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Mature Business Growing New Shoots

We are initiating coverage of Rayonier Advanced Materials, Inc. (RYAM), a leading supplier of wood-derived products and specialty materials, such as specialty cellulosics, paperboard, and high-yield pulp, to the industrial and consumer markets. The company is currently focused on deleveraging the balance sheet and investing in the growth of higher-value biomaterial products, while improving operations and profitability of cash generative, but slower-growing, legacy operations. FCF generation in a weak operating environment. With 2Q23 seeing downward pressure on commodity prices, as they retreat from the post-pandemic spike, and volumes, affected by customer destocking, management raised its free cash flow (FCF) generation goal to $55-70 million from $40-65 million in 2023 in order to accelerate debt paydown, toward the 2.5x net debt to EBITDA target level. Debt refinancing takes one uncertainty off the table. Despite a tougher borrowing environment, RYAM has successfully raised $250 million in new term debt, using the proceeds and cash on hand to pay off $318 million in debt maturing in 2024, increasing the likelihood of refinancing the debt due in 2026 at acceptable terms. Rightsizing production. With market demand for some of its commodity products currently affected by lower demand and customer destocking, RYAM will reduce production of high-yield pulp and postpone throughput-enhancing capex to reduce costs and increase FCF in 2023, with plans to resume production and investments in increased productivity once demand begins to recover. Expanding offerings in the value chain. RYAM is investing in the growth of new adjacent product lines, such as bio-based fuels and lignosulfonates, to take advantage of faster growth rates and higher margins of these more specialty products, which already represent 6% of company sales. Their continuing growth may contribute to management’s goal of raising the company’s EBITDA margins from 10-11% in 2023 to 13-15% in three to five years, thereby placing it among specialty materials peers that historically commanded higher multiples. Potential to reduce market cyclicality. Given the ongoing weakness in the more economically sensitive parts of its business, RYAM is evaluating options for its viscose and paper pulp operations, with a potential asset sale or closure resulting in reduced economic cycle sensitivity of its remaining operations, while providing funds to further delever the balance sheet and invest in bio-based products growth initiatives.