Sylvamo Corporation

Good morning. Thank you for standing by. Welcome to Sevamo's third quarter 2024 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, press star one on your telephone keypad. To withdraw a question, press star one 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, Audra. Good morning, and thank you for joining our third quarter 2024 earnings call. Our speakers this morning are Jean-Michel Rivieras, 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'll 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'd like to turn the call over to Jean-Michel.

Thanks, Hans. Good morning, and thank you for joining our call. I'll begin on slide four. We had a really strong third quarter. Our teams executed very well, delivering strong commercial and operational performance. Our mill system ran well, and we continue to see relatively stable input costs. We continue to make good progress with Project Horizon, our cost reduction program to streamline overhead, manufacturing, and supply chain costs. We are on target to exceed our 110 million year-end run rate saving goal by up to $10 million. Lastly, these combined performances by our teams resulted in very strong earnings and outstanding cash flow in the quarter.

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

We earn adjusted EBITDA of $193 million with a margin of 20%. Pre-cash flow generation was $119 million. and we generated adjusted operating earnings of $2.44 per share. I'm proud of our team's delivered impressive results while taking care of our customers. More importantly, I'm proud of our team's commitment to putting people before paper to ensure everyone returns home safe at the end of each day. We are focused on building a resilient safety culture by involving every team member in our efforts to proactively eliminate risk and create a safe environment for everyone every day. Now, John will review our performance in more detail.

Thank you, Jean-Michel, and good morning, everyone. Slide six contains our third quarter earnings bridge versus the second quarter. The 193 million of adjusted EBITDA was better than our outlook of 170 to 185 million and almost 30 million higher than the prior quarter. Price and mix was unfavorable by 4 million and driven by North America mix. Volume increased by 10 million, driven by North America. Operations and other costs were stable and better than projected, reflecting solid operations across our mill system. Plan maintenance outages cost decreased by $28 million as we had no major planned outages in the quarter. Input and transportation costs increased by $4 million as negative fiber costs in Latin America more than offset positives in energy and transportation in North America. I'd also like to commend our teams for their very strong all-around performance that resulted in a 20% margin.

Let's move to slide seven.

We expect to deliver fourth quarter adjusted EBITDA of 150 to 165 million. We project price and mix to be unfavorable by 20 to 25 million. This is due to pulp and paper price decreases in Europe, higher export mix in Latin America, and customer mix effect in North America. We expect volume to improve by 15 to 20 million, mainly due to stronger volume in Latin America. Operations and other costs are projected to increase slightly due to an $8 million operating expense for a planned 10-year turbine generator maintenance event at our Eastover Mill. This will be partially offset by better fixed cost absorption from less economic downtime in North America. We expect input and transportation costs to increase by 5 to 10 million, mostly due to transportation and seasonally higher energy. Plan maintenance outages are projected to increase by 17 million as we have a planned outage at Eastover this quarter.

Let's go to slide eight. An important part of our strategy is to be a low-cost producer.

This time last year, we initiated Project Horizon, a cost reduction program to streamline overhead, manufacturing, and supply chain costs. As Jean-Michel mentioned earlier, before inflation, we're on target to exceed our $110 million year-end run rate savings goal by up to $10 million. This will continue to be a focus for us moving forward, and we will provide more details in our next earnings call when we wrap up 2024. Let's move to Slide 9. As was announced two weeks ago, the VAMO and International Paper have agreed to mutually terminate the Georgetown Supply Agreement in December. International Paper has also announced that the Georgetown Mill will cease production by the end of the year. We have plans to support customers through this transition as they find alternative suppliers. Of the approximately 250,000 tons we expect Georgetown to supply us this year, we will exit about 150,000 tons. This will have roughly a negative 400, I'm sorry, 40 million earnings impact, assuming 2024 margins, i.e., no change in operating costs, prices, input costs, et cetera. We retained about 100,000 tons of the most profitable products. These products have largely been qualified and transitioned to our Ticonderoga and East River Mills which will reduce economic downtime in our North America business. A combination of optimizing our mix of products, segments, and customers while leveraging efficiencies from a simplified footprint will help us mitigate the loss of volume. As a result of the Georgetown closure, our North America business will become leaner and more productive. we are continuing to focus on strategic initiatives to simplify the business, unlock efficiencies, and drive earnings growth.

Let's move to slide 10.

With the Georgetown Mill closing by the end of December, in addition to the capacity reductions announced earlier this year, North America uncoded free sheet capacity will be reduced by approximately 10%. On this slide, you can see the effect of these capacity reductions. The left-hand side shows the supply positions as of the end of the first half of the year. And on the right-hand side, you have the view after all announced capacity reductions have been removed. Consistent with our strategy and our investment thesis, We are committed to the uncoated free sheet business and are very well positioned to help our customers win in their respective areas. Let's go to slide 11. Uncoated free sheet industry conditions are improving in Europe and North America as seen on this slide. Next year, European demand is estimated to decline 2% However, supply is expected to drop by 7% after two uncoded free sheet closures later this year. Latin America demand and supply are both expected to be stable in 2025. Lastly, North America demand is estimated to decline 3%. However, supply is expected to drop by 10%. As industry conditions evolve, We are well-positioned to serve our customers for the long run through our talented teams, iconic brands, and our low-cost global footprint. I'll conclude my comments on slide 12. I want to wrap up with some encouraging news as it relates to the Brazil goodwill tax dispute. Last month, a Brazilian federal regional court ruled in our favor on a court case covering two-thirds of the amount. As a result of this, we are currently discussing with our lenders the possibility of eliminating the $60 million escrow requirement that we funded in 2023. The Brazilian tax authorities will appeal the court ruling, and it could be several years before there is a final resolution on this matter. As of now, that's all we have to report on this. We will keep you posted on any material changes as we progress, and there's also more detail in the appendix. I'll now turn the call back over to Jean-Michel.

Thanks, John. I'll conclude my comments on slide 13. If VAMO is a cash flow story and we are creating shareholder value through strong cash generation and disciplined capital allocation, continue to be impressed with our teams as we work to take care of our customer needs and remain the supplier of choice. We generated outstanding free cash in the third quarter. We're reducing our cost structure and are reinvesting in our business through a great pipeline of high return capital projects, which will enable us to grow earnings and cash flow in the coming years. We are simplifying our North American business to become leaner and more agile to drive earning growth. We are committing to retain at least 40% of our cash flow to shareholder this year. Looking forward, we are encouraged by the uncoated free sheet conditions across our regions. We're 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, Audra, we're ready to take the questions.

Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw a question, press star one again. We do ask that you limit yourself to one question and one follow-up question. Thank you. We'll take our first question from Daniel Harriman at Sedodian Company.

Hey, good morning, guys. Thanks for taking my call. With the upcoming closure of Georgetown and then the announced strategy changes at IP, to the extent that you can, could you provide any comment or ideas about how the capacity reduction has any impact on how you think about the Riverdale agreement that you have going forward with the company?

Yes. So hi, Daniel. Thanks for joining the call. You know, since we started the spin off of IP and started Sylvamo, we've been preparing for that. So we know it will happen. We have no information on when. We've not been noticed of anything, but we're prepared. The one thing which is important to understand with Riverdale, which is different than Georgetown, is Riverdale grades are grades we produce in all of our other mills. So if Riverdale was going to go down, we believe that the mix improvement we will realize at current margins would essentially mitigate any potential negative impact to our earnings. So Riverdale for us, we're ready, we're prepared, and if it was to happen, we'd probably be a breakeven with the benefits we would have from it.

Perfect. Thank you. And then with the 100,000 tons that you are retaining of that business, has that all been transitioned over to your existing footprint or is that still ongoing?

Yeah, it's all been transferred.

It's ready. Okay. Thanks, guys. Thank you.

We'll move next to George Cephos at Bank of America.

Hi, everyone. Good morning. Thanks for the details. Congratulations on a very strong quarter, guys. My two questions to start, can you talk about what offset you may have from you know tightening the footprint etc that would help to offset the if you will the gross impact from georgetown and those 100 000 tons so said differently of the 40 million currently based on current operating margins or margins you know what do you think the net would be all else equal in 2025 given all the other things that you're working on that's question number one question number two uh silvamo has been a cash flow story since it's been to its credit and uh you you've certainly uh been very singular in your in your and and executing your strategy here and elsewhere um when we look at free cash flow for the fourth quarter based on where ebitda is based on capex and interest expense and then tax affecting that we're coming up with something around 65 to 75 million dollars for free cash flow Could you talk to that? I don't know if there's a comment in the slides around that in terms of whether that's a reasonably good estimate or other things that we should be thinking about. Thank you.

Yeah, George, this is John Simms.

Thanks for joining the call. On your first question, and good morning, we're going to be careful. We're not going to project anything in terms of pricing and impact that we have next year. But, you know, certainly, as we put out, The capacity closure, if you will, of the Georgetown mill is going to be a net positive for the industry. And on top of that, with the other closures that have occurred. So, again, you know, the 40 million impact we have is based on 2024 margins, not projecting 2025 margins. Of course, there's other things other than the impact of pricing that could impact that. and other things like that. I also want to mention, you know, we talked about Project Horizon. We are slightly exceeding our target of 110. We're now projecting $120 million run rate. Now, that reminds you that is before inflation. We estimated about $50 million of inflation this year. And we're running ahead of that. So we think that, you know, that also we did horizon in anticipation of Georgetown. And so that also helps us mitigate the impact of the Georgetown.

John, I understand. I guess maybe what I'm saying is, could you help us with, you know, the reduced economic downtime, the improved mix and streamlining SKUs? Does, you know, holding everything else constant, we understand. while you need to do that, does that add back $5 million, $10 million, or too hard to say, or it's modest enough that we should just think about $40 million? And then my other question. Thanks. Yeah, I understand your question now.

Yeah, that's factored into the $40 million net impact.

I see.

Okay. Yes, it factors in the reduction of the simplification of the business and reduction of lack of order downtime.

Okay. And on free cash flow for the fourth quarter?

Yes, free cash flow for the fourth quarter. I think you said estimate about $65 million. And I would say that that's approximately, I mean, that's not out of the realm of possibility yet.

Okay. Thanks so much. I'll turn it over.

Go ahead. Thank you. Sorry. No, I'm just saying we don't usually give an outlook on cash flow. That's why I'm a little bit hesitant, but I don't. I don't see anything that's wrong with you. Thank you.

And as a reminder, if you would like to ask a question, please press star one. We'll go next to Matthew McKellar at RBC Capital Markets.

Hi, good morning. Thanks for taking my questions. I'd like to ask about planned maintenance in Europe in 2025, which you've communicated I think will be in the $30 to $40 million range across SIAT and NEMLA. Could you first maybe just remind us of where those outages will fall in the year? And then I'd assume Europe is the largest moving part year over year, but how do you expect your total maintenance outage cost in 2025 to compare to the 73 you're guiding to in 2024?

So, hi, Matt. Jean-Michel speaking. Thanks for joining the call. We will deliver a more precise estimate in our next earnings, but directionally the thing is our European meals are mostly on a 24 month cycle, which means one year you have outage costs and the other year we don't have outage costs. That's probably the biggest change with this year. Then there will be some small ones there and there, but And that's 40 million impact because we are on the year with outages at both mills, Sayad and Eastover and Numola, sorry, next year. So I don't have the exact number, but I would say when we finish the budget, we'll inform them to you. But directionally, you take what we've done historically and you have the 40 million. And that would be good. Boost outage, by the way, will be on the first half of the year, the two European outages.

Okay, thanks very much for the help there. Next, I'd like to ask about the implementation of the European Union Deforestation Regulation, which has been pushed out a year, but what is your view on how its eventual implementation will affect the European uncoated free sheet markets and maybe imports into Europe in particular?

So, you know, I think It's always the same things. The intention of the EEGI is a good one. We are very in favor of controlling the wood and making sure we use appropriate wood with no deforestation. We do that all the time and have always done it. Specific of the rules still needs clarification. We've got some improvement in understanding what Europe is expecting. I think that's why it's been moved. It's not because people don't want to do it. It's because we need to be clear on how the law will impact some of the things we do every day, which we don't know it's going to be treated. Considering potential import in Europe, I think it's a little bit early to say, because it will depend on the details of the ruling. But it could have an impact, which would be positive for us being a European producer.

Great. Thanks very much. And if I get to sneak one last one in on capital allocation, can you share any updated perspective on how you may be evaluating reception of share purchases here with where the shares are today versus how you potentially think about a special dividend?

We haven't changed our strategy, you know, in terms of capital allocation. We maintain a strong balance sheet. We have a strong dividend, which is the foundation of our cash return. And as long as we find the repurchase share price attractive, we will share back. And on special occasions, it could be we do one time, but I would say we've got still a lot of opportunities on repurchasing share. So we're looking at it like we look at all the elements, but we We committed to a 40% for this year. Turn back to Sherwin.

Okay. Thanks very much. I'll turn it back.

Thanks, Matt.

And we'll take a follow-up from George Staffos at Bank of America.

Hi. Thank you very much. So as we look at your fourth quarter bridge versus third quarter, and thanks for doing that work for us, are there any things – that we should particularly consider as continuing into the first half of 25 on that waterfall, particularly, you know, on slide seven, you know, this price mix stay unfavorable, recognizing that sequential, not year on year. But nonetheless, do we have to worry about a little bit of pressure into the first half of the year based on what you can see right now? And then secondly, you know, we've been seeing generally pulp prices heading lower. You know, certainly you have some effect in terms of merchant sales of your pulp, but what's that doing to the cost curve and how the markets are developing on paper, particularly in Europe? Thank you, guys.

Yeah, let me, George, I'll take that. So from, if you look at the price and mix, certainly the pulp price and the European pricing as a result because that does have a strong correlation between the two. We expect that to continue and that'll be offset somewhat by some things that from a mixed perspective. Remember also that the first quarter is typically our lowest volume in LAT-TAM. and then it increases throughout the year. So we're going to go from a very strong quarter, typically we have for lab time and volume, into seasonally a little bit slower going into the first quarter. I think from operations and costs, both the fourth quarter and the first quarter were burdened, but with a little bit more operating costs due to colder temperatures in the northern hemisphere. being offset somewhat by the warmer temperatures in LATAM. I do want to, you know, call your attention, and we call this out, that burdening our ops in this outlook is a turbine generator outage. That's a 50-day outage. It shows up in ops. It's a 10-year inspection that we have. And so what it means is that while that turbine generator is being inspected, we're purchasing energy that we normally would be making. And that's about a negative $8 million impact that won't repeat into the first quarter.

Okay. And John, maybe if I can just sneak one in to use a phrase. So overall, again, you've given us the guide for the fourth quarter. Should Latin America be up given the uptick in volume or will the mixed effect with exports be an offset you know said differently uh if flat tam is you know flat up then you know north american europe or you know you know uh holding more of the burden would that be fair or have us how would you have us think about that thank you yes latin america in the fourth quarter is up in volume um the mix is um let's say slightly negative and that meaning um because of brazil the brazil demand

It's slightly down, where the rest of the LATAM is up. So that's having a little bit offsetting effect in the fourth quarter outlook. So we're seeing a negative mixed impact in LATAM, but that's showing up in a positive volume, which you can see in our outlook, because it's seasonally stronger in LATAM.

Okay. Thank you.

And we'll take a follow-up from Daniel Harriman at Sidoti & Company.

Hey, guys. Thanks again. Just a quick one. How should we think about economic downtime in Europe moving forward? Obviously, it was up both in Europe and North America in 3Q, which based on comments in the second quarter call was not unexpected. North America is going to benefit from reduced capacity from Georgetown, but should we expect the same in Europe as capacity leaves the system in 2025? Yes.

Hi, Daniel, Jean-Michel. As we've shown to you before, there is reduction in capacity in Europe also. In total, there are two mills, two machines which are shutting down, which effect would be by the year end. So we expect for both North America and Europe to have stronger capacity reduction versus demand decrease. So net should be good for volume, and if we have better volume, we have less LO in these two regions.

Daniel, if you recall from our statements around the fourth quarter outlook, we actually talked about less lack of order downtime in our operations and other costs, and that's across the board, both North America and Europe. So we're already seeing less lack of order downtime in the European system.

Great. Thanks so much, guys, and best of luck in the quarter. Thank you.

And as a final reminder, to ask a question, press star one. We'll go back to George Staffos at Bank of America.

Hi, guys. I know no guarantees in this, certainly, but my last question, you know, if you're looking at demand, you know, both from North America and Europe that are, however you pitched it, flat to up, should shipments be comparable with your demand outlook? Or do you expect shipments might track above or below? And if so, you know, what would be the reasons that you see at this juncture? Thank you. I think we expect about the same number. Okay. And I, forgive me, I misspoke. You're looking for a demand to be down a little bit in Europe and in North America. Yes. Either way, shipments should be the same. What's that? Yes.

Yeah, I just want to make sure. You're talking about the 2025 comments we made?

Correct. I'm on slide 11. With demand down, call it two and three in Europe and North America, you expect shipment should be comparable from what you can see right now. Yes. Okay. Thank you, guys.

And that concludes the question and answer session. I'll now turn the call back over to Hans Bjorkman for closing comments.

Thanks, Audra. Before we wrap up the call, I'll turn it back over to Jean-Michel for some closing thoughts.

Thanks, everybody, for joining our quarter, our call. It was, as we said, a good quarter. We intend to continue to maintain a strong financial position. We intend to continue to return cash to shareholders. And one thing which we've talked a lot and maybe not progressed as fast as we wanted to know, but it's going to accelerate, is reinvesting in our business to increase our competitive advantages. As we've told you before, we have a pipeline of greater than 200 million of high return projects. As we are preparing a budget for next year, we're looking at some high return projects that are nearing finalization of engineering work and even preparation for board approval. So we expect to be able to invest and ultimately get the increased returns from this project relatively soon for some of these $200 million. So lastly, we're confident in our ability to generate strong earnings and cash flows through the cycle. So we're looking at the upcoming quite positive. Thank you to all of you for joining today.

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