Sylvamo Corporation

Good morning and thank you for standing by. Welcome to Silvamo's fourth quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, you will have an opportunity to ask questions. To ask a question, please press one and zero on your telephone keypad. To withdraw a question, please press one and zero again. As a reminder, your conference is being recorded. I'd now like to turn the call over to Hansby Orkman, 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 Ribieres, chairman and chief executive officer, and John Simm, 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-US GAAP financial information. Reconciliations of those figures to US GAAP financial measures are available in the appendix. Our website also contains copies of the earnings release as well as today's presentation. With that, I'll turn the call over to Jean-Michel.

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 of commercial excellence, operational excellence, and financial discipline to strengthen our competitive advantages in our core uncultivated pre-share 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 down our investment fee. We earned 607 million adjusted a bit, 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 investment in high-return capital projects. We also acquired the 570 million new MOLA mill in Sweden, 467 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 established in 2017. The mill was completed just before the acquisition. In a tough market, the mill generated about

$50

million in cash

before any allocated overhead. Slide 5

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 free cash flow in the second half of the year. Our adjusted operating earnings were $6.51 per share. We got our 2023 financial results as solid considering uncoated pre-fee 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 share owners. Slide 6

shows

our fourth quarter

key financial metrics. Our adjusted EBITDA was $117 million, which was a margin of 12%. We generated $104 million in free cash flow as we continue 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 $90-110 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 the seasonally stronger volume in Latin America and positive trend 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 SIOT mill. It 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 planned 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,

and Europe and North America will continue to see improving order bugs 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 Brazilian 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 communicate pump and paper price increases to our European and Latin American customers effective in January. We do, however, expect some price and mix erosion in North America, and as usual in the first quarter, we expect an unfavorable seasonal mix 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 $20 to $25 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. Plan maintenance allergies are projected to decrease by $3 million. Moving forward, we will continue to provide quarterly earnings guidance and selected annual financial metrics as shown on slide 17 in the appendix. On the advice of our high conviction long-term share owners, we will no longer provide full-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. 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 Brazilian 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 will invest $35 million in our forest lands to increase our self-sufficiency and reduce our wood costs. We are also investing $20 million this year, $12 million in 2025, for a three-year third-party wood supply agreement to ensure adequate wood supply in 2024 through 2026.

Let's look at slide 11 for additional detail on our Brazilian forest lands. We source the majority of our wood in Brazil from

our owned

and managed wood and

supplement that with open market purchase. Most of our wood needs comes from our forest lands, from strategic long-term partnerships. Our owned and managed wood has the capacity to produce or provide 80 to 90 percent of our total wood needs from forest lands close to our mills. However, several years of reduced planning, combined with natural causes, largely droughts and fires, forced us to harvest trees early. These factors increase the amount of market wood required to meet our needs. We are currently purchasing about 25 percent 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 percent 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 lands. 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 increased valuation. Our forest lands are not only a source of global competitive advantage, but also an enduring repository of shareholder value.

Mr. Alves, 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 2022 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 agreement. Returning cash to shareholders remains a key component of our capital allocation strategy. In 2024, we expect to return at least 40 percent of 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 our investment thesis. We believe in the promise of paper for education, communication, and entertainment, and we intend to increase our competitive advantage in the market we share

itself.

We are a low-cost global producer with strong supply positions, 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 Han. Thanks, Jean-Michel, and thank you, Jean. 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? Yes, we can. 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 in 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. Given our experience over the years covering the Latin American producers, that connection to Timberland is a source of competitive advantage and 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 not being sort of under – 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 a prison 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, on the come – George,

I'll take your second question in terms of the experience and how much runway we have at Boeing board. So, what we talked about, I think it's important to note, is that our quarter books have improved across all our regions. We're in the middle of the city of today. In fact, we're running full in both Europe and Latam, and with a lot – significantly less economic downtime in North America. And that has driven a lot of the operational room because we're taking less and less order of downtime, and we're solving more of the fixed costs that 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. Yeah, we did certainly squeeze 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 unobsorbed 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 outlook that we gave because we're running more full right now in the first quarter

than we were even in the fourth quarter. 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 Horizon?

Yes, Harmon. And thanks for joining the call. Also, pass our congratulations over to Matt for understanding the situation. Having a baby is 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 free sheet, but there was a large mill that was shut down in South Carolina, in Charleston, and it was a large consumer of wood chips. And 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 Greece 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 implications going to be in terms of the Red Sea crisis. What we are seeing right now in Europe is decreasing 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 imports in Europe, which then means that more domestic supply has to be stay on shore 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 an increased freight costs as well as fleet time.

And concerning 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 come 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 on that point that was raised just before. All right. I know you 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 on more or more on, you know, cut size and graphic papers overall. That in turn is leading to better demand for for you and or your customers.

Mostly, I would say George cut size. That's what's easier to export. So, mostly you see from Asia are cut size, you know, 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 man, not today's.

The world. The world commercial. Okay. And John and Jean-Michel, my next question, I'll come back and queue again related point. So to the extent that we've seen whole prices continue to rise in Europe, you know, recognizing Asia, we're starting to see them fade a bit. Has that cost curve or let me say differently, has a cost curve shifted sufficiently where that's also beginning to have an impact on supply within Europe by either curve shifted some of your non integrated peers or having some difficulty producing or really that's 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 new from the trust. The fall prices in Europe have gone up 160 years from last year trust to today. So it is for sure impacting the non integrated players in Europe. And that's maybe one of the reason why we think operating rates back up I 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. I know in paper so multiple factors, but power price has an impact.

Yeah, Jean-Michel. 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 share it.

I don't, but I would. I don't have the number precisely. So all I can make is maybe a guess very high level guess and it might be about 10%.

Okay, thank you very much. I'll turn it over.

Once

again, if you have a question, please

press one then zero. And we'll go back to the line

of George Staples. 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 RISC 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 on two Q through four Q.

So, George, I cannot give you an exact price, but I can give you a trend. We saw the same RISC report you did. As you mentioned it, we do not report to our pricing to RISC. I would say on a trend, RISC might have the direction correct, but we have seen in the past and 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 last time, 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 somewhat below our expectations. Now, you know, that's not here nor there. That's our forecast versus your actual. But was performance in Europe as you had expected in terms of that that loss and you know what, you know, if we again, you're not guiding for the full year. But should we expect that ultimately Europe should be break even or better for this year? And what are the bigger bridge items to to get you there? If in fact, that's your your assumption. Thank you.

Yeah, so 23, as you know, in Europe was difficult. It was a graph in terms of demand. The prices of pulp, which affect a lot of our Siam mill, went down. We had an annual outage in Siam, which cost us 20 million dollars. We had an annual outage in the fourth quarter in New Mola. We had an issue with the turbine we mentioned in the same mill, which is over now, which cost us five million dollars. 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. New Mola is performing very well. Siam is performing well. The other book, as I mentioned, is food. And we've seen price increasing. So Europe is rebounding significantly. It's tailwind for 24.

Just

to add on to that, we say that it was a trough. It was a significant. You think about in terms of demand decline that we had in Europe, it was even worse than COVID. We will get how much volume and shipments were down. And also pulp prices, Siam 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 as Jean-Michel said, and we said earlier, we're currently running full right now in Europe. And so that's a very positive. We also have prices going up both in paper and pulp. So the reason I think that's helped us with pulp prices going up already almost $160 per ton. But trough would indicate that Europe would be better. Thank you.

Next, we'll go back to the line of Harman 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, had some technical difficulties at the start of the Q&A. But for just just had a quick clarifier that 15 million reduction in overhead expenses, is that factored into your 110 million dollar target or is this on top of it? And I suppose, secondly, it's there be an update to the prior inflation assumption. I believe it was around 50 million with Q3 results.

Yeah, Harman, the 50 million that we reported for the fourth quarter is additive, but was not included in the 110 target we talked about when we reported the third quarter. And we're the inflation number that we provided, you're correct, was 50 million. 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 Stafos. 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 Silvano you've seen elsewhere? Just some quick thoughts there and I'll turn it over.

I think you saw for 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 droughts, natural causes which have impacted. And 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 our strategic investment in the very valuable forest land. We have a, we'll make up for that.

I mean, we're starting to see a little bit of an uptick in South America overall and box shipments. Obviously, that's a bit more softwood. But, you know, 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 or are you as much as you're 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, John.

Thank you. And at this time, there are no further questions. I'd now like to turn the call back to Hans-Bierkman 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 free cash flows 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 are confident in our ability to generate strong earnings and free cash flow through the cycle. We are confident for 2024.

Thank you, Jean-Michel. And thanks, everyone, for joining us today. We appreciate your interest in Sovamo. 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 Sovamo's fourth quarter 2023 earnings call.

You may now disconnect.