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Rayonier Advanced Materials reports second quarter results

Second quarter 2018 adjusted net income was $39 million, or $0.60 per diluted common share, compared to $9 million, or $0.11 per diluted common share in the second quarter of 2017. Second quarter 2018 adjusted net income and diluted earnings per share are adjusted for a gain on bargain purchase associated with the acquisition of Tembec Inc. (Tembec). Adjusted net income and diluted earnings per common share amounts for second quarter 2017 are adjusted for transaction costs and an unrealized gain on a derivative instrument both associated with the acquisition of Tembec.

Year to date 2018 net income was $78 million, or $1.22 per diluted common share compared to $14 million, or $0.18 per diluted common share for the first half of 2017. Earnings increased in the current year due to the November 2017 acquisition of Tembec. Year to date adjusted net income was $63 million, or $0.99 per diluted common share, compared to $18 million, or $0.26 per diluted common share in 2017. Year to date 2018 adjusted net income and diluted earnings per share are adjusted for a gain on bargain purchase associated with the acquisition of Tembec. Adjusted net income and diluted earnings per common share amounts for the first half of 2017 are adjusted for transaction costs and an unrealized gain on a derivative instrument both associated with the acquisition of Tembec.

“With strong demand in our pulp and forest products segments and improved performance in our manufacturing operations, we delivered solid earnings for the quarter, underscoring the earnings potential of the new portfolio,” said Paul Boynton, chairman, president and chief executive officer. “We remain committed to a disciplined and balanced capital allocation program as evidenced by our investment of $23 million in strategic capital projects, debt reduction of $12 million and $29 million of capital returned to shareholders through dividends and common stock repurchases through the first half of the year.”

Second Quarter and Year to Date Operating Results
In the following tables, the company’s net sales and operating results for the second quarter and first half of 2018 are compared against the prior year comparable period results which preceded the acquisition of Tembec. In addition, the 2018 net sales and operating results are compared against the combined net sales and operating results which assume that the company’s prior year comparable period had been combined with Tembec’s.

High Purity Cellulose
Operating income for the three and six month periods ended June 30, 2018 decreased over the comparable 2017 periods by $3 million and $17 million, respectively. These decreases were primarily driven by lower cellulose specialties prices and volumes from the Company’s historical operations partially offset by the operating income from the Tembec acquisition.

On a combined basis, operating income for the three and six month periods ended June 30, 2018 decreased over the comparable 2017 periods by $15 million and $44 million, respectively. These decreases were primarily driven by the expected decrease in cellulose specialties sales prices and volumes combined with higher chemical and energy costs. The increased chemical and energy costs were partially offset by increased productivity as well as transformation and synergy savings during the periods.

Forest Products
Operating income for the three and six month periods ended June 30, 2018 increased over the comparable 2017 periods by $17 million and $27 million, respectively, driven by the Tembec acquisition.

On a combined basis, operating income for the three and six month periods ended June 30, 2018 increased $7 million and $11 million, respectively, primarily due to an increase in lumber prices of 31 and 30 percent, respectively, partially offset by lower sales volumes, duties imposed on shipments to the U.S. and higher costs for wood and transportation.

Pulp
Operating income for the three and six month periods ended June 30, 2018 increased over the comparable 2017 periods by $26 million and $49 million, respectively, driven by the Tembec acquisition.

On a combined basis, operating income for the three and six month periods ended June 30, 2018 increased $16 million and $34 million, respectively, primarily due to improved high-yield pulp prices of 29 and 32 percent, respectively.

Paper
Operating income for the three and six month periods ended June 30, 2018 increased over the comparable 2017 periods by $7 million and $10 million, respectively, driven by the Tembec acquisition.

On a combined basis, operating income for the three and six month periods ended June 30, 2018 decreased $5 million and $13 million, respectively, primarily due to higher pulp costs in paperboard, which benefits our Pulp segment, duties imposed on U.S. shipments of newsprint and increased amortization and depreciation related to the purchase accounting associated with the acquisition of Tembec. These benefits were offset in part by higher newsprint sales prices and volumes and higher paperboard sales prices.

Transformation and Synergy Savings
During the first half of 2018, the company achieved approximately $18 million of its $40 million cost transformation target for 2018, excluding one-time costs. Approximately $11 million of the savings were related to the synergy activities and are associated with reduced corporate expenses and enhanced procurement practices. Synergy savings required approximately $1 million in one-time costs to achieve these results. The company now expects to exceed its Cost Transformation target for 2018.

Non-Operating Expenses
Interest expense was $15 million for the second quarter of 2018 and $30 million for the first half of the year. The increases of $6 million and $12 million over the prior year three and six month periods, respectively, were due to higher debt balances and interest rates associated with the debt used to finance the acquisition of Tembec. Interest income and other expenses, net, increased in the current year primarily due to the favorable impact of Tembec’s pension plans on other components of net periodic pension costs.

Non-operating expenses also includes a $15 million adjustment to the gain on bargain purchase associated with the acquisition of Tembec in the fourth quarter of 2017. The adjustment was recorded in the second quarter of 2018.

Income Tax Expense
The year to date effective tax rate was 27 percent for 2018, compared to 42 per cent in the prior year period. The current year to date effective rate differs from the current federal statutory rate of 21 per cent primarily due to different statutory tax rates of foreign operations and certain additional U.S. taxes on foreign derived income implemented as part of the Tax Cut and Jobs Act enacted in December 2017, partially offset by a nontaxable bargain purchase adjustment included in pretax income. The prior year to date effective tax rate differed from the then enacted federal statutory rate of 35 per cent primarily due to the unfavorable tax impact of the accounting for the 2014 employee incentive stock program which did not pay out as a result of not meeting the required performance criteria.

Cash Flows and Liquidity
Year to date, the company generated operating cash flows of $89 million and adjusted free cash flows of $48 million. Working capital used $67 million of cash as a result of higher inventories, increases in deferred costs related to the annual maintenance outages at all four high purity plants, and the timing of customer incentive and prepayments. Working capital is expected to improve during the second half of the year. Year to date, the company invested $64 million in capital expenditures which included approximately $23 million of strategic capital.

The company paid down $12 million of debt year to date and ended the quarter with adjusted net debt of $1,149 million and $297 million of total liquidity, including $80 million of cash and $217 million available under the revolving credit facility after taking into account outstanding letters of credit. The Company also returned $29 million of capital to shareholders through dividends and stock repurchases.

Outlook

High Purity Cellulose
On a combined basis, cellulose specialties prices are anticipated to decline approximately 4 percent in 2018, reflecting an improved mix, and sales volumes are expected to decline approximately 2 percent, dependent on revenue recognition timing. Commodity volumes are expected to be comparable to the prior year. Profitability is expected to improve in the second half of 2018 as the annual maintenance outages have been completed at all four facilities and synergy benefits continue to favorably impact results. Results in the second half of the year are expected to represent approximately 55 percent of the annual EBITDA.

Forest Products
Lumber prices are expected to decline from the recent historical high prices, but profitability is anticipated to remain favorable as solid demand from the U.S. housing market is expected to continue. Duties on lumber sales into the U.S. are anticipated to affect approximately 50 percent of the Company’s sales in this segment and reduce EBITDA by approximately $30 million during 2018.

Pulp
High-yield pulp prices are expected to remain near historically high levels in the near-term and moderate by year end. Strong demand for pulp, reduced recycled fiber imports to China, and supply side issues in the global pulp industry continue to support pulp prices. With no significant new capacity expected in the pulp markets in the near future, supply-demand dynamics indicate continued strong market conditions.

Paper
Paperboard markets are expected to remain stable, though peak pulp prices which benefit the Company’s Pulp segment will negatively impact margins. In newsprint, reduced industry production capacity and duties have led to higher prices which have effectively offset the impact of the duties. Profitability is expected to remain stable in the near-term. Additional supply or a more rapid decline in demand due to the duties could negatively impact newsprint results.

Capital Allocation and Investment
The Company anticipates that it will spend approximately $100 to $110 million in maintenance capital expenditures across its businesses in 2018. In addition, the Company anticipates spending approximately $45 million on high-return strategic projects in 2018. These strategic opportunities are predominantly focused in the High Purity Cellulose and Forest Products segments with an average pay-back of less than 2 years.

“With elevated commodity prices, the completion of planned maintenance outages at all four high purity facilities, accelerating synergies and the weighting of EBITDA toward the second half of the year for the high purity business, we expect to deliver solid results for the remainder of 2018,” Boynton stated. “We will continue to allocate capital to high-return investments, debt reduction and stock repurchases.”