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3Q23 Results May Indicate a Cyclical Trough

3Q23 results reflect cyclical bottom. RYAM reported 3Q23 results that included total revenue of $369 million, EBITDA of $24 million, and EPS of ($0.39), which reflected the Q/Q decline across all three measures, as previewed by company management at its Investor Day held earlier in October. 4Q23 recovery implies inflection point reached. Despite continuing softness in the company’s acetate part of the specialty cellulose portfolio, driven by weak building & construction markets and weak Y/Y prices in commodity CS, as well as the Paperboard and High-Yield Pulp divisions, management expects 4Q23 EBITDA to double from last quarter’s $24 million, as cost reductions gain traction, and both prices and volumes improve Q/Q across all three divisions, with HPC also expecting to benefit from mix improvement and RYAM picking up share in the specialty portion of the cellulose market in the wake of a competitor’s plant closure and business exit. Balance sheet is top priority in 2024. Having successfully refinanced its debt maturing in 2024 this year, the company is looking to refinance the debt maturing in 2026 over the course of 2024, efforts that may be aided by management’s intention to monetize “passive assets”, which may generate $35-45 million in proceeds, and potentially divest its Paperboard and High-Yield Pulp businesses, with a combined 2023E EBITDA of $60-70 million. This could generate gross proceeds of $350 million or more, which could be used to pay down debt, possibly allowing for better loan terms on new debt and strengthening RYAM’s financial position. 2024 sets up as a year of recovery. While lower Y/Y prices in commodity CS, paperboard, and HYP may continue into early 2024, sequential price improvements, higher mix, as commodity CS production is reduced in favor of specialty CS, driven by share gains and the expected 1Q24 startup of the Tartas bioethanol plant, better Y/Y pricing in 2H24, and continuing programs to control costs and expenses may see 2024 EBITDA recover to ~$200 million, putting RYAM on a sustainable pathway to continuing top-line growth and margin expansion, combined with debt reduction, which may provide greater confidence in management’s ability to deliver on its 2027 goal of EBITDA of $325 million and net debt/EBITDA of 2.5x. Estimate adjustments. We are reducing our 4Q23 estimates on continuing price and demand weakness, with EBITDA of $48 million (versus $57 million prior) and EPS of ($0.10) [versus ($0.01) prior]. Our 2024 EBITDA estimate increases from $185 million to $197 million.