Sylvamo Corporation

Good morning and thank you for standing by. Welcome to Silvano's fourth quarter 2023 earnings 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 one then zero on your telephone keypad. To withdraw a question, please press one then zero again. As a reminder, your conference is being recorded. I'd now like to turn the call over to Hans Bjorkman, Vice President, Investor Relations. Sir, the floor is yours.

Thanks, Greg. Good morning, and thank you for joining our fourth quarter and full year 2023 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 earnings release as well as today's presentation. With that, I'll turn the call over to Jean-Michel.

Thanks, Hans. Good morning, and thank you for joining our call. Let's turn to slide four, please. In 2023, we created value for shareholders by managing what we could control as we executed our three-point strategy commercial excellence, operational excellence, and financial discipline to strengthen our competitive advantages in our core unquoted fishing market. First, we allocated cash to improve our financial position by repaying 76 million in debt, achieving a net debt adjusted a bit of 1.2 times. Second, we continue to deliver on our investment thesis We earned 607 million adjusted EBITDA, generated 294 million in free cash flow, and returned 127 million in cash to shareholders. Third, we invested to strengthen our low-cost assets. We invested 210 million and continued to accelerate investments in high-return capital projects. We also acquired the 500,000 ton New Mala mill in Sweden for 167 million. This is a great asset with a talented team. The mill is performing well, and we are benefiting from the $40 million bulk mill modernization project that was completed just before the acquisition. In a tough market, the mill generated about $50 million in cash before any allocated overhead.

Slide five.

highlights our 2023 full-year key financial metrics. Our adjusted EBITDA was $607 million, which was a 16% margin. Our $294 million of free cash flow was more than $7 per share. In 2023, our free cash flow was heavily weighted to the second half of the year. We generated almost 90% of free cash flow in the second half. You may recall that in 2022, we generated about 75% of our free cash flow in the second half of the year. Our adjusted operating earnings were $6.51 per share. We got our 23 financial results as solid considering uncoated industry conditions that were more unfavorable than expected. As we enter 2024, we are confident in our ability to continue to create value for our customers and shareholders.

Slide 6 shows our fourth quarter key financial metrics.

Adjusted EBITDA was $117 million with a margin of 12%. We generated $104 million in free cash flow as we continued to optimize our working capital. Our adjusted operating earnings were $1.16 per share. These strong performances during challenging industry conditions demonstrate our agility and ability to adapt. I'm proud of how our teams collaborated to meet our customer needs and maximize cash. Now, John will review our fourth quarter performance in more detail. John?

Thank you, Jean-Michel. Good morning, everyone, and thanks for joining our call. Slide 7 shows our fourth quarter earnings. Our $117 million of adjusted EBITDA was higher than our outlook of $90 to $110 million. Let's discuss the changes versus the third quarter. Price and mix decreased by $25 million, largely due to earlier paper price decreases in all regions, as well as unfavorable mix in Latin America and North America. Paper prices were stable in the fourth quarter in all regions. Volume improved by $20 million due to a significantly stronger volume in Latin America and positive trends in both Europe and North America. Operations and other costs increased by $12 million, primarily due to higher seasonal operating costs in Europe and North America, as well as unexpected reliability issues with a third-party energy provider at our SIAT mill, which had a $5 million impact. This issue has been resolved, and we're working to recover the full amount. These negative impacts were partially offset by lower economic downtime costs versus the third quarter. Plan maintenance outage costs increased by $25 million, with plan outages in all three regions. Input and transportation costs improved by $1 million, driven primarily by favorable chemical costs more than offsetting seasonally high energy costs.

Let's move to slide eight. Current industry conditions are showing signs of improvement.

In Europe and North America, we continue to see improving order books as well as lower import levels. In Latin America, we expect seasonally weaker demand in the first quarter. Keep in mind, in Latin America, historically, demand is sequentially stronger in each calendar quarter. We also expect improving demand for civilian exports to other Latin America and offshore markets.

Let's go to slide nine.

We expect to deliver first quarter adjusted EBITDA of 105 to 125 million. We project price and mix decrease slightly, about 5 to 10 million. In the fourth quarter, we communicated pulp and paper price increases to our European and Latin American customers expected in January. We do, however, expect some price and mixed erosion in North America, and as usual in the first quarter, we expect an unfavorable seasonal mixed impact in Latin America. We expect volume to decrease by 10 to 15 million, reflecting seasonally weaker industry demand quarter in Latin America. Operations and other costs are projected to improve by 2025 million, primarily reflecting lower economic downtime. We expect input and transportation costs to increase by 5 to 10 million due to increased transportation costs, mostly in North America, and higher fiber costs in Latin America. Planned maintenance outages are projected to decrease by 3 million. Moving forward, we will continue to provide quarterly earnings guidance and selected annual financial metrics shown on slide 17 in the appendix. On the advice of our high conviction, long-term shareholders will no longer provide four-year guidance for earnings or free cash flow. They have encouraged us to discontinue annual guidance and to continue our focus on growing long-term shareholder value.

So let's go to slide 10.

We continue to reinvest to strengthen our low cost assets and will fund high return projects to increase our earnings and cash flow. Our 2024 capital spending outlook includes $125 to $130 million in maintenance and regulatory spending, as well as $30 to $35 million for high return projects. Our resilient forest lands are a significant competitive advantage. These eucalyptus plantations provide a material cost advantage relative to most other global competitors. In 2023, we invested $34 million, and this year we'll invest $35 million in our forest land to increase our self-sufficiency and reduce our wood costs. We're also investing $20 million this year, $12 million in 2025 for a three-year third-party wood supply agreement to ensure adequate wood supply 2024 through 2026. Let's look at slide 11 for additional detail on our Brazilian forest land. We source the majority of our wood in Brazil from our owned and managed wood and supplement that with open market purchases. Most of our wood needs come from our forest land, from strategic long-term partnerships. Our owned and managed wood has the capacity to produce or provide, rather, 80 to 90 percent of our total wood needs on forest lands close to our mills. However, several years of reduced planting, combined with natural causes, largely droughts and fires, forced us to harvest trees early. These factors increased the amount of market wood required to meet our needs. We are currently purchasing about 25% of our wood from the open market, and this wood costs two to three times our owned wood. The increase in reforestation capital and a three-year wood supply agreement will enable us to return to about 85% owned and managed wood by 2027.

Let's move to slide 12.

In addition to providing global competitive advantages, our Brazilian forest lands have significantly increased in value. In the fourth quarter, we commissioned a third party to appraise our forest land. In December, they valued it at about $1 billion at the current exchange rate. The updated valuation reflects an increase of about $600 million from our 2021 appraisal done by the same firm. Increasing demand for land and wood in Brazil has driven this increase in valuation. Our forest lands are not only a source of global competitive advantage, but also an enduring repository of shareholder value.

Jean-Michel, I'll now turn it back over to you. Thanks, John.

I'm on slide 13. We are a cash flow story. We have generated substantial cash over the past two years, And importantly, we returned 90 million in cash to shareholders in 22 and 127 million in 2023. Last year, we also deposited 60 million in escrow, which allowed us to return more than the 90 million limit in our credit agreements. Returning cash to shareholders remains a key component of our capital allocation strategy. In 2024, we expect to return at least 40% free cash flow to shareholders.

Slide 14, please.

We are confident in our ability to continue to create long-term shareholder value by executing our strategy and delivering on our investment thesis. We believe in the promise of paper for education, communication, and entertainment, and we intend to increase our competitive advantages in the market we share. We are a low-cost global producer with strong supply position, iconic brands, and talented teams. We leverage our strengths to drive high returns on invested capital and generate free cash flow. We use that cash to increase shareholder value by maintaining a strong financial position, returning cash to shareholders, and reinvesting in our business. We are confident in our future and motivated by the opportunities that lie ahead. With that, I'll turn the call back to him.

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

Okay, if you would like to ask a question, please press 1 and 0 on your telephone keypad. To withdraw a question, press 1 and 0 again. We do ask that you limit yourself to one question and one follow-up question. Thank you. One moment, please, for your first question. Your first question comes from the line of George Staffos from Bank of America. Please go ahead.

Hi, everyone. Good morning. Can you hear me okay? Good morning, George. How are you? Thanks for the details. I'll ask my two questions and get back in queue. First of all, I know you're not giving guidance past the first quarter, but how repeatable are the trends and what you're doing and operations and other costs, they seem to have been a source, even with some offsets that you talked to, seem to be a source of positive variance in the fourth quarter for you. It's certainly a positive bridge item in the first quarter. How much longer can that go, and how much is the cost reduction program driving that? That's question number one. Question number two, to my recollection, is the first time in a while that you've talked about the Timberland values in Brazil. You know, given our experience over the years covering the Latin American producers, that connection to Timberland is a source of competitive advantage, a source of process improvement. Are you suggesting that over time this would be something you could disconnect from the portfolio, or do you see this as a reason why You should be able to maintain your position, grow profitably, and either way, it's being underappreciated within the market. How should we think about what you're trying to say on Timberlands here? Thank you.

George, I will start by your second question, and John will take the first one. So we thought our Timberland is key to our competitiveness, and it's really a key advantage. The reason why we updated appraisal is we think it was undervalued, and that's the only reason. We continue to invest in it, and I think this is a base of, exactly as you mentioned, of long-term competitiveness, which we count on. Fiber is key in our paper advantage. John, I'm coming.

Yes, George, I'll take yours. Your second question comes of the ops variance and how much runway we have that going forward. So what we talked about, I think it's important to note, is that our order books have improved across all our regions, the city of today. In fact, we're running full in both Europe and LATAM, and with significantly less economic downtime in North America. And that has driven a lot of the operational boom, because we're taking less and less order downtime, and we're absorbing more of the fixed costs that we we had in the first half of last year. Second thing is we are continuing to start to get the benefits of some of this high return cost reduction capital that we started to invest in. You know, it's fun, but we really didn't start ramping that up until next year. And I think third, we talked about what we call Project Horizon. That's our cost reduction program. It was both operational supply chain and S&A. And we started seeing some benefit of that a little bit in the first – we expect to see a little bit in the first quarter, but really that's going to really start ramping up through the balance of the year.

Hey, John, forgive me, just a point of clarification. You said on the reduction in unabsorbed costs, if I heard you correctly, you're going to see more of that this year or more – I just want to make sure I heard the cadence on that correct because the phone cut out.

Yes. So if you look at even in the first fourth quarter, and you'll see in the appendix, we took about 90,000 tons less lack of order downtime in the fourth quarter. Got it. And what I said was in the first quarter, that is somewhat what's driving the operation output that we gave because we're running more fuel right now in the first quarter than we were even

Okay, thank you. I've got that. I'll be back.

If there are any additional questions, please press 1 and 0. Next, we'll go to the line of Harmon Dott from RBC.

Please go ahead. Hi, good morning. Thanks for taking my question. This is Harmon filling in for Matt McKellar. I guess one quick question I had was just around, and apologies if this was mentioned in the first question. I had some technical difficulties, but with the high return projects that the company is looking at in 2020, are you able to share any incremental details on what sort of things you're pursuing and how that can shake out in terms of increased margins or even potentially supporting more cost reductions as you've outlined with Project Horizons?

Yes, Armin, and thanks for joining the call. Also, pass our congratulations over to Matthew. I understand he's having a baby. That's exciting. I'll give you an example of what we have. So this also talks about really the agility I think we have as a company because we're singly focused on uncut and breechy, but there was a large mill that was shut down in South Carolina, in Charleston, and it was a large consumer of wood chips. One of the significant cost reduction projects we'll be investing in this year is increasing our capacity to handle chips in our mill at Eastover so that we can take advantage of the increased supply now that's come about because of that mill's closure. And so those are some of the type of projects we have done. In fact, just recently we completed a chemical recovery project in Eastover that has also, we've already started seeing results of pretty significant returns in terms of cost reduction that we started experiencing here even in January. Typically, these projects that we have, we've targeted almost $30 million of high return projects. These returns are well over 20% returns, even much higher than that.

Awesome. No, that's great. That's helpful color.

And I suppose just, I guess more broadly, with the Red Sea crisis, would you be seeing additional European products show up in North America given the increased cost of reaching Asian markets from Europe? I guess our last check with RISI sort of said that North American outbound shipping costs have been somewhat flat, but inbound or up. So we were just hoping to get some more perspective on that.

Yeah, Harmon, it's hard to tell what the implication is going to be in terms of the Red Sea crisis. What we are seeing right now in Europe is decreased imports. And some of the transit times coming from Asia, it's almost increased. About four weeks, we understand, for imports from Asia to get into the Europe. So it could have an impact that actually increased import in Europe, which then means that more domestic supply has to stay onshore to service that need. But I would say right now it's hard to tell what the impact of the Red Sea is going to be. It's certainly increasing freight costs. So all exporters are seeing increased freight costs as well as retail.

what you were asking about Europe export overseas, we export very little from Europe to overseas. Our production in Europe mostly remain in Europe, and we have a very few going to Middle East, Africa.

So it's really not impacting us so far significantly. Gotcha. No, that's helpful. And yeah, thanks again. I'll jump back.

Next, we'll go back to the line of George Staffos from Bank of America. Please go ahead.

Yeah, thank you very much. Just on that point that was raised just before, I know you aren't really quantifying it, but is the impact from Asia, if there is a positive on reduced imports into Europe, more on converted products or more on cut size and graphic papers overall? that in turn is leading to better demand for you and or your customers?

Mostly, I would say Georgia's cut size. That's what's easier to export. So mostly you see from Asia are the cut size. And the role in the offset business, because of the various sizes that you have to have, it's much more difficult for any exporter. That matter not just to Asia.

Okay. And John and Jean-Michel, my next question, and I'll come back in queue again. Related point, so to the extent that we've seen pulp prices continue to rise in Europe, you know, recognizing Asia, we're starting to see them, you know, fade a bit. Has that cost curve, or let me say it differently, has the cost curve shifted sufficiently where that's also beginning to have an impact on supply within Europe, i.e., the curve shifted, some of your non-integrated peers are having some difficulty producing, or really that's not really having much of an effect at this juncture from what you can see?

I think, George, it's a good question. I think it's impacting. You know, from the trough, the fall prices in Europe have gone up 160 euros from last year trough to today. So it is for sure impacting the non-integrated players in Europe, and that's maybe one of the reasons why we're seeing operating rates back up high in Europe and having a very strong demand. It might impact it. We also know the inventory correction in Europe is behind us, and industry inventory are quite low, actually, right now in paper. So multiple factors, but full price has an impact.

Yeah. Jean-Michel, ultimately, look, I realize it's our job, not yours, but to the extent that you have a view on this, is there kind of a view in terms of how much now is kind of in the red in terms of industry production relative to the cost curve? And if you don't have a view, that's fine. I just thought I'd ask if you had, and you can share it.

I don't, but I don't have the number precisely, so all I can make is – No worries. Maybe a guess, a very high level guess. And it might be about 10%.

OK. Thank you very much. I'll turn it over.

Once again, if you have a question, please press 1, then 0. And we'll go back to the line of George Staffels.

Please go ahead.

Hi, guys. To the extent that there's been some pricing reductions in North America, as memory serves, at least in terms of published indices, how much of that, if you can quantify, recognizing you're not tied to RSEI in your contracts per se, but how much of that is baked into your guidance, if anything at all, for the first quarter? And, you know, to the extent that you could size it broadly, how much would be something we need to make sure we model for over the rest of the year, recognizing you're not guiding on 2Q through 4Q?

So, George, I cannot give you an exact price base. I can give you a trend. We saw the same RISI report you did. As you mentioned it, we do not report to our pricing to RISI. I would say on the trend we might have the direction correct, but we have seen in the past that in absolute value we see it differently. So in our outlook, mostly from third quarter actually, we expect slight erosion in North America, not a huge one, a slight one, and at the same time we expect because of two price increases announced to our customers in Europe and in Brazil and LATAM, we expect price increase on the other regions.

Okay. And then back to Europe and I'll turn it over. You know, the performance for the quarter was, you know, somewhat below our expectations now. You know, that's neither here nor there. That's our forecast versus your actual But was performance in Europe as you had expected in terms of that loss? Again, you're not guiding for the full year, but should we expect that ultimately Europe should be breakeven or better for this year? And what are the bigger bridge items to get you there, if in fact that's your assumption?

Thank you. as you know, in Europe was difficult. It was a trough in terms of demand. The prices of pulp, which affect a lot of our sire mill, were down. We had an annual outage in sire, which costed us $20 million. We had an annual outage in the fourth quarter in Lumola. We had an issue with the turbine we mentioned in the sire mill, which is over now, which costed us $5 million. And it was really the trough of the cycle in terms of prices. So we clearly see 24 rebounding significantly and hope to very soon be talking about positive earnings for Europe. So we're quite positive about Europe. It's more cyclical than any other businesses, so sometimes it's a bit frustrating. But on average, we really believe Europe would be good. Numola is performing very well. SIA is performing well. Our order book, as I mentioned, is full, and we've seen price increasing. So Europe is rebounding significantly. It's tailwind for 24.

Yeah, Thomas, just to add on to that, you say that it was a trial, but it was a significant. You think about in terms of demand decline that we had in Europe, it was even worse than COVID. When you look at how much volume and shipments were down, and also pulp prices. Sayat is one-third of its capacity is pulp, so it is, to a certain extent, more exposed to the cyclical pulp prices than our other mills. But, you know, as Jean-Michel said and we said earlier, we're currently running full right now in Europe, and so that's That's a very positive. We also have prices going up, both in paper and pulp. So the reason, the thing that's helped us with pulp prices going up, already almost $160 per ton for trough would indicate that Europe would be better. Thank you, John.

Next, we'll go back to the line of Harmon Dott from RBC. Please go ahead.

Hi, thanks. I just had a couple quick follow-ups on the cost reduction plan, and apologies if it was mentioned earlier. I had some technical difficulties at the start of the Q&A, but just had a quick clarifier. That $15 million reduction in overhead expenses, is that factored into your $110 million target, or is this on top of it? And I suppose, secondly, would there be an update to the prior inflation assumption? I believe it was around $50 million with Q3 results.

Yeah, Harmon, the $15 million that we reported for the fourth quarter is additive, but was not included in the 110 targets we talked about when we reported the third quarter. And the inflation number that we provided, you're correct, was $50 million, and that won't be updated. That's still a good number.

Gotcha.

Yeah, that's all from my end. Thank you. And next, we'll go back to the line of George Staffos. Please go ahead.

Hi, guys. Last one from me. Now, you're not the only company in South America that's talked about having to go farther from its own mills for wood and do a bit more third-party wood. And although the company in particular I'm thinking of is more packaging-grade production, but is there a broader issue that's been affecting the producers? Has it been just the droughts, or has there been something else that's gone on, either in terms of maybe over-harvesting or under-investing that, not just for Sylvamo, you've seen elsewhere. Just some quick thoughts there and I'll turn it over.

I think some of our competitors talked about the same thing we did on some plantations about six to seven years ago, where those plantations have suffered under the seven-year cycle of drought. natural causes which have in fact impacted that has impacted all brazilian forestry plantations so we're not the only one this is not the case anymore but it's been two years and we also specifically more significantly from our past companies reduce some of our investments in the forestry during those years which we are you know it's a six seven year cycle so we think the impact of that now which is why we've had to go more outside market than we usually do and we wanted to solidify the need of wood because there is a strong demand of wood in Brazil right now. So the demand is clearly strong. So the demand plus the natural causes which have reduced the productivity of plantation is an impact we're feeling and or strategic investment in the very valuable forest land, we'll make up for that.

We're starting to see a little bit of an uptick in South America overall in box shipments. Obviously, that's a bit more softwood, but to the extent that we see a bit of a rebound there, does that put your wood position, maybe make it a bit more precarious and mean that next quarter or quarter down the road, you're talking about further inflation that you're contending with? Are you, as much as you can, relatively well set for the rest of the year?

With the investment we've made, we feel like we're well set.

Okay. Thank you, Jean-Michel. Good luck in the quarter. Thank you, Jean.

Thank you. And at this time, there are no further questions. I'd now like to turn the call back to Hans Bjorkman for any closing comments.

Thanks, Greg. Before we wrap up the call, Jean-Michel, any closing comments?

Yeah, just thank you, first of all, for joining the call. We're a cash flow story. In 23, we generated $294 million in free cash flow and returned $127 million to shareholders. We allocate capital to increase shareholder value. We use cash to maintain a strong balance sheet, return cash to shareholders, and we invest to strengthen our business. And we're confident in our ability to generate strong earnings and free cash flow through the cycles. We are confident for 2024.

Thank you, Jean-Michel, and thanks, everyone, for joining us today. We appreciate your interest in Silvamo, and we look forward to continued conversations in the coming weeks and months ahead. Thank you so much.

Once again, we would like to thank you for participating in Silvamo's fourth quarter 2023 earnings call.

You may now disconnect.