Reports and previous episodes of this program by visiting www.watertowerresearch.com. Joining me today, please welcome Joshua Hicks. He's a vice president, senior vice president of High Purity Cellulose Business at Rayonier Advanced Materials, the company's largest business unit, focusing on specialty celluloses products and markets. The company, stock trades in the New York Stock Exchange under the ticker RYAM. You can learn more about the company by visiting www.ryam.com. Welcome, Joshua.
Thanks, Dmitry. Thanks for having me.
It's my pleasure. Joshua, why don't we start by having you tell us and our audience a little bit about your background and the High Purity Celluloses business you are running at RYAM?
Sure. Yeah, you bet, and again, thanks for having me. Welcome to Jacksonville, Florida. That's where I'm at right now today, our headquarters here. So yeah, as Dmitry mentioned, I'm a Senior Vice President of our High Purity Cellulose strategic business unit, which is, from a revenue and EBITDA standpoint, roughly 75%-80% of RYAM's enterprise. So it's really our core business. I joined the company about 2.5 years ago. Prior to that, I spent my entire career in the specialty chemical and ingredients industries, running various different businesses. I joined RYAM really for two main reasons.
One is I saw the opportunity to really help change the way the company was operated, and perceived externally, as a commodity pulp manufacturer, and really move it to a true specialty materials manufacturing company. And, I'm sure we'll talk a little bit more about that. And, the other big reason was I saw an opportunity to drive significant shareholder value. And, so that's really why I joined RYAM, and, it's been a good ride so far.
Can you, can you discuss RYAM's strategy and the vision to transform? You mentioned you started out as more of a pulp and paper type of a company before you joined, but now you're trying to pivot into a higher value specialty celluloses company with more stable and growing markets. Can you talk about some of the factors behind that decision and how the process is going to date?
Sure. Yeah. I mean, so first, let me sort of unpack and explain the HPC SBU, the High Purity Cellulose SBU. So we're made up of three different businesses. So our cellulose specialties business, we call it CS, our fluff business, and our non-fluff commodities business. So those are the three. If you look at our CS business, our specialties business, it's a wonderful business that we have. I would tell you, we're not being recognized for that business from an external market valuation standpoint, right? But in that business, just to unpack that a little bit, we're the market leader in CS. We estimate currently to have anywhere from, call it, 39%-40% of the market.
Our EBITDA margins in that business are very healthy, so think mid-20s+% is where that business is today. And it's, I refer to it as a very sticky business. What I mean by that is it's, it requires significant R&D resources on our side and the customer side, and long customer qualification times to get our products into the applications our customer use them for. So, in with many of our products and the applications that go into, it's taken years and years to develop those in partnership with our customers. So you can imagine this really creates a strong competitive moat around this business.
The high barrier to entry business, new capacity is expensive, and the expertise needed to enter that business is challenging because of the involved chemical process and process equipment and systems that you need to do in order to have to develop those products. So that's our specialties business. Our fluff business is, we have a really nice fluff business, Dmitry. I mean, it's, we're a boutique supplier in this space, so I think we're 3%-4% of that market in any given year. But we target higher value areas in that fluff and growth areas like adult incontinence, for example, which obviously aligns well with the mega trend of aging population and things like that.
We're focused on emerging geographies around the globe in that business to target sort of outsized growth and look to grow our business north of market a little bit. So, the fluff business is also a solid business. If you go to the third part of the business, this non-fluff commodities, this is where you've seen us talk about it externally a little bit. Our EBITDA margins are negative in this space, so I think 15%-20% negative, right? So not immaterial. And here recently, as the street is seeing, we've announced an indefinite suspension of our High Purity Cellulose line in Temiscaming, Canada, which, by doing that, that's gonna continue to reduce our exposure to this space. So, you know, we're really looking to reduce our exposure.
By the end of the year, we expect this to have cut our exposure about in half, so still more work to do, but good progress. So yeah, I hope that gives a little bit of color there for you.
It does, but I was also wondering if you can outline some of the trend, you know, you mentioned the closure of the Temiscaming plant, but some of the sort of what drove you to pivot to this business, and start working on improving the profitability by getting rid of some of the more commodity parts of the business. When did this process begin? Prior to the Temiscaming closure, what were some of the accomplishments? And you know, maybe talk about the impetus for RYAM to go in this direction, after being more of a pulp and paper company, and paperboard company for most of its existence.
Yeah, I mean, good question. I mean, I think it's if, I guess what I'd tell you is, fresh set of eyes, right? I mean, I joined the company in December 2021. I'm a value guy. Obviously, my diligence on the company, I saw there was an opportunity really to capture more value for the very valuable products that we manufacture. And so, you know, as we've been open about value over volume from a commercial standpoint, I've helped drive that. Being the market leader in specialties, we believe in being strong price stewards, obviously. And so we are disciplined about not chasing volume with price and being careful and methodical about business that we go after. We price the value of our products.
We price our products based off the value they provide to our customers. So not how much we can produce, but what are they worth to the customer? You know, which is not dissimilar from other specialty materials companies out there that, you know, you may follow, Dmitry, or others that may be listening to. So I would say that fresh set of eyes really started to drive that commercial excellence change, if you will. Then De Lyle joined as CEO in May 2022, and obviously started driving additional change, which was good. And the whole management team, the whole leadership team, De Lyle and his direct reports, have really worked well to find opportunities to continue to drive value.
And so one of those areas is, I think if you look historically, just if I'm candid with you, I think RYAM has had an opportunity to probably better manage production capacity, across different economic cycles over the years. And so what I mean by that, I mean, I think, again, we take our role as a market leader seriously, which means that you need to manage excess capacity reasonably, and responsibly. And so we're really running our assets to match capacity to market demand now, which is, again, a departure from historical cycles. And if you look at us, and I'm sure we can talk a little bit more later about our capabilities, but if you look at us, we have 6 production lines globally, right? And all of our competitors have 1 line.
And so by definition, we're the ones that have the majority of the excess capacity. And so, you know, that went into the very difficult decision to indefinitely suspend that Temiscaming HPC line I just talked about. And there are various reasons that kind of went into making that decision, market conditions and other things. So you know, that whole topic of managing excess capacity is one that we've really been working on diligently. And then the other thing you've seen us talk about, I'll just touch on briefly, is we've launched a new strategic business unit called Biomaterials. And the purpose of that is really to capture the remaining value from our wood inputs. So today, my business, the HPC business, is usually using roughly 40% of the wood, of the tree inputs.
The balance of that is primarily being used for BTU value in our boilers. So, we are gonna be made great progress already, a lot of exciting prospects in that business to, to further monetize and commercialize and, and value up the remaining part of that tree. And we've been, we've been open about saying, by 2027, we expect to deliver a little over $40 million in EBITDA from, from that SBU.
Well, thank you, Joshua. That's a very good background information on where the company has been and, and where it's going. So let's dive into the HPC business and products in a little bit more detail. What are some of the end markets your products go into? What does the competitive landscape look like? And, what have been some of the recent actions taken by the company to improve its competitive position in the market, as well as improve the business's operations and financial performance?
Yeah. So, yeah, I mean, I love talking about where our products are used. I guess the short answer is we're, we're in all sorts of areas. I mean, we are a very, very diverse set of applications and end markets. To give you a feel, I mean, we're in over a hundred different end market applications. But let me give you kind of some examples to give your audience a feel for where we're at. So we're in pharmaceutical applications. So think medicine, capsules, and tablets. We're in food. Think protein shakes and plant-based meat substitutes, things like that. We're in cosmetics and shampoos. We're in. You look at passenger cars and engines and industrial engines. We're in the filtration, air filters, oil filters, cabin air filters.
We're in electronics, so we are the TV that you and I are looking at is, has our product in it. We're in LCD screens, computer screens, tablet screens, et cetera. High-end eyeglass frames is another area for us. High-performance tires, we're in the tire cord there. We're in construction applications, so tile adhesives, grout, we're in paints. A lot of our applications are, you know, sort of higher-end applications, if you will. So those are that gives you hopefully a little bit of flavor of where we are, where, how our products are used. If you look at, on your competition question, so this is an interesting market, Dmitry, which as you know, but it's, it's a pretty duopolistic market.
What I mean by that is, within each of our major market segments, it's really RYAM and one other player, for the most part. And if you look at the top three producers in CS globally, those top three make up about 80% of the market, so quite concentrated. But if you look at our, we classify our business into the, into three main areas. We call our acetate business, and in that area, it's primarily ourselves and a company called Bracell out of Brazil. Another segment is our Ethers business. In Ethers, it's primarily ourselves and Borregaard out of Norway.
And then we have sort of a catch-all category called other CS, not the most creative name for it, Dmitry, but other CS is really RYAM and either a competing technology, which would be cotton linters pulp, which I can unpack that a little bit more for your audience, if you'd like. Or you see Borregaard, or you see Bracell in, you know, some of those markets within other CS. So, you know, that's a little bit about the competitive landscape. Cotton linter, by the way, is and some of your listeners may, you know, may already know a decent amount about that chemistry, but that's it's sort of a niche, niche area, but it's not immaterial. I mean, you're talking 250-300 thousand tons market.
We obviously sell against CLP because it, it doesn't have the best environmental profile. It's a heavy water consumer. It's dependent on, on how harvests go every single year, so supply reliability and product quality can be a little bit hit or miss, and obviously, those are things that we're selling against in CLP. So let me, let me pause there. I don't know if I hit everything on your question, Dmitry.
I think you hit most of it. Let me just follow up with a quick question about. You know, you mentioned that this, this is a, what's called oligopolistic, if not, if not outright duopolistic, markets in most of your segments. Other CS seems to be a market where there is a little bit more, capacity or, or competition. There has been some capacity rationalizations, both by yourself and other market participants. Can you talk about that and what the impact of that would be, or can be, on the performance of these businesses going forward?
Yeah. Yeah, you bet. I mean, that's a good question because it's, as I, yeah, again, I was talking about sort of managing capacity responsibly. So if you look at, again, our CS business, we, from a capacity standpoint, we're about 2x the size of the next largest competitor. And we estimate we have, from a capacity standpoint, about 55% of the CS, you know, industry capacity, right? So, but you've seen, it's been busy out there lately, so let me kind of share a little bit what's going on. So one of our competitors, Georgia-Pacific, Foley plant, which is not that far from where I sit today, just a couple hours from us here in Florida, they shut down last year. And that represented about 10% of that CS capacity.
That is very much almost a sister plant, if you will, to our Jesup, Georgia plant, which is also a couple hours away. So they were a Kraft process. We both had similar fiber baskets. So anyway, that plant has shut down due to really, as they've cited, inability to be profitable. Then our Temiscaming HPC line, as we've just talked about, we've announced indefinite suspension effective here in a couple weeks. And that represents about 4%-5% of the CS capacity. So you know, obviously, we're looking and are working to retain as much of that volume as we can and move that to other facilities and qualify, keep our customers qualified, and those sorts of things.
So, you know, fully closing Temiscaming, suspending operations, you know, Temiscaming, we believe, is the most economically viable capacity to come online if needed, right? So we, that's a line that we're gonna keep in good shape and rotate equipment and those sorts of things, so in the event that we need to turn it back on, we can. You look at some of the other suspensions or outright closures in the case of Foley or others, you know, they've gone to the point of demolishing and things like that, which is not what we're gonna do at Temiscaming. That's a key point I wanna make.
But if you look at supply-demand market, the industry consultants have sort of a supply-demand ratio that they look at, and right now, they estimate around, we're about 87%, with that growing to low 90s in the next few years, which is a good sign. I mean, so I would tell you right now, it feels, and our analysis shows we're relatively balanced, but we're getting more snug, and one of the big drivers there is gonna be as the Ethers market and construction rebounds, you know, we anticipate to see some additional tightness. So, so hopefully that helps.
Thank you, Joshua, that does. One simple thing I wanna touch on is something you mentioned at the beginning of our conversation, talking about the mold or the stickiness of the business or and the heavy R&D capabilities that are required to be a dependable supplier to your customers. Can you talk about RYAM's history of innovation, focusing on your R&D capabilities, as well as the variety of both hardwood and softwood products that you can bring to the market to develop new products?
Sure, yeah. I mean, I think, you know, that. So a number of the, sort of the key selling points for us are our R&D capabilities, are we, we have the broadest product portfolio in the market, and, and we—security of supply, because, again, we have, you know, six large production lines around the globe. You know, five now will be operating here shortly, one will be idle. But, but, you know, if you look at our R&D capabilities, RYAM is known for high quality, extremely high purity products, product consistency. And a lot of that is born from our R&D efforts, in a couple areas. So we have two, two R&D centers, one in Bordeaux, France, and one in Jesup, Georgia, here in the US.
And both of those are staffed with teams of PhD chemists, whose primary role is to really match our customers' unique needs and their manufacturing process to our capabilities at our plants, and developing bespoke or customized solutions for the customer. So we, it's a very... We should— You, listeners should think of this as almost very close to kind of a one customer, one SKU kind of business, because we're so customized. So we, you know, we're changing our products for our customers and things like the viscosity they need, or the sheet thickness, or the density, or the color, product dimensions. I mean, we're doing a lot to customize for customers' needs. So you can imagine our customers see a lot of value in this, as we offer these solutions to them.
And you obviously have to be an innovator in order to do this. You know, RYAM's been around almost a hundred years, and from the beginning, we've always been a strong innovator, I would tell you. And if you go way back, you know, we helped or developed rayon from wood cellulose in partnership with DuPont, right back in the 1930s. And in the 1940s, we helped develop nitrocellulose technology for energetics, which was going on, obviously, at that time around the world. But in more recent times, we've done a number of new product developments and innovation. We've come up with ultra-high viscosity cellulose applications for Ethers, construction, food, pharma, things like that, protective and polarizing films and LCD screens. So, I mean, we've done a lot of innovation over the years.
We have an odor control fluff that we've launched here recently. So, you know, I generally believe that specialties commoditize over time, you know, some period of time. And so, as a result, you gotta have a strong pipeline of specialties, right? So that you can, you know, which means obviously, you're gonna have to innovate. So, yeah, I mean, I think the market values, talking about the customers, primarily the customers value that capability we bring. And it's our lifeline. It's something we obviously need to continue to do. I think you asked a little bit about sulfite and Kraft, which, you know, probably due to time, I don't need to unpack that too much. But I guess suffice it to say, we have both technologies at our plants.
We have Kraft technology, and Sulfite technology, depending which plant we're talking about. And that, that helps us have the broadest product portfolio, is what that's all about. Portfolio, you get many different product options from a different fiber basket or wood fiber that you bring in, as well as your manufacturing process, Sulfite or Kraft. And so that, that goes back to our broad product portfolio.
That's very helpful, Joshua. Thank you. Let's kind of maybe take a step back or maybe follow up, would be the more appropriate tactic here on what you just said. Many people when they hear chemicals automatically think of products made from either petrochemical feedstocks, like oil and natural gas or from metals and minerals that have to be mined and processed. Understandably, there may be a preconception that these products and the raw materials extract a heavy environmental toll when it comes to their production. You've mentioned that you use wood as your starting point for your raw material supply. Can you please talk about what RYAM's products and raw material supply chain and how it's different from what a typical, if you will, chemical company would be when it comes to environmental impact and sustainability?
Yeah, yeah. I mean, you bet. And this is, again, a story I love telling because I think it's a story we as RYAM probably haven't told enough, we need to continue to tell externally. And that is, we're as renewable and as green as you get. And what I mean by that? So it's like our raw materials, as you say, are wood. But where we're bringing our wood in is from tree farms. These are farms dedicated to growing pine trees to be harvested and grown again. And every time you cut one down, you're planting another two or three in its place, w e're not cutting down, you know, thousand-year-old sequoias out of California, right? I mean, this is not, we're not, we're not going after old growth.
If you look at the U.S. South or some of these areas where we source our trees from, our wood chips from, I should say, they're actually the number of trees in these states is actually growing every year, not shrinking, because of these tree farms I'm talking about. So very renewable, we call them working forests. That's what it's known for in the industry, renewable, working forests that are our inputs. If you look at energy in our process, so about 80% of all the energy we use as a company, so obviously we use a lot of energy, is produced ourselves with biomass materials being burned in our boilers, so you know, bark and things like that. So very green way to produce electricity.
So much so that there are times we even sell that into the grid, which obviously is a good thing. And then water, we do use a lot of water, but close to almost 100%. I think the stat is 98%-99% of all the water we use is recycled and then returned into its natural environment. So very conscientious about the environment. Obviously, to your point, we're sort of in this chemicals and materials space. Many, many of our customers, by the way, are heavily hydrocarbon-based enterprises, right? And so they look to RYAM, in many cases, rely on RYAM to help them tell their sustainability story as they take our products and in some cases, react them with chemicals and things to make products used in the marketplace. So...
And the key of all this, in all this, by the way, is, yes, sustainable, but high performance. I mean, my whole career at Dow Chemical and Nexeo and Univar was that was always the holy grail, was finding products that were sustainable or environmentally friendly, but also performed well in their application, and that sometimes can be a bit hard to find. But in our case, obviously, we're known for our performance and, and how our products are used.
Thank you, Josh. That, that's very helpful, and I think it does, it is important for investors and stakeholders to understand that, you know, no manufacturing process is completely environmentally inert, if you will. But, given your raw material source and given the energy usage and the water usage that you've mentioned, this is probably as close to a sustainable manufacturing as we get in the chemicals industry. Before we turn to Q&A, would you please summarize RYAM's value proposition and near-term goals, perhaps discuss the future direction of the core HPC business that you're running, and outline future direction of the business unit and anticipated developments that investors and other stakeholders can look forward to, including perhaps some financial goals?
Yeah, sure. I mean, obviously, due to the size of the HPC business unit, we're a key part of RYAM delivering on its goals overall, right? And so, the way I think about the HPC business, Dmitry, is success to me is delivering at least minimum 10% year-over-year EBITDA growth. To me, that's measure of success. How do you achieve that? There's obviously a couple different levers that we need to continue to pull. One is, I've touched on, is disciplined commercial excellence, making sure we're capturing the fair value for our products. The other key part is cost out at our plants through automation and plant efficiency projects.
You know, although you've heard me talk a lot about being a value guy and pricing our products appropriately, low cost, I believe, should always be part of any strategy. Low cost always supplements any strategy, right? So we constantly have focus on driving cost out. We are a culture of continuous improvement. I would tell you, from a manufacturing standpoint, we've been pretty open about. I think we shared the figure that we're looking to drive about $20 million of cost out of our Fernandina plant. For example, our other plants have other plant efficiency projects that we're all working on.
What I'd tell you, one of the things that I've been really pleased with here at the company and with our team is what I'd describe as the creativeness and strength of our engineering teams and our plants. We've just really, really strong engineers who are bringing forward tremendous high-returning projects for us to consider. And you know, our hurdle rates as a company are you know, not all that easy for the space, right? We've set hurdle rates at a minimum. We're not gonna consider projects unless they're at least a two-year payback or less and a minimum 30% IRR. But that hasn't stifled the project flow at all.
I continue to see projects come across my desk that are very nice returning projects that our engineering teams have developed, which is great. And so we're gonna continue to review those. And obviously, as a shareholder or a prospective shareholder, whoever is listening, this is what you want, right? You want to know that we have opportunities within our company with those sort of returns. We'd much rather invest in those than, e ven though our cost of debt is quite high right now, by the way, we'd much rather reinvest in those high-returning projects than somewhere else. So I'm encouraged by the project flow of opportunities.
Thank you, Joshua. It sounds like you've done a lot of work and continue to have opportunities to do even more to improve the operations of your business, and that's good to hear. Let's turn to the Q&A here from our audience. Let's take one of the questions here. How is RYAM addressing the reporting requirements of the European deforestation regulations, and how will or how can this affect sales of U.S. [solo] into the E.U. market?
Yeah. So EUDR, you know, for those who don't know, it's been in play for some time now. It's picked up steam here, sort of year-to-date, but it was really started discussing, you know, a year or so ago, a little over a year or so ago. That, I'm not gonna take time to kind of explain exactly what that means. Your listeners can Google it and understand if they're, they don't know about it already. But there is some legislation that is likely gonna go in effect the end of this year, for products that are wood sourced that are ultimately going into Europe, okay, and European countries. We're taking this very seriously.
We have a whole project team working on this right now to develop a solution where we can be compliant with this for our customers. In the case of our Tartas, France facility, EUDR would actually classify that as an operator, is their term, right? So the requirements within Tartas itself is a particular work stream for us, as well as materials that we're producing elsewhere, U.S. and Canada, that will go into Europe. So, it's dynamic right now. There's a lot of moving pieces. We've invested monies into ensuring that we get this right as a company, and we're committed to being with our customers hand in hand, as we, like I said, as this goes into effect at the end of the year.
Thank you, Joshua. Let's take another question. Talking about the Ethers market, which, as much of the industry has been down a little bit recently, but seems to be recovering, or at least stabilizing. So the question is, will the Ethers market rebound in the near future? And if so, when and how will this impact RYAM's results and financial performance?
Yeah. So I guess, let me give you a little bit of background and context on Ethers, right? So in 2023, throughout 2022 and 2023, the Ethers market, in particular in construction, has been in a downturn. Our analysis shows that in 2023, we conscientiously ceded share to a competitor, okay? Because we weren't chasing price. And, you know, that being Borregaard, just to be open. I think in the past several quarters, Borregaard has disclosed openly that they've sold more volume than they have produced. You heard me already talk about the capacity versus market demand balance. You know, we obviously believe that RYAM is really the only producer that has meaningful capacity available for Ethers as that market rebounds. It's hard for me to tell you when, Dmitry.
I would tell you, I would tell you there are some green shoots in pockets of our business, that we're getting from our customers, which is great. But, you know, one thing we know in that space is, you know, it can be interest rate sensitive, and it does go through a lot, you know, some cycles, but it comes back. And so, you know, I think we're positioned very, very well for when that market rebounds, to pick up that additional business.
Okay. Thank you, Joshua. And then to follow up, on your other business, the acetate business, has the destocking in your acetate market, or end markets, mostly played out, or do you expect to see impacts into the H2 of this year?
Yeah, I mean, we've talked about that in a couple of our earnings calls, right? We, s o the short answer is, we're still living it right now, but it's mostly, we expect to really be played out by the end of the year. So, you know, for those who don't have that context, as well, right? Our acetate customers, primarily in Asia, and it wasn't just unique to RYAM, by the way, it was everyone in the space. They mostly moved from a sort of a just-in-time inventory model to a just-in-case model, just to ensure they didn't run out of product, with all the logistics constraints with ocean-going containers over the past couple of years, which obviously has gotten better now. But as a result, they had, you know, a lot of inventory.
I was in Asia just here recently, and I saw elevated inventory levels firsthand myself. Customers have been great partners with us in collaborating on sort of order timing this year throughout 2024. But we think the majority of that you know overstocking or over-purchasing issue will be resolved by the end of the year. And by the way, our guidance, which we've given most recently, reflects that, by the way.
Okay. Then let's take one more question. It looks like you've made significant progress in reducing your exposure to commodity production associated with your, you know, non-CS part of the business, and consequently, hopefully, reduce some of the volatility associated with these businesses. You mentioned going from about 15% that this business represented for you, down to about 8%. So are the plans in place to eliminate the remaining 8% of the commodity revenue, or are you always going to maintain some level of commodity production, just not as big as before?
Yeah, great question. Great question. I mean, I think, wave the magic wand, I'd love for that to go to zero, right? Just to, just to be brutally honest. And for practical reasons, though, it's, it's not gonna go to zero. So we're gonna always have some level of commodity production, just for, for practical matters. So when you're, when you're grade changing on specialties, for example, you'll produce some commodities here and there, or, or you may run some as you have excess capacity to help absorb fixed costs. So I think, yes, we'll continue to whittle that down, but I don't see it going all the way to zero. How much it goes down further is gonna be highly dependent on, on the CS market demand, as we just talked about, right?
So as Ethers rebounds, that percentage is gonna come down because we're gonna replace, we're gonna naturally replace commodity production with more Ethers or CS production.
Well, thank you, Joshua. That, that's very helpful. This is all the time we have today for our Fireside Chat. Joshua, thank you very much for joining us. This has been a very informative discussion, and I hope shareholders and other stakeholders have gotten the information they were looking for and have learned something new. I know I have. Thank you very much for joining us.
You bet. Thank you, Dmitry. Thanks for having me. Appreciate it.
Thank you. If you would like to learn more about the company, again, please visit their website, www.ryam.com. And if you want to watch previous episodes of this program, please visit watertowerresearch.com. Thank you very much, and have a good day!