RYAM Value Destruction
I have been working in corporate finance for more than 30 years and I have also had the opportunity to work 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 the DWP market, 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 2011/12 and was ultimately reversed with a loss of $400 million but the damage done was far greater than the loss of the initial $400 million.
Arguably, the failure of the C-Line investment was the impetus for the C $1 billion 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 significant or new 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, perhaps not to everyone. 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 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 unusual belief system.
I also favour audited accounts and cash flows over magic; while Quinn suggests that RYAM , “….can recover some of the magic…and the stock will trade dramatically higher” he suggests a 40% rise to $10 in the near-term, I expect a 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 with this website I have endeavoured 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 RYAM research quickly revealed the serial failures of Boynton and his colleagues at RYAM since 2012, including:
1. RYAM has seen a persistent decline in specialty grade volumes and are now half commodity and half specialty grade dissolving wood pulp production – when Boynton took over in 2012 his oft-repeated strategy was to be 100% specialty by 2018 and he has wasted hundreds of millions in pursuit of this now abandoned strategy.
2. A disastrous deterioration in customer relationships – the two most obvious examples of these are the lawsuit by their number one customer, Eastman, in 2015 and the complete loss of their third largest customer, Celanese, in 2014.
3. Since Boynton became CEO, RYAM has seen a 35% reduction in the price of its key acetate pulp product.
4. At the same time prices were falling, production costs were rising and RYAM is now among the highest cost producers in the DWP business.
5. After investing $400 million in the conversion of the commodity producing C Line at Jessup to the production of specialty grade products, on July 30th, 2015 Boynton announced that RYAM was going to spend $25 million to convert that capacity back to commodity grade production.
6. In 2017 Boynton acquired Tembec for C $1 billion and 4 years later he has sold most of it off for less than $400 million while retaining four money losing businesses from Tembec.
7. 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.
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 since then with RYAM, I expect his compensation to date approached $70 million.
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 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, 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 this site 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 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. While the company recently reduced its traded debt by $150 million this makes little impact on how far under water they are.
Similar to the debt of most Western governments with unsustainable levels of debt, RYAM’s debts are also not sustainable. However, unlike government’s RYAM doesn’t have a printing press nor a central bank, nor a captive population to deal with these debt burdens.
RYAM management obviously realises that their debt burden is unsustainable and are trying to deflect investor’s attention from the facts of their balance sheet. This effort was clearly in evidence in late September with their “Investor Outreach” publication which contained no new information, just platitudes. As RYAM has made numerous attempts to mislead investors about their true debt position and they have been accused of misleading investors before - as clearly expressed in the shareholder lawsuits against the company which are shown on this site - we don’t see their “outreach” as being sincere.
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 3rd, 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 3rd, 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 you 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 credit them with having both excess cash and having reduced the traded debt by $150 million after accounting for the proceeds of the sale of their lumber business. While I may have overstated their cash balance, as with all things in my analysis, I try 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 numbers appear to be overstated. Further, RYAM has underinvested for years and, arguably, they needed the cash from the sale of the lumber business to fix problems at their four dissolving wood pulp mills.
In the printed material and transcripts from their investor call, there were no stated commitments that RYAM planned to reduce their pension and health underfunding.
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 would 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 significant 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.
A 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 7 multiple would be very 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 base case scenario I credit them with:
· Delivering a 10% price increase in specialty grades – a complete reversal of pricing trends over the past 8 years,
· Increase their specialty grade volumes – again, a reversal of the trends over the past 8 years;
· Increase their commodity grade prices – at a time when the commodity price boom is losing steam;
· Improve their profit margins - at a time when their own presentation shows that increased costs are taking 90% of any price increases.
Even with these optimistic assumptions in my model, my valuation puts the equity value at zero.
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 if our values matchup with one another.
About Me:
I have more than 30 years corporate finance experience and I own and manage a company specialising in business valuation and the valuation of intellectual property...
All RYAM-Related Content:
Debt Analysts Come Up Short - Benjamin Graham III
(NOV 17)Lies and Deflection - Benjamin Graham III (NOV 15)
First they came for Specialties, now it is Commodities (NOV 13)
Bubbles Collapse (NOV 10)
RYAM Q3 Results & Updated Model (NOV 6)
Pump & Dump - Benjamin Graham III (NOV 6)
It’s More Than The Debt (OCT 14)
RYAM Report Card (OCT 11)
Junk Loan Defaults Worry Markets (SEP 6)
Prices fall, where will this end? - Benjamin Graham III (SEP 5)
RYAM’s Balance Sheet Woes - Simply Wall Street (AUG 29)
Trevor - Benjamin Graham III (AUG 12)
Another Quarter, Another Loss - Benjamin Graham III (AUG 4)
Dead Cat Bounce - Benjamin Graham III (AUG 2)
8 Times EBITDA to Debt = RYAM Insolvency - Benjamin Graham III (JUL 6)
Just Go! - Benjamin Graham III (JUN 18)
RYAM’s EBITDA Sleight of Hand (JUN 18)
Have they no shame? - Benjamin Graham III (JUN 6)
Does RYAM have the worst board in the USA? - Benjamin Graham III (JUN 2)
RYAM flips the bird to shareholders - (JUN 1)
Plus Ca Change (MAY 31)
Deflection To Hide Decline - Edward Mills (MAY 30)
Is This All You’ve Got? - Kenichi OhMy (MAY 30)
Chatham Sells 100% of RYAM Shares - Benjamin Graham III (MAY 20)
How Did You Go Broke? MAY 14)
A Nothing Burger (MAY 13)
RYAM - Morgan and Palumbo should hang their heads in shame (APR 21)
A Case Study In Value Destruction - Fisher International (MAR 15)
RYAM - All fluff all the time? - Edward Mills (MAR 3)
Paul Quinn surprised by underperformance - Andy Gee (MAR 1)
It’s the RYAM Management - not the Market - Edward Mills (FEB 28)
RYAM - A new vision or cognitive dissonance on steroids? - Kenichi Ohmy (FEB 28)
RYAM dissapoints on every measure, but the share price increases? - Benjamin Graham III (FEB 27)
Paul Quinn RYAM Valuation Model Predictions 2023 - 2026 (FEB 27)
2022 Valuation Model Update For RYAM - Andy Gee (FEB 27)
2022 RYAM Valuation Model Notes - Andy Gee (FEB 27)
RYAM - The Flogging Will Continue (FEB 24)
RYAM - The Noose Tightens (JAN 31)
RYAM Down Again (DEC 20)
Standard & Poor Calls It Wrong Again (NOV 25)
RYAM - The Gloss Is Coming Off (NOV 20)
RYAM In Their Own Words (NOV 3)
RYAM Q3 Results Due November 2. (OCT 26)
RYAM Won’t Get Fooled Again (OCT 22)
Disclosure:
I have no stock, option or similar derivative position in any of the companies mentioned, nor have I ever had any and I have no plans to initiate any such positions in the future.