Sylvamo Corporation

Good morning and thank you for standing by. Welcome to Sylvamo's second quarter 2025 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 star then the number one on your telephone keypad. To withdraw your question, press star then one a second time. 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, Virginia. Good morning, and thank you for joining our second quarter 2025 earnings call. Our speakers this morning are Jean-Michel Rivieres, Chairman and Chief Executive Officer, John Sims, Senior Vice President, Chief Operating Officer, and Don Devlin, 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'd like to turn the call over to Jean-Michel.

Thanks, Hans. Good morning, and thank you for joining our call. I'll start on slide four with our second quarter highlights. Our teams are committed to the success of our customers and are partnering with them to be the supplier of choice every day. Our operational performance improved during the second quarter, and the challenges we ran in the first quarter are no largely behind us. We completed the largest planned maintenance all-age quarter we've had in over five years. Lastly, we returned nearly $40 million in cash to shareholders. We distributed $18 million via the second quarter dividend, and we repurchased $20 million in shares in the quarter. Let's move to the next slide. Slide five shows our second quarter key financial metrics. We earned adjusted EBITDA of $82 million with a margin of 10%, in line with our expectations. This reflects having almost $70 million of planned maintenance outages in the quarter, which is the largest in recent history. We now have almost 85% of our planned maintenance outage for the year behind us. We generated adjusted operating earnings of $0.37 per share. Free cash flow was negative $2 million. The variance to the second quarter last year is due to lower adjusted EBITDA and slightly higher capital spending. Keep in mind that our free cash flow is heavily weighted to the second half of the year. In the last two years, we generated almost 90% of our free cash flow in the second half. Now, I will turn it over to Dom to review our performance in more detail.

Thank you, Jean-Michel, and good morning, everyone. Slide six contains our second quarter earnings bridge versus the first quarter. The $82 million of adjusted EBITDA was in line with our outlook of $75 to $95 million. Excluding the $13 million in FX headwinds in the quarter, we would have been at the high end of our outlook. Price and mix was favorable by $12 million, driven by better mix in North America and Latin America, with lower export sales from both regions. volume decreased by 9 million mostly in north america about half was due to less volume from ip's riverdale mill than planned over the last three quarters they've only produced about 80 percent of their 27 000 ton per month plan and we expected that to continue into the third quarter the other half was partially due to our own operational challenges we experienced in the second quarter Operations and other costs were favorable by 23 million, driven by 18 million in improved operational performance in North America and Europe. We continue to make progress in resolving the operational issues experienced in the first and second quarters. Other costs were also favorable by 18 million, primarily due to green energy credits in Europe and lower overhead costs. This more than offset the unfavorable impact of 13 million from FX. Plan maintenance outage cost increased by 39 million, largely as expected as we conducted complex outages in five of our mills. Input and transportation costs were favorable by 5 million, primarily due to energy in North America. Let's move to slide seven. Looking at industry conditions for the first half of 2025 versus the first half of 2024. In Europe, demand remains sluggish and is down 8% year over year. Industry capacity was reduced by 7% after two uncoated free sheet machines closed late last year. Paper prices stabilized in the second quarter, but are under pressure entering the seasonally slower third quarter. All prices in Europe significantly decreased in the first half of this year, contributing to uncoded free sheet pricing pressure. In Latin America, demand is down 2% year over year, with demand down 6% in other Latin American countries. However, Brazil is up 6% due to strong publishing demand. Industry capacity across the region remains stable. In North America, reported apparent demand is stable year over year, driven by higher imports, which were up nearly 40%. Much of this increase in imports is in converting and printing roles. We believe that real demand will be down 3% to 4% this year. Industry supply was reduced by 10% after a few machines, including IT's Georgetown Mill, closed in the second half of last year. In addition, Pixel announced they will close their Chillicothe, Ohio mill in August. This will further reduce uncoated free sheet capacity in North America by approximately 6%. Let's go to slide eight. We continue to monitor the U.S. tariff situation and the potential challenges and opportunities that may unfold. In the first half of the year, we saw some shifts in uncoated free sheet and trade flows. This is one of the main reasons why imports into the US were up almost 40% through the first half. We're also keeping an eye on several cross-regional themes, for example, currency fluctuations with the US dollar devaluation against many currencies. Regarding our major capital spending plans for the year, the business cases for these projects included the possibility of higher tariff costs, which are not expected to be material at this point. We're staying close to our customers to understand their needs and opportunities to help them be successful. And we are focused on what we can control, improving productivity, reliability, and leveraging our cost initiatives. Let's move to slide nine. Looking ahead, we expect to deliver third quarter adjusted EBITDA of 145 to 165 million. We project price and mix to be unfavorable by 15 to 20 million. This is primarily due to paper and pulp prices in Europe. We expect volume to be favorable by 15 to 20 million. This is primarily due to stronger seasonality in both Latin America and North America. Operations and other costs are projected to be favorable, up to 5 million due to improved operational performance. We expect input and transportation costs to be stable, Plan maintenance outages will improve by 66 million as we have no outages planned in the quarter. We expect a significantly better adjusted EBITDA performance in the second half. This is due to much lower planned maintenance outage expenses, improving volumes, and better operations. Now I'll turn it over to John to talk about our capital allocation plans.

Thank you, Don, and good morning, everyone. I'll pick up on slide 10. A long-term capital allocation strategy drives share owner value. We are focused on maintaining a strong financial position, reinvesting in our business, and returning cash to share owners. This allows us to stay focused on our customers, helping them win through commercial excellence efforts. It enables reinvesting in our business, enhancing our reliability, productivity, and improving our service through operational excellence initiatives. And our healthy financial position preserves the flexibility to return cash to shareholders. We'll continue to evaluate opportunities to repurchase shares at attractive prices with the 42 million available in our current share repurchase authorization. Let's move to slide 11. This slide shows how the deleveraging of our balance sheet has enhanced our financial position. We have reduced our debt by about half, including more than $150 million last year, which we did in anticipation of the potential uncertainties in 2025. Our net debt to adjusted EBITDA now stands at 1.3 times. We have no major maturities due until 2027, plus we have almost $400 million available in our revolver. Our strong balance sheet and available cash on hand provides us with the ability to focus on our customers, run our business, and invest in our future throughout the cycle. Let's go to slide 12. Our teams continue to develop our high-return project pipelines with returns greater than 20%. We're investing in high-return projects to generate earnings and cash flow. want to take this opportunity to highlight our 2026 and 2027 capital spending outlook the purple shaded bars on this chart show our high return investments the light purple is for our easter investments and the dark purple is for all other high return projects as disclosed on our fourth quarter 2024 earnings call back in february we are investing $145 million in strategic projects at our flagship mill in Eastover, South Carolina. These investments will be spent from 2025 through 2027, with the majority of spending taking place next year. Overall capital spending is increasing in 2026, but then dropping back down to prior levels in 2027. This outlook should provide you with a good sense of our capital spending for the next few years, and we will continue to update you as we refine our plans. Let's go to slide 13. We feel the importance of the strategic investments that our East River Mill warrants a quick refresh of our exciting plans. We have three high-return projects that will reduce costs while improving efficiency and mix of the most competitive uncoated free sheet mill in North America. First, we are investing to optimize one of our two paper machines. The enhancements will allow us to reduce costs while improving our product mix across both paper machines. This investment should result in an incremental 60,000 tons of uncoated free sheet capacity. Second, we are replacing an existing cut-sized sheet with a brand new state-of-the-art sheeter. This will lower our sheeting costs up to 15%, reduce waste by maximizing paper machine trim, while providing incremental cut-size capacity. This sheeter will allow us to provide improved reliability and additional flexibility to better service our customers. Detail engineering work continues, and many of the orders for the parts and equipment have already been placed. All plans are on track. Once completed, these combined investments should create incremental adjusted EBITDA of more than $50 million per year, resulting in additional cash flows and an internal rate of return of greater than 30%. Lastly, we are partnering with the Price Companies, an industry leader in woodyard operations, to modernize our woodyard and improve our efficiency. This will result in more efficient, reliable, and cost-effective wood processing operations and allow us to avoid about $75 million in capital over the next five years. This woodyard modernization project is progressing as planned and remains on schedule to begin the startup in early 2026 and will be completed by the end of 2026. Let's go to slide 14. Our strategy is to be simply focused on uncoded free sheet paper because we believe uncoded free sheet will be needed for a long, long time. Uncoded free sheet remains the largest and most resilient segment in the graphic paper space, and we view uncoded free sheet industry landscape as an opportunity. We're investing to strengthen our competitive advantages to generate earnings and cash flow. We view these investments as high return and low risk as we are staying in our core product line of uncoded free sheet and reinforcing our position as supplier choice for our customers. We will leverage our strength to our talented teams, iconic brands, strategic channel partnership, and low-cost mills that drive high returns on invested capital. I'll now turn it back over to Jean-Michel.

Thanks, John. I'll conclude my remarks on slide 15. We will create shareholders' value by partnering with customers so we remain the supplier of choice, maintaining a strong financial position to provide flexibility, and reinvesting in our business through a great pipeline of high-return capital projects, enabling us to grow our earnings and cash flow. Silvermore is creating shareholders' values through strong cash generation and disciplined capital allocation, including chair repurchases at prices well below our interesting value. And we are progressing well. We are still in CFO transitions with John and Don as we prepare for my retirement at the end of the year. We are confident in our future and motivated by the opportunities that lie ahead. With that, I'll turn the call back to Hans.

Thank you, Jean-Michel, John, and Don. Okay, Regina, we're ready to take questions.

If you would like to ask a question, simply press star then the number one on your telephone keypad. To withdraw your question, press star then one a second time. We do ask that you limit yourself to one question and one follow-up question. Our first question will come from the line of George Stappos with Bank of America. Please go ahead.

Hi, everyone. Good morning. Thanks for all the details. I guess the question I have for you is can you talk a little bit about what the outlook is for South America in the third quarter to the extent that you can talk about EBITDA and how things are trending, that would be helpful. And the second question would be, I remember from last quarter, I seem to remember that you were expecting North and South America on a combined basis to be up in EBITDA versus 24. Is that still the outlook? And what are the puts and takes there? Thanks, guys.

Hey, George. Thanks. So for our outlook, Our third quarter on LATAM, we're expecting that you'll see, you know, continued improvement. First of all, we have seasonally increasing shipments, and we've seen that typically, and we expect that, again, to occur this year, and you'll see that in the third quarter. Second, of course, we don't have any outages. We had two significant major outages in the second quarter down in Latin America, and so that is behind us. James Pfeiffer- Our shipments were slightly lower than what we expected, and the second quarter, because we were slow to come out and both of those outages that cost us about 10,000 times the devil course that's behind us will be moving forward with that the. James Pfeiffer- The. Second question you had was around the combined earnings. And in general, you know, it is, we don't give a full year outlook, as you know, and these current market conditions with the tariffs provides a lot of uncertainty. But right now, we believe that the combined earnings of both North America and Latin America could be slightly less than what they were last year. And this is mostly due to kind of a change in position because of some of the weakness that we've seen in other Latin American markets' pricing. And that's really driven by the impact of the tariffs and increased imports into those markets, and also weaker demand. So in particular, in some of our Latin American markets, as we talked about, other than Brazil, Brazil is up 6%. Demand is strong there. And the other Latin American markets demand generally is down 6%, and that's mostly driven by really Mexico. Now, we don't ship into Mexico because of the tariffs that they implemented against Brazil there, but it does have a knock-on impact to the other regions.

Thanks, John. I'll turn it over. Appreciate that.

Our next question will come from the line of Daniel Harriman with Sedoti. Please go ahead.

Thank you. Hey, good morning, guys. Thank you for taking my questions. First, I just wanted to start with Europe. And in the last quarter, you spent quite a bit of time talking about some changes that were made there. Obviously, the region continues to suffer from soft demand and lower pulp prices. And I'm just wondering if you could update us on what needs to happen either commercially or operationally to kind of stabilize performance there heading into 2026.

Yeah, Daniel, Europe is in difficult market conditions. This is also driven a lot by the tariff impacts, particularly the impact it's had on market pulp due to weak demand in China. As you know, market pulp prices were going up in the first quarter, but then significantly decreased in the second quarter. And pulp pricing is a driver of uncurried free sheet prices. Europe because of the level of non-integrated capacity that is there. So, we're seeing weakness in both pulp and uncutted free sheet pricing in there. Certainly, we need the market conditions to improve. You know, with pulp going up would be part of stabilization for the pricing there. But what we're really focused on, we talked about it, is the factors that we can control, and that's improving our competitive cost position. So we're focused on and try out around mix improvement as well as fixed cost reduction in our new mill, reducing wood costs and improving our operations there. Those are the things that we're focused on. We've got We believe the right leader driving that. We've got talented teams that are focused on that, and that's what the team is working on.

Okay. Thanks so much, John.

Our next question comes from the line of Matthew McKellar with RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking my questions. You mentioned shifting trade flows and uncoded free sheet to the first half of the year. Can you maybe just give us a sense of what the latest is that you're seeing on that front and how trends, excuse me, through the past couple of months and into August have looked in particular? What are you seeing by market? Thanks.

Yeah, Matthew. So relative to the first half of this year, we've seen a significant increase in roles, mainly coming into North America. And we believe it's in advance of, you know, the tariff uncertainties. And so it's had an impact in creating, making more supply available in North American primarily roles.

Okay. Um, and are you seeing any, I guess, changes in trends in Europe at this point?

We, we've seen some pressure also from, uh, importers trying to get into the european market where we see it is some which have anticipated to have new access to us of difficult access with tariffs trying to go to ola john was mentioning to you prices in ola were under pressure and partially is because of some countries trying to import at very low prices to ola And we didn't have that before. So OLA is out of Latin America, to be sure, what I mean by OLA. So we've seen it, as we said, in North America, especially in the first half. And we've seen it a lot in OLA and Middle East. So some of the traditional people who were used to sell to the U.S. will try to find other avenues. And this is where we call with the flow impact.

OK, thanks very much for that detail. Next, let me just zoom out a bit here. What is your outlook for how uncoated free sheet demand in Latin America evolves over the next couple of years? Thanks.

Yeah, we think that Latin America will continue to be maybe flat or slightly down. I think what we're seeing today, if you look at it, Brazil is up 6%. So that's in Brazil demand year to date is up 6%. It's other Latin America markets that are down. And that's really, as I said earlier, is being driven by Mexico. And that's being driven mostly, we think, because of the tariff uncertainty that's occurring, that's driving through the economy in Mexico. We also see it in a couple of the other countries in Brazil. But in general, we believe... I'm sorry, not Brazil, but in other Latin American markets. But in general, we believe the long-term trend will be flat to slightly down in the whole Latin American market.

Thanks very much. And if I could just sneak one last one in here. I recognize that East Delta spending will be ramping into 26, but How do you think about the opportunity to lean into share repurchases with where the share price is at, particularly with the balance sheet in good shape and the second half of 25 likely to be stronger from a free cash perspective? Thanks.

Yeah, I think it's clear we have a pretty strong balance sheet, so we have a lot of capacity to take advantage and opportunistically buy back our shares when they're significantly undervalued. We have a little bit over $40 billion that are still authorized from the Board of Directors. And so we think we have plenty of capacity to take advantage of in purchasing our shaders.

Thanks very much. I'll turn it back.

Again, to ask a question, simply press star followed by the number one on your telephone keypad. And our next question is a follow-up from the line of George Stappos with Bank of America. Please go ahead.

Thanks, everyone. Could you talk about the green energy credits that you received in 2Q? What was the amount? Are they non-recurring? And then, you know, to the extent that you can comment, the fact you're seeing so much in the way of imports into North America, is that affecting any of your tactics and, for that matter, the behavior of, you know, producers in the region? um you know vis-a-vis their their margin efforts and then i guess relatedly you're saying imports i believe into to europe as well from what i heard from you jean-michel you know i recognize it's slow but is it changing behavior at all um and how are you contending with that thank you george uh this is don to your first question relative to the green credits in q2 they were eight million

And this is recurrent.

Yeah, it's something that recurs throughout the year.

Okay, got it. Thank you for that. And your second question. And what's going on? Thank you.

Well, you know, with the import situation in the U.S., just our view with that, whether that in the first quarter was due to anticipation of the tariffs being implemented. Given where we stand today with the tariffs, We're expecting imports to decrease into U.S. because of the high level of tariffs that are being applied, particularly on those countries where those imports will be coming into. So, in general, we believe in North America that with the closure of the Chillicothe Mill and the reduction in imports, operating rates are going to improve, probably be in the mid-90s on the second half of the year. In terms of our tactics, no. I mean, I think that our strategy continues to be, as we said, to be focused on uncoded free sheet. We want to be the supplier of choice for our customers. We're continuously working to improve our cost positions, our competitive advantages and values of our brands and what we provide to the customers. This is why it's so important for us, we believe, to de-bottleneck the East River Mill so that we can produce more uncutted free sheet. And the timing is going to look, we believe, pretty good on that, given where we think that the operating rate, where we think the import situation is going to be near term and also longer term.

Yeah. I mean, John, I appreciate that. Have you seen, looking at 2Q and to date 3Q, recognizing you can't comment on a forward basis. Did the fact that you had more supply perhaps from imports change any of the competitive activity on pricing? Was it a little bit more intense on pricing than you would have expected? I think from your waterfalls, it was a little bit worse than you would have expected. So if you can talk a little bit about that across the regions.

Yes. And the answer is, you know, we put a price increase announcement to our customers in the first part of this year, and we realized much less than what we expected. And that was true. We attributed it to the increase in the imports and also the fact that with the announced closure of the Chillicothe, there was an effort by them to sell their inventory at very low prices, which... Right. impacted our ability um to get the price increase that we would have expected and so yes um that did impact uh us in the short term okay thank you john i'll turn over i'll now turn the call back over to hans bjorkman for any closing comments all right thank you i'm going to let john michelle do a quick wrap-up

So thank you, first of all, for joining our call. We understand we're facing some difficult industry conditions, but we've faced them before. So we have a very strong position financially, and we think we can continue to perform very strongly through the cycles. We're committed to a long-term strategy of reinvesting in our business to increase our competitive advantages and returning cash to shareholders. We're in the process of executing seamless CEO and CFO transition plan with John and Don as we prepare for my retirement. Our long-term strategy investment thesis remains intact. So we're really confident in our ability to generate strong earnings and cash flow through the cycle. Thank you for joining again.

Once again, we would like to thank you for participating in Silvamo's second quarter 2025 earnings call. You may now disconnect.