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spk02: Good morning, and thank you for standing by. Welcome to Sylvamo's second quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will have an opportunity for questions. To ask a question, please press 1 and 0 on your telephone keypad. To withdraw your question, please repeat the 1-0 command. I would now like to turn the call over to Hans Bjorkman, Vice President of Investor Relations. Sir, the floor is yours.
spk06: Thanks, Tawny. Good morning, and thank you for joining our call today.
spk01: Our speakers this morning are Jean-Michel Rivieres.
spk06: 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. 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 second quarter 2022 earnings press release, as well as today's presentation. On slide four, we want to provide a brief update on our Russian business. As communicated in our first quarter earnings call, we made the decision to exit Russia and began conducting a process to sell our Russian business. In the second quarter, we have transitioned the Russian operations into discontinued operations. It is important to note, now that our Russian operations are reported in discontinued ops, all earnings and figures for current and prior periods, as well as our outlook in this presentation, exclude our Russian business. unless otherwise noted. The process to sell the business continues, and we will provide an update on any material developments when appropriate. Please keep in mind that the situation in Russia is complex and continues to change frequently. In the meantime, we will continue to comply with all regulations and sanctions. With that, I will now turn the call over to Jean-Michel.
spk03: Thanks, Hans. Good morning, and thank you for joining our call. I'll begin my comments on slide five. I'm very pleased to share our second quarter highlights. We continue to have good results with another quarter of excellent commercial and operational execution. Quarter over quarter, we had a 290 basis point improvement in our margins, and we grew our adjusted EBITDA to 189 million, a 29% improvement. Our adjusted earnings per share grew 51% quarter over quarter to $2.02 per share. We generated $39 million in free cash flow and we repaid $48 million in debt. We initiated a dividend with the first payment in July, and our board also authorized a share repurchase program of up to $150 million. Our strong performance is a result of our low-cost asset base, talented people, and our continued effort to help our customers succeed. Let's move to slide six. We continue to execute and deliver on our three-pronged strategy of commercial excellence, operational excellence, and financial discipline, which resulted in a 20.7% adjusted EBITDA margin. Demand for uncuted free sheet continued to strengthen in Latin America and North America as schools and offices reopened. Our volumes remained strong We remain at full capacity in all regions, and we outperform industry demand across our regions by 260 basis points with our customer focus. In fact, year-to-date in Europe, our brand new sales as a percentage of overall mix is up almost 10% against last year. And in Brazil, our cut-size sales are now back to pre-pandemic levels. We operated well in the current supply chain environment where the availability of many raw materials remains stretched. We continue to realize the benefits of prior price increases result in price mix outpacing cost inflation. I'm proud of how our teams navigated the current landscape and the work to take care of each other as well as our customers. Executing this strategy generated significant free cash flow that we have used to pay down debt and pay a dividend. Slide seven highlights our key performance metrics and our strong results for the quarter. Net sales were $920 million, which was up 11% quarter over quarter. As mentioned earlier, we generated and registered a bidda of $189 million, which was an improvement of 29% over the first quarter. Our adjusted EBITDA margin was strong at 20.7%, especially since the second quarter was an heavier maintenance audit quarter. We have not seen margin this high since before the pandemic. We generated $39 million in free cash flow, up 22% quarter-over-quarter, and delivered adjusted operating earnings per share of $2.02, which is at 51%. Slide 8 summarizes our performance for the first half of the year. We delivered an adjusted EBITDA of $335 million, achieving an adjusted EBITDA margin of 19.3%. We generated $71 million in free cash flow after several substantial one-time spin-related payments. And we continue to strengthen our balance sheet by paying down $81 million of debt. This strong performance demonstrates our ability to continue to deliver on our investment thesis. Our teams perform well, creating value for all of our stakeholders. I now turn it over to John to discuss our second quarter performance in more detail. John? Thanks, Jean-Michel.
spk05: Good morning, everyone. Let's turn to slide nine. As Jean-Michel mentioned, we generated $189 million in adjusted EBITDA with a margin of 20.7%. Again, this was a 290 basis point improvement over the first quarter as our gains in pricing, commercial excellence, and operational excellence are outpacing cost inflation. We improved price and mix by $73 million as price realizations exceeded our forecast. AND WE HAVE BENEFITED FROM SEVERAL MIXED OPTIMIZATION INITIATIVES. VOLUMES INCREASED BY 2 MILLION, WITH STRONGER SEASONAL DEMAND IN LATIN AMERICA, AS BACK-TO-SCHOOL BOOK PUBLISHING WAS STRONG. OUR ORDER BACKLOGS REMAIN STRONG IN ALL REGIONS. OPERATIONS AND COSTS ALSO IMPROVED BY 2 MILLION. OVERALL OPERATIONS RAN WELL. WE SUCCESSFULLY CONDUCTED PLANNED MAINTENANCE OUTAGES AT OUR EAST OVER AND TICONDO ROVER MILLS and spent $17 million more on outages than in the first quarter. Input and transportation costs increased by $16 million with rising costs of chemicals, energy, fiber, and distribution. Let's take a look at our regional results on slide 10. Each region continues to perform very well, demonstrating the strength and resilience of our talented teams, our low-cost mills, iconic brands, as well as favorable industry conditions. We continue to win with customers and increase our positions in key segments. For example, in Brazil, we are expanding our presence in high-margin food retail channels, and in North America, we are growing on-demand book publishing. We remain focused on earning the right to be our customer supplier of choice. Our volumes remain strong in all regions, and we continue to outperform industry shipments. Our commercial performance reflects our compelling customer value proposition, as well as continued price increase realizations. Operations were good in all regions, while executing two large annual outages in North America. Supply chain costs remain under pressure. However, we're seeing truck availability starting to improve in North America. One of the competitive advantages of Savambo is our global footprint. And I want to remind you that our European team has been selling products from Brazil into Europe for over a decade. Now that our Russian business is in discontinued operations, the Brazilian volume represents a much higher percentage of our total European sales and impacts our reported EBITDA margins in Europe. So if we exclude the Brazilian volume sold by our European team, where they only receive a sales commission, Europe's second quarter adjusted EBITDA margin would have been closer to 20%. The appendix contains additional details on our regional performance, so let's turn to slide 11. Six months into the year, global uncoded free sheet industry conditions continue to be favorable. As demand continues to rebound from the effects of COVID and operating rates remain tight, particularly in the regions where we operate. It should be noted that industry inventory levels are below historical levels across our regions due to tight supply conditions. Year-to-date through June, North American industry demand growth is 2 percent, while Latin American industry demand growth is positive 16 percent. Western Europe industry demand declined 2.7 percent in the first half of the year. But the prior shutdown of high cost capacity still results in favorable supply and demand balance there. It is believed that this tight supply is negatively impacting European demand. Selling prices remain favorable, and we expect to continue to realize prior increases throughout the third quarter. Our price and mix improvements continue to more than offset input and transportation costs. So let's move to slide 12 and look at our third quarter outlook. In the third quarter, we expect to deliver an adjusted EBITDA of $205 to $215 million. Price and mix is projected to improve by $40 to $45 million as we continue to realize price increases already communicated to our customers in all regions. We expect volume to improve by $5 to $10 million with seasonally stronger volume in North America. Operations and costs are projected to increase by $5 to $10 million. We expect input and transportation costs to increase by $35 to $40 million, largely due to higher chemicals, energy, fiber, and transportation costs. Maintenance outage expenses are projected to decrease by $14 million as we conduct less planned maintenance outages this quarter. Slide 22 contains further details on additional financial metrics for the third quarter outlook. Now let's turn to slide 13. I want to remind you how we are planning to allocate cash to create value. This slide frames up how we plan to allocate our capital. We intend to use our cash to strengthen our balance sheet, invest in high-return projects, and return cash to shareholders. Let's start by diving into how we plan to strengthen our balance sheet on slide 14. Last quarter, I shared with you that we are now targeting growth debt of $1 billion. We believe this will achieve the following. It reduces our risk and our cost of capital, reduces our interest expense, puts us in a position to invest in businesses throughout the cycle, and increases our flexibility for other value creation opportunities through the business cycle. As you can see on the slide, we have repaid $225 million in debt since our spend. and we have steadily driven down our growth debt to adjust the EBITDA ratio every quarter. In addition to the $48 million repaid in the second quarter, we also repaid another $20 million in the month of July. This now puts our growth debt level below $1.3 billion. We were able to accomplish all of this within our first 10 months of being a standalone public company. Here on slide 15, we will take a closer look at how we plan to invest in high-return projects to improve our business, lower our costs, and make our assets even more competitive. We are developing a portfolio of high-return cost reduction and strategic volume and mixed-related capital projects. Over 100 million of capital projects with high returns have been identified so far. Thirteen costs were Cost reduction projects have been approved at this point with a total capital cost of $33 million. These projects will be executed over the balance of 2022 and 2023. This slide shows six of these projects to illustrate some of what we're working on. We expect to achieve an excess of $12 million in annual savings from these investments, with most of the projects starting to return savings in the second half of 2023. All these projects are focused on reducing energy, fiber, and chemical costs, as well as indirect cost savings. These projects have an investment range of $200,000 up to $2.5 million, and they have internal rate of returns ranging from 20% to 80%. Let's turn to slide 16 to discuss returning cash to shareholders. On our last call, we mentioned that we were conducting board-level discussions around returning cash to shareholders. In May, our board approved a quarterly dividend of 11.25 cents per share that was paid in July. Our board also authorized a share repurchase program of up to $150 million. Let's turn to slide 17. So if we look at the balance of the year and beyond, you can see that our debt maturity profile that we do not have any significant maturities due until 2027. It is also important to note that we have $128 million of spend related payments in 2022 that will not repeat. These include 77 million of day one Riverdale and Georgetown inventory inventory payments. 29 million of one time spinoff expenses. and $22 million of transition service agreement costs. We'll also benefit from our high return project pipeline as that ramps up, as we now have the option to opportunistically buy back shares to help create further value. Also note that in Brazil, a settlement program became available for disputes over the amortization of Goodwill, and it expired in July. International paper which directs our goodwill tax dispute there determined not to settle the dispute through the program. I'll now turn the call back over to Jean-Michel.
spk03: Thanks, John. I'll conclude our remarks on slide 18. We are well positioned to continue to create value in 2022 and beyond. We remain committed to generating strong earnings and cash flow and confident in our ability to achieve pre-pandemic earnings levels in 2022. In fact, we are increasing our full year adjusted EBITDA guidance from a range of $725 to $775 million to $740 to $780 million. We are also increasing our full year free cash flow guidance from a range of $160 to $180 million to $170,280 million. Our reasoning is as follows. We see favorable industry conditions and expect that to remain in the second half. Our customer value proposition has continued to strengthen. We continue to have excellent commercial and operational execution. Our price mix continues to uppace inflation. In the second half, we expect improving adjusted EBITDA margins and strong sustainable free cash flow. Our strategy has not changed. Also, we are now targeting a growth debt level of a billion dollars. We are accelerating our high return project and we continue to work hard to strengthen our company and improve the business. Our ability to navigate dynamic industry conditions and achieve success is because of our talented and engaged teams. We appreciate their dedication to working safely while delivering on our promises to our employees, customers, and shareholders. We are committing to delivering value for all our stakeholders by continuing to deliver on our investment thesis. We remain confident in our ability to achieve our vision of being the employer, supplier, and investment of choice. With that, I'll turn the call back over to Hans.
spk06: Thanks, Jean-Michel, and thank you, John. Okay, Tawny, we're now ready to take questions.
spk02: Thank you. If you wish to ask a question, please press 1 then 0 on your telephone keypad. If you would like to withdraw your question, please repeat the 1-0 command. We do ask that you limit yourself to one question and one follow-up. Thank you. Our first question will come from the line of Paul Quinn with RBC Capital Markets. Please go ahead.
spk07: Yeah, thanks, guys. Good morning. Just a question on price increases. I've seen a number of competitors in North America introduce September price increases in the marketplace. Just wondering if you follow suit and what's the status in Latin America?
spk03: I think we don't comment on pricing, but there's been some press or media or specialists which have informal price trends. So I think it's public knowledge for North America.
spk07: Okay, then just maybe just a bonus question here. Just on guidance, I think I made this wrong last quarter, but essentially you've moved up guidance by 10 million on the midpoint, right? But I was assuming that Q1's reported 187 was in your guidance as opposed to the 143 that's ex-Russia, right?
spk03: Yeah, this is all ex-Russia, and you're correct. We've upgraded especially the midpoint by about 10 million, a bit more.
spk07: All right. That's all I had. Thanks.
spk03: Thanks, folks.
spk02: Thank you. As a reminder, if you wish to ask a question, please press 1 and 0 on your telephone keypad.
spk01: Thank you.
spk02: And I'll turn the call back over to Hans Bjorkman for closing comments. Oh, one moment. We do have a last moment question that just come in. And that's from Cole Hadhorn with Jefferies. Please go ahead.
spk08: Good morning. Thanks for taking my question. I'd just like to follow up on the wood cost trends that you're seeing by region. Particularly interested in hearing what you're seeing in the European markets for wood costs. Some of your competitors are calling out would cost inflation and then following up on on that i'd like to hear a little bit more about the office paper demand trends that you're seeing in europe relative to to north america are you seeing any divergence from your customer base in the strength of those office paper order books thank you
spk05: Yeah, hey Cole, it's John Sims. On the wood cost, we're seeing wood costs increase across all our regions, but mostly that's driven by transportation costs due to diesel, although diesel is going down its lag because mostly it's indexed to that. In particular to Europe, you know, our sources of wood is from the Sayat Mills in France, and we actually have a wood harvesting operation there. We're not seeing the pressures that you see in other places, particularly like you're seeing in Poland and other places, that's being impacted either because of the Russian ban on wood to the Nordics and some other things that are going there. So we're not seeing that increase other than the transportation costs in Europe and in SIAT. In terms of your question around uncoded free sheet demand in Europe, it is. As we mentioned, the demand in Western Europe, uncoded free sheet is down. It's down 2.5%. And as we also mentioned on the call, we believe that the conditions, despite the conditions, are so tight there that you have a lot of stock outs in shelves. And we reported that some availability of paper is not there. we think that that is impacting uh the ban how much we we don't really uh have a view on that but we do think that that is impacting it uh the most significant demand decline though we're seeing is in uh eastern europe and that's mostly driven because of the ukrainian situation i believe that's been reported almost down 10 percent but that really doesn't impact us uh from Sayat, which our shipments there is predominantly Western Europe.
spk08: Thank you. If you permit one follow-up, given your region of producing in France, I imagine you don't have any water level or drought issues. Are you seeing any water level issues impacting potentially some of your competitors' production for the market? Any comment you can give on that would be helpful.
spk03: Yeah, we don't know about competitors on draft. There is, as you know, in France, some draft also. It might not be as bad as some other countries of Europe. There is a lot of people making attention, and government has given instruction on water. So we're not too affected right now, but we're paying attention to that. The one thing which we are paying more attention, which is not impacting us directly yet, but could is the fire, the wood fire, the forestry fires. You know, there's especially one big one in the southwest of France. There's been a lot this summer, and that has created some disruptions. So far, we've been able to manage it, but it has created some disruption on the wood side.
spk08: Thank you.
spk03: Thank you.
spk02: Thank you. As a reminder, if you have a question or comment today, please press 1, then 0 on your telephone keypad. And we do have a question from the line of Jonathan Luft with Eagle Capital Partners. Please go ahead.
spk04: Hey, guys. Thanks for taking my question. The first question I have is maybe just talking about Europe and the energy situation. Can you just walk us through your exposure there?
spk05: Yeah, Johnson. This is John. We're well positioned, if you will, with our site on mill because we're an integrated mill and produce most of our energy needs. We do have some demand for gas there, but it really represents almost 10% of our energy needs.
spk04: Perfect. And now that Russia is part of the discontinued operation, can you maybe talk to us a little bit about, you know, what the business would have looked like without Russia if we went back to 2019, 2020, pre-pandemic, and, you know, how the business, you know, the guidance this year and how it relates to, you know, ex-Russia.
spk05: Yeah, Jonathan, I mean, I think, and when you mentioned it, is that, you know, our earnings even without Russia is approaching or actually better than almost in pre-pandemic levels. Even back in 2019, where we had, you know, we actually had another machine, we had a Riverdale 15 machine that was producing. Today, we're projecting to produce more earnings and have higher EBITDA margins than we did back then. So if you think about what Russia contributed in terms of EBITDA margin during that time frame pre-pandemic, it was north of $120 to $125 million. OK.
spk04: That's very helpful. And then just a last question from me is, if you could talk about the competitive environment, given that margins are pretty attractive now, Are you seeing people try and turn on machines or sell some incremental capacity into the market? What are you seeing there?
spk03: We're not seeing any major changes. And I think, you know, if you are in a non-integrated position in Europe with the energy, wood, and chemical price and the power price right now, your position remains difficult, I would say, probably. And there is no change in capacities in the other main regions. So we're not seeing anything significant right now. Operating rates remain very high in every region we operate.
spk04: All right. Well, thank you so much.
spk02: Thank you. Thank you. And I'll turn the call back over to Hans Bjorkman for closing comments.
spk06: Thank you, Tony, and thank you, everyone, for joining us today. We do appreciate your interest in Silvamo, and we look forward to continuing the conversations in the coming days, weeks, and months ahead. Have a great day. Thank you.
spk02: Once again, we'd like to thank you for participating in Silvamo's second quarter 2022 earnings call. You may now disconnect.
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