Sylvamo Corporation

Good morning, thank you for standing by welcome to so vamos first quarter 2024 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 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, Leah. Good morning, and thank you for joining our first quarter 2024 earnings call. Our speakers this morning are Jean-Michel Rivieras, Chairman and Chief Executive Officer, and John Sims, Senior Vice President and Chief Financial Officer. Slides two and three contain important information, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. 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. As anticipated, we experienced improving uncoated fruit sheet and pulp condition in the first quarter, which resulted in improved order books. Our mill system ran near full capacity, and our earnings reflect much less economic downtime. We're making good progress with Project Horizon, our program to streamline overhead, manufacturing, and supply chain costs. We are on track to meet our year-end run rate target of $120 million in savings. We also continue to return substantial cash to shareholders. We distributed $12 million via the first quarter dividend, and as of today, we have repurchased $20 million in shares this year.

Let's move to the next slide. Slide five shows our key financial metrics.

We generated adjusted EBITDA of $118 million, with a margin of 13%. As expected, free cash flow was lower than the fourth quarter due to the timing of year-end payments, the non-repeat of the fourth quarter inventory reduction benefit, and the payment of annual incentive compensation in the first quarter. Keep in mind that our free cash flow is heavily weighted in the second half. In 2023, we generated almost 90% of free cash flow in the second half, And in 2022, about 75% in the second half. We generated adjusted operating earnings of $1.07 per share. Now, John will review our first quarter performance in more detail. John?

Thank you, Jean-Michel. And good morning, everyone.

On slide six, which contains our first quarter earnings bridge. 118 million of adjusted EBITDA we earned was within our outlook of 105 to 125 million. Price and mix were better than projected. This reflects the implementation of pulp and paper price increases that we had communicated late in the fourth quarter and early in the first quarter in all regions. Volume decreased by 12 million, driven by the normal seasonally weaker demand in Latin America. Volume trends in Europe and North America were favorable, as we projected. Operations and other costs improved by $19 million, primarily reflecting lower economic downtime across our region. Plan maintenance outage costs decreased by $3 million, and input and transportation costs increased by $9 million.

Let's move to slide seven. This graph shows our economic downtime over the last five quarters.

In the first quarter this year, we took 11,000 tons of economic downtime, which was an 80% decrease from the first quarter of 2023 and nearly a 95% reduction from the peak in the third quarter of last year.

Let's move to slide eight. Uncoded free sheet conditions continue to improve.

Our order books have strengthened across all regions versus 2023 levels. We implemented previously communicated price increases in both paper and pulp in all regions as well.

We're also experiencing stabilization of input costs. Let's move to slide nine. We expect to deliver second quarter adjusted EBITDA of 145 to 160 million.

We project price and mix to improve by $15 to $20 million, primarily reflecting price increase realizations across all regions.

We're also expecting a favorable mix impact in Latin America.

We expect volume to improve by $5 to $10 million, driven by seasonally stronger demand in Latin America, plus continued momentum in Europe and North America. Operations and other costs are projected to improve by $5 to $10 million. primarily due to lower operating costs in Europe and North America, as well as lower economic downtime in North America. We expect input in transportation costs to improve by up to $5 million due to better transportation energy costs in North America, partially offset by unfavorable fiber costs in Latin America.

Planned maintenance outages are projected to increase by $3 million. Go to slide 10.

In order to remain a low-cost producer of commodity products sold in mature demand cyclical markets, we must become a leaner and stronger company. That's why we initiated Project Horizon to streamline our organization and improve our cost structures. We are on track to deliver 30 million overhead cost reductions and to reduce our manufacturing supply chain costs by 80 million before inflation. We have communicated about 150 position eliminations globally. Approximately one-third of these have already occurred, and nearly all the rest will be completed by the end of the third quarter. We are on track to meet our run rate savings targets by the end of this year.

Let's move to slide 11.

We spent $25 million on planned maintenance outages in the first quarter and expect to spend $28 million in the second quarter. By mid-year, we'll have spent about three-quarters of the total annual planned maintenance outages cost for this year. In the second quarter, we'll conduct outages in Latin America and North America. We have no planned maintenance outages scheduled for our European mills in 2024. Let's move to slide 12. We are focused on Uncoded Pre-Sheet and will continue to create long-term value through our talented teams, iconic brands, and low-cost mills in favorable locations. Our capital allocation strategies maintain a strong financial position, reinvest in our business to improve our competitive advantages, and continue to return substantial cash to shareholders.

Let's look at the next few slides for some additional color on each of these

Slide 13 shows our commitment to maintaining a strong financial position to allow us to operate and invest throughout the cycle. We have reduced our gross debt by $580 million, almost 40% since the spinoff, and remain below our $1 billion target. This healthy position allows us to retain flexibility to address macro conditions, downside risk, and to invest in high return opportunities across the cycle.

Let's look at the cash returns to shareholders on slide 14.

We will continue to return substantial cash to shareholders via dividends and share repurchases. On this graph, as this graph shows, since 2022, we have returned $170 million in cash via opportunistic share repurchases. We have repurchased almost 3.5 million shares, or 8% of our initial shares outstanding, at an average price of just over $49 per share. These repurchases show a return of 35% based on a share price of $65. We will continue to look for opportunities to repurchase shares at attractive prices and to also return cash via regular and special dividends.

All right, so let's shift gears and discuss reinvesting in our business on slide 15.

We will continue to invest in high return projects to strengthen our business and increase our cash flow. At the time of our spinoff, we projected at least 100 million of high-return projects, about 70 million of which we will have funded by the end of this year. We have now identified another 200 million of high-return capital projects, which will allow us to grow our earnings and cash flow in the future. We expect such investments to generate well above cost of capital returns. This slide highlights three specific projects, two at Eastover that are already ramping up and one in Luis Antonio that will start up later this year. In Eastover, we had the opportunity to take advantage of a new supply of low-cost wood chips. This project started up in the first quarter, and we project annual savings of a half a million dollars with an IR of 35%. We also started up the evaporator heat recovery system in Eastover. This project will allow us to capture and reuse evaporator heat. We expect annual savings of $1 million with a return of 33%. The third example is a new turbine generator in Luis Antonio. This will increase our self-generated power and reduce annual maintenance expenses. We expect annual savings of $2 million with a return of 24%.

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

Thanks, Jean. we are strengthening our ability to create shareholder value throughout the cycle. Sylvamo is a cash flow story and continues to deliver against our investment keys. Uncoated free sheet conditions are strengthening across our region. Our system is still running near full capacity, and our price and mix continues to improve. As a result, our earnings are improving from the bottom of the cycle. Financial discipline is a key component of our strategy. We continue to leverage our strengths to drive high returns on invested capital, generate free cash flow, and use that cash to increase shareholder value. As John discussed, we are reducing our cost structure, and we see opportunities to grow earnings and free cash flow. We're confident in our future and motivated by the opportunities that fly ahead. With that, I've come to close back to enhance.

Thanks, John, Michelle, and thank you, John. Okay, Leah, we're now ready to take questions.

Thank you, ladies and gentlemen. As a reminder, if you would like to ask a question, please press 1, then 0 on your telephone keypad. If your question has already been answered, you may withdraw by pressing the 1, 0 again. We do ask that you limit yourself to one question and one follow-up question. One moment, please. And our first question is from George Stappos with Bank of America. Please go ahead.

Hi, everyone. Good morning. Thanks for the details. I want to go to slide six where you have the waterfall. And look, at the end of the day, your performance was in line with your expectations. The guidance looks at least in line for 2Q with where the street is. So congratulations on all that. But on ops and other costs, there was a slight sort of miss, if you will, versus the midpoint of the range, and just because of the performance being in line or better elsewhere, just curious what was driving that. And then, if you could, maybe to start off and warm up, across the regions, how was performance relative to your expectations across North America, Europe, Latin America, any things to call out, either positive or negative? Thank you, guys.

George, John, thanks for your question. We were slightly below our range in ops, and we had a couple of things that were not planned or not forecasted. One was a tax laying down in Brazil, and then we had an inventory revaluation that occurred in Europe. So those two things were roughly about $4 million that would have put us closer into our range. In terms of expectations by regions, we were close to where we thought we were across all the regions, a little bit better maybe in Europe and also in North America, a little bit less. And Brazil, mostly because of a mixed issue, we ended up selling more into export markets and less into Brazil than we expected. pretty much in line with what we expected. Yes. Hi, George.

Thanks for joining. In terms of outlook, you were asking, I think we have a continued momentum of what we've seen in first quarter, which is improvement in every one of the regions. Latin America, you know, the first quarter, seasonally always the weakest one, so it should come up. The rest is just continuing to progress, and you can see it in our outlook. Thank you.

And next we go to the line of Matthew McKellar with RBC Capital Markets.

Please go ahead. Mr. McKellar, do you have your phone muted?

Hi, thanks. Good morning. Thank you for taking my questions. First, could you provide a little bit more color on the $200 million of high return capital projects you've identified Is there anything you can share over what timeframe you'd expect to invest in these projects? What share of the project set would maybe be associated with each geographic segment? And then if there's anything you can share around weighted average IRRs across the pipeline of projects, that would be helpful. Thank you.

Sure, Matthew. I think we said on the call that by the end of this year, we'll have invested in about $70 million. If you look at next year, we probably will spend about $115 million on high-return projects. If you look at the weighted average returns across those projects, it's almost greater than 35 percent, so even higher than what we're showing in return on our share repurchases. If you think about in terms of what we're spending on an annual basis, it's about that trajectory. So it took us about three years to go through $100 million return projects. Now we've identified another $200 million. We'll probably generally continue at that rate. Most of these projects, when you look at them on average, it's about $2 million capital project on average, returning well above 20% internal rates of returns. There are several projects that we need to continue to evaluate and, of course, get board approval that may be above, you know, 15, $20 million, but those are things that we're still looking at.

Okay, thanks. That's helpful. As a follow-up, would that $70 million for this year be encompassed within Project Horizon? And then just on Project Horizon more generally, could you maybe talk about how much you may be achieved on an annualized run rate basis in Q1 and how much incremental benefit you might expect in Q2? Yeah.

Some of these high return projects are driving cost reductions that we're seeing, particularly in our manufacturing industry. So they are incorporated into our targets for horizon and also will be part of our strategy going forward as we say we're doing this to strengthen our competitive positions in our core assets across the region. In terms of the benefits of what we saw in the first quarter, remember we shared this last time, we expect about Bottom line, 10 to 15 million this year because of $50 million roughly of inflation. So we said horizon we're going to deliver $110 million of run rate by the end of this year. We'll be at that run rate. 50 million of inflation will have to be netted against that. So we expect 10 to 15 this year. And most of that's back in loaded towards the second half of the year. as we implement these projects and also reduce position. So the bottom answer is that we probably didn't see much in the first nor the second quarter. I'll be back in loaded.

Okay. That's helpful, Collin. Thanks. I'll turn it back and get back in the queue.

And we have a follow-up from George Staffos with Bank of America. Please go ahead.

Hi. Thanks for taking my question. I know it's a little difficult to talk about this sort of thing live, Mike, but some of the other producers in North America have either scaled back and or we've heard from our trade contacts had some operating issues in the first quarter where they had outages, perhaps not planned. Has that been a material driver of your business? And if so, should we be, to the extent possible, maybe trying to build in some cushion should that business leave that entered earlier in the year, leave you later in the year and into 2025? How would you have us think about that conceptually? And then a second question I had, and then I'll turn it over. I know you're not guiding on third quarter yet. We do know what the maintenance guide is. Are there any other significant bridge items that you would have us at least conceptually think about as we think about 2Q to 3Q? Thank you.

George, if you don't mind, I'll ask you to repeat your first question because I think I didn't get the first question. I can answer the second question on the high level. So the main thing is the maintenance, as you said, The other thing, as we always say, the second half is a much better seasonality in Latin America than the first half. So if I had to guide on two things, which maybe is important, I'll do those two. And then, of course, the continuation of the improvement that we've seen in the first quarter of this year. So the momentum that time and the outage is probably a good way to look at it. And I'm sure...

Jean-Michel, give me momentum, LATAM, and what was the other thing you said?

Momentum in general in this region. Yeah. And the outage. And the outage that you mentioned.

Yep, yep. No, my first point, we had heard some of the other free sheet producers had some operating issues in the first portion of the year. I think there was one that was in the press with, I think, an unplanned outage. Did any of that business accrue to you? And if it did, Does it go away once those producers are back running more normally, I guess, is a substance of the question.

Yeah, we heard about it, too. And we just saw the first estimate of operating rate for the month of April. And the statistic is saying it was 96%, which is very high. But I don't think we can put a direct relation between our order book and what happens to our competitors, I think. Those two are independent. Okay.

Thank you.

And we go back to a follow-up with Matthew McKellar with RBC Capital Markets. Please go ahead.

Hi, thanks. I think you talked about upward pressure on the cost of your wood fiber in Sweden in 2023. And I think you also mentioned expecting continued headwinds on the cost of fiber in Latin America, at least in the near term here. Can you talk about what the latest trends are in each country and maybe talk about whether you expect any moderation in wood fiber costs as 24 progresses?

Yes, Matthew. The situation in Sweden, the wood cost continues to be elevated. Remember we said that the reason for that is higher demand for wood for bioenergy and also the Russian situation and a lack of exports from wood. It is stabilized, but it's stabilized at a higher level. We're not seeing increases in Sweden, but we're not seeing decreases, so it's pretty much stabilized there. And same thing in Brazil. Brazil wood prices have certainly increased on the open market side, and that also is stabilized, but stabilized at a higher rate.

Thanks. That's helpful. If I could sneak one more in. Are you seeing new opportunities in Mexico that you could serve from either the U.S. or Brazil with Mexico imposing import duties and uncoated free sheet from China and Indonesia?

So the Mexico side is a balance for us because we have some export from Brazil, which is going to be taxed, and it's created opportunity from North America. So net-net, I think it When we looked at it, it's more opportunities than anything, but it's been a balance between the two. But yes, you're correct. That's probably an opportunity, which we are seeing, to export more from North America to Mexico.

Okay, thanks for the color. I'll turn it back.

We do have another follow-up from George Staffos. Please go ahead.

Hi, everyone. Just a last one from me. Just number one, If possible, could you give us a quick snapshot on capacities by region, you know, paper versus pulp? And if it's in the deck or in the coming queue, we'll wait and or look. But if you had that quickly, that'd be great. And then what did you say the headcount reduction is with Horizon for this year in total? I recognize a third is already done from what you said, but what was the number that you cited for the year? Thank you, guys.

George, I'll answer the horizon question first. 150 positions, and that is the cost globally. And from the capacity perspective, what we have by region is for uncoded, so I'll give these numbers to you. So for uncoded papers in Europe, it's $765,000. For market bulk in Europe, it's $130,000. In Latin America, it's $1.1 million for uncoded free sheet and $160,000 for market bulk. And in North America, for our facilities, it's $975,000 for uncoded free sheet and $115,000 for market bulk. But remember, we have a supply agreement with International Paper. The supply agreements for both Georgetown and Riverdale is $655,000.

Thank you so much. And that is in the appendix. Yeah. Thanks very much.

Ladies and gentlemen, for any additional questions, please press 1-0 at this time.

We have no other questions, and I'll turn the call back over to Hans Bjorkman for closing comments.

Thanks, Leah. Before we wrap up the call, Jean-Michel, any closing thoughts?

Yeah, just a few. So first of all, thank you for joining the call. As we've demonstrated since the spinoff, we've maintained a balance between a healthy financial position, returning cash to shareholders, and reinvesting in our business. And we continue to go to the same direction. Part of our strategy is reinvesting in our business to increase our competitive advantages. We're confident in our ability to generate strong earnings and cash flows throughout the cycle and looking forward for the second quarter and this year. Thank you very much.

Thanks for joining us today. We appreciate your interest in Silvamo and we look forward to continued conversations in the coming weeks and months.

Once again, we'd like to thank you for your participating in Silvamo's first quarter 2024 earnings call. You may now disconnect.