Sylvamo Corporation

Good morning and thank you for standing by. Welcome to today's Sylvamo's third quarter 2021 earnings review conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, you will have the opportunity to ask questions. To ask a question, please press star 1 on your telephone keypad. To withdraw your question, press the pound key. I'd now like to turn today's conference over to Hans Bjorkman, Vice President, Investor Relations. Please go ahead, sir.

Hans Bjorkman Thanks, Angie. Good morning, and thank you for joining our call today. Our speakers this morning are Jean-Michel Ribieris, Chairman and Chief Executive Officer, and John Sims, Senior Vice President and Chief Financial Officer. Slides two and three 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, including the impact of COVID-19. 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 third quarter 2021 earnings press release, as well as today's presentation. I will now turn the call over to Jean-Michel. Thanks, Hans.

Good morning, everyone, and thank you for joining us today. I'm on slide four. Our vision is to be the world's paper company, the employer, supplier, and investment of choice. We are a new corporation with roots that go back more than 120 years. We are committed to transforming renewable resources into papers that people depend on for education, communication, and entertainment. Moving to slide five. As we discussed on investor day, while we have a strong North American business, we generate more than 70% of our profit in Europe and Latin America. Over the last 12 months, we generated sales of 3.3 billion and 535 million in adjusted EBITDA. As of the end of the third quarter, Our gross debt adjusted EBITDA ratio was 2.8. On the net debt basis, we ended the quarter with a ratio of 2.6 times adjusted EBITDA. Slide 6 shows how we built momentum from the October 1st launch. Third quarter net sales increased 8% to $908 million. We delivered adjusted EBITDA of $177 million and an adjusted EBITDA margin of 19.5%, above the high end of our target range of 15% to 18%. Adjusted operating earnings were $2.27 per share. We remain focused on generating cash and strengthening our balance sheet. Let's turn to slide seven to review our third quarter results in greater detail. As we continue to realize the benefit of prior price increases, price and mix outpaced increasing input costs. Global demand for encoded free sheets continued to gain momentum as schools and offices reopened. Our volumes remained strong, and we continued to run full in all three regions. We tend to avoid conducting planned maintenance outages during the hardest months of the year. so the third quarter was a low maintenance outage quarter. However, if we had normalized maintenance outage expenses, our third quarter adjusted a bit of margin, we still have been a strong 17.6%. Our customer value proposition has strengthened as our channel partners and customers value a supplier committed to the uncultured free sheet segment. Strong commercial and operational performances during the spin-off period drove our above-target financial results. Now, John seems to provide more detail about our third quarter performance.

John? Thank you, Jean-Michel, and good morning, everyone. It certainly is exciting to be part of Savalma's first earning call. On a daily basis, we all hear and read about increasing input costs and supply chain bottlenecks, and Savalma was not immune to those challenges. Our input costs have increased by $26 million in the third quarter. However, our price and mix improvements outpaced increased input costs by $4 million. Year-to-date, our improvement in price and mix was $23 million more than input cost inflation. An important takeaway from this slide is the advantage we have in our global footprint. As you can see, on a per ton basis, increasing costs impacted our regions differently. I want to point out that $3 million of the increase in fiber costs that you see in Latin America It's related to the pulp we purchased for our non-integrated Trace Lagos mill. Seventy percent of this increase is naturally hedged by our pulp sales in Latin America. So if you take that into account, you'll see that our Latin America costs on a per ton basis would be similar to Europe. So most of the cost impact that we're seeing globally is in our North America business. Moving to slide nine. Global uncoded free sheet demand continues to recover from the impact of COVID pandemic, and we continue to run full and improve our mix as our commercial teams maximize opportunities across geographies, segments, and channels. Let's talk a little bit about global demand. Third quarter year to date, global uncoded free sheet demand was up 5.3%. Industry demand in Latin America was up 11%, and in Eastern Europe, demand was up nearly 8%. In Western Europe and North America, demand was up 3.5%. So the recovery of copy paper demand continues to lag other uncoded appreciates segments because a significant number of office workers still have not returned to the office in North America and Europe, and schools still remain closed in Latin America. I point this out. because there's still more recovery to be had as people return back to the offices and schools begin to open. This should be supportive of global operating rates and particularly operating rates in the regions we operate in. Currently, global copy paper demand was only up 2.6% through the third quarter. Year-to-date, our uncoated free sheet shipments were up 14% versus last year, and our third quarter shipments were up 11%. versus 2020. So we're continuing to outperform industry growth rates due to our strong commercial teams, brands, and our focus on commercial excellence. Let's go to slide 10. We generated $177 million in adjusted EBITDA in the third quarter, up from $124 million in the second quarter. We achieved $30 million in price and mix improvements and $12 million in volume. Operations improved by $10 million, reflecting a foreign exchange benefit in Brazil, and good operations as we prepared for the spinoff. As Michelle mentioned, we conducted fewer planned maintenance outages and spent $27 million less than in the third quarter. This benefit, though, was largely offset by $26 million in increased costs in fiber, energy, chemicals, and distribution. We feel good about the performances of our regional and staff teams during the third quarter as they work extremely hard to meet customer needs, manage global supply chain challenges, and prepare to execute the spinoff. Let's turn to slide 11. We regard commercial excellence and operational excellence as key differentiators of Savama. We're gaining new business and improving our mix with key customers who are eager to expand their positions with a supplier committed to uncoated free sheets. We have best-in-class commercial teams working tirelessly to deliver value to our customers and land new business that improves our mix and increases our positions with key channel partners and customers that are winning in their segments. For example, in the third quarter, our North America team landed an incremental 12,000 tons of Accent Opaque business from several new customers. Accent Opaque is one of our premium commercial printing grades. We also expanded our channels to market in Latin America. We recently added Chamex copy paper, our branded copy paper, into 46 new Brazilian retail outlets that previously did not sell copy paper in their outlets. In addition, we are leveraging product development to expand beyond traditional end-use applications. For example, in Brazil, we're expanding our position in medicine insert applications. Our best-in-class operations team demonstrated their commitment to operational excellence in the third quarter. They successfully completed an extremely challenging operating system cutover during a very difficult supply chain environment. Let's take a second and look at our regional results on slide 12. Each of our regions performed well in the quarter. Strong earnings and margins reflected the realization of prior price increases, improving volume in Europe, and continued strong volume in Latin America and North America. Europe and North America had no planned maintenance outages, and Latin America executed two outages well. As we discussed earlier, input cost increases were significant. Although supply chains have been disrupted, some customers have shifted incremental business to us. And in fact, we have customers that would like to shift more of their business to us if we could accommodate them. The appendix in the back provides more detail on our regional performance. So let's turn to slide 13 to discuss our outlook for the fourth quarter. We expect to deliver an EBITDA of $140 to $150 million in the fourth quarter. That's adjusted EBITDA. Price and mix is expected to improve by $30 to $35 million as we continue to realize price increases that have been communicated to our customers in all regions. We expect seasonally strong volume in Latin America, contributing to overall volume improvements of $10 to $15 million. Operating costs are expected to increase by 15 million, and that's reflecting seasonally high energy use in Europe and North America as we transition into the colder timeframe. We expect input costs and distribution to increase 35 to 40 million. Most of this is driven by energy, wood, and chemicals. I'll speak a little bit about that. In the energy area, particularly in the gas prices, Particularly in Europe is where we're seeing most of the increase. Gas prices in Europe were up almost 300% versus last year. In wood, we're seeing increases in North America, primarily weather-related. This has driven our inventories low because of low harvesting. We do expect that we will replenish our inventories and our wood costs will return back to normal sometime around March next year. Maintenance outages expenses will increase by $24 million as we conduct two extended planned maintenance outages at our SIAT and East River Mills. Our adjusted EBITDA outlook does not include one-time costs for transition service agreements. Slide 27 in the appendix contains fourth quarter estimates for corporate items. Let's turn to slide 14 to discuss free cash flow. As Jean-Michel discussed, We are focused on generating free cash flow to drive share owner value. We expect we will generate strong free cash flow in the third quarter. We generate strong free cash flow in the third quarter, and we expect strong free cash flow in 2022. Please recognize that our 2021 free cash flow is not representative of the free cash flow we will generate in the future. primarily because it doesn't reflect 130 to 150 million of annual capital spending for maintenance, regulatory, and reforestation, which is going to be above the 90 million that's forecasted for this year. It also does not include our projected interest expense. Even with our interest expense and normalized capital spending, we expect our 2022 cash flow to be more than sufficient enough to allow us to reduce debt, fund $145 million of maintenance, regulatory, and reforestation capital, plus the $15 million of engineering that we'll spend for the Sylveta Gorse Recovery Board, and position the company to begin to return cash to shareholders. I will conclude my comments from slide 15 with a review of our current debt structure. On Investors' Day, we showed that we launched Samama with just over $1.5 billion in gross debt. We ended the third quarter at 2.8 times gross debt to adjusted EBITDA, which is equivalent to 2.6 on a net debt basis. On October 29th, we repaid $30 million of the outstanding balance of our revolving credit facility, bringing the outstanding balance down to $70 million. And as you can see, we have favorable debt maturity profile. Over the next four years, on average, less than $50 million of debt will amortize each year. So with that, I'm going to turn it back over to you, Jean-Michel.

Thanks, John. I'll wrap up our comments on slide 16. Even with the continued uncertainty of the COVID-19 pandemic and supply chain disruptions, we are well positioned for continued success. Our commercial and operational excellence will continue to drive strong business results and our financial discipline will create value for shareholders. The cash flow generation John outlined will position us to improve shareholder value by reducing debt and beginning discussion with our board about returning cash to shareholders. I couldn't be more proud of how our employees have performed throughout 2021. We appreciate their commitment to working safely during the pandemic and taking care of our customers. We are passionate about our employees, customers, and our shareholders. Sylvamo is off to a great start. We really like our position in paper and have a great deal of momentum to close out the year on a high note. With that, I will turn the call back to Hans.

Thanks, Jean-Michel, and thank you, John. Okay, Angie, with that, we're ready to take questions.

Absolutely. If you would like to ask an audio question, please press star 1 on your telephone keypad. We ask that you do limit your question to one and one follow-up. Please hold for your first question. Your first question comes from the line of George Staffos with Bank of America. Please state your question.

Hey, good morning. This is actually John Batcock on the line for George. I guess just the first question, can you talk about how demand trends have held up so far in 4Q across your different markets? It sounds like overall it was pretty strong in 3Q. And then also, if you could talk about what impact you're seeing from the supply chain, particularly in North America, that would be helpful.

Good morning, John, and thank you for joining our call. First of all, I will answer the question around demand. Demand continues to be really strong globally. As I mentioned, we are full everywhere, and the trend continues to be very good And we even have some region like Latin America, which are kind of getting out of the pandemic. So you have back to schools, which are starting, return to office, which should start soon, and have even started in some regions of Brazil. So we expect to have a continuous strong demand in the fourth quarter. Concerning supply chain, we've been, like everybody, I mean, who is not today on transportation, on supply chain issues, impacted with what's going on. In the U.S., I would say for us, it's mostly truck. We are looking at mode shift to more rail and looking at different options and have good partners, but truck is where we put a lot of attention. In Latin America, I would say it's mostly from Brazil, vessels for exports. It's difficult to get exports, and if you miss one, Getting a new one is really very difficult, so making sure we comply with the planning timing of vessels is essential. In Europe, we had some issues in third quarter, a little bit in rail in Russia, but it's been taken care. It's managed by the government, and they actually did a good job to put it back to a smoother relation. And we have some truck in some specific regions of Europe, like UK, I think everybody has seen that on media. So North America, a lot specific to tracks. Latin America vessels, Europe, mostly tracks also.

Gotcha. Thanks for that, Karl. And then, you know, moving on, I guess like my next question before I turn it over. You know, on maintenance, it seems like that's going to be up a decent bit in 4Q. I thought you mentioned, you know, some projects at SIAT. Correct me if I'm wrong there. And then also, how should we think directionally about maintenance in 2022? Hey, John.

This is John Sims. If you think for the fourth quarter, we have two major outages, extended outages, both at SIAT and the East River Mill. So those are the site I know is actually a 21-day outage. It's a 10-year outage that we have to do every 10 years. And east there was a cold outage. So that will drive up the cost of those outages. We do provide guidance and appendix back there in terms of what 2022, we estimate that to be $62 million for the outage expense, slightly less than what we did this year.

Thanks for the call. I'll get back to you.

If you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from the line of Russ Everman with ROH Investment. Please state your question.

Good morning, gentlemen. Thank you for taking my call. Could you talk about the capital expenditures you're going to use on your European plants? I think I saw something from your original deck that you needed to upgrade. I think it's your Russian operation. Could you address that, I guess, for 2022?

Yes, Russ. We did discuss that also in our Form 10 and Investor Day. So we have two recovery boilers that are reaching their end of life at our Svetogorsk Mill in Russia. And we've been looking at options either to rebuild those two boilers or to replace them. We haven't made a final determination on that. We'll be bringing that to our board of directors. But we put in our projections, if you will, and we talked about it in investors' day, the higher capital option, which is to rebuild the recovery boiler, which estimated somewhere around $220 million. This is a lower capital but less operationally impacting option because if you rebuild it, you have to shut the mill down and so you lose the production of that. But when you install a new one, you don't lose that. You don't have that impact. So next year we have $15 million in our capital spend that's around the engineering of the recovery boiler. And then we're projecting that we'll have in 2023, approximately $75 million and related to the Savetta Gorse boiler. And in 2024, we'll have a hundred million. And then we install it and complete it with 30 million in 2025.

So if you do go the new route, how much operating cash flow will that take out of your number in 22 and 23 if you go the new boiler route?

So if we go the new boiler route, we will not impact the production at our and operating cash flow, we'll be able to continue to run that mill, and that won't be impacted.

Okay. Thank you, guys. Thank you very much. Sure.

If you would like to ask a question, please press star 1 on your telephone keypad. You do have a follow-up question from the line of George Staffos with Bank of America. Please state your question.

Thanks for taking my questions again. I did want to ask, actually, can you just remind us what price hikes you have in the market and also how much is left to be realized from the hikes that you've announced?

So what we have price increases actually in all regions. And we've had some price increases that we announced since the investor, to our customers, you know, we announced since the investor meeting. So we have price increases that will be going through in Russia, Europe, and Latin America in export markets and in North America. So you saw that we project that we have $30 to $35 million in terms of price and mix in the fourth quarter. And how you can think about that, there will be further implementation and realization of those price increases in the first quarter because essentially That $30 to $35 million probably represents about a half a month of implementation of those price increases.

Okay. Thanks for that. And then can you also just remind us how mix tends to shift across the region? So is it more of a positive impact or negative impact, you know, across different regions? Yeah, it looks good.

Yeah, from a mix perspective, we're always looking for opportunities to improve the mix, and particularly in the demand environment that we have today, there is a lot of opportunity to do that. And so when you think about mix, we have the flexibility or ability to improve our mix from a product perspective. We also have it from a customer perspective domestically in each of our regions and also export-wise. And that means taking opportunities to be able to export to the markets that we generate the most profits in. And so when you think about mixes, we're trying to pull those levers in all our markets.

Okay. Isn't there a seasonal impact, though, to mix, at least from what I remember? Maybe I'm completely wrong here, but that's really what I was getting at.

You're correct, John. There is a small regional impact, but because we are in the three regions, it's a little bit different. But usually the first quarter is, especially in Latin America and in Russia, the lowest one because of the holidays and the vacations. And then you have the third quarter, which is average. So we do have some seasoning, but because we are the third region, they kind of balance each other.

Okay. Thanks for that. And then just a last question. You know, just on cash flow, are there any notable items we should be mindful of in the fourth quarter here, whether it's working capital or otherwise?

No. We did share with you that, well, we got, you know, the TSA expense, so that'll show up in the fourth quarter, which we hadn't, you know, had previously, of course, because of the spin. And also we have some one-time items. Okay.

All right. Thank you.

Thank you.

Your next question comes from the line of Brian Lally. Please state your company name followed by your question.

Hey, guys. Yeah, it's Brian Lally from PGIM. Thanks for the time this morning. If I could maybe just follow on John's question there, you know, not to get too far ahead of ourselves with 2022, you know, guidance, et cetera, but if you were to sum up up all of the price actions you've taken relative to the inflation that you're dealing with. Is there an amount for 2021 that you'd say you're still not fully caught up on yet? And obviously, all things being equal, which isn't fair, you know, you'd say 2022 has additional tailwinds from the pricing you've already enacted. I'm just curious kind of what that number might be as we move into next year.

Yeah, I think if you looked at a full-year basis, because we still have some of these price increases that we're implementing in the fourth quarter, and we've had some significant cost increases. And some of these, I think, may not go forward, right? So we think that the gas prices in Europe, as more gas is coming in from Russia, and hopefully the wind will blow stronger in Europe, that we may actually see some of the gas prices back off. And like I mentioned earlier, the wood cost in North America, we expect that it's elevated now because of weather, but that will come off. But in general, I think that when you look at our price increases relative to cost increases, we're just staying ahead of it by the time we exit the year. However, when you look at the first quarter, because of prices that we have already announced to our customers that we're and feel very strong and confident that these will be implemented. We're going to see the benefit that in the first quarter, it's in the first quarter that we'll start to really show that we're outpacing the cost inflation.

Is there a number that we should be thinking about on that, John? I'm just, I'm just curious, you know, again, to your point, The run rate as we exit the year maybe isn't as, you know, high as you think you'll get to, again, with the prices that you've announced and feel confident in with your customers.

Just so we size it up correctly in our – Yeah, Ryan, I'm not going to give you numbers right now for projections for 2022. You know, we don't get forward-looking in terms of price details, so –

Okay. No, that's fine. Again, I just wanted to, you know, I wanted to ask the question. Not a big deal. And then I guess my second one would just be, you know, again, as the Brazil, you know, tax liability, I'm just curious if there's any update on that. I know there's some limitations around, you know, restricted payments and stuff until you get that figured out. So I figured I'd just see if there was an update on that front as you talk about shareholder returns.

Yeah, Brian, it's Good question in terms of the – there's still a bill pending in the Brazilian legislation about a potential tax amnesty program, but that still hasn't worked its way through yet. And just to remind everybody on the call that it's really international papers' decision. They control the decision of whether they want to pursue that amnesty or not. But it still hasn't worked through, so it doesn't appear that it's going to come through in November. There's a lot going on in terms of the Brazilian government right now. It may come out in December or may sometime in next year.

No, I appreciate the update on that, John. All right, guys, thanks so much for the time. I appreciate it. Best of luck with the rest of the year.

Thank you.

At this time, there are no further questions. I would now like to turn the floor back to Mr. Bjorkman for any additional or closing remarks.

Thank you for joining us today. We do greatly appreciate your interest in Silvamo, and we look forward to the continued conversations in the months and quarters to come. Have a great rest of your day and a great week.

Thank you for participating in today's conference call. You may now disconnect your lines at this time.