Investor Spin

RYAM over the past decade has engaged in a variety of practices to obscure its strategies, operating performance and to influence investors, suppliers and customers with information that is, at best, misleading. This appears more to be a habit than a one-off. To illustrate this behaviour I have selected four case examples, all since Paul Boynton became CEO, and they are:

• Inflating Investor Expectations Of Future EBITDA.

• The Failed C-Line Investment

• The Tembec Boiler Failure And Disclosure

• The DWP Operating Failures, Falling Prices And Rising Costs

Elsewhere on this site our focus is on the current and future prospects of the business and what the value of the equity and debt are. Here our focus is on the perfidy of the management. When a company, like a person, makes a mistake it is often better to issue a mea culpa, put it behind you and move on. That’s not what RYAM under Paul Boynton does, they favour spin, deflection, and sometimes worse rather than admitting fault. 

These are far from the only examples and I invite readers to share their own examples in the Forum.

In the course of my research into RYAM and some of the misleading and sometimes downright wrong statements and guidance given by Boynton and his team, I was struck by this particularly egregious example from the RYAM Earnings Call on May 8, 2018.

“Our first quarter results demonstrate the benefits scale and diversification has resulting from our acquisition of Tembec. Importantly, the integration is proceeding in line with our expectations, and we remain confident in our goal of delivering $75 million of synergies and a total of $155 million of incremental EBITDA growth by the end of 2020….”

RYAM’s 2017 EBITDA was $478 million, the highest in its history (and incidentally the highest it would ever achieve). Boynton’s claim that the company would generate an additional $155 million of EBITDA by 2020 meant that its 2020 EBITDA would be around $633 million. That is a compound annual growth rate (CAGR) of about 10%, not too shabby at all. But let’s look at what actually happened. The actual EBITDA numbers are set out in the table below and the outturn EBITDA of $171 million in 2020 represents a negative compound annual growth rate of -29%. Quite a far cry from Boynton’s prediction, but nobody has picked him up on this. Why is that?

RYAM’s dissolving wood pulp (DWP) mill in Jesup, Georgia has a rated capacity of 330,000 tonnes of specialty grade and 245,000 tonnes of commodity grade product. 

In 2020 RYAM’s average price for specialty grade sales was $1,288 and for commodity grade sales, $ 615 per tonne. This relationship has long been present for good reasons in that specialty grade product is harder to produce, costs more to produce and reduces the yield from the production line. 

In 2011/12 RYAM’s predecessor company, Rayonier, with its CEO, Paul Boynton took the decision to convert the “C-Line” at Jessup from the production of fluff pulp to the production of specialty grade pulp, primarily, acetate to be used in the production of cigarette filters. 

In 2012 the C-Line was capable of producing 245,000 of fluff pulp and if the line’s production processes were converted to the production of specialty grade DWP it could produce 190,000 tonnes of, primarily, acetate for cigarette filters.

At the time that the investment was being considered RYAM had enjoyed a period of low competition in the acetate for cigarette filters market since 2006 with the result that RYAM then had approximately a 65% market share globally in the production of acetate with acetate sales of approximately 450,000 tonnes in 2012. 

Rayonier and RYAM attributed their market dominance to superior management and production capabilities but others might say that the dominance was a function of a lack of competition. The provision of acetate for cigarette filters in the 1990’s and early 2000’s was an almost exclusively US marketplace. The core producers were Rayonier, International Paper, Weyerhaeuser and Georgia Pacific. To this list by 2012 we would add Bracell, Borregaard and Nippon.

When companies face increased competition, they don’t normally expand their production volumes, as RYAM planned to do, for fear of undermining their own pricing by creating excess supply. That should have been obvious in 2010/11/12. Regardless of the increasing competitive threats to both price and volumes of acetate in a market that was more likely to decline than grow, filters for cigarettes, RYAM plunged forward with the C-Line expansion. 

It was quickly apparent that the C-Line conversion was a mistake, but Boynton didn’t admit the mistake, fix it and move on. Instead, they doubled down on the mistake by claiming that 70%, then 80% of the output from the C-Line was pre-sold. 

Boynton and his colleagues chose to tell their investors, customers, and competitors that their volumes were selling and selling at current prices in 2011 and 2012. Neither was true. 

Their misrepresentations began to unwind with the loss of their third largest customer, Celanese as a customer and culminated in the Eastman lawsuit against them. 

In late 2013, Rayonier, acknowledged that the market was slowing but that even with this slowing their total tonnage of specialty grades in 2014 would be 25,000 to 40,000 tonnes higher than it was in 2013. But that’s not what happened, in 2014 they sold 8,000 tonnes less than in 2013, not 40,000 tonnes more. 

In its 2013 Q3 10-Q filing RYN said:

“We are currently negotiating 2014 prices with our customers. Because of the market conditions noted above, our negotiations with some customers have been more difficult than in previous years. Additionally, we are negotiating a new agreement with a customer whose existing multi-year agreement expires at the end of 2013. This customer’s volume in 2013 was approximately 75,000 tons of cellulose specialties. Although this customer indicated its intention to enter into a new multi-year agreement with 2014 volumes of 50,000 tons, we have been unable to reach agreement on a final contract to date. If we are unable to reach agreement, or can only reach agreement on lower volumes, our 2014 operating results would likely be adversely affected.”

By the time of this statement the customer they referred to, Celanese, was already making it clear to RYN that it was likely to take its business elsewhere. In spite of this, in the run-up to the June 2014 flotation of RYAM, Rayonier continued to maintain that all was well and that they would get the 50,000 multi-year contract that they referred to in their filings. 

But they didn’t get that contract and they failed to adequately warn investors about what they already suspected if they didn’t already know.

RYN led the market to believe that their growth would be lower than expected but they didn’t give the full story which meant that they weren’t going to have less growth, they were going to see a decline.

“As a result of these recent market changes, it is possible that our 2014 incremental cellulose specialties volume may only be approximately 25,000 – 40,000 tons versus the prior estimate of 90,000 tons.”

In February of 2014 - again in the run-up to their IPO as RYAM - RYN again stated publicing that it would increase their 2014 specialty grade sales by 30,000 to 50,000 tonnes. As contracts in the specialty grades are negotiated and signed in the prior year, normally by November of 2013, it is implausible that in February of 2014 RYN didn’t know that they were going to have a loss of acetate volumes in 2014. 

In February of 2014 they either had signed a contract with Celanese and others for these volumes or they hadn’t. Obviously, as the 2014 results show, they hadn’t signed these contracts and couldn’t plausibly make the statement in their February 28th, 2014, 10-K filing:

“We have achieved important milestones to transition Performance Fibers to a specialty chemical company with an excellent foundation for long-term growth and stability. We have recently unlocked significant growth potential with the completion of our cellulose specialties expansion project, which increased production capacity of high-value cellulose specialties at the Jesup mill by approximately 190,000 metric tons. Compared with 2013, Performance Fibers is expected to sell an additional 30,000 to 50,000 metric tons of cellulose specialties in 2014 as it commences the multi-year ramp-up to full cellulose specialties production.” 

By July of 2015 it had become impossible to maintain these fictions and RYAM issued the now infamous “Strategic Repositioning” press release indicating that the C-Line would be returned to commodity grade production at a further expense of $25 million for a total investment in excess of $400 million to take them back to where they started three years earlier. 

When the truth of the folly of the C-Line expansion became unavoidable markets reacted as the shares dropped from the IPO level of $40 to below $7 by August of 2015.

In late January or early February 2019 a significant boiler problem emerged at Temiscaming which caused the plant to shut down for as much as a month. 

During the February 14th, 2019 equity analyst call, in parallel to the 2018 annual results release, the RYAM management team chose not to mention the boiler problem at Temiscaming.

At the March 7th, 2019 Investor Day, RYAM’s management, again, chose not to inform their investors of the problem at Temiscaming and in fact in the printed materials they went out of their way to say “The Temiscaming asset is a really good asset….” As we don’t think that Temiscaming has made a cash profit in at least 3 years we might have a different definition of what a “good asset” is from an investor’s perspective. 

Finally, during their equity analyst call on May 9th, 2019, RYAM acknowledged the problem at Temiscaming and that it would reduce their 2019 expected EBITDA by $10 million. 

During the call the CEO, Paul Boynton stated, “ It’s a 5-year old boiler, put in by a very reputable builder but quite honestly a very poor boiler design….we found another exact design boiler that another producer had that they had to go through the exact same thing a couple or three years ago.”

At the time of the problem RYAM had owned Temiscaming for about 15 months. A flaw in the boiler design would have been something that would normally have been found in the acquisition due diligence process but no one challenged Boynton on this failure, even though RYAM had paid millions of dollars in fees to acquire Tembec.

The equity market reaction to this news was pronounced as shown below.

As the chart shows the May revelation about the Temiscaming boiler problem saw an immediate fall in the share price and a large increase in the volume of shares traded in the days around the revelation. 

The immediate drop in the equity value was more than $300 million, 30 times the loss in EBITDA that the company anticipated, why? In our view the share price was reflecting a loss in confidence in the management for not having disclosed the problem in February when it became known nor on the two prior occasions when there were investor calls or meetings. 

Prior to the announcement the share price was trading around $15 and it has never returned to that level since. Instead, over the balance of 2019 it fell further and ended the year at $ 3.84, a loss of value in 7 months of 75%, roughly $600 million. 

For his ‘performance’ Paul Boynton received $13.8 million in compensation in 2018, $7.3 million in 2019 and $5.6 million in 2020. Nearly $4.6 million of his 2018 compensation was a retention bonus from the time of the RYN / RYAM split off. His 2018 compensation was 162x multiple of RYAM’s median-paid employee. 

In 2012 the key acetate selling price for Rayonier was approximately $2000 per tonne and they were selling 450,000 tonnes a year. The estimated cost of production was below $900 per tonne. 

Today, their average acetate price is $1350, they are selling 260,000 tonnes of acetate and their production costs are over $1,100 per tonne. As RYAM have changed the way they present information about their acetate versus specialty grade sales volumes and pricing this makes it more difficult to track over time but what we have pieced together shows the following:

Their average specialty prices have declined consistently since 2014, in spite of that, in our best case scenario we give them the benefit of the doubt that they will get an unprecedented 10% price increase in 2022 and hold those higher prices through 2025. Our overly generous forecast still leaves the equity value at zero because the level of the debt remains so high. 

For their volumes of specialty grade product we also give them a significant benefit in our forecast where we suggest that they can stem the tide of their diminishing specialty grade volumes.

The increase in specialty grade product in 2018 came from two sources, the acquisition of Tembec for $1 billion plus the change in their definition of what is included in specialty grade production. 

Since 2014 RYAM has announced a number of cost saving initiatives and claimed victory from those initiatives but none of this seems to translate to actual profits. In the first half of 2021 the DWP business - the jewel in their crown - generated net income for the 6 months of $1 million. Given that the base level prices in the viscose grade side of the commodity DWP market have risen by 75% from $650 to $1,160 over the past 12 months, investors might have expected a bit more profit if the cost reduction efforts had been as successful as claimed. 

We would like to know more about their operations but statements that RYAM makes about operating performance are largely ignored by the equity analysts tasked with following the company and certainly there are no challenging questions asked in this respect with the respect that investors are left guessing. 

Share prices reflect future expectations of performance and the past information is a starting point, not an end point in a valuation. Consequently, the securities laws in the US and most jurisdictions try to rein in the worst behaviours of managers in extolling the virtues of their companies future performance. Investor safeguards in this respect are supposed to be, the securities regulations, the company’s board, the stock exchange, the equity analyst reports and the company’s bankers. It appears to me that all of these supposed safety rails have failed and that has enable RYAM to get away with materially misleading investors about future performance. 

A prime example of this can be seen in an October 10th, 2019 press release from RYAM which states: 

“(RYAM) ….will increase prices of its high-alpha and high-viscosity Cellulose Specialities products (including acetate, ethers, micro-crystalline cellulose, nitrocellulose and other grades) by 6%, effective immediately, or as contracts allow.”

This statement was clearly intended to send a message to investors that RYAM had pricing power with its customers and that there would be material improvements in profitability in the near term. To its customers it was sending a statement that it was going to demand significant immediate price increases in its negotiations for 2020 which were underway in October of 2019. 

However, the vast majority, at least 90% of the products identified are on annual contracts that do not allow for any price increase during the year. Consequently, a 6% price increase for the last two months of the calendar year was unlikely to produce any additional revenue and was not a demonstration of RYAM’s pricing power. I am aware from industry contracts that purchasers viewed this release as somewhat ridiculous and that RYAM fell even further in their estimate for having issued such a facile press release. 

In the February 2020 investor call to discuss the Q4 2019 investor results, an analyst from Davidson asked, “ …the 2% price hike, which is the first in 7 years, is that - the 6% hike that you announced last fall? ….will there be more trickle from the fall ’19 price hike into 2021?”

The response from Frank Ruperto, EVP of High Purity Cellulose at RYAM was:

“So, Steve, let me back up a little bit. So, the 2% hike, and I think you pointed out something that’s important. We did have certain contracts which had ricing set between ’19 and ’20 at relatively flat levels. So the 2% takes that into account when we look at some of those issues. The 6% was a price increase that we announced there. I think that the way to think about it is, we realized roughly, 2% of it. We realized it stronger in certain markets and not as strong in others. So, if you think about how weak the automotive and filtration secotrs were last year, we found that more difficult to push pricing through. In some of the more stable and growing sectors, we saw a better pricing improvement.”

To me, this is the worst kind of corporate double speak but there was no effective challenge to Ruperto’s response from Davidson. 

During this same call Ruperto also stated:

“….They (specialty volumes) will be down roughly 7% to 8% on a contracted basis. 2/3 of that was anticipated as we went into the strategy to better align our product mix with the overall market and get out of some of those lower-margin businesses.”

In the DWP market the idea that anyone would consciously eliminate any specialty grade business is anathema. If specialty grade product was making insufficient profit margins than that was a failure in RYAM’s sales efforts or a failure of cost control at its mills but its not a market problem. 

To any industry participant this is wildly obvious. If you reduce your specialty grade sales, in RYAM’s case by 70,000 tonnes in 2020 then you have to make a sell something else. So, they made 80,000 tonnes more of commodity grade product. 

In 2020 the average price of specialty grade product sold at RYAM was $1,332 and the average price of their commodity DWP sales was $ 615. RYAM, supposedly by strategic design, gave up 70,000 * $1,332 = $93 million of sales because they preferred to sell 80,000 * $615 = $49 million. 

What business person would voluntarily give up $ 44 million ( $93 - $49 )? While there are additional costs of production associated with specialty grades over commodity grades and some of the business cited may have been at less than $1,332 per tonne. It is extremely unlikely that the differential in the cost of production was $700 per tonne.

Mr. Ruperto left the company in early 2021. 

So, what actually happened? 

When RYAM issued this statement in October 2019 they knew that less than 10% of their sales allowed for any price increase in 2019 and many didn’t allow for one in 2020 either. 

In 2020 RYAM’s specialty grade volumes were 12% below their 2019 levels, some, but not all of this was attributable to Covid as almost all of the prices and volumes had been contracted in the last quarter of 2019 for 2020. 

90% or more of the specialty grade pricing and volumes for 2020 were set in 2019, well before any Covid threat.