May 2, 2017
Executives
Mickey Walsh - Treasurer and VP, IR Paul Boynton - Chairman, President and CEO Frank Ruperto - CFO and SVP, Finance and Strategy
Analysts
John Babcock - Bank of America/Merrill Lynch Roger Spitz - Bank of America/Merrill Lynch Chip Dillon - Vertical Research Steve Chercover - D. A.
Davidson Paul Quinn - RBC Capital Markets
Operator
Greetings and welcome to the Rayonier Advanced Materials First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mickey Walsh, Treasurer and Vice President of Investor Relations for Rayonier Advanced Materials. Thank you.
You may begin.
Mickey Walsh
Thank you, Mellissa, and good morning everyone. Welcome to Rayonier Advanced Materials 2017 first quarter earnings call and webcast.
Joining me on today's call are Paul Boynton, our Chairman, President and Chief Executive Officer; and Frank Ruperto, our Chief Financial Officer. Our earnings release and presentation materials were issued yesterday afternoon and are available on our website at rayonieram.com.
I'd like to remind you that in today's presentation, we will include forward-looking statements made pursuant to the Safe Harbor provisions of federal securities laws. Our earnings release, as well as our filings with the SEC list some of the factors which may cause actual results to differ materially from the forward-looking statements we may make.
They are also referenced on Slide 2 of our presentation material. Today's presentation will also reference certain non-GAAP financial measures as noted on Slide 3 of our presentation material.
We believe non-GAAP financial measures provide useful information for management and investors, but non-GAAP measures should not be considered an alternative to GAAP measures. A reconciliation of these measures to their most directly comparable GAAP financial measures are included on Pages 13 through 17 of our presentation.
At this time, I would like to turn the call over to Paul for his opening remarks.
Paul Boynton
Thanks Mickey, and good morning everyone. We are off to a strong start in 2017.
Our continued focus on cost and operational excellence delivered solid results that are in line with our expectations for the quarter. Implementation of our 2017 cost transformation initiatives are ahead of plan and we are now on track to deliver the entire $30 million of cost improvements we've targeted.
Therefore we are confident that our team will generate net income and EBITDA at the high-end of our initial guidance. To-date we have achieved over $90 million of savings and continue to advance towards our ultimate four year goal of $140 million of cost improvements.
With our focus on our four strategic pillars, we are building a more globally competitive company with low-cost operations and innovative product offerings that enable us to write severe superior value and service to our customers. With that let me turn it over to Frank for review of the financials and more details on cost transformation.
Frank Ruperto
Thank you, Paul. Let's look at Slide 4 to review our financial highlights for first quarter.
Sales totaled $201 million for the first quarter of 2017, 8% below prior year. The decrease was driven by contractually lower prices on cellulose specialties, a higher mix of lower value specialty cellulose products, and lower commodity sales volume.
Operating income was $26 million for first quarter 2017 compared to $32 million for first quarter 2016. Our variance analyses for operating income relative to the first quarter of 2016 and the relevant price and volume statistics are provided on Slides 5 and 6 of the financial presentation material.
As you can see on Slide 5, first quarter 2017 operating income was negatively impacted by $7 million as a result of the previously announced lower cellulose specialty prices. Prices for commodity products were up 6% from the prior year due to higher prices, as well as a mix shift towards viscose which currently provides better profitability.
Volumes and sales mix lowered operating income by $3 million compared to the first quarter of 2016. As you can see on Slide 6, cellulose specialty sales volumes increased 1,000 tons to 107,000 tons while commodity volumes decreased 16,000 tons.
The decrease in commodity tons is due primarily to the timing of revenue recognition and sales mix. Returning to Slide 5, cost for the first quarter of 2017 were 6 million better than the prior year driven primarily by our cost transformation initiative offset in part by higher cost of prices.
On balance, inflation in most of our key inputs was roughly in line with our expectations. SG&A and other costs for first quarter of 2017 were $2 million negative from the prior year driven primarily from the timing of recognition of stock compensation expense and increased research and development spending.
Our cost transformation strategy continues to produce solid results. As a reminder, on Slide 7 we have a four-year plan to improve cost by $140 million from our 2014 cost base.
In 2015 we captured 35 million of these cost improvements, in 2016 we recognized another 50 million improvements. Through the first quarter of 2017, we have captured approximately $7 million of this year's target bringing our total savings to $92 million.
Taking all this into account, we believe our 2017 net income and pro forma EBITDA will approach the high-end of our original guidance. As a reminder, our initial net income and EBITDA guidance was $41 million to $48 million and $190 million to $200 million respectively.
In addition to cost improvements we remain focused on driving cash flow throughout the organization. As shown on Slide 8, in the first quarter of 2017 we generated $24 million of adjusted free cash flow.
As a result, net debt was reduced by $22 million from year-end. With the improved operations and other cash initiatives, we are now targeting adjusted free cash flow for 2017 of $90 million to $100 million, an incremental $10 million increase over the prior guidance.
We remain well-positioned with $574 million of liquidity including $345 million of cash, $229 million available under our revolving credit facility. This strong cash and liquidity position gives us the capacity to make meaningful investments in our business that will allow us to grow and diversify, enhancing our competitive position.
We will focus on deploying this liquidity into investments to try superior long-term shareholder returns. At this point, let me turn the call back over to Paul.
Paul Boynton
Thanks Frank. From a strategic perspective, we are focused on our four pillars of growth as shown on Page 11.
As we discussed in our Investor Day six weeks ago, we laid out our objectives for each of the four pillars. Frank provided an update on the cost transformation pillar.
Now let me provide a few comments on the other three pillars. Specific to market optimization, we continue to cultivate opportunities in markets where we remain underrepresented or have not had a meaningful presence.
The overall goal of our market optimization strategy is to maximize the capabilities of our assets, and optimize the product mix for the greatest bottom line return. We believe that this strategy allows us not only to optimize our base level volumes, but increase overall cellulose specialty volumes by utilizing the full 485,000 tons of cellulose specialty capacity, a 30,000 ton increase from 2016 levels.
In our commodity segment, we aggressively entered the viscose market with a strong product offering and leading technical service which is beginning to pay dividends. In 2017, viscose will play a more meaningful role in our commodity mix than any time in the past allowing us to maximize profits in the current market environment.
Combined these cellular specialties and commodity segment initiatives could generate an excess of $10 million to $15 million of profit above driven by market conditions within the next two to three years. With our focus on market optimization and our continued success in cost transformation, we are very confident in our ability to defend and grow our existing positions by offering customers a value proposition of quality, price, technical service, and security of supply that we believe no other competitor can match.
New products will continue to be an ever increasing focus of Rayonier Advanced Materials. We are progressing projects with the strongest potential through our stage gate process.
Our focus is on making commercially attractive products that can drive growth in our existing businesses, as well as provide us an entry into other attractive and faster growing segments. As such, we are accelerating our goal to capture $200 million in revenue by pushing to achieve the target within the next five years.
Based on the opportunities in our current pipeline, we hope to generate $20 million to $40 million of incremental EBITDA within the five-year period. We have a lot of work to do but we are pushing hard to achieve this goal.
Within our acquisition pillar, we are actively evaluating opportunities that possess strategic rationale, attractive end markets, strong growth and most importantly high returns. We will pursue acquisitions that meet these criteria and offers significant synergy potential all at a price that is accretive to our shareholders.
We accelerated our efforts in this area in the second half of last year. However we remain disciplined with regards to purchase price and we will look for other means to drive shareholder value if compelling opportunities do not present themselves in a reasonable timeframe.
We are confident that our four strategic pillars position us well for both the near and long-term. Now, I'd like to open up the call for questions.
Operator
[Operator Instructions] Our first question comes from the line of John Babcock with Bank of America/Merrill Lynch. Please proceed with your question.
John Babcock
Hi, good morning, this is John Babcock. Want to quickly follow up on your last point you made with the rest acquisitions I was wondering if you could talk about whether anything is really changed since the Investor Day back in March if any interest and opportunities have come across your desk or if there is any sort of update there we should know about?
Paul Boynton
John, nothing we can comment on. We continue to look and have looked at the compelling opportunities and we will update you and the others as soon as we have something to share.
John Babcock
Okay, I appreciate that. And then with regards to the commodity business just wondering how you think about that, it sounds like you guys predominantly target the spot markets and I was wondering if you could kind of talk about the pros and cons of targeting more the contract market their particular since you now have a machine it's not focusing on specialty sales and I was wondering really like how much because it seems like you had a pretty decent EBITDA pick up from contracting more that business and so you’re targeting the spot markets and just want to get your sense and approach there?
Paul Boynton
Yes, so John first let me say I wouldn't characterize what we’re doing is targeting the spot markets of focusing on that. We are looking at a balance between absorb materials fluff pulp as well as viscose pulp.
We are continuing to watch the markets we look ahead in the near future and say is the one that is more attracted the end than the other. And do we want to shift out waiting to one or the other and when we decide to do that we typically enter into contracts into that segment more than the other segments.
So we’re heavily contracted on both sides but as we commented we have shifted more of our volume in 2017 towards the viscose market as we saw prices there rise in 2016 putting the profitability ahead of what we look at in the absorb material side. So again to answer your question we’re more focused on contracted volume as just we’re going to go ahead and shift that around as appropriate as we look at more attractive returns against the two different segments.
John Babcock
Okay. And have you talked about how much of that is contract?
Paul Boynton
We have not talked about that but I would tell you of the majority it’s a pretty significant amount but we remain always keep a little bit of flexibility out there as well.
John Babcock
Okay, I appreciate that. And then next just recently one of your largest customers reported earnings and provide some commentary on the acetate tow side of things.
And they mentioned specifically I guess if they have seen some turnover in the first half that could lead to lower volumes during that period and while they expected to recover in the second-half I was just wondering if you could talk about how that might impact RYAM’s order pattern for acetate?
Paul Boynton
Yes, so all of our customers and we talk about this at the beginning of the year most of our all of our volume in cellulose specialties side is contracted out. So we're usually able to predict our volume levels for the year fairly well and we’ve given you that guidance and that guidance is out there they’re relatively flat year-to-year.
So we don't anticipate any change in our business as a result of what they had indicated we have that already baked into our plans going forward. So I wouldn’t expect to see anything we talk about a little bit of shift out there in our volume and we said is going to be roughly flat or slightly down that’s mainly due to revenue recognition and not anything on any particular customer.
John Babcock
Okay, right. And then the last question I had was just also following on some there commentary they talked about how they seen some stability but none to in the 2017 but potentially expect some stability in 2018 getting conversations with some of your other customers I was wondering if that something reasonable to expect or if you might be seeing potential signs to the contrary?
Paul Boynton
Look I think I would look just more broadly at what we’ve talked about in the past which is just the fundamental demand for cigarette. And we believe that demand out there is roughly flat and you can argue it slightly up or down but we’re going to call it roughly flat.
And so as we look at that we look at the overall demand for our type of products to be in that same region of roughly flat for that acetate markets. So no, I have no commentary on how 2018, 2019, 2020 looks relative to 2017 at this point.
We just say look we think the market is fairly steady out there and the growth opportunities we believe are in the other segments outside of acetate.
John Babcock
Okay. Thanks Paul.
Operator
Thank you. Our next question comes from the line of Roger Spitz with Bank of America Merrill Lynch.
Please proceed with your question.
Roger Spitz
Thank you. So regarding the commodity volumes I think in the last presentation in the outlook it gave volumes up 10% and in this presentation it just higher.
Are you backing off to 10% of volume or you just didn’t put in there?
Paul Boynton
Yes, the way we look at the commodity volumes is that two things impact that one is just a level of CS volumes which we know are set for the year. And then the second biggest impact is mix and so when we're making viscose and we shift to viscose we will typically lower the volume a little bit than we would otherwise sell just because it takes longer to make.
So some of what you're seeing in there is some mix shifts as we think about looking forward and the other impact is as we think about sales timing at the end of the year the revenue piece of that and when we see things shipping. So we haven't changed our guidance materially from that, but again there are couple of things that may impact whether or not it's at 10% or slightly lower but from a profitability perspective before moving to viscose we’re doing that for reasons because it’s better profit today.
Roger Spitz
Okay. And my other question was going back to John's question regarding – I know your CS volumes are set under contracts what those volumes are this year but those two guys those report are showing down volumes a bit and do you think they are just taking the volumes beyond their underlying requirements and that might catch up to you later or how do you compare your volumes be flat where a couple of the big customers and other tow guys are showing down volume at least for the first quarter?
Paul Boynton
Yes Roger, this is Paul. Again just look back and we have certainly adjusted our total volumes of a bit in the last couple years right where we were up that are full capacity and we’ve guided that we’re below that in the last year or two and roughly flat.
Part of that is the acetate impact out there. And then we guided this year that we got more other cellulose specialty in our mix this year and less acetate.
So we're adjusting with them, keep in mind a lot of this is being driven to China and CNTC’ plant to reduce inventories and to reduce their inventories they’re mainly adjusting their import amount. And as such it’s hurting some of our customers and some of the players out there in the industry.
So that's what you're hearing about but we’ve adjusted along with that in the last couple years. And so you're seeing that show up of course in our financials as well.
Roger Spitz
Is your view that China is still doing some destocking at least in Q1 of 2017?
Paul Boynton
Yes, we said we think that they’re settling out in the beginning of this year and I think our position is that still what’s happening out there. And again I think as far as the best words I can use is settling out I can't say that it’s done and I can't say it’s going to continue on much longer but it’s still settling.
Roger Spitz
Thank you very much.
Operator
Thank you. Our next question comes from the line of Chip Dillon with Vertical Research.
Please proceed with question.
Chip Dillon
Good morning. Paul as we think about the units in the 200 million goal I think you said like over five years from new products if I got that or new markets I think you mentioned a smaller number and if you could just repeat that and for what period.
And then would that include for example expanding into you know into more of the ethers categories as an example or am I misunderstanding that?
Paul Boynton
Well, let me just kind of first while just capture what I did say and I just said look we’re continuing to drive growth and focus in this area and we said our goal is to accelerate what we've previously had announced out there and capture $200 million of revenue by pushing at target within the next five years. And that $200 million can come from replacing existing business as well as growing at some so as you look at our total revenue now it’s taking that total revenue and capturing $200 million of that into new products that don't exist today.
And with that we hope to generate $20 million $40 million within that five of EBITDA within the five-year period. So hopefully that clarifies a little bit.
Chip Dillon
And then just I also understand, you're suggesting that maybe the commodity part of the volumes this year, I think you said were up 10 or maybe be up a little less assuming you can get a little bit more mixed into the specialties, is that - did I heard you say, is that correct.
Frank Ruperto
You actually heard me saying, in consuming we get more mixed into viscose. So again we are always looking at which of those commodities are aging to generate the most incremental profit, so when we talk about mix shift in commodities, it's fluff versus viscose and so as we see it, we look to go to the markets with our swing arm volume into the higher value market at that given time.
And they're both commodities, they both move around but right now we've been moving volumes towards viscose.
Chip Dillon
That's clear but are the overall combined fluff viscose volume supposed to be up about 10% still this year?
Frank Ruperto
It depends on the mix, for shifting more towards viscose, those will be down a little bit. Down below the 10% but that will be above this year's.
Chip Dillon
I got it, okay. And it's interesting you say that because we see the fluff prices if they stick in May would be up over 100, I think like $115 since January and is it fair to say that, despite that the viscose improvements even better at least for you guys.
Frank Ruperto
Yes, good observation. So that is happening out there.
From the beginning of year fluff pulp prices up about 7.5% but keep in mind viscose prices really rose last year quite a bit and to John's earlier question based on that, we shifted over and contracted and work with customers out there for more viscose volume and even today even with that rise in fluff pulp prices, we're still committed and we had better profitability to where we're sitting today in our mix. If it shifts around we may look at that for 2018 and say, okay, do we want a contract anything different at that time, we'll make that decision later in the year.
Chip Dillon
And last quick question is, as we think about the acetate business and some of the other specially businesses, I know that there's been a range of dates where you've given us some indication about what the business looks like for '18, I think you even might have indicated that some of your contracted business might be, I’m not sure if that was for this year or next year down 2% but if you could just review what you have said for 2018 and what you might be able to tell us, whether it's later this year or as late as you know January.
Frank Ruperto
So we have not given any guidance out on 2018 ships, so the 2% that you're referring to is what we said about acetate pricing this year and we started saying that kind of mid-last year or earlier last year when we had contracted out at roughly down 2% of acetate pricing for '17. We haven't given out any guidance on '18 as you know those discussions tend to take to start in the second half of the year in earnest and we typically would announce the outcome of that guidance in the January '18 call.
Chip Dillon
Okay, great. Thank you.
Operator
Thank you. Our next question comes from the line of Steve Chercover with D.
A. Davidson.
Please proceed with your question.
Steve Chercover
Thanks. Good morning, everyone.
A couple of questions, one is operational, couple of modeling. So starting with the operational question, just how easy is it to toggle between fluff and commodity viscose on your flexible line, like is this a changeover that takes hours or days.
Paul Boynton
We are very fortunate in this regard because we do have assets that we can move in between and experience that we can move in between fluff and viscose. Not only on the customer side but as you indicate on the operational side.
So it is something that's relatively easy and that the shift on over and so it's not a long take of time, it's not a days type of thing. So I would just, leave it at that it’s just - is relatively short changeover.
Steve Chercover
Great, thanks. And then your tax rate was pretty elevated in Q1, I was just wondering if you could remind us what the full-year tax rate is expected to be?
Frank Ruperto
Yes, we're expecting the full year tax rate to be now at somewhere in the 36% to 37% range for book purposes. Obviously cash purposes will be materially lower.
Steve Chercover
Okay. And then on that anti-dilutive earnings calculation, I just want to verify, looks like there is an inflection point right around 16 million bucks quarter, 64, 65 a year, are we thinking of that the right way?
Frank Ruperto
I want to get back to you on that because I haven’t looked at the specific inflection point but we can get back to you.
Steve Chercover
Okay. And one last question, is lignin included in that 200 million 5-year objective?
Frank Ruperto
No, it is not. Not the LignoTech Florida joint venture, if we do something else it would be, but not LignoTech Florida.
Steve Chercover
Because that’s going to be accounted for the line item, correct?
Frank Ruperto
The line item as we talked last call we’re working through what the disclosure would be in the footnotes on more extended disclosure.
Steve Chercover
Great, thank you.
Operator
[Operator Instructions] Our next question comes from the line of Paul Quinn with RBC Capital Markets. Please proceed with your question.
Paul Quinn
Thanks very much guys. Just a question viscose versus fluff, it sounds like you guys have indicated that you are more profitable right now and viscose and then fluff recognizing that fluff prices are moving up almost a monthly basis right now.
But what you think you have better visibility in terms of the long-term pricing outlook between those two products.
Paul Boynton
Good question and I think both are difficult to look out, pass any certain amount of time. That's why we want to be somewhat flexible with in keeping up a foot in the basin in both.
As you are well aware, most analysts out there looking at the fluff market for 2017 had predicted it actually going down slightly, flat to down and as you just indicated is actually moving in the opposite direction. So even the folks who just track and get on hard time predicting it.
So it it's not easy that's why we just need to say nimble and again fortunately we have assets that can do that and so we’ll just continue to monitor it and if we think we’re at a point where we’re going to push our weight into another side, we will do that.
Paul Quinn
Okay. I like your four prong strategy and you guys have done a really exceptional job on the cost side, I would say on the three pillars not so much and just wondering if you can give us some metrics as to on the market optimization.
Where your mix is right now between acetate, I mean we've been talking about diversification in the marketplace for I guess as long as I've covered you and I think the only data point I've got is like 2013 when you were kind of like 82% acetate. Can you give us advance benchmarks sort of mix between acetate ethers and others at this point so that we can track how you're progressing on the diversification or optimization.
Paul Boynton
Paul, you’re right. We don’t have that detail out there and the majority of our mix is still sitting in the acetate business but as we indicated as over the last couple of years, that's come down a bit as our customers have experienced pressure on themselves and so we've adjusted, we’ll have to look into.
How and if we don’t want to going to disclose that differently out there. At the current time we decided having a value but - so we're still out there saying that we’re over half on the acetate side over gaining certainly another cellulose specialty area and so that's all we have out there at this point in time.
But appreciate the questions.
Frank Ruperto
Paul I was just going to say, last quarter Paul pointed to some of the other CS markets tire cord and other markets where we've been focused and have seen some opportunities there over the last year.
Paul Quinn
Yes, I recognize that and you've got a one of the public competitors that had some very strong results here and you know globally leader in ether side, so I’m just brilliant to be able to track your progress as you diversify and I struggle with that your - the second of market you want to diversify but you don't seem do want to give us any kind of overall metrics around it. So I’ll leave it to you to figure out.
Last question I had was, just on your balance sheet. You’ve done a great job taking down the debt.
Where is this balance sheet have to get to before debt reduction starts being a priority?
Frank Ruperto
Yes, I think Paul, where we're at a point now where our priorities are investing in growth as much and so we put the balance sheet in a position to act on the four pillars whether it's investing in our assets through market optimization, investing more in R&D, and then obviously the acquisition pillars we look at that and we actively evaluate - or are actively evaluating opportunities as they come along. But as we’ve said before, if we can't find opportunity to reinvest that money in a reasonable timeframe, we will have to consider other alternatives to drive returns for the shareholders.
Paul Quinn
Thank you.
Operator
Thank you. Our next question comes from the line of [indiscernible] with Sidoti & Company.
Please proceed with your question.
Unidentified Analyst
Good morning. Appreciate the time.
I just wanted to skew the conversation a little bit kind of thinking longer-term beyond the core of business. The Analyst Day, you provided a lot of rich detail on how you're thinking about things like acquisition and then I think you gave us a lot of details on the lignin as well.
Just wondering, it's just been two months since Analyst Day, has anything changed on, first, the lignin on some of the core markets you are targeting? I think you highlighted construction Ag and feed, when you guys spoke with us and then for the acquisitions, it seems like that conversation on Analyst Day, there’s a lot of talk about maybe the private label tissue and then, apart from the market dynamics, excited about is the non-will.
Has anything changed - I know it’s been two months, but anything changed on what you seen with that regard. Any new updates for us?
Thanks.
Paul Boynton
So just on the lignin, our focus has not changed on that with our partner it stays in construction Ag and feed. So that is the focus of that business.
I will say that that project LignoTech Florida is proceedings right on schedule. So we are very pleased with the progress on the construction side.
We are still on plan to have that facility up and running mid-2018. So, no change in that whatsoever.
On the acquisition front, Dan, I would tell you that we actively look at opportunities as we see them both reactively and proactively. And when we have something to tell people, we will.
But I think that that the key is we are focused on those areas that are close to home that we can find synergies, whether it's in the cellulose, specialty chemical sector, but we see very strong returns opportunity for shareholders and real synergy potential to drive through that and grow the business. So, not a lot of change that I can talk about, but I think when I tell you is the focus is close to home and finding synergistic opportunities to grow this business.
Unidentified Analyst
Thank you.
Operator
Thank you. Our next question comes from the line of John Babcock with Bank of America/Merrill Lynch.
Please proceed with your question.
John Babcock
Just one quick follow-up. I was just recalling that one of your peers obviously announced that they are planning on adding a little bit more capacity than expected at their facility over Scandinavian.
Just want to get a sense from you as to where you think that capacity might land.
Paul Boynton
I assume you mean the Norwegians and their announcement. Look, I can't see where that’s going to land, and I don't say that it's anything that we look at this point and say that’s of concern.
We compete out in on the global market against them all the time, and have for decades. So no, I think you’d have to ask that question to them, John, not from me.
Operator
Thank you. We've come to the end of our time for questions.
I’ll turn the floor back to Mr. Boynton for any final remarks.
Paul Boynton
Thank you. There are no more questions at this time.
I’d like to thank everyone for joining us today. We're off to a good start for the year.
We remain focused on executing on our strategic pillars and in providing long-term value creation for our stockholders. We look forward to updating you on our progress in a timely manner as we move forward.
Thank you.
Operator
Thank you. This concludes today's teleconference.
You may disconnect your lines at this time. Thank you for your participation.