance the notes. But how we're going to do it, we're still in discussions.

Okay. That's good. And then just lastly, just on Anomera that was an investment a couple of years ago. Just wondering how that -- if you could give us an update on that?

Yes. We actually had our first commercial sales this year. Really, the sales were fairly de minimis. But they were sales that we made to customers that needed the product for product qualifications. We expect that we'll go into full commercialization in '23 and '24 with the goal of breakeven in mid-'25.

[Operator Instructions] And next, we'll take Roger Spitz from Bank of America.

First, with the repayment of $9 million of additional debt in October, was that the 5.5s?

Roger, it's Marcus. That was on our cogen facility up in Canada that we paid that principal payment.

Got it. And then can you tell us what kind of working capital dollar inflow you might be thinking about in Q4? I mean, among other things, you're -- instead of $880 million now, you want to get to $725 million that's a $155 million repayment. You've just done $9 million in October. So that suggests that there's -- unless you take your cash balances down further that you're going to be generating some free cash -- operating cash flow here less CapEx.

Yes. Roger, as you mentioned, we're focused on the working capital item. You can see year-to-date the changes in working capital on our cash flow statement that we disclosed was around $68 million. We're going to be focused on working on our accounts receivable and improving that cash conversion cycle to the support that next step to the $725 million target.

Got it. And are there any assets that you could consider selling or perhaps a sale leaseback to further reduce debt?

Roger, this is De Lyle. Not right now. We don't see that we have any assets that are available and -- readily available to sell. So we're going to have to kind of monetize the working capital, manage and tighten down our custodial CapEx, other elements to make sure at the end of the day, we'll have the free cash flow to pay down our debt going forward.

And Roger, thanks for the questions. Mickey and I will plan to be down at the conference at the end of the month that you're hosting.

We look forward to that.

And we'll take another question from George Staphos from Bank of America.

Just a couple of quickies for me to finish up. Just -- and this has come up, I think, in past calls. As you think about the high-yield pulp markets that you operate in. We've obviously been going through a couple of years of very, very strong pricing. Earnings have improved somewhat, but it would seem like pricing has gone up a lot more in the cycle, it's probably closer to a peak than closer to a trough. So how -- what would you say to us as we try to figure out what your earnings trajectory can look like when we may be looking at pricing that's plateauing, if not declining, over the next few quarters? And then separately, can you give us a bit more color -- you probably talked about this in the past, just the interplay on some of the production issues that you've had in your non-cellulose specialty markets relative to demand? And what kind of latent or incremental demand pickup could you get once those are resolved, over the, let's say, the next 1 to 2 quarters?

Yes, it's Marcus. I can touch on the high yield question, certainly. Given our range of products that we produce in the high yield, our customer base is very focused on 3 ply board and packaging, which, as you know, in this economy really resonates from a sustainability footprint. And we're seeing our product well placed in that market. You're right, there is more capacity in the future. But given the bulk attributes of our products, we're seeing the ability to perhaps be positioned in a niche where we will, on a mix basis versus BEK, still have a pretty good position.

George, does that answer that one question before we try to address your second question?

Yes, it's helpful. I appreciate it. Why don't we move on to the other ones, guys, that would be great.

All right. George, can you just articulate your first question again just to make sure I got it right?

Well, the first question was on really the high yield outlook, which I thought you were largely covering, but really...

The other question is what I was referring to.

Yes. Just can -- you've had production issues in your non-cellulose specialties markets, which implicitly have impacted your demand, what kind of demand pickup can you get once you've gotten those issues resolved over the next 1 to 2 quarters?

All right. And we're talking about HPC, or kind of our commodity HPC business. Is that your question?

Yes. And also, I think paperboard, you said you've had some issues there.

Right. So quickly about -- to talk about paperboard. We've got largely the issues around paperboard are addressed and will be addressed in Q4. We believe that business will remain sold out as we go into '23. In fact, we are very confident that we will realize higher prices in '23 for our paperboard business. So as I mentioned earlier, we believe that we should have a very strong year in '23 with that particular business. With respect to our HPC, call them commodity grades that I think you're referring to, whether it's the fluff business, the viscose business. We've already touched on the viscose business a little bit. There's a lot of excess capacity in that market. Pricing is going down, but -- and so we're not really targeting that business. We look at that business as a business to fill up capacity if we need to at our mills, but it's not a business that is particularly attractive right now. The fluff business, again, we are -- spent a lot of money and made a number of investments to improve its reliability in '22, and we see that as a business that we can differentiate ourselves on by bringing in some new product characteristics, for example, the order control or noncompressible fluff products that we're hoping to launch in '23. And so we continue to look at that as a business that we will continue to consider strategic and we'll take a product differentiation strategy as we go forward there.

On paperboard -- one last one, and I'll turn it over and good luck at the rest of the quarter. On pricing for paperboard, I assume you're referring more to just pricing that's already been recognized and [indiscernible] like and that you'll have a benefit from on an average basis in '23 versus '22. Are you suggesting you think you can see further pricing, incremental pricing in '23, i.e., new pricing?

Well, I think certainly, the pricing that we've -- momentum that we've had in '22 will also be sustained into '23. It's too early to tell whether we'll be able to get anything higher than that and press -- be able to press further prices in '23, right now.

And we'll take another question from Paul Quinn from RBC Capital.

Yes. Just one further one. You already stated that you're trying to improve your HPC mix in '23. Just wondering where you're sitting on your commodity mix between fluff and viscose? Where are you heavy to now? And what's your ability to switch from viscose to fluff if viscose markets are really weakening?

Yes. Marcus, you may have a better insight on the.

Well, it's Marcus. So we're definitely a larger weighting to fluff given the [indiscernible] at Jesup. And then at viscose, it's mainly Temiscaming. So certainly a larger weighting to fluff. And as you know, the market is holding pretty good for fluff right now. And on softwood, we're still getting the premium versus hardwood viscose in the market, even though it's softened a bit.

[Operator Instructions] And there appear to be no further questions at this time. I'd like to turn the floor back over to Mr. Bloomquist for closing remarks.

Well, thank you, everybody, for your time today. I'm very proud of the accomplishments we made this past quarter and confident that we will continue to execute on our near-term initiatives to improve our profitability and to reduce our debt. And I look forward to our next update. Until then, if you have any questions or need to reach out to us, please feel free to do so.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.