JACKSONVILLE, Fla.–BUSINESS WIRE–Rayonier Advanced Materials Inc.has reported third-quarter 2018 net income of $38 million, or $0.60 per diluted common share, compared to $16 million, or $0.28 per diluted common share in the third quarter of 2017. Year-to-date 2018 net income was $116 million, or $1.82 per diluted common share, compared to $30 million, or $0.46 per diluted common share for the first nine months of 2017. Earnings for both the third quarter and year-to-date 2018 periods increased due to the November 2017 acquisition of Tembec Inc. (“Tembec”).
Third quarter 2018 adjusted net income was $35 million, or $0.54 per diluted common share, compared to $10 million, or $0.18 per diluted common share in the third quarter of 2017. Year-to-date adjusted net income was $98 million, or $1.53 per diluted common share, compared to $28 million, or $0.42 per diluted common share in 2017.
A reconciliation of net income to adjusted net income and the related impact on diluted earnings per share can be found on Schedule F.
“Year-to-date we have generated $291 million of adjusted EBITDA, $97 million of adjusted free cash flow, and captured cost transformation and synergy savings of $38 million. Our solid results this quarter allowed us to invest in high-return strategic capital projects, repay debt and return capital to shareholders,” said Paul Boynton, Chairman, President, and Chief Executive Officer. “With our strong position in High Purity Cellulose, a positive outlook in the Pulp markets, and significant cash generation, we remain committed to our execution focus and opportunities to return capital through share repurchases.”
High Purity Cellulose
Operating income for the three-month period ended September 29, 2018, increased $4 million driven by the operating income from the Tembec acquisition. Operating income decreased $13 million for the nine-month period ended September 29, 2018, over the comparable 2017 period as lower cellulose specialties prices and higher chemical and energy costs from the Company’s historical operations were offset by the operating income from the Tembec acquisition.
On a combined basis, operating income for the three, and nine-month periods ended September 29, 2018, decreased over the comparable 2017 periods by $16 million and $60 million, respectively. These decreases were primarily driven by the expected decrease in cellulose specialties sales prices and volumes combined with higher chemical, energy and wood costs. Additionally, 2018 three, and nine-month periods were negatively impacted by $2 million and $3 million, respectively, for the Company’s share of the new lignin joint venture loss. The increased costs were partially offset by transformation and synergy savings during the periods.
Forest Products
Operating income for the three, and nine-month periods ended September 29, 2018, increased over the comparable 2017 periods by $8 million and $35 million, respectively, driven by the Tembec acquisition.
On a combined basis, operating income decreased $3 million for the three-month period ended September 29, 2018, over the comparable 2017 period as higher lumber sales prices were more than offset by lower sales volumes and higher wood and transportation costs. Sales volumes in the quarter were impacted by weakening market conditions and production downtime to implement capital improvements. Operating income increased $8 million for the nine-month period ended September 29, 2018, over the comparable 2017 period as higher lumber sales prices were partially offset by lower sales volumes and higher costs for wood and transportation.
Pulp
Operating income for the three, and nine-month periods ended September 29, 2018, increased over the comparable 2017 periods by $26 million and $75 million, respectively, driven by the Tembec acquisition.
On a combined basis, operating income for the three, and nine-month periods ended September 29, 2018, increased $10 million and $44 million, respectively, primarily due to higher high-yield pulp prices of 17 and 27 percent, respectively.
Paper
Operating income for the three, and nine-month periods ended September 29, 2018, increased over the comparable 2017 periods by $14 million and $23 million, respectively, driven by the Tembec acquisition.
On a combined basis, operating income increased $5 million for the three month period ended September 29, 2018 over the comparable 2017 period as the reversal of duties on U.S. shipments of newsprint and higher newsprint sales prices more than offset lower sales volumes, higher pulp costs in paperboard, which benefits our Pulp segment, and increased amortization and depreciation related to the purchase accounting associated with the acquisition of Tembec. Operating income decreased $9 million for the nine-month period ended September 29, 2018, over the comparable 2017 period primarily due to higher pulp costs in paperboard and increased amortization and depreciation related to the purchase accounting associated with the acquisition of Tembec partially offset by higher sales prices.
Corporate
Operating expense for the three, and nine-month periods ended September 29, 2018, increased over the comparable 2017 periods by $15 million and $12 million, respectively, driven by the Tembec acquisition.
On a combined basis, operating expense increased $7 million for the three-month period ended September 29, 2018, over the comparable 2017 period driven by severance expense of approximately $4 million, higher costs for disposed operations and higher incentive compensation costs. Operating expenses decreased $6 million for the nine-month period ended September 29, 2018, over the comparable 2017 period primarily related to synergy savings offset by severance expense, increased disposed operations costs and increased incentive compensation costs.
Transformation and Synergy Savings
During the first nine months of 2018, the Company achieved approximately $38 million of its $40 million Cost Transformation target for 2018, excluding one-time costs. Approximately $19 million of the savings were related to synergy activities and are associated with reduced corporate expenses, enhanced procurement practices, and operational effectiveness. Synergy savings required approximately $6 million in one-time costs and an additional $4 million in capital expenditures. The Company currently expects to exceed its prior Cost Transformation target for 2018 and is raising the target by $10 million to $50 million for the year.
Non-Operating Expenses
Interest expense was $15 million for the third quarter of 2018 and $45 million for the first nine months of the year. The increases of $6 million and $18 million over the prior year three, and nine-month periods, respectively, were due to higher debt balances and interest rates associated with the debt used to finance the acquisition of Tembec. Interest income and other expenses, net, increased in the current year primarily due to the favorable impact of Tembec’s pension plans on other components of net periodic pension costs.
Non-operating expenses also include $21 million in adjustments to the gain on bargain purchase associated with the acquisition of Tembec in the fourth quarter of 2017. The adjustments were recorded in the second and third quarters of 2018.
Income Tax Expense
The year-to-date effective tax rate was 26 percent for 2018, compared to 38 percent in the prior year period. The current year-to-date effective rate differs from the federal statutory rate of 21 percent primarily due to different statutory tax rates of foreign operations and the U.S. taxes from the inclusion of certain foreign income, partially offset by a nontaxable bargain purchase adjustment included in pretax income and a return to accrual adjustment related to previously filed tax returns. The prior year-to-date effective tax rate differed from the then enacted federal statutory rate of 35 percent primarily due to the unfavorable tax impact of the accounting for the 2014 employee incentive stock program which did not pay out as a result of not meeting the required performance criteria.
Cash Flows and Liquidity
Year-to-date, the Company generated operating cash flows of $160 million and adjusted free cash flows of $97 million. Working capital used $74 million of cash as a result of higher inventories, increases in deferred costs related to the annual maintenance outages at all four high purity plants, and the timing of customer incentive and prepayments.
Year-to-date, the Company invested $93 million in capital expenditures, which included approximately $30 million of strategic capital, and received approximately $16 million from the sale of its resins operations.
The Company paid down $34 million of debt year-to-date and ended the quarter with adjusted net debt of $1,103 million and $322 million of total liquidity, including $106 million of cash and $216 million available under the revolving credit facility after taking into account outstanding letters of credit. The Company also returned $39 million of capital to shareholders through dividends and stock repurchases year-to-date.
Outlook
High Purity Cellulose
On a combined basis, cellulose specialties sales prices and volumes are anticipated to decline approximately 3 to 4 percent in 2018 from 2017 driven primarily by lower demand for acetate products. Commodity sales volumes are expected to decline 2 percent. Despite higher wood costs caused by wet weather, the sale of its resins business and an estimated $2 million fourth quarter impact of the 5 percent tariff on approximately $160 million of annual sales of cellulose specialties into China from the U.S., the Company expects fourth quarter adjusted EBITDA to be modestly below third quarter.
Forest Products
Lumber prices have declined significantly from the recent peak. However, the Company believes the market has over-corrected and expects lumber prices to rebound given the relative level of the U.S. housing starts and strong GDP growth. Industry participants have begun to take downtime which will reduce capacity and may improve market conditions. Profitability is anticipated to be break-even or at worst a modest loss in the fourth quarter. Capital investments and cost reductions are expected to provide incremental profitability in 2019. Duties on lumber sales into the U.S. are anticipated to affect approximately 50 percent of the Company’s sales in this segment and reduce EBITDA by approximately $25 million during 2018.
Pulp
High-yield pulp prices are expected to remain near historically high levels in the fourth quarter. Strong demand for pulp, reduced recycled fiber imports to China, and global industrial production at or near capacity continue to support pulp prices. With no significant new capacity expected in the pulp markets in the near-future, supply-demand dynamics should yield positive market conditions into 2019.
Paper
Paperboard markets are expected to remain stable while newsprint sales prices are expected to adjust downward with the reversal of the duties on U.S. shipments. In the fourth quarter, segment profitability is expected to be in-line with prior quarters, when taking into account the reversal of duties.
Capital Allocation and Investment
The Company anticipates that it will spend approximately $100 to $110 million in maintenance capital expenditures across all segments in 2018. In addition, the Company anticipates spending approximately $45 million on high-return strategic projects in 2018. Overall spending may be modestly below these amounts depending on the timing at year-end. These strategic opportunities are predominantly focused in the High Purity Cellulose and Forest Products segments with an average payback of less than 2 years.
The Company expects to continue its dividend and share repurchases.
“During the year, we have realized the benefits of the scale and diversity brought to us by the Tembec acquisition and remain excited about our plans to grow EBITDA $155 million over the next three years through our strategic initiatives. As a result, we see a substantial opportunity to drive higher value in our business through the execution of our strategic plan,” concluded Boynton.
