Paul Boynton’s Shareholder Value Destruction

Paul Boynton was appointed as President of Rayonier in 2011 and Chairman and CEO in 2012. Over the past decade he is the only member of the senior management team who has lasted more than 5 years. As such the company’s strategy and operating results rest clearly with one person, Paul Boynton. The stock market judgement on the past 7 years of Boynton’s tenure makes their verdict clear, below.

In 2014 Rayonier was split into two entities and Boynton became CEO of Rayonier Advanced Materials with a share price in June of 2014 of $38.75. At the close of trading on September 10th , 2021, those shares were “worth” $7.18; a decline of 81.4%.

I think that the market has been unduly generous towards Boynton as my analysis today shows that the equity has no value at all as the company does not generate sufficient cash to meet its debt obligations, leaving nothing for the equity value.

I think that the $7 per share value is the product of spin and wishful thinking supported by a stock market which, in some sectors, may itself be overvalued.

Some may attempt to excuse Boynton’s dismal performance over the past decade by suggesting it's the market and not the management. If that were true, how would these superficial supporters explain the share price performance of one of RYAM’s key competitors, Borregaard, over the same time period?

Borregaard is shown in blue, up 400%, since June of 2014 while RYAM is down 82.4% over the same period.

During this continuous period of value destruction Boynton has been paid at least 3 times as much as the CEO of Borregaard, Per Sorlie; both have been their companies CEOs over the entirety of the past decade.

In Boynton’s case his compensation from 2014 to 2020 is in excess of $56 million according to RYAM’s 10-Q filings. In addition to this amount would be Boynton’s compensation in 2012, 2013 and 2021.

Why is he still the CEO?

One possibility is that when RYAM was first listed in 2014 it contained a payments schedule for a change of control or termination of Boynton that provided him with a minimum of $ 36 million in severance pay. From their 2020 10-K this would be composed of:

• Cash $ 5,025,000

• Severance $ 8,670,000

• Pension Benefits $ 6,909,000

• Medical & Outplacement $ 143,000

• Acceleration of Equity Awards $15, 444,000

Total package $ 36,192,000

For any company or private equity firm that might have attempted to takeover RYAM and fix the company, Boynton’s severance arrangements are a major impediment.

How did this happen?

It wasn’t a single event or action it was a pattern of actions, inactions and failed choices that led to Rayonier going from the market leader in dissolving wood pulp (DWP) in 2012 when Boynton took over to its present state.

Key events in that process include some obvious failures and some less obvious ones:

1. The conversion of the C Line at the Jesup mill from fluff production to specialty grade DWP production which was reversed within 12 months of the conversion’s completion at a cost of more than $400 million.

2. The acquisition of Tembec in 2017 at a cost of more than C $1 billion.

3. The deterioration in customer relations that produced a lawsuit from Eastman, their largest acetate for cigarette tow client.

4. The deterioration in customer relations that resulted in the loss of their third largest acetate for tow client, Celanese in 2014, information which RYAM withheld from the market at the time of the June 2014 split of the company.

5. Customer and investor lawsuits.

The less obvious failures at RYAM over the past decade include:

1. A loss of both volumes and share in their key acetate for tow market, primarily to Bracell, Borregaard and Georgia Pacific.

2. A rise in costs which has taken RYAM from being amongst the lowest cost DWP producers to amongst the highest cost producers.

3. 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.

4. 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.

5. 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.

6. Employee morale, in large part this is driven by the deteriorating self-image of moving from 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, or with a further $1 million in free stock awards to Boynton in March 2021.

The cumulative effect of these failures can be seen in the section on financial analysis as the trends in the financials are clear and they are all worse today than they were when Boynton became CEO in 2012.

In 2014 Boynton decided to split Rayonier into two publicly traded companies. Ostensibly this was to provide investors with a pure play in dissolving wood pulp, separate from the forestry and real estate assets.

This struck many people at the time as being, at a minimum, odd but part of the storyline was that it was a tax advantageous decision.

At that time there were other issues surrounding Rayonier which may or may not have been factors in the decision to split the company and these include:

• A pending lawsuit regarding an overstatement of the forestry reserves of Rayonier in the Pacific Northwest. The company subsequently lost this lawsuit and had to pay $73 million in damages. Prior to becoming CEO of the whole company, Boynton had been in charge of the forestry division.

• A realisation that the C-Line was a mistake, and the separation of the company created an opportunity for a number of changes in corporate governance that protected Paul Boynton’s position as the CEO by introducing a number of poison pills into the articles of association.

• A realisation that Bracell and other competitors were making inroads into the market that undermined RYAM’s position going forward.

The stated reason that this would “create shareholder value” has been disproven by the results 7 years on. The equity market value of RYAM at the split was just over $ 2billion, today is below $450 million. While RYAM stock has lost 82% of its value the Rayonier equity market value remains above $5 billion today.

Boynton claimed in 2014 that this was a strategic decision but in 2017 he reversed that decision with the acquisition of Tembec, a Canadian company that had lesser forest and real estate assets than those of Rayonier. The pure play strategy lasted less than 3 years.

The C-Line decision and project was arguably the most significant decision in Paul Boynton’s career and its failure set the tone for the company’s behaviour over the past decade.

The C-Line decision raises huge questions about the company’s ability to forecast its own markets, understand its competitors and execute a discipline capital budgeting process. Worse, the responses of Boynton to the C-Line investment disaster were to double down on their mistakes rather than accept that they had made a mistake and move on. To their customers, suppliers, and competitors, they sent signals that were all bad.

This was most ably summed up in a comment from a Borregaard investor presentation where they described one of their core competitive advantages as:

“Competence is the main competitive advantage.”

“Competence differentiates Borregaard from the competitors.”

“Combination of competences in sales & marketing, R&D, and production.”

Borregaard Investor Day, July 2020, page 6.

While not naming RYAM directly, the people at Borregaard were no doubt aware that at that time the RYAM share price was below $3 and had been as low as $1 a share in the prior three months.

In 2011/12 when Rayonier decided to proceed with the $400 million conversion of the C-line at Jesup they knew that Bracell was up and running and producing customer samples for acetate.

In 2011/12 they also knew that the Cosmopolis mill had been restarted in May of 2011 and that in Cosmopolis’s last year of production under Weyerhaeuser, 100% of their production of 140,000 had been for acetate for tow.

When they made the decision to convert the C-Line to producing more speciality grade DWP product, primarily acetate, RYAM was selling about 450,000 tonnes of acetate into a 650,000-tonne acetate market but there were 500,000 tonnes of potential new acetate production entering the market by 2012.

When Rayonier decided to proceed with the investment in the C Line they must have known:

• That the market for acetate tow for cigarettes was at best static and at worst, declining by 1 or 2% per year.

• That they were facing new 500,000 tonnes of potential acetate production together with growing competition from existing competitors, Georgia Pacific and Borregaard who had more than 100,0000 tonnes of capacity that could have been directed at the acetate market.

• That to protect their existing market position their decision to increase supply was likely to lead to reductions in prices if they cannibalised their own markets.

In spite of these very obvious market realities, they went ahead with this investment. As far as we know, they have never publicly commented on why they decided to proceed with the C-Line conversion.

At the time of the RYAM decision on the C-Line I was working at the Cosmopolis mill. All of our salespeople were gobsmacked by Rayonier’s decision. While we were much smaller and had no market power, we did have far superior market research than they appeared to have at RYAM. We knew that there wasn’t sufficient specialty grade market demand to justify this increased production from RYAM and by July of 2015, RYAM was forced to admit this reality.

RYAM did ‘get lucky’ in that the Cosmopolis mill failed to have its acetate product requalified in 2012. At the time that Cosmopolis failed the acetate qualification, in November of 2012, we had agreed – but not signed – contracts for 45,000 tonnes of acetate sales for 2013. All of that volume was being taken from Rayonier.

Luckily for Rayonier, the private equity owners of Cosmopolis, Gores wanted to flip the mill and weren’t interested in the long-term strategies required of participants in the acetate market, they just wanted to ‘flip-it’. As part of their flip-it strategy Gores had chosen both a CEO with a background in human resources who didn’t understand the dynamics, chemistry, economics, or production requirements of the acetate business which led Cosmopolis to fail to become a qualified acetate supplier.

At the time that Rayonier made their investment decision to proceed with the ill-fated C-Line, they had no way of knowing that Cosmopolis would flame out in the acetate market, so their decision was extraordinarily risky.

While the management at Cosmopolis failed in the acetate market, Bracelll, Borregaard, Georgia-Pacific, Tembec and Nippon Paper didn’t fail, and they have been taking volume and share away from RYAM for almost a decade now. The exact opposite of the dominance that Rayonier expected to achieve with the C-Line conversion.

The shifting competitive dynamic in the acetate market was also obvious to the buyers, who recognised the opportunity to force RYAM’s prices down by more than 30%. Rayonier were aware that their customers saw an opportunity, but their response was a series of flagrant lies. In 2012 they began to tell people, openly and on their investor calls that they had firm orders for 80% or more of the C-Line’s new capacity; this turned out not to be true and was why in July of 2015 they issued a press release indicating that they were reversing the conversion and spending tens of millions of dollars to effectively spike the specialty capacity at the C-Line that they had just converted.

In short order, this produced the Eastman lawsuit which I address in another section.

Rayonier was left in a marketplace where competition had been dramatically reduced in a short period of time and where building replacement capacity would take years. While Rayonier wasn’t the last man standing, they were certainly the largest of the remaining producers, for a while. As acetate prices rose other competitors saw the opportunity to enter the market and the most significant of these was Bracelll, Brazil.

In 2011, Bracell entered the acetate for cigarette filters market and over the past 10 years they have gone from zero acetate sales to almost 200,000 tonnes a year. As the acetate tow for cigarette filters market has decreased over the past decade and shows no signs of returning to growth all of Brecel’s gains had to come from taking market share and most of that was from Rayonier.

Rayonier was able to dominate the market for a 6- or 7-year period because of an absence of competition. However, when they were faced with a credible challenger, Bracell, they have consistently lost business to them, and that process is more likely to accelerate than it is to reverse.

The Bracelll mill can produce up to 345,000 tonnes of acetate DWP for tow and currently about 200,000 tonnes of this is producing acetate while the balance is producing commodity viscose grade pulp.

The owner of the Bracell mill, RGE, is in the process of starting a new facility in Brazil that can produce 1.5 million tonnes of viscose grade DWP, https://www.Bracell.com/en/project-star/. This will give RGE a combined annual production in 2022 of 2 million tonnes of DWP in Brazil alone; RGE own more than 1 million tonnes of DWP production in other countries as well.

While the new production in Brazil will not be able to make acetate grade pulp this new production frees up capacity at the existing Bracell site at Bahia to increase from 200,000 tonnes a year to something closer to 345,000 tonnes a year; almost all of those sales will be at the expense of RYAM with its higher costs of production.

Brecel’s costs of production are significantly lower than RYAM’s which means that if they choose to, Bracelll can undercut RYAM on price to acquire higher acetate sales volumes. This should not be a surprise to anyone as it is the pattern that Bracell has pursued successfully over the past 8 years.

In my base case forecast, I have given RYAM the benefit of the doubt on every measure. I have forecast a 10% price increase in 2022, even though that’s unlikely. I have suggested that RYAM will not lose further specialty sales volumes even though that too is unlikely. I forecast a slight improvement in their profit margins even though in their own August 4th, 2021, investor call they showed that any price increases are likely to be eaten up by cost increases, below.

RYAM’s own figures and material clearly shows that their debt burden exceeds the cash generation abilities of the assets that remain in the company as its “continuing business”.