Rayonier Advanced Materials Inc. Q2 FY2025 earnings call

1. Guidance Change: 2025 guidance revised from $215 million to $235 million at the start of the year to $150 million to $160 million due to nonrecurring macroeconomic and internal challenges. 2. EBITDA Growth Outlook: Expect to nearly double EBITDA over the next 2 years relative to revised 2025 guidance, driven by core cellulose specialties and biomaterials. 3. Cellulose Specialties: Industry consolidation with RYAM, Borregaard, and Bracell controlling ~80% of the dissolving wood pulp cellulose specialty market; noncyclical markets provide stable demand, cyclical segments offer upside potential. 4. Cost Reduction: Target $10 million in corporate expense reductions via automation and ERP system efficiencies, and ~$20 million in operational savings from manufacturing automation, etc. 5. Biomaterials: Biomaterials strategy with projects like the BioNova JV, expected to generate significant EBITDA and high equity ROI. 6. Temiscaming Turnaround: Plan to restore Temiscaming to historical EBITDA levels via aggressive cost cuts, launching new products, and leveraging tariff benefits for North American market share.

Cellulose Specialties: Quarterly net sales decreased $33 million to $208 million. Operating income declined $21 million to $29 million. Adjusted EBITDA margins declined to 22% from 28% year-over-year. Biomaterials: Net sales declined $2 million year-over-year to $6 million. Operating income was flat at $1 million. Adjusted EBITDA margin was 17% compared to 25% in the prior year. Cellulose Commodities: Net sales decreased by $26 million to $59 million. Operating results improved by $12 million, reducing the operating loss to $9 million. Paperboard: Net sales declined by $13 million year-over-year to $47 million. Operating income declined $12 million. Adjusted EBITDA for the segment was $5 million, with margins declining to 11% from 25% in the prior year quarter. High-yield Pulp: Net sales decreased $4 million year-over-year to $29 million. Operating loss increased by $8 million to $7 million.

1. Revised 2025 adjusted EBITDA guidance to $150 million to $160 million, with second half EBITDA expected to be approximately $105 million to $115 million. 2. Adjusted free cash flow guidance: negative $10 million to $25 million for the full year, with positive free cash flow of approximately $35 million anticipated in the second half of the year. 3. Expect EBITDA growth from 2026 onwards, driven by core cellulose specialties and biomaterials initiatives.

1. Tariff Uncertainty: Indirect effects on customer access to key geographic markets, though direct tariff issues are improving. 2. Operational Disruptions: Past labor strikes, outages, etc., which were largely resolved but were a past headwind. 3. Macroeconomic Headwinds: Impacted near-term financial results, but long-term trajectory remains intact.

Q: What kind of time line are you anticipating for having this dissolving wood pulp fluff product approved for sale in China at 0 tariffs?

A: We have sent and are sending material to our customers in China as we speak for their trials and qualifications. If those go well, we expect to commercialize those going forward in 2026. And we expect to recapture most, if not all, of our share loss as a result of the 10% tariff that we have right now going into China.

Q: How should we think about capital allocation in 2027?

A: The focus will be on generating and executing on high-return projects as we plan through 2027. There will always be a desire to pay down debt. But if projects dry up or the return on those projects get to a certain level that is no longer attractive to our shareholders, we would then consider possibly returning capital back to the shareholders.

Q: How fast do you think that you can get to that $30 million run rate of cost reduction given that some of these things, particularly the noncorporate portions will require some time as far as automation and things like that, that you're targeting to get these cost savings?

A: We expect that we'll be at that run rate as we enter 2026. A lot of the investments needed to achieve that run rate outside of corporate have already been invested or are being invested and the expectation of those projects will be completed as we exit this year.

Q: Are you going to benefit from the 15% and 50% tariffs on EU and Brazil imports in terms of gaining market share being a lower-cost producer than the Europeans and the Brazilians plus the tariff?

A: The 15% tariff obviously gives us -- will increase our headroom with respect to our competitive positioning relative to our competition. That may allow us to be a little bit more aggressive in defending our share in our home market here in the United States. So -- and maybe at the end of the day, we end up having that realized as increased margin going forward in terms of -- if it translates into a lower U.S. dollar relative to other currencies.

Q: Is your confidence of being able to ramp up your biomaterials business as rapidly through 2028 based on the fact that you see these markets growing fast enough to allow for new entrants such as yourself to gain market share without having to sacrifice price?

A: We're highly confident that we're going to be able to ramp up the construction of these facilities and commercialize them over the course of the next few years. With respect to the strategy to enter the markets that we're pursuing, whether it be CTO or bioethanol or, call it, green electricity, we're a drop in the bucket. So our new supply isn't going to materially change the marketplace in any significant degree. We believe that as we -- as part of the financial -- as a result, as part of the financial investment decision, we will have in hand commercial agreements. That's one of the stipulations of getting to a financial investment decision is actually having a commercial agreement in hand that we will have the ability and already have the agreement to move that material before we even produce the first drop of any of those products.