Rayonier Advanced Materials Inc. has reported a net loss from continuing operations for the third quarter of $14 million, or $(0.29) per diluted common share, compared to income from continuing operations of $30 million, or $0.47 per diluted common share, for the prior year quarter. Adjusted net loss from continuing operations for the 2019 third quarter was $15 million, or $(0.29) per diluted common share, compared to adjusted net income from continuing operations of $27 million, or $0.41 per diluted common share, for the prior year quarter.
“With our initiatives to lower costs and improve cash flows and liquidity, combined with the completion of our loan amendment and the sale of Matane, we are taking aggressive action to manage the current challenging market conditions”
The net loss from continuing operations for the third quarter 2019 improved $5 million compared to the second quarter 2019. Adjusted net loss from continuing operations improved $3 million for the same periods.
The net loss from continuing operations for the nine months ended September 28, 2019 was $62 million, or $(1.36) per diluted common share, compared to income from continuing operations of $93 million, or $1.45 per diluted common share, for the prior year period. The adjusted net loss from continuing operations for the nine months ended September 28, 2019 was $61 million, or $(1.36) per diluted common share, compared to adjusted net income of $75 million, or $1.17 per diluted common share, for the prior year period.
“The increased EBITDA over prior quarters demonstrates the progress we are making on our initiatives to overcome these difficult market conditions. Price declines in commodity segments alone accounted for a $97 million decline in operating income,” said Paul Boynton, chairman, president and chief executive officer. “With our immediate covenant issue resolved as a result of our loan amendment, we are focused on lowering costs, managing working capital and reducing capital expenditures to generate cash and improve our balance sheet.”
Third Quarter 2019 and YTD Operating Results
As a result of the sale of the Matane facility on November 3, 2019, its operating results have been classified as discontinued operations. Prior period amounts related to the Matane operations have been reclassified to conform to the presentation of discontinued operations. Unless otherwise stated, information herein relates to continuing operations.
Net sales comprised the following for the periods presented:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||
| Net sales
(in millions) |
September 28, 2019 |
June 29, 2019 | September 29, 2018 |
September 28, 2019 |
September 29, 2018 |
||||||||||||||
| High Purity Cellulose | $ | 268 | $ | 269 | $ | 308 | $ | 822 | $ | 876 | |||||||||
| Forest Products | 65 | 81 | 86 | 222 | 282 | ||||||||||||||
| Pulp | 26 | 40 | 46 | 95 | 133 | ||||||||||||||
| Paper | 74 | 74 | 78 | 218 | 238 | ||||||||||||||
| Eliminations | (17 | ) | (14 | ) | (17 | ) | (50 | ) | (53 | ) | |||||||||
| Total net sales | $ | 416 | $ | 450 | $ | 501 | $ | 1,307 | $ | 1,476 | |||||||||
Operating results comprised the following for the periods presented:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||
| Operating income (loss)
(in millions) |
September 28, 2019 |
June 29, 2019 | September 29, 2018 |
September 28, 2019 |
September 29, 2018 |
||||||||||||||
| High Purity Cellulose | $ | 7 | $ | 7 | $ | 34 | $ | 11 | $ | 83 | |||||||||
| Forest Products | (5 | ) | (16 | ) | 8 | (27 | ) | 35 | |||||||||||
| Pulp | (2 | ) | 3 | 13 | 3 | 37 | |||||||||||||
| Paper | — | 3 | 13 | 1 | 24 | ||||||||||||||
| Corporate | (8 | ) | (12 | ) | (25 | ) | (39 | ) | (48 | ) | |||||||||
| Total operating income (loss) | $ | (8 | ) | $ | (15 | ) | $ | 43 | $ | (51 | ) | $ | 131 | ||||||
High Purity Cellulose
Operating income for the three and nine months ended September 28, 2019 decreased $27 million and $72 million, respectively, when compared to the same prior year periods. The decreases were driven by a 1 percent and 3 percent decline in cellulose specialties sales prices in the three-and nine -month periods, respectively, primarily as a result of duties on products sold into China. Cellulose specialties volumes declined by 16 percent and 7 percent in the three-and nine-month periods, respectively, due to demand weakness in acetate, automotive and construction markets driven primarily by a slowdown in global economies and customers aggressively manage inventory. Additionally, approximately half of the three-month comparison period decline was due to strong sales volumes in the third quarter of 2018. Both periods benefited from higher commodity sales volumes due to lower cellulose specialties demand and improved production. Costs for both periods were higher as wood and maintenance costs were partially offset by lower chemical prices, primarily caustic, and reduced labor costs.
The 2018 three-and nine-month periods include operating income of $2 million and $5 million, respectively, from the resins business, which was sold in September of 2018.
Compared to the second quarter of 2019, operating income was flat as higher commodity product sales volumes due to higher production, higher cellulose specialties sales prices due to mix, and lower wood and maintenance costs were offset by lower commodity sales prices and lower cellulose specialties sales volumes, both due to weaker markets.
Forest Products
Operating income decreased $13 million and $62 million for the three and nine months ended September 28, 2019, respectively, when compared to the same prior year periods. The decreases were primarily driven by 25 percent and 26 percent lower lumber sales prices, in the three-and nine-month periods, respectively. For the three-month period, costs were lower driven by a $5 million reversal of the net realizable inventory reserve as a result of price increases in the period.
Compared to the second quarter of 2019, the operating loss improved by $11 million. The improvement was driven by 3% higher lumber sales prices and lower costs primarily driven by a $5 million reversal of the net realizable inventory reserve as a result of price increases in the period.
Pulp
Operating income decreased $15 million and $34 million during the three and nine months ended September 28, 2019, respectively, when compared to the same prior year periods. The decreases were primarily driven by 32 percent and 22 percent lower high-yield pulp sales prices in the three-and nine-month periods, respectively, due to weaker markets. For the nine-month period, both pulp sales volumes and costs were impacted by lower production due to market-related downtime and reliability issues at the Temiscaming plant in the first quarter, as previously reported.
Compared to the second quarter of 2019, operating income decreased $5 million. This decrease was primarily driven by 16% lower pulp sales prices and 30 percent lower volumes due to weaker markets partially offset by reduced costs primarily due to lower transportation expenses.
Paper
Operating income decreased $13 million and $23 million during the three and nine months ended September 28, 2019, respectively, when compared to the same prior year periods. Results were negatively impacted by 2 percent and 3 percent lower paperboard sales prices in the three-and nine-month periods, respectively, as a result of increased competition and lower newsprint sales prices. Additionally, newsprint sales volumes for both periods decreased as a result of lower production. For the three-month period, costs increased due to lower newsprint production levels, partially offset by lower market pulp prices for the production of paperboard. In addition, the 2018 three -month period was favorably impacted by the reversal of $5 million of duties on newsprint exported to the U.S. For the nine-month period, costs increased due to lower newsprint production levels, higher maintenance and transportation costs, partially offset by lower market pulp costs for the production of paperboard and lower energy costs.
Compared to the second quarter of 2019, operating income decreased $3 million. The decrease was driven by higher energy costs and partially offset by lower transportation, maintenance and raw material pulp costs for the production of paperboard.
Corporate
The operating loss improved $17 million and $9 million for the three months and nine-month periods ended September 28, 2019 when compared to the same prior year periods. The improvements were primarily driven by lower incentive compensation, severance costs and environmental liabilities expense as well as an insurance recovery partially offset by loan amendment costs and other non-recurring expenses associated with the review of Company’s commodity asset portfolio.
Compared to the second quarter of 2019, the operating loss improved $4 million. The improvements were primarily driven by the insurance recovery and favorable foreign exchange rate changes partially offset by loan amendment costs and non-recurring expenses associated with the review of Company’s commodity asset portfolio.
Non-Operating Expenses
Interest expense increased slightly from $14 million and $42 million to $15 million and $43 million for the third quarter and year-to-date periods, respectively. Overall debt levels were higher during the period ended September 28, 2019. The Company’s increased interest margin was partially offset by the lower LIBOR rates, resulting in slightly higher interest rates on variable debt.
Income Tax (Expense) Benefit
The year-to-date 2019 effective tax rate was a benefit of 30 percent compared to an expense of 24 percent for the same period in 2018. The difference in the periods effective tax rate is primarily driven by mix of results in taxable jurisdictions. The effective tax rate benefit differs from the federal statutory rate of 21 percent primarily due to tax credits, excess tax deductions on vested stock compensation, and different statutory tax rates of foreign operations.
Discontinued Operations
As previously discussed, the Company has presented the operating results for its Matane operations as discontinued operations for all periods presented herein. The decline in discontinued operations during the 2019 periods is principally driven from lower sales prices when compared to the same prior year periods. Included in discontinued operations is allocated interest expense for $100 million of debt that is required to be repaid upon completion of the sale. The 2019 periods presented also includes professional fees to sell the operation.
Cash Flows and Liquidity
In the nine months ended September 28, 2019, the Company’s operations provided cash flows of $5 million. Year-to-date working capital used $30 million, an improvement of $39 million compared to $69 million for the 2018 period. This was primarily driven by efforts to reduce inventory levels.
For the first nine months of 2019, the Company invested $81 million in capital expenditures, which included approximately $18 million of strategic capital. Additionally, the Company incurred net borrowings of $43 million to fund its operations and ended the quarter with adjusted net debt of $1,174 million which includes $63 million of cash.
Outlook
High Purity Cellulose
For full year 2019, the Company continues to expect cellulose specialties prices to be lower by approximately 1 to 2 percent, as previously guided, excluding the impact on sales prices of any Chinese duties the Company incurs. Cellulose specialties volumes are expected to be down approximately 6 percent versus 2018 due to demand weakness in acetate, automotive and construction markets, as customers aggressively manage inventory levels. Commodity product (primarily viscose and fluff pulp) sales prices are expected to be significantly lower in the fourth quarter due to weakness in the broad paper pulp markets as global trade issues persist. For the full year, the Company anticipates High Purity Cellulose EBITDA of approximately $140 million.
Forest Products
U.S. housing starts and remodeling activity are the key drivers for lumber demand and have remained relatively flat in 2019; Low interest rates provide positive market environment. Announced production curtailments should positively impact future pricing once inventories have been reduced. Duties on lumber sales from Canada into the U.S. will continue to impact financial results. To date, the Company has paid approximately $53 million of lumber duties.
Pulp
High-yield pulp prices continued to weaken in the third quarter due to lower demand for paper pulp products. However, the Company believes Chinese high-yield pulp markets have stabilized resulting in modest increases in regional pricing from September levels. European market prices continue to decline as they come into closer alignment with the Chinese pricing. The weaker demand has held inventory levels relatively high and continue to pressure global pulp prices.
Paper
North American paperboard prices will remain under pressure primarily due to increased competition. In newsprint, demand continues to decline as industry production capacity remains stable, resulting in continued pricing pressure.
Capital Allocation and Investment
Due to market conditions and increased leverage, the Company is reducing its capital spending across all segments. The Company currently expects capital spending to be $120 million for the full year 2019, down $10 million from its original $130 million estimate, and continues to evaluate further actions.
On September 6, 2019, the Company announced that its Board of Directors determined to suspend the Company’s quarterly common stock dividend to improve cash flow.
On November 3, 2019, the Company sold its Matane facility for $175 million. The Company received approximately $150 million, net of fees, expenses, working capital and other adjustments related to the sale. Proceeds from the sale will be used to repay $100 million of debt with the remainder for general corporate purposes, including enhancing liquidity.
Amendment
On September 30, 2019, the Company amended its Senior Secured Credit Agreement. The amendment relaxes financial covenants through 2021. The Company believes it now has the runway to manage the business through these challenging economic conditions enabling it to emerge financially stronger and able to realize the earnings potential of the business.
Conclusion
“With our initiatives to lower costs and improve cash flows and liquidity, combined with the completion of our loan amendment and the sale of Matane, we are taking aggressive action to manage the current challenging market conditions,” added Boynton. “We are focused on increasing price and margins through our Go-to-Market strategy, reducing costs with our Strategic Pillars and reducing earnings volatility as we conclude our Portfolio Evaluation process. We believe our short-term efforts and long-term strategy position us for improved profitability and sustained value creation.”