Sylvamo : First Quarter 2024 Transcript

Transcript

SYLVAMO: 1st Quarter Earnings Call

May 10, 2024/9:00 a.m. CDT

SPEAKERS

Hans Bjorkman - Vice President, Investor Relations

Jean-Michel Ribiéras - Chairman and Chief Executive Officer

John Sims - Senior Vice President and Chief Financial Officer

ANALYSTS

George Staphos - Bank of America

Matthew McKellar - RBC Capital Markets

PRESENTATION
Moderator	Welcome to Sylvamo's First Quarter 2024 Earnings Call. All lines have
	been placed on mute to prevent any background noise. As a reminder,
	your conference is being recorded.
	I'd now like to turn the call over to Hans Bjorkman, Vice President,
	Investor Relations.
H. Bjorkman	Good morning, and thank you for joining our First Quarter 2024 Earnings
	Call. Our speakers this morning are Jean-Michel Ribiéras, Chairman and
	Chief Executive Officer and John Sims, Senior Vice President and Chief
	Financial Officer.
	Slides 2 and 3 contain important information, including certain legal
	disclaimers. For example, during this call, we will make forward-looking
	statements that are subject to risks and uncertainties. We will also present
	certain non-US GAAP financial information. Reconciliations of those
	figures to US GAAP financial measures are available in the appendix. Our
	website also contains copies of the earnings release, as well as today's
	presentation.
	With that, I'll turn the call over to Jean-Michel.
J. Ribiéras	Thanks, Hans. Good morning and thank you for joining our call. Let's turn
	to Slide 4, please.

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	As anticipated, we experienced improving uncoated freesheet and pulp
	condition in the first quarter, which resulted in improved order book. Our
	mill system ran near full capacity and our earnings reflect much less
	economic downtime. We are making good progress with Project Horizon,
	our program to streamline overhead, manufacturing and supply chain
	costs. We are on track to meet our year-end run rate target of $110 million
	in savings.
	We also continue to return substantial cash to shareowners. We distributed
	$12 million via the first quarter dividend. As of today, we've repurchased
	$20 million in shares this year. Let's move to the next slide.
	Slide 5 shows our key financial metrics. We generated adjusted EBITDA
	of $118 million with a margin of 13%. As expected, free cash flow was
	lower than the fourth quarter due to the timing of year-end payments and
	non-repeat of the fourth quarter inventory reduction benefit and the
	payment of annual incentive compensation in the first quarter.
	Keep in mind that our free cash flow is heavily weighted in the second
	half. In 2023, we generated almost 90% of free cash flow in the second
	half, and in 2022 about 75% in the second half. We generated adjusted
	operating earnings of $1.07 per share.
	Now, John will review our first quarter performance in more detail.
J. Sims	Thank you, Jean-Michel and good morning, everyone. I'm on Slide 6,
	which contains our first quarter earnings bridge.
	The $118 million of adjusted EBITDA we earned was within our outlook
	of $105 million to $125 million. Price and mix were better than projected.
	This reflects the implementation of pulp and paper price increases that we
	had communicated late in the fourth quarter and early in the first quarter in
	all regions.
	Volume decreased by $12 million driven by the normal seasonally weaker
	demand in Latin America. Volume trends in Europe and North America
	were favorable as we projected.
	Operations and other cost improved by $19 million, primarily reflecting
	lower economic downtime across all regions. Planned maintenance outage
	costs decreased by $3 million and input and transportation costs increased
	by $9 million.

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Let's move to Slide 7. This graph shows our economic downtime over the last five quarters. In the first quarter this year, we took 11,000 tons of economic downtime, which was an 80% decrease from the first quarter of 2023 and nearly a 95% reduction from the peak in the third quarter of last year.

Let's move to Slide 8. Uncoated freesheet conditions continue to improve. Our order books have strengthened across all regions versus 2023 levels. We implemented previously communicated price increases in both paper and pulp at all regions as well. We are also experiencing a stabilization of input costs.

Let's move to Slide 9. We expect to deliver second quarter adjusted EBITDA of $145 million to $160 million. We project price and mix to improve by $15 million to $20 million primarily reflecting price increase realizations across all regions. We are also expecting a favorable mix impact in Latin America. We expect volume to improve by $5 million to $10 million driven by seasonally stronger demand in Latin America, plus continued momentum in Europe and North America.

Operations and other costs are projected to improve by $5 million to $10 million primarily due to lower operating costs in Europe and North America, as well as lower economic downtime in North America. We expect input and transportation costs to improve by up to $5 million due to better transportation and energy costs in North America, partially offset by unfavorable fiber costs in Latin America. Planned maintenance outages projected to increase by $3 million.

Let's go to Slide 10. In order to remain a low-cost producer of commodity products sold in mature demand, cyclical markets, we must become a leaner and stronger company. That's why we initiated Project Horizon to streamline our organization and improve our cost structures.

We are on track to deliver $30 million overhead cost reductions and to reduce our manufacturing and supply chain cost by $80 million before inflation. We have communicated about 150 position eliminations globally. Approximately one-third of these have already occurred and nearly all the rest will be completed by the end of the third quarter. We are on track to meet our run rate savings targets by the end of this year.

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Let's move to Slide 11. We spent $25 million on planned maintenance outages in the first quarter and expect to spend $28 million in the second quarter. By mid-year, we'll have spent about three-quarters of the total annual planned maintenance outages costs for this year. In the second quarter, we will conduct outages in Latin America and North America. We have no planned maintenance outages scheduled for our European mills in 2024.

Let's move to Slide 12. We are focused on uncoated freesheet and will continue to create long-term value through our talented teams, iconic brands and low-cost mills in favorable locations. Our capital allocation strategy is to maintain a strong financial position, reinvest in our business to improve our competitive advantages and continue to return substantial cash to shareowners.

Let's look at the next few slides for some additional color on each of these three uses of cash. Slide 13 shows our commitment to maintaining a strong financial position to allow us to operate and invest throughout the cycle. We have reduced our gross debt by $580 million, almost 40% since the spin-off and remain below our $1 billion target. This healthy position allows us to retain flexibility to address macro conditions, downside risk and to invest in high return opportunities across the cycle.

Let's look at the cash returns to shareowners on Slide 14. We will continue to return substantial cash to shareowners via dividends and share repurchases. As this graph shows, since 2022, we have returned $170 million in cash via opportunistic share repurchases.

We have repurchased almost 3.5 million shares or 8% of our initial shares outstanding at an average price of just over $49 per share. These repurchases show a return of 35% based on a share price of $65. We will continue to look for opportunities to repurchase shares at attractive prices and to also return cash via regular and special dividends.

Let's shift gears and discuss reinvesting in our business on Slide 15. We will continue to invest in high-return projects to strengthen our business and increase our cash flow. At the time of our spin-off, we projected at least $100 million of high-return projects, about $70 million of which we will have funded by the end of this year.

We have now identified another $200 million of high-return capital projects, which will allow us to grow our earnings and cash flow in the

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	future. We expect such investments to generate well above cost of capital
	returns.
	This slide highlights three specific projects, two at Eastover that we're
	already ramping up and one at Luis Antonio that will start up later this
	year. In Eastover, we had the opportunity to take advantage of a new
	supply of low-cost wood chips. This project started up in the first quarter
	and we project annual savings of $0.5 million with an IRR of 35%.
	We also started up the evaporator heat recovery system in Eastover. This
	project will allow us to capture and reuse evaporator heat. We expect
	annual savings of $1 million with a return of 33%.
	The third example is the new turbine generator in Luis Antonio. This will
	increase our self-generated power and reduce annual maintenance
	expenses. We expect annual savings of $2 million with a return of 24%.
	Jean-Michel, I'll turn it back over to you.
J. Ribiéras	Thanks, John. We are strengthening our ability to create shareowner value
	throughout the cycle. Sylvamo is a cash flow story and continues to
	deliver against our investment thesis. Uncoated freesheet conditions are
	strengthening across all regions. Our system is still running near full
	capacity and our price and mix continues to improve.
	As a result, our earnings are improving from the bottom of the cycle.
	Financial discipline is a key component of our strategy. We continue to
	leverage our strength to drive high returns on invested capital, generate
	free cash flow and use that cash to increase shareowner value.
	As John discussed, we are reducing our cost structure and we see
	opportunities to grow earnings and free cash flow. We are confident in our
	future and motivated by the opportunities that lie ahead.
	With that, I will turn the call back to Hans.
H. Bjorkman	Thanks, Jean-Michel and thank you, John. Leah, we are now ready to take
	questions.
Moderator	Our first question is from George Staphos with Bank of America.

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G. Staphos	I want to go to Slide 6 where you have the waterfall and look, at the end of
	the day, your performance was in line with your expectations. The
	guidance looks at least in line for 2Q with where The Street is. So
	congratulations on all that, but on ops and other costs, there was a slight
	sort of miss, if you will, versus the midpoint of the range and just because
	of the performance being in line or better elsewhere, just curious what was
	driving that?
	Then if you could maybe to start off and warm up, across the regions, how
	was performance relative to your expectations across North America,
	Europe, Latin America? Anything to call out either positive or negative?
J. Sims	We were slightly below our range in ops and we had a couple of things
	that were not planned or not forecasted. One was a tax item down in Brazil
	and then we had an inventory revaluation that occurred in Europe. So
	those two things were roughly about $4 million that would have put us
	closer into our range.
	In terms of expectations by regions, we were close to where we thought
	we were, across all the regions. A little bit better maybe in Europe and
	also in North America. A little bit less in Brazil mostly because of a mix
	issue. We ended up selling more into export markets and less into Brazil
	than we expected, but in general, pretty much in-line with what we
	expected.
J. Ribiéras	In terms of outlook, you were asking, I think we have a continuing
	momentum of what we have seen in first quarter, which is improvement in
	every one of the regions. Latin America, the first quarter is seasonally
	always the weakest one, so it should come up. The rest is just continuing
	to progress and you can see it in our outlook.
Moderator	Next, we go to the line of Matthew McKellar with RBC Capital Markets.
M. McKellar	First, could you provide a little bit more color on the $200 million of high-
	return capital projects you've identified? Is there anything you can share
	over what time frame you'd expect to invest in these projects? What share
	of the project set would maybe be associated with each geographic
	segment? Then if there is anything you can share around weighted average
	IRRs across the pipeline of projects, that would be helpful.
J. Sims	Sure, Matthew. I think we said on the call that by the end of this year, we
	will have invested in about $70 million. If you look at next year, we

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	probably will spend about $115 million on high-return projects. If you
	look at the weighted average returns across those projects, it's almost
	greater than 35% or even higher than what we're showing in return on our
	share repurchases. But I think the- if you think about in terms of what
	we're spending on an annual basis, it's about that trajectory.
	So it took us about 3 years to go through $100 million return projects.
	Now we have identified another $200 million. We will probably be
	generally- continue with that rate.
	Most of these projects when you look at them on average is about $2
	million of capital project on average, returning well above 20% internal
	rates of returns. There are several projects that we need to continue to
	evaluate and of course get board approval that may be above $15 million
	to $20 million, but those are things that we are still looking at.
M. McKellar	As a follow-up, would that $70 million for this year be encompassed
	within Project Horizon? Then just on Project Horizon, more generally,
	could you maybe talk about how much you may be achieved on an
	annualized run rate basis in Q1 and how much incremental benefit you
	might expect in Q2?
J. Sims	Yes, some of these high-return projects are driving cost reductions that
	we're seeing, particularly in our manufacturing. So they are incorporated
	into our targets for Horizon and also will be part of our strategy going
	forward. As we say, we're doing this to strengthen our competitive
	positions in our core assets across the regions.
	In terms of the benefit of what we saw in the first quarter, remember, we
	shared this last time, we only expect about bottom line, $10 million to $15
	million this year because of $50 million roughly of inflation. So we said
	Horizon, we're going to deliver $110 million of run rate. By the end of
	this year, we'll be at that run rate, $50 million of inflation will have to be
	netted against that. So, we expect $10 million to $15 million this year and
	most of that is back-end loaded towards the second half of the year as we
	implement these projects and also reduce position.
	So the bottom answer is that we probably didn't see much in the first nor
	the second quarter. It will be back-end loaded.
Moderator	We have a follow-up from George Staphos with Bank of America.

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G. Staphos	I know it's a little difficult to talk about this sort of thing live mic, but
	some of the other producers in North America have either scaled back
	and/or we've heard from our trade contacts, had some operating issues in
	the first quarter where they had outages perhaps not planned.
	Has that been a material driver of your business? If so, should we be, to
	the extent possible, maybe trying to build in some cushion should that
	business leave that entered earlier in the year, leave you later in the year
	and into 2025? How would you have us think about that conceptually?
	Then a second question I had and then I'll turn it over. I know you're not
	guiding on third quarter yet. We do know what the maintenance guide is.
	Are there any other significant bridge items that you would have us at
	least conceptually think about as we think about 2Q to 3Q?
J. Ribiéras	George, if you don't mind, I'll ask you to repeat your first question because
	I think I didn't get the first question. I can answer the second question on a
	high level.
	So the main thing is the maintenance as you said. The other thing as we
	always say is the second half is a much better seasonality in Latin America
	than the first half. So, if I had to guide on two things, which may be is
	important are those two. Then, of course, the continuation of the
	improvement that we've seen in the first half- first quarter of this year.
	So the momentum, LatAm and the outage is probably a good way to look
	at it. And I'm sure-
G. Staphos	Jean-Michel, momentum, LatAm and what was the other thing you said?
J. Ribiéras	Momentum in general in the three regions and the outage as you
	mentioned-
G. Staphos	No. My first point, we had heard some of the other freesheet producers
	had some operating issues in the first portion of the year. I think there was
	one that was in the press with, I think, an unplanned outage. Did any of
	that business accrue to you and if it did, does it go away once those
	producers are back running more normally, I guess, is the substance of the
	question.
J. Ribiéras	Yes, we heard about it too and we just saw the first estimate of operating
	rate for the month of April and that statistic is saying it was 96%, which is

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	very high, but I don't think we can put a direct relation between our order
	book and what happens to our competitors. I think those two are
	independent.
Moderator	We go back to a follow-up with Matthew McKellar with RBC Capital
	Markets.
M. McKellar	I think you talked about upward pressure on the cost of your wood fiber in
	Sweden in 2023. I think you also mentioned expecting continued
	headwinds on the cost of fiber in Latin America, at least in the near term
	here. Can you talk about what the latest trends are in each country and
	maybe talk about whether you expect any moderation in wood fiber cost
	as '24 progresses?
J. Sims	Yes, Matt, the situation in Sweden, the wood cost continues to be elevated.
	Remember, we said that the reason for that is higher demand for wood for
	bioenergy and also the Russian situation and a lack of exports of wood. It
	has stabilized, but it stabilized at the higher levels. So we are not seeing
	increases in Sweden, but we're not seeing- nor are we seeing decreases.
	So it's pretty much stabilized there.
	Same thing in Brazil. Brazil where prices have certainly increased on the
	open market side. That also is stabilized but it was at the higher rate.
M. McKellar	If I could sneak one more in. Are you seeing new opportunities in Mexico
	that you could serve from either the US or Brazil with Mexico imposing
	import duties on uncoated freesheet from China and Indonesia?
J. Ribiéras	So the Mexico side is a balance for us because we had some export from
	Brazil, which is going to be taxed and it created opportunity from North
	America. So net-net, I think when we looked at it, it's more opportunities
	than anything, but it's been a balance between the two. But yes, you are
	correct. That is probably an opportunity which we are seeing to export
	more from North America to Mexico.
Moderator	We do have another follow-up from George Staphos.
G. Staphos	Just last one for me. Just number one, if possible could you give us a quick
	snapshot on capacities by region- paper versus pulp? If it is in the deck
	or in the coming Q, we'll wait and/or look, but if you had that quickly, that
	would be great.

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	Then what did you say the headcount reduction is with Horizon for this
	year in total? I recognize a third is already done from what you said, but
	what was the number that you cited for the year?
J. Sims	I'll answer the Horizon question first- 150 positions and that is across
	globally.
	On the capacity perspective, what we have it by region is for uncoated-
	so, I will give these numbers to you. So for uncoated papers in Europe, it
	is 765,000. For market pulp in Europe, it's 130,000.
	In Latin America, it's 1.1 million for uncoated freesheet and 165,000 for
	market pulp.
	In North America, for our facilities, it is 975,000 for uncoated freesheet
	and 115,000 for market pulp, but remember, we have a supply agreement
	with International Paper. So the supply agreements for both Georgetown
	and Riverdale, it's 655,000 of uncoated freesheet. That is in the appendix.
Moderator	We have no other questions. I'll now turn the call back over to Hans
	Bjorkman for closing comments.
H. Bjorkman	Thanks, Leah. Before we wrap up the call, Jean-Michel, any closing
	thoughts?
J. Ribiéras	Just a few. So first of all, thank you for joining the call. As we've
	demonstrated since the spin-off, we maintained a balance between a
	healthy financial position, returning cash to shareowners and reinvesting
	in our business. We continue to go to the same direction.
	Core to our strategy is reinvesting in our business to increase our
	competitive advantages. We are confident in our ability to generate strong
	earnings and cash flow throughout the cycle and looking forward for the
	second quarter and this year. Thank you very much.
H. Bjorkman	Thanks for joining us today. We appreciate your interest in Sylvamo and
	we look forward to continued conversations in the coming weeks and
	months.
Moderator	Once again, we'd like to thank you for your participating in Sylvamo's
	First Quarter 2024 Earnings Call. You may now disconnect.