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spk00: Good morning. Thank you for standing by. Welcome to Sylvano's third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, you will have an opportunity to ask questions. To ask a question, please press 1 and 0 on your telephone keypad. To withdraw a question, please press 1 and 0 again. As a reminder, your conference is being recorded. I would now like to turn the call over to Hans Bjorkman, Vice President, Investor Relations. Sir, the floor is yours.
spk02: Thanks, Greg. Good morning, and thank you for joining our call today. Our speakers this morning are Jean-Michel Rivieres, Chairman and Chief Executive Officer, and John Simms, 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. We will also present certain non-U.S. GAAP financial information. Reconciliations of those figures to U.S. GAAP financial measures are available in the appendix. Our website also contains copies of the third quarter 2023 earnings press release, as well as today's presentation. With that, I'll turn the call over to Jean-Michel. Thanks, Hans.
spk03: Good morning, and thank you for joining our call. Let's turn to slide four, please. In the third quarter, we achieved $158 million in adjusted EBITDA and generated strong pre-cash flow of $155 million. We achieved adjusted operating earnings of $1.70 per share. Price and mix, operation and input transportation costs were all favorable to the outlook we provided in our second quarter call. Our third quarter volume was short of our expectations, reflecting ongoing shadow inventory stocking and weaker than expected demand. We strengthened our financial position in the third quarter with net debt now at $796 million, another 1.2 times net debt to adjust it a bit to our ratio. We also deposited $60 million in escrow to remove cash return limits related to the Brazil tax dispute in our credit agreement, while returning $24 million in cash to share owners in the quarter. Slide five compares our third-quarter key financial metrics versus prior periods. In the third quarter, our earnings were better than our outlook, and we took measures to maximize free cash flow, including selling administrative cost reduction, shrinking working capital, and adjusting the timing of capital spending. I'm proud of how our teams collaborated to take care of our customer needs while executing significant economic downtime safely and as efficiently as possible. Now, John will discuss our third quarter performance in more detail. John?
spk05: Thank you, Jean-Michel. Good morning, everyone, and thanks for joining our call. Slide six shows our third quarter earnings bridge. As Jean-Michel stated, we earned $158 million of adjusted EBITDA in the quarter, which was slightly higher than our guidance of $130 to $150 million. Let's discuss the changes versus the second quarter adjusted EBITDA. Price of mix decreased by $55 million due primarily to lower paper prices in Europe and Latin America export markets, as well as lower global pulp sales. Volume increased by $6 million in the Americas while Europe remained stable. Operations and other costs improved by $1 million with better operating and supply chain results offset by $13 million in higher, unabsorbed fixed costs due to increased economic downtime. Plan maintenance outages costs decreased by $55 million, with no major plan outages in the quarter. Input and transportation costs improved by $27 million, driven by favorable fiber, chemical, and transportation costs. Let's move to slide seven. This slide shows world graphic paper demand at just over 100 million tons. Here you can see that uncoded free sheet is the largest and most resilient of all the graphic paper grades. What separates uncoded free sheet? You know, it's quite simple. Uncoded free sheet has the highest number of end-use applications and is used across all sectors of the economy. Uncoded Precinct is sustainable, affordable, and functional. And we believe paper will remain an effective vehicle for education, communication, and entertainment for a long time. Paper plays a critical role in education. Studies continue to show that students of all ages absorb more when reading on paper versus reading on digital screens.
spk04: In fact,
spk05: Sweden recently moved students off digital devices and back onto books and handwriting on paper. This is why total demand for uncoded free sheet exceeds the sum of all the other printing and writing grades combined. Let's turn to slide eight. We continue to believe that current uncoded free sheet consumption is better than the demand data suggests. The Pulp and Paper Products Council has published data that shows year-over-year changes in estimated consumption versus demand. And on this slide, you can see North American comparisons for 2021, 22, and the first half of 23. The Fulton Paper Products Council shares our view that coming out of the pandemic, customers were buying more paper than they were using. And this year, they're using more paper than they are buying. Situations in Europe and Latin America are similar.
spk04: Moving to slide nine.
spk05: Current industry conditions are starting to show signs of improvement. U.S. advertising is starting to pick back up, and the U.S. economy continues to show resilience. An uncoded free sheet with channel destocking nearly completed, we are starting to see increased border entry globally. Both inventory levels have improved significantly globally, and prices are increasing globally.
spk04: Slide 10, please. We expect to deliver fourth quarter adjusted EBITDA of 90 to 110 million.
spk05: We project price and mix to decrease at a slower rate of 20 to 25 million. primarily reflecting prior paper price decreases in Europe and unfavorable geographic mix in the Americas. We expect volume to improve by 2025 million. This will reflect seasonally stronger volume in Latin America, the completion of deep stocking in Europe and North America, as well as a new business we picked up in North America. Operations and other costs are projected to increase by 25 to 30 million. This is primarily due to higher seasonal operating costs in Europe and North America. We expect input and transportation costs to increase by 5 to 10 million due to seasonally higher energy. Land maintenance outages are projected to increase by 25 million as we have outages in all our regions in this quarter. We project adjusted operating earnings of 55 to 90 cents per share. This level of fourth quarter adjusted EBITDA may be a bit less than expected, and here's how I think about it. At current industry demand, price, and input costs, the quarter would be 15 to 25 million higher, adjusting for three factors. First, normalizing for planned maintenance outage. Second, adjusting for higher cold weather operating costs. And third, we're taking more downtime to reduce our inventory in the fourth quarter, especially in North America.
spk04: Let's go to slide 11. We compete as a low-cost producer of commodity products sold in mature demand cyclical markets.
spk05: To become a leaner, stronger company, we initiated Project Horizon to streamline our organization and improve our cost structure. Before inflation, we are targeting a run rate savings of $110 million by the end of 2024. About two-thirds of the target will come from operational cost reductions in our mills and supply chains by improving efficiencies, celebrating our cost reduction capital spending pipeline, and reducing direct variable and indirect costs. The remainder will come from selling administrative cost reduction, including the elimination of about 150 salary positions globally, or nearly 7% of our salary workforce.
spk04: Let's move to slide 12 to talk about how we are allocating cash to create value. Year to date, through the third quarter, we have generated $190 million in free cash flow.
spk05: We will continue to maintain a strong balance sheet, return substantial cash to shareholders, and create value by reinvesting in our business. Through the third quarter, year to date, we repaid $36 million of debt, and in October, we repaid another $10 million. As of November 9th, We have returned $110 million in cash to shareholders and plan to return $125 million this year. Remember, we also deposited $60 million in escrow in the third quarter so we can return more than $90 million. Our board of directors increased our regular dividend by 20% and declared a 30% per share special dividend. We paid both, totaling $25 million on October 17th. The board also authorized an incremental $150 million share repurchase program at the end of the third quarter. The May 2022 and the September 2023 authorizations collectively had $167 million remaining. We will continue to look for opportunities to repurchase shares at attractive prices. Jean-Michel, I'll turn it back to you. Thanks, John.
spk03: I'm now on slide 13. In October, we celebrated our two-year anniversary. Who would have thought that we would go through such extreme industry cycles in the first two years? Being a low-cost global producer with strong supply position, an iconic brand has positioned us well. We have created significant shareholder value by managing what we can't control. First, we have allocated cash to improve our financial position by reducing debt by 35% or 530 million to strengthen our balance sheet. Second, we continue to deliver on our investment treaties. We have earned over 1.3 billion in adjusted EBITDA, which is a 19% margin. We also generated 568 million in free cash flow and returned $200 million to shareholders since our spin-off. Third, we continue to reinvest in our business to strengthen our low-cost assets. We have invested $318 million and are accelerating investments in high-return capital projects. I'll conclude my remarks on slide 14.
spk04: we are strengthening our ability to create shareholder values throughout the cycle.
spk03: Sylvamo remains a cash flow story, and we are now projecting more than $270 million in free cash flows this year. We are building on our strong supply position while we further develop our Australian Channel partnership. Operational excellence remains key to our performance as we leverage our low-cost assets and Brazilian prospects. John worked us through our cost reduction initiative, Project Horizon, which will make us a leaner, stronger company. We understand that all our efforts to reduce our global salary positions may affect our colleagues whose position will be eliminated. We will help these employees by providing transition service and want to thank them for this service. Financial discipline is very important to us. We will continue to leverage our strengths to drive high returns on invested capital, generate free cash flow, and use that cash to increase shareholders' value by maintaining a strong financial position, returning cash to shareholders, and reinvesting in our business. We will create long-term values for our talented team, iconic brands, and low-cost meals in favorable locations. We're confident in our future and motivated by the opportunities that Liar has. With that, I assume we'll go back to him.
spk02: Thanks, Jean-Michel, and thank you, John. Okay, Greg, we're ready to take questions.
spk00: Okay, ladies and gentlemen, if you'd like to ask a question, please press 1 and 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press 1 and 0 at this time. And one moment, please, for your first question. Your first question comes from the line of George Staffos from Bank of America. Please go ahead.
spk06: Thanks very much. Hi, everyone. Good morning. Thanks for the details. Hey, the first question I wanted to hit on is with Project Horizon. The deck speaks to about $22 million of run rate savings from the salaried reduction, if I'm reading it correctly, the footnote correctly. In total, what net benefit do you think you'll be able to get from the program in 24, recognizing, obviously, you know, it affects a number of people who work with the organization for a long time, and it's bittersweet. But what do you think the net benefit to the P&L would be from this program in 24?
spk05: George, good morning. It's John. To answer your question, you know, we're talking 110 million run rate by the end of 2024. And we do have on the slide, we're estimating that inflation for 2024 is going to be approximately $50 million. So the net benefit in total will be $60 million once we get to the full run rate. In 2024, we're expecting a net benefit about $10 to $15 million. Okay.
spk06: Thanks for that, John. Second question. What we've been seeing in volumes, while maybe from an amplitude standpoint, is larger and therefore worse than expected. It's not unreasonable based on history. It's fairly consistent with seeing big drops in demand in very large economic downturns or decelerations. you know, whether or not we're in a recession, certainly from this company that I look at over the last year or so, the volumes have been such where I think packaging paper has been basically in a recession. And what you normally then see, though, is not a real rebound in demand. Rather, the world learns to be more productive and you have a new demand level for uncoated free sheet. What do you think in terms of where we are right now in terms of any further demand destruction that we may see or may not. Hopefully it's resolved. And what, if you had to estimate at this juncture, what do you think your shipments, your demand will look like in 24 by market year on year, if you can provide that?
spk03: Hi, Joe, Jean-Michel. Thanks for joining the call. I think, as you say, we've had in our cycles some more strong numbers, sometimes in decrease, due to economical factors, due to COVID, due to multiple factors. Even if you take 23 strong decrease, we are still in our trend back to 4% to 6% in the U.S. downtown and back to 3% to 4% down in Europe. I think we are on this trend, and we're going to continue to be on this trend. What happens is when you have strong elements like the inventory correction you've seen this year, you could kind of think, is it much worse than this trend? And numbers show it's not. 24, it's difficult to predict. What we do know in 24 is we do not expect to have the inventory correction again. So when you compare it to 23, It should probably look better, but on the trend, demand, deep, I think there is no change. It's still a minus 5% delivery. Sorry, go ahead, John.
spk05: I was going to add one more comment to that. I think we agree with what you're saying and to the extent for North America and Europe. Latin America, the Demand is down, but most of that is all due to inventory correction. So, you know, I just must focus that, you know, for one part of our market, we're not seeing that recessionary type decline that you referenced.
spk06: So, should we expect on a year-on-year basis that demand should match consumption in 24, or would you expect some inventory rebuild there? such that you might actually see some year-on-year increases in percentages for the grades. And my last one, I'll turn it over. Can you talk about the – you indicated you had a new win in North America. If I heard you correctly, if you could talk to that, that'd be great, and I'll be back in queue.
spk03: Yeah, so we do expect to be at least at level of consumption. I would say maybe some inventory correction would be an upside, but our expectation is to be more at normal demand consumption pattern, with, as you mentioned, the upside. If you remember in North America, we mentioned it, I think it was last quarter, the one before, with the closing of the Canton Mill, there was opportunity to take some new businesses first in North America, and we did. So that's what we did.
spk06: Thank you. I'll turn it over.
spk00: Your next question comes from the line of Matthew McKellar from RBC Capital Markets. Please go ahead.
spk01: Good morning. Thanks for taking my questions. Maybe just picking back up with Project Horizon, is there any more color you can give on what kind of opportunities you're seeing to reduce costs in the manufacturing supply chain side in particular, including if there are any specific mills or even geographies that you call out as presenting the best opportunities? And then is there a need to spend capital to achieve some of these savings?
spk05: Yeah, Matt, John, a couple of them. First of all, some of it is realization of capital that we've already spent in terms of cost reduction. And then we also do have some cost reduction capital planned for next year that will yield some benefit. The other area is that it's just continuing to work on efficiencies around energy consumption, chemical consumption, and becoming more efficient in terms of our operations.
spk03: I'll add to that. We have some probably a little bit more opportunities in supply chain, especially in North America. When we spin, we kept the network we had before mostly intact. We didn't look at what was the opportunities to ameliorate, optimize that network. I know that we have two years of experience and understand better the market. And where we do, we think we have opportunities to significantly improve our supply chain operation efficiency, especially in North America. That's probably where we have the biggest supply chain. But there are good opportunities there, too.
spk01: Great. That's helpful. Thanks for that. Maybe next. It sounds like you're expecting channel inventory corrections to be largely complete by your end. Would that be the same or similar across geographies? Are there any areas where you'd call out as being a little bit different as you look from region to region? And in particular here, I'm thinking about Latin America, which I think you've said has kind of exhibited different demand trends and would be seasonally stronger in Q4?
spk03: Yeah, I think Latin America, the strongest we saw was not Brazil, other Latin America. And I would say with the other pattern we have right now, we can say this is behind us. I would say both Europe and North America, especially the last four weeks, when we see our other intakes and what our customers said, that gives us good indication that inventory correction is gone.
spk01: Okay, thanks. That's all from me. I'll turn it back.
spk00: Thank you. Next, we'll go back to the line of George Staffos from Bank of America. Please go ahead.
spk06: Thanks so much. I want to come back. I think Matthew queued it up nicely on Project Horizon. Was this a program that you developed internally, either from existing learnings you had within Sylvamo or the predecessor company, or did you bring in somebody from outside the firm to sort of teach you whatever you're doing to get at these net savings over time. And then, you know, again, we've got supply chain, we've got efficiencies, that's all well and good and we wish you well in the program, but is there something sort of unique to this program relative to past cost reduction programs that you might have been associated with either at Sylvana or prior companies that we should, you know, keep in mind and give us more or less optimism on its prospects.
spk05: Well, there's two things on that, George. First of all, we named it Project Horizon because this was a project that talked about the future for Sabama. So we knew coming out of the spin that we could operate more efficiently, leaner, more focused. And the plan was to get there as soon as we got the spend behind us. And so we did this internally. This is about focusing on our strategy and make sure that we have the organizations and the capabilities we need to execute going forward. So this is from an internal perspective. We did not go to outside resources for that. And the same is true for our operational side. And some of this has to do with us continuing to ramp up our investments that we've been doing and showing in terms of our facilities, both in the maintenance and the cost reduction capital. But it's also more of a concerted effort and focused on areas of opportunities we have to improve our operations. We set a short time frame because we want to be able to execute this quickly, and we wanted to be able to so that you ought to be able to see it on the bottom line pretty quickly. Now, we talked about 10 to 15 million in 2024, but this is going to be an exit rate, so you should be seeing it beginning first quarter of 2025.
spk03: If I may, John, just in supply chain, when I was talking about network optimization, we did get some specialists of supply chains services to help us, and we're continuing to have them helping us with designing our network and thinking about it differently.
spk06: Okay. But I actually just want to make sure I understood. So the 10 to 15, I took it as a net realized with the run rate being, you know, after inflation, the 60 million or so. Did I get that incorrectly? And if I got it correctly, does that mean then there's another, you know, $30 to $40 million benefit you get in 25 based on the program?
spk05: That's right. So it's the net benefit in the 15 after inflation, and the $60 million is net of inflation.
spk06: Okay. And on the ops efficiencies, I mean, is it just purely you went machine by machine, you know, boiler by boiler, and just did, you know, indexing and yield analysis, or was there something else related to the program? I'm sure it was much more, but, you know, was that the fundamental that you were employing there?
spk05: Yeah, that's probably a good way to describe it. It was a bottoms-up work with extensive feedback or information from everybody working in our facilities.
spk03: And some of it is due also to our cost investment that John mentioned. We've invested in some equipment, in some mills, in much better online data analytics. So we've got the capacity now to much better understand clients and protecting them and act on them. So some of the cost programs we've done with this automation, I won't call it AI, it's too much, but I would call it digital progress in the mills. Analytics is helping us also a lot.
spk05: And George, let me add, these are structural changes. We're not trying to push off or avoid. When we're looking at $110 million, these are sustainable changes. So they do not include, for example, increased volume and absorbing, you know, unabsorbed fixed costs that we had this year versus because of the lack of water downtime we took because of the inventory correction. So that's not included in this $110 million.
spk06: Interesting, John. One last quickie for me, and then I'll turn it back and try to get back in queue. I remember discussion about LATAM saying some improvement in volumes with the textbook program. Did that materialize, and how's the order book in LATAM going into 24? Thank you, guys.
spk03: Yeah, it did materialize mostly, and all the book is good. You know, it's a seasonality also, which is always very good on the fourth quarter. So fourth quarter in LATAM is the strongest one. First quarter is the weakest one. But that's just the season of demand.
spk04: Thank you.
spk00: Mr. Staffos, please continue with your questions. Mr. Staffos, your line is open.
spk06: Please go ahead. Oh, thank you so much. Last one's for me.
spk05: so sherry purchase currently available authorization did you say 160 million dollars and do you have an outlook on maintenance at this juncture gentlemen for 24th thanks and good luck in the quarter yeah we have uh i think it's believe 167 million uh authorization and we have yet to we're still developing the plan for 2024 and we'll probably be sharing that maintenance outlook with you and when we announce the fourth quarter
spk06: Okay. At this juncture, would you expect relatively flat, or could it be lower or likely higher?
spk05: I would say right now relatively flat.
spk06: Okay. Thank you, John. Or maybe. Yep, understood. Thank you, guys.
spk00: Thank you, George. And at this time, there are no further questions. I'd now like to turn the call back to Hans Bjorkman.
spk02: Thanks, Craig. Before I wrap up the call, Jean-Michel, any closing comments? First of all, thank you for joining our call.
spk03: We remain a cash flow story. We're projecting more than $230 million in free cash flows this year and remain committed to raising $125 million to shareholders. We remain confident in our ability to generate stronger big-time free cash flows throughout the cycle. We will exit this current industry down cycle as a leaner, stronger company. We allocate capital to increase shareholder value. We use cash to maintain a strong balance sheet, return the cash to shareholders, and reinvest to strengthen our businesses. We're confident in the future.
spk02: So thank you, everybody. Thanks for joining our call today. We appreciate your interest in Sylvamo, and we look forward to the discussions in the coming weeks and months ahead. Thank you so much.
spk00: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.
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