How will the recent tariff changes affect the cost structure and pricing strategy moving forward?

Impact of the Recent Tariff Changes on RYAM’s Cost Structure

1. Immediate cost pressure:

   • The press release notes that “tariff volatility” was one of the extraordinary, largely non‑recurring items that depressed RYAM’s Q2 results. This wording implies that a portion of the company’s cost of goods sold (COGS) – most likely the cost of key raw‑material inputs (e.g., petro‑chemical feedstock, resin components, or any imported commodity that feeds the advanced‑material product line) – was lifted by the recent tariff adjustments.
     
   • Because the impact was “largely behind us,” the company anticipates that the sudden cost spikes associated with those tariffs have largely passed. Still, any tariffs that remain in place will stay in the cost base for the remainder of 2025 and possibly beyond, influencing the overall cost‐structure profile (higher variable cost, potentially higher fixed‑cost component if the company invests in hedging or alternative supply chains).

2. Normalization of cost structure:

   • Removal of the “one‑time” surcharge: As the tariff‑related charges were described as non‑recurring, the next quarter’s cost base should revert to what the company would have reported without the tariff hit. That means a step‑down in COGS and an improvement in gross margin if no other cost drivers change.
     
   • Potential re‑baseline: The company will likely re‑baseline its cost model to reflect the “new normal” of any remaining tariffs (if still in effect) plus any ongoing supply‑chain adjustments. In practice this means:
     • Re‑calculated material‑cost assumptions for budgeting and forecasting, now eliminating the temporary tariff premium.
       
     • Adjusted contribution margin assumptions—if the tariffs are now settled, the underlying contribution margin can be projected higher than the Q2 figure but still below pre‑tariff expectations if the tariffs were not fully reverted.

Implications for Pricing Strategy Moving Forward

1. Passing through higher input costs:

   • If the tariff environment is stable but at a higher level than before, RYAM will need to embed the higher raw‑material cost into its product pricing. Because the company says the extraordinary challenges are “now largely behind us,” it suggests that the firm expects to recover the short‑term losses via future price adjustments. In practice this could be:
     • Incremental price increases on new contracts or on renewals of existing contracts where the price‑adjustment clause permits market‑based pricing.
       
     • “Cost‑plus” revisions for long‑term supply agreements that can be updated on an annual basis.

2. Strategic pricing levers:

   • Segmented price increases: RYAM can focus higher price elasticity items (e.g., specialty polyester resin) where customers typically accept modest price hikes, while protecting volume‑sensitive product lines through less aggressive pricing.
     
   • Value‑based pricing: The company can shift the conversation beyond raw‑material cost and emphasize performance‑related attributes of its advanced materials (e.g., higher strength, lower weight, sustainability benefits) to justify a premium. This helps mitigate the sensitivity of pure cost‑pass‑through.
     
   • Dynamic pricing based on contract exposure: The company likely has a mix of firm‑priced contracts and spot‑sale arrangements. For the latter, the market will immediately reflect a higher price. For long‑term contracts, they might ** renegotiate index‑linked pricing clauses** (e.g., tie to a material cost index that now includes the tariff‑adjusted baseline).

3. Managing customer impact:

   • Transparency: Since the tariffs were an “extraordinary” event, the company will be careful to explain the one‑time nature of the costs while simultaneously demonstrating the longer‑term pricing plan (i.e., the price increase is not a “one‑off cost hike” but a return to a “normal” pricing scenario.
     
   • Gradual implementation: To mitigate shock, the company may adopt a phased approach, raising prices incrementally over 2025‑2026 as the supply chain stabilises.

4. Mitigation and risk‑management that shapes pricing:

   • Hedging and geographic diversification: The company can protect itself from future tariff shifts by expanding its sourcing base (e.g., locating suppliers in jurisdictions not affected by U.S. tariffs). This reduces the risk of future cost spikes, which in turn provides more pricing stability for customers.
     
   • Supply‑chain resilience: Investing in process efficiencies or alternative raw‑material pathways (e.g., more recycled PET, bio‑based feedstock) could lower the variable cost share, giving RYAM more latitude to keep prices stable.
     

Overall Outlook

• Short‑term: The recent tariff volatility artificially inflated Q2 costs, but as those extraordinary items recede, RYAM’s upcoming quarters should show normalized margins—provided the underlying raw‑material market does not swing dramatically.
• Mid‑term: Because some tariff‑related cost increments may become permanent (if the tariffs stay in place), the company’s cost base will be slightly higher than pre‑2025, prompting a structured price‐adjustment cycle to restore gross margin targets. This will likely be reflected through modest price hikes or index‑linked contract adjustments.
• Long‑term: To sustain profitability, RYAM likely will embed a flexible pricing framework (cost‑plus with index‑adjusted pricing, tier‑based pricing for high‑value products, and ongoing operational cost‑control measures). This strategy lets the company absorb new tariff structures while maintaining competitive positioning and protecting the bottom line.

In short, while the Q2 results were hit by tariff volatility, RYAM expects the immediate “one‐off” cost impact to subside. Going forward, the company will likely re‑engineer its cost structure to incorporate any remaining tariff‑induced price increases and will implement a measured pricing strategy—likely a modest pass‑through of higher costs, selective premium pricing, and tighter contract terms—to protect margins and sustain growth.