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Market Fundamentals Improving, Albeit Slowly

Light at the end of the tunnel? As RYAM prepares to release its 1Q24 results next Wednesday, it appears that fundamentals are improving across several of its markets, with pulp prices continuing to recover from mid-2023 lows and demand from construction markets stabilizing in the wake of customer inventory drawdowns that reduced RYAM’s opportunities to sell into the market in 2023. 1Q24 comps likely to struggle, but outlook may improve. Management’s guidance for 1Q24 issued at the 4Q23 report indicated flat Q/Q performance, with modest improvement in prices offset by lower operating rates and residual effects of an inventory correction at the customer level. With 1Q23 being RYAM’s strongest quarter last year, revenue and profit may therefore continue to show negative Y/Y comps. However, with commodity prices heading in the right direction, RYAM’s results could improve significantly as the year progresses, both on a sequential and Y/Y basis, providing a sharp contrast to 2023, when results worsened through 3Q23. Pulp price improvements unlikely to be derailed. The recent news that Sappi (SAP-ZA) will be converting its North American graphic paper plant to paperboard production should not negatively affect the pricing trend in paperboard or pulp in the next 12 months, as the conversion is not expected to be completed before 2H25. Furthermore, this move has been anticipated by the industry and therefore reflected in RYAM’s 2027 outlook, which includes a brief period of modest price softness in pulp and paperboard in 2026, before recovering in 2027. Construction industry stabilizing. With demand from consumer end markets still robust, construction weakness has been a major impediment to better performance by RYAM in 2023. With an inventory correction throughout the supply chain having largely run its course and likely to be concluded in 1Q24, fundamental market demand from construction should result in better Y/Y operating environment for RYAM’s ethers business—an important driver of profitability. Although construction demand remains somewhat uneven, pockets of strength, especially in the commercial, infrastructure, and industrial segments, which utilize proportionately higher amounts of concrete (driving RYAM’s concrete additives business), coatings and adhesives (driving RYAM’s ethers business), bode well for the company’s ability to increase revenue and profit off the 2023 trough. Pivot toward specialty portfolio offers further upside. RYAM continues to execute on its mission to reposition itself away from commodity pulp, paperboard, viscose, and fluff markets toward higher-growth, higher-value cellulosic specialties and biomaterials applications. During our recent fireside chat, CEO De Lyle Bloomquist intimated that the process of divesting the company’s non-core assets is progressing well, with a deal potentially being announced in 2Q24, with closing in 3Q24. Furthermore, the company’s Tartas, France second-generation bioethanol plant successfully came online in March and made its first shipment in April. The entry into the rapidly growing bioethanol market and portfolio optimization can further improve sentiment as 2024 unfolds.