I have been working in corporate finance for more than 30 years and I worked in the dissolving wood pulp (DWP) industry from 2010 to 2013. At that time the dominant player in the market was Rayonier, now Rayonier Advanced Materials (RYAM).
Over the past decade I was vaguely aware that RYAM was no longer the dominant market player and indeed by many accounts from colleagues still active in DWP, RYAM had completely lost its way.
The turning point in the company’s fortunes appears to have been the decision to convert one line of commodity grade production to enable specialty grade production. This decision was made in 2011/2012 and was ultimately reversed with a loss of $400 million, but the damage done was far greater than the loss of the $400 million.
Arguably, the failure of the C-Line investment was the impetus for the $870 million acquisition of Tembec in 2017 which has also proved to be a huge mistake.
The C-Line failure may also have been an unspoken part of the rationale for splitting the company into two parts in 2014, Rayonier (RYN) and Rayonier Advanced Materials, (RYAM). As a small digression the name chosen for RYAM seems to be misleading as they haven’t produced anything new or advanced in the way of materials in the past decade.
As Adam Smith wrote, “There is a great deal of ruin in a nation;” and this aphorism applies to companies as well, although with a truncated timeline. While the rise and fall of nations may span centuries, with a company, the timeline is much shorter.
I began to look at RYAM in earnest in early August of this year when I was ‘triggered’ by a comment from an equity analyst at RBC Capital markets, Paul Quinn:
“While the business (RYAM) only generated $121 MM of EBITDA last year, recall that these same mills generated $486 MM of EBITDA in 2012…. If Rayonier can recover some of that magic, the shares would trade dramatically higher”
The prima facie case that this statement is absurd should be apparent but, sadly, is perhaps not. For Quinn’s statement to be remotely plausible you would have to:
1. Believe that the decade long downward slide in global cigarette consumption will be reversed and that cigarette demand, and hence the demand for acetate, will increase.
2. Believe that RYAM’s competitors, notably Bracell, Borregaard, Georgia-Pacific and others are going to cease to compete with them rather than continuing to take market share away from RYAM as they have done consistently over the past 8 years.
3. Believe that RYAM’s largest customers will agree to pay higher prices, in some cases 50% more than their current prices, to get back to 2012 price levels.
4. Believe that in a time of rising inflation RYAM’s wood, energy, chemical and labour costs would fall back to 2012 levels.
5. Believe that RYAM could achieve improvements in sales prices and reduce their operating costs with little or no investment in technology and fixed capital expenditure.
6. Believe that a CEO and management team that have delivered serial failures are the people who could reverse RYAM’s precipitous decline.
I favour empirically derived and disciplined analysis over Quinn’s seemingly irrational faith.
I also favour audited accounts and cash flows over magic; while Quinn posits that RYAM , “….can recover some of the magic…and the stock will trade dramatically higher” suggesting a 40% rise to $10 per share in the near-term, I expect a very different outcome.
I found the vacuity of Quinn’s assertions of a return to 2012 to be professionally offensive, and I was dismayed that investors would be fed this type of advice. I think that investors deserve better than this from people who identify themselves as industry experts, and on my website www.RYAMValueDestruction.com I have tried to show what “better” looks like.
I took Quinn’s 2012 reference as my chronological starting point. 2012 was definitely the highwater mark for the company’s dissolving wood pulp business and it was also the year when the current CEO, Paul Boynton, took control.
My researches quickly revealed the extensive failures of Boynton and his colleagues at RYAM since 2012; it wasn't so much a single event or action, it was rather a pattern of actions, inactions and failed choices that led to Rayonier going from the market leader in DWP in 2012 when Boynton took over, to its present predicament.
Key events in that process include some obvious failures and some less obvious ones:
- The conversion of the C Line at the Jesup mill from fluff production to specialty grade DWP production which was reversed within 24 months of the conversion’s completion at a cost of more than $400 million.
- The acquisition of Tembec in 2017 at a cost of $870 million.
- The deterioration in customer relations that produced a lawsuit from Eastman, their largest acetate for cigarette tow client.
- The deterioration in customer relations that resulted in the loss of their third largest acetate for tow client, Celanese in 2013, information which RYAM withheld from the market at the time of the June 2014 split of the company.
- Customer and investor lawsuits.
The less obvious failures at RYAM over the past decade include:
- A loss of both volumes and market share in their key acetate for tow market, primarily to Bracell, Borregaard and Georgia Pacific.
- A rise in costs which has taken RYAM from being amongst the lowest cost DWP producers to amongst the highest cost producers.
- A stated strategy in 2012 to become a 100% specialty grade supplier in the DWP markets to the reality in 2021 where at least half of their production remains in the commodity markets.
- A deterioration in the ongoing capital investment and the maintenance of its DWP facilities with the result that their operating production rates have dropped from the 99% level to as low as 89% in recent years. To regain their prior operating levels will require significant investment and technology upgrades.
- Trust and credibility, difficult to measure but anecdotally it is hard to find a single client that has a good word to say about the company’s management.
- Employee morale, in large part this is driven by the deteriorating self-image of moving from being the industry leader to an also-ran, the animosity regarding the pay levels of the senior executives and the dismay for those who invested in RYAM stock in their 401K’s, often at prices above $20 a share, to be sitting on significant losses on their stock while management awards themselves more options at $2.50 a share, as they did in 2020.
The cumulative effect of these failures can be seen in tRYAM's financials as the trends are clear and they are all far worse today than they were when Boynton became CEO in 2012.
In 2014, Boynton split Rayonier into two separately listed companies of roughly equal value. Since then, the part that Boynton runs, RYAM, has seen its share price decline by 82% while the ongoing Rayonier business (RYN) without Boynton has an equity value of $5.4 billion, more than 10x that of RYAM.
8. In 2012 Rayonier paid over $200 million in dividends. In 2019 RYAM ceased paying any dividends and are unlikely to ever pay another dividend. By contrast, RYN paid $150 million in dividends for 2020.
For delivering these “results” RYAM’s CEO, Paul Boynton, has received more than $56 million in compensation since 2014 alone. His compensation from Rayonier between 2012 and 2014 is not included in this figure, nor is his 2021 compensation. These compensation numbers are found in RYAM’s mandated 10-K and 10-Q filings. Over the entire span as the CEO of Rayonier and then RYAM, I expect his compensation to date is over $70 million.
Moreover, if there was a change of control in the company or Boynton was dismissed, he would be in line for a further payment of at least $36 million more. Some might think these numbers excessive in return for an 82% reduction in the RYAM share price and for ending dividends in 2019.
The required SEC disclosures show that RYAM’s management team, not just Boynton, are the highest paid management team in the dissolving wood pulp business, not just the highest paid in the US, but the highest paid in the world.
In the past month I have undertaken extensive research into the company, the dissolving wood pulp market and, from their own publicly available financial statements, developed my own financial models, all of which I am openly sharing on www.RYAMValueDestruction.com to enable debt and equity investors to perform the analysis that the equity analysts don’t provide them with.
My own valuation of RYAM demonstrates that:
· The economic value of RYAM’s equity is zero.
· The $1.06 billion of publicly traded debt is overvalued by at least 30%; and
· There is a high risk that the company will go into Chapter 11.
On the latter point the key factor is that with the sale of the lumber assets the remaining assets at RYAM are incapable of generating earnings that are sufficient to meet the debt liabilities.
Somewhat like most Western governments, RYAM’s debts are not sustainable. However, unlike a government, RYAM doesn’t have a printing press nor a central bank.
RYAM management obviously realise that their debt burden is unsustainable and are trying to deflect investor’s attention from the facts of their balance sheet. RYAM has made numerous attempts to mislead investors about their true debt position and that this is not their first rodeo was clearly expressed in the shareholder lawsuits against the company; which are addressed on my website.
While the lawsuits focused on the run up to the 2014 IPO of RYAM and its aftermath, we have much more recent examples from RYAM’s investor presentation of August 4th, 2021, below:
What’s wrong with this picture?
The first issue is the definition of “Total debt”: of $1,081 million. This figure is very different than the total long-term liabilities in RYAM’s 10-Q filing which show:
Senior Secured Notes due 2026 at a fixed interest rate of 7.625% $500 million
Senior Notes due 2024 at a fixed interest rate of 5.5% $496 million
Canadian dollar, fixed interest rate term loans with rates ranging from 5.5% to 6.86% with maturity dates ranging from July 2022 through April 2028, secured by certain assets of the Temiscaming mill $73 million
Long-term Environmental Liabilities $162 million
Pension and other Post retirement Benefits $247 million
Deferred Tax Liabilities $24 million
Total Long-Term Liabilities $1,525 million.
Difference: $1525 - $1081 = $444 million
The difference between RYAM’s investor slide of August 34d, 2021 and the 10-Q filed for the same period is $444 million, ($1525 - $1081 = $ 444 million).
Are RYAM suggesting that the $444 million of long-term liabilities that didn’t make it to their presentation slide are going to disappear? These claims by pension and health care beneficiaries and for environmental liabilities rank above any claims on the company’s assets from equity holders and they can’t just will them away.
Does the current equity market value for RYAM of $450 million, reflect this missing debt component? It doesn’t appear so.
RYAM may argue that their slide is net debt and not long-term debt, but that would be specious, as neither they nor I am looking at the working capital or other debt which is offset by current assets. However, in my model I do credit them with having $400 million of cash from the performance of the lumber business this year and the cash and debt relief from closing the sale of the lumber business. While I may have overstated their cash balance, as as in the rest of my analysis, I have tried to give RYAM the financial benefit of the doubt.
The second issue on this slide is that the green bars from cash on the balance sheet and cash from the sale of the forestry business are all presented as though they are going to be applied to reducing the debt load; but the company has not made that commitment and it is unlikely that they can afford to.
In the printed material and transcripts from their investor call, there were no stated commitments that RYAM planned to redeem or retire any of the debt outstanding before maturity nor reduce their pension and health underfunding. The recent announcement that $150 million of debt is being redeemed is rather small beer. The remaining $850 million in publicly traded debt won’t be significantly reduced prior to its due dates in 2024 and 2026. As a result the target net debt of $650 million doesn’t seem credible.
Also, the financial statements reveal that there has been a significant deterioration in the operating performance of the company’s DWP assets, from 99% to as low as 89% as an operating rate. This decline in recent years suggests that RYAM has significantly under-invested in their property, plant and equipment and failed to introduce new technologies in any of their 4 core DWP mills. This underinvestment would also partly explain the deterioration in their profit margins.
I suggest that any equity analyst worth their salt would ask what the application is of these funds rather than simply accepting the notion that the debt is going to be reduced and that the cash from the recently sold lumber business is simply going to stay in the bank. However, a review of the August 2021 analyst call transcripts reveals that no questions of substance were asked about this “net debt” picture.
The third issue with this slide is the timeline “near-term”, is deliberately misleading when the primary debt reduction or rescheduling won’t occur until 2024/2026.
The fourth issue I have with this slide is the assertion that the understated debt level of $650 million would represent a debt multiple of 2.5x EBITDA. But their 2021 EBITDA - not RYAM’s spurious use of “adjusted EBITDA” - for continuing operations in 2021 is likely to be in the $120 million range. If RYAM achieves that $120 million level then even against the highly suspect $650 million figure the debt multiple would be between 5 times and 5.5 times, not 2.5x.
RYAM’s slide with their improbable 2.5x multiple is asserting that the EBITDA from the remaining assets will reach $250 million in the “near-term”. To say that this $250 million target is improbable would be an understatement.
Using my optimistic forecast for an EBITDA of $160 million in 2022 their EBITDA to long-term debt multiple – minus cash on hand - would be around 7 times EBITDA.
Even in the unusually tolerant corporate debt markets of today a 7x multiple would be hard to finance.
In their defence, RYAM may attempt to assert that my 2022 forecast is unfair to them or understates their prospects. If they tried to make this case it would quickly fall apart as in my presented scenario I credit them with:
· Delivering a nearly 9% price increase in specialty grades – a complete reversal of pricing trends over the past 8 years,
· Increasing their specialty grade volumes – again, a reversal of the trends over the past 8 years;
· Increasing their commodity grade prices – at a time when the commodity price boom is losing steam;
· Improving their profit margins - at a time when their own presentation shows that increased costs are taking more than 90% of any price increases.
Even with these optimistic assumptions in my model, my valuation puts the equity value at less than zero. By any evaluation, this is a "best-case" scenario and the reality is likely to be substantially worse as the likelihood of RYAM achieving the all of the above is rather remote.
If they don’t achieve all of these targets the result is, obviously, even lower.
I don’t expect anyone to take my word for this or to blindly accept my analysis in the manner that many seem to have blindly accepted the assurances in RYAM’s investor materials. Instead, I invite you to check my work for yourself. To facilitate this I have documented how I arrived at this valuation and provided my financial models for readers to review in detail. Do your own analytical work and see what value you reach. I would appreciate you sharing your insights with me and other readers on this site to see how our values matchup.