Sylvamo Corporation

Good morning. Thank you for standing by. Welcome to Silvano's first quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. As a reminder, this conference is being recorded. I will now turn the call over to Hans Bjorkman, Vice President, Investor Relations. Sir, the floor is yours.

Thanks, Samantha. Good morning, and thank you for joining our first quarter 2026 earnings call. Our speakers this morning are John Sims, Chief Executive 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 John.

Thank you, Hans, and good morning, everyone. I'm glad that you're joining our call. I'm on slide four. Today I'd like to begin with a few important macro developments that have occurred since our fourth quarter call in February, which have led us to change our operating strategy to achieve our plans this year. First, the U.S. Supreme Court invalidated IEPA tariffs, and the U.S. government responded to this by placing 10% tariffs on all trading partners. Europe had previously been at 15%, while Brazil was at 50%. This change benefits Avamo, and late in the first quarter, we began to bring product into the U.S. from our Brazilian operations while ramping down imports from our European operations. Second, the Middle East conflict has resulted in higher energy, logistics, and input costs. Across our regions, we're looking to reduce costs and taking commercial actions to help offset these impacts. Let's move to slide five. Our first quarter highlights include implementing the previously communicated uncoded free sheet price increases to our customers across all our regions. We had a difficult first quarter operationally. Reliability issues, particularly in Europe and Brazil, negatively impacted us by almost $9 million relative to the fourth quarter. And we expect some additional costs in the second quarter. The root cause of these issues have been identified and fixed or will be corrected, and the annual outages will be taking this quarter. The one exception is that our numeral mill, where it issued with a debarking drum, will not be corrected until the fourth quarter. We took an important step in achieving our vision by launching our lean transformation journey in our Latin American business. along with our Moji Wasu mill. I was in Brazil last week and was very encouraged by the energy and commitment the teams have in learning and executing the lean transformation. Lastly, yesterday we completed the refinancing of our 2027 debt to extend our maturity profile, which sustains flexibility and maintains our strong financial position. Let's move to the next slide. Slide 6 shows our first quarter key financial metrics. As a reminder from our last call, 2026 is the transition year as we work through some short-term capacity constraints due to the termination of the Riverdale Supply Agreement at the end of April and the extended outage at Eastover later this year as we execute our strategic investments there. Our first quarter result came in as expected, except for the operational issues I mentioned. We built inventory, which resulted in lower sales volume, and we also incurred the incremental cost due to sourcing and converting. We earned an adjusted EBITDA of 29 million with a margin of 4%. Adjusted operating earnings were negative 53 cents per share. As anticipated, free cash flow was impacted by lower earnings, the unfavorable impacts of our inventory build, and the timing of payments. Keep in mind that our free cash flow is heavily weighted to the second half of the year. In the last few years, we generated the vast majority of our free cash flow in the second half, and we expect to do so again this year. Now I'll turn it over to Don to review our performance in more detail.

Thank you, John, and good morning, everyone. Slide 7 contains our first quarter earnings bridge versus the fourth quarter. As John mentioned, the quarter played out largely as we expected, with the exception of operations and other costs, which I'll cover shortly. In the first quarter, we earned $29 million of adjusted EBITDA compared to $125 million in the prior quarter. Price and mix were unfavorable by $13 million. Overall mix was $17 million unfavorable, which more than offset the price improvements we saw in the quarter. About half of the mix was due to seasonably weaker mix in Latin America, which is normal for Q1, and the other half was driven by unfavorable North American customer and sourcing mix. On the favorable side, paper prices improved in North America and Latin America as Q1 increases were implemented. Paper prices in Europe bottomed out in the quarter, and previously communicated price increases are expected to realize in Q2. Volume decreased by 36 million due to normal Latin America seasonality and the anticipated inventory build in North America as we prepare for the end of the Riverdale Mill Supply Agreement and the extended Eastover Mill outage in the fourth quarter. Operations and other costs run favorable by 29 million. with about half due to non-repeat of favorable fourth quarter items from year-end LIFO accounting in North America and green energy in Europe. The other half was related to $9 million in manufacturing costs across our regions that John described earlier, as well as $3 million in FX. Plan maintenance outage costs were flat. Input and transportation costs were unfavorable by 18 million, primarily due to energy in North America, highly impacted by a one-time charge of $10 million from International Paper's Riverdale mill due to the exceptionally high natural gas cost from the winter storm. Let's move to slide eight. European industry supply and demand remains challenging. But pulp prices improved throughout the first quarter, and we are realizing the previously communicated paper price increases in April. We have communicated a second paper price increase effective in May and expect the realization to occur through the second and third quarters. In Latin America, we moved from the seasonally strongest demand in the fourth quarter to the seasonally weakest first quarter, but now expect demand to increase each quarter throughout the year. This should positively impact our volume and geographic mix as the year progresses. We are realizing the previously communicated paper price increases to our customers in Brazil and to our export customers across other Latin American countries, as well as the Middle East and Africa region, and should continue to see additional realization throughout the second quarter. In North America, industry supply and demand dynamics have improved as 7% of annual uncoated free sheet industry supply was removed with the Riverdale Mill conversion. After peaking in June of last year, imports into North America have declined significantly throughout the second half of last year and into the first quarter. We also began realizing the previously communicated paper price increases to our customers and expect to see additional realization through the second quarter. We expect the Middle East conflict to continue pressuring costs across our regions as we go through the year. We're already seeing increases in energy, chemicals, diesel, and ocean freight in the second quarter. Let's move to slide nine. As John mentioned earlier, the changes in U.S. tariffs have led us to bring in product from our Brazil operations while ramping down imports from our Europe operations. Last quarter, we provided you with an estimate of the adjusted EBITDA impacts of the North American footprint transition, which we indicated was about $85 million negative for the full year. Assuming that tariffs remain at the current levels, we now estimate total full-year impact to be around $65 million negative, which is $20 million improvement from our prior estimate and will be realized mostly in the second half. This improvement is the result of the mixed improvement by redirecting our Brazil imports from the Middle East and Africa to the U.S. We will stay close to the situation and be prepared to go back to our prior plans should the tariffs increase in the second half. Let's move to slide 10. Our capital allocation philosophy remains unchanged. We will deploy every dollar with the goal of improving Let me go back, excuse me. We're on slide 10. This slide is to remind everyone of our planned maintenance outage schedule for the full year by region and by quarter. We will have an increase of 20 million in the second quarter versus the first quarter as we have more outages in Latin America. 2026 is also different than past few years where we have more than 80% of the total costs in the first half. This year we had more than 50% of the total cost in the fourth quarter as we complete the investments in Eastover. Now let's move to slide 11. Our capital allocation philosophy remains unchanged. We will deploy every dollar with the goal of improving our competitive position and delivering the best possible shareholder returns over time. We plan to maintain a strong financial position, reinvest in our business, and return cash to shareholders. The refinancing of our long-term debt allows us to navigate this uncertain environment without changing our thoughtful long-term approach to capital allocation. With a strong financial position, we can navigate the geopolitical and economic challenges and focus on improving customer experience, continue reinvesting in low-risk, high-return projects, as well as execute through the end of the Riverdale supply and the Eastover mill outage later this year. These investments and improvements will help to grow earnings and cashflow in the future. Let's move to slide 12. Yesterday we refinanced 2027 debt to extend our maturity profile. We refinanced our term loan F that matured in 2027 with a new term loan F3 that matures in 2032. We also extended our accounts receivable securitization facility out to 2029 And here on slide 12, you can see the before and the after picture of our maturity profile. This move provides flexibility and allows us to maintain our focus on taking care of our customers and improving our business while we navigate these external challenges. Further details are in the appendix and will be included in our 10Q that will be filed later today. I'll now turn the call back to John.

Thank you, Don.

I'll pick back up on slide 13. Last quarter, I shared our vision that Savama will be legendary. Legendary for the way we relentlessly pursue and achieve world-class excellence in all that we do. Consistently performing at world-class levels will create substantial lasting value for our employees, customers, and shareholders, and will enable us to be the employer, supplier, and investment of choice. Let's move to slide 14. As we strive to achieve world-class standards in the areas that define our success, We are establishing an employee-driven continuous improvement culture by transforming the company to a lean-driven mindset. By incorporating a lean mindset and best practices into our everyday efforts across all functions, we expect significant improvement in the following areas. Customer centricity. Lean transformation will help to enable a new standard of customer experience and loyalty, where we strive to be truly outstanding and this is critical to our strategy. Operational excellence, lean transformation will also help to enable best-in-class levels of efficiency, reliability, and performance in our mills and supply chains, ensuring that our operations consistently deliver to the highest standard. Cost leadership, the impact that lean transformation will have on our customer centricity and operational influence should combine to enable us to attain industry-leading cost effectiveness through an employee-driven continuous improvement culture, strengthening our competitive position, and ensuring sustainable results. Now let's go to slide 15. Lean is a long-term company-wide strategic transformation not a short-term change program. Over the next three years, our objective is to embed continuous improvement into how we run the business so performance improvement becomes systematic and self-sustaining. Our lean transformation is focused on maximizing customer value by eliminating waste, improving performance, and engaging every employee, starting with a structured hands-on rollout supported by expert partners. We kicked off our efforts in our Latin American business and have value stream mapping underway at Umoju-Watsu Mill to identify waste and unlock cost savings across end-to-end processes. We will also be conducting Kaizen improvement events, driving employee engagement and building a culture of continuous improvement from the ground up. Later this month, we'll kick off our lean efforts in our North America business and across our corporate functions at our world headquarters. We'll then roll out lien at our Ticonderoga Mill later in the second quarter. We'll continue expanding across all regions, businesses, and locations, targeting efficiency improvements and margin gains. Let's go to slide 16, where I'll provide an update on our investments at our Eastover Mill. Our high-return strategic investments at our Eastover Mill are on track and making solid progress. The paper machine optimization project will add 60,000 tons of uncutted free sheet, reduce costs, and improve our mix and efficiency. This project is on schedule with the bulk of the work to be completed in the fourth quarter during a 45-day planned maintenance outage. The brand-new state-of-the-art sheeter is also on schedule and will start to be installed in the third quarter and will be ramping up in the fourth quarter. The woodyard modernization project is on track. THE HARDWOOD LINE IS OPERATING AS OF MAY 1, AND WE'RE ALREADY SEEING SIGNIFICANTLY IMPROVED CHIP QUALITY AND EXPECT TO SEE BETTER YIELD GOING FORWARD. WE PLAN TO START UP THE SOFTWOOD OPERATION IN THE FIRST QUARTER OF 2027. THESE ARE HIGH RETURN PROJECTS THAT WILL GENERATE INCREMENTAL EARNINGS AND CASH FLUID FOR THE LONG TERM. I'LL CONCLUDE MY REMARKS ON SLIDE 17. As I stated in my CEO letter to share owners earlier this year, 2025 and 26 will be low points in our free cash flow generation as we weather the cyclical industry downturns, particularly in Europe, and complete these investments at our East River Mill. We are focused on long-term value creation by making disciplined, data-driven decisions that position the company for sustainable success and strengthen Savamo for decades to come. We will generate strong and sustainable results by diligently executing our flagship growth strategy, adhering to our disciplined capital allocation principles, becoming more customer-centric, institutionalizing lean continuous improvement in principles, and digitally transforming our business operations. As industry conditions turn, our capital spending normalizes. The benefits from our investments begin to materialize. We have the potential to generate annually greater than $300 million of free cash flow and greater than 15% returns on invested capital. So with that, I'll turn it back over to Hans.

Thanks, John, and thank you, Don. Okay, Samantha, we're ready for questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your first question comes from the line of George Staffos with Bank of America Securities. George, your line is open. Please go ahead.

Hi, thanks very much, everybody. Appreciate the detail. I'll ask a couple of questions and come back into Q, but I do have a bunch to go through. I guess, first of all, John, the company talks about operational excellence being legendary in terms of service and the like, and I recognize you're still early in that journey. That said, what was going on with operations reliability in that $9 million number that you called out? Particularly in LATAM, as I recall, and correct me if I'm wrong, I thought LATAM was expected to be better operationally, or at least not as much of an issue as Europe in this quarter. So that's question number one. Question number two, you called out or pointed to some mixed factors in North America in the first quarter. What was behind that? And related to price, not expecting you to talk about future price increases forward-looking or whatever, but For the pricing that is in the markets right now in the publications, if we hold that, what price benefit do you get in 2Q versus 1Q sequentially or for the year? Thank you.

Yeah, George, thank you. Thank you for joining and calling your questions. So I anticipated the questions on the reliability issues. And yes, I mean, I guess key to our performance if we're going to light the customer, increase customer loyalty, reliability, and operational efficiency. It's critical that, you know, that's why we're implementing the lean process, but also we are strengthening and have been focusing on no reliability process and systems. And, you know, the biggest focus we've got there is ensuring that we're investing to maintain the equipment and also we're putting in the right processes, And also training and development of our workforce. And those are all critical aspects to being, you know, world class in that performance. And we're clearly not there. I mean, this is what this indicates, the issues that we've had is we've got work to do around our reliability. You know, as it pertains to the particular items we had, Both Moji and Luis Antonio had issues in the power plant and also in the digesters that needed to be fixed actually in the annual outage. So Moji is right now down going through its annual outage. So the issues that we had in the first quarter, we actually continued to see that in the first month of this quarter, and now we're planning on fixing that. Luis Antonio's outage is not until June. So we are continuing to struggle from there with, you know, with that mill and its performance. And that's driving our increased operating costs, use of chemicals and whatnot that's impacting us. You know, if you look at Europe, the biggest issue we had was CYOT. It was a turbine generator that's operated by a third party that tripped. And, you know, the, you know, The issues we had in Europe also occurred in the area when it was a cold winter and probably the worst time we could have, but this issue knocked the SIOP bill offline for a couple of days until we could get back up and running. And in Nirmala, we also had boiler issues at the beginning of the year. And then, as I mentioned, I think, prepared remarks that we have two debarking drums in Numla, but one of the debarking drums, due to mechanical failure, is offline. It won't be... We won't be able to fix that until the fourth quarter this year.

Your second question... I guess... So, just before we go there... Go ahead. So, you described what happened, but I guess my question would be, following up, why? Did the issues come up at Moji and Luis Antonio? Why didn't you necessarily, not you, but the team sort of determine what was happening and prevent it from occurring? And the same thing in Numula, especially with the boiler and the debarking.

Yeah, so in terms of the why, it would be different for each of these, whether it's, you know, mechanical failure or an operating area. You know, we do a detailed root cause failure analysis on any of these significant events. And those have been done here. And then we put a lot of effort into ensuring that we correct and also communicate what we learned across those failures. But in all those cases, you know, we think that, you know, except for the one in SIOP because that was out of our control. That was a third-party operator area. Everyone points to, you know, an area where we've got to either improve our reliability process systems, identifying those areas that could fail and making sure that we're taking corrective actions before that occurs, or training and improving the

uh the quality of our workforce so that the right operating decisions are made and that's all what we're working on george appreciate that john i can take pricing and mix thanks john yeah george this is don i'll take uh that mix question so george uh q1 a couple of big things in mix in q1 so in latin america it's seasonally weaker uh for us in in What's happened typically is there's less domestic Brazil volume, which is our most profitable, and more export as a percentage of the mix. And so we expect that. It's normal for the quarter. And in Brazil, what typically happens is it gets stronger as the year goes on all the way through the fourth quarter. And in North America, it's a little different situation. As we prepare for the Riverdale and Eastover quarter, You know, the Eastover outage later in the year and the Riverdale supply agreement going away. We are, you know, we're using third-party sheeting. We're buying some volume from third parties buying paper. And we're doing this so that we have the inventory to serve our customers and really preserve our customers as we ramp up Eastover later in the year. And so it's a cost that shows up in mix. because the margins on that either externally sourced or converted paper is a bit lower. So those are the two main reasons. And really, we cited this as a North American piece, as a one-time in our February call that we wouldn't expect to have next year as we ramp up Eastover and the sheeting operations in Sumter.

Okay. And on the pricing impact?

Okay, yeah. So the... Make sure I understand your third question was around the pricing, the pricing realization.

Yeah, if we just hold where the publications are right now, what would it mean for benefit, if any, price-wise, 2Q versus 1Q or rest of year versus 1Q, however you want to discuss it. Thank you.

Sure, George. So, you know, we announced increases across all the regions, so I think it's best if we just go around the regions to talk about what we saw and what we're in the process of realizing from what we've announced to our customers. So, in North America, we communicated a price increase of 5% to 8% range to our customers. We're realizing that increase Within that range, we began to start to see that in March, and it's going to go through the bulk of it. We'll see that in the second quarter coming through. In Brazil, we announced a 5% increase on cut size for January, and we realized about two-thirds of that in the first quarter. In the other Latin America markets, we communicated about a 7% increase for Q1. And we realized about one-third of that in the first quarter. And that's about all we're going to get from that one. But we did announce a second increase of 7% to customers for the second quarter. We'll start to realize that in May. In Middle East and Africa, and we export this from both, mostly from Brazil, but also some from our European operations, we implemented a 4% increase in the first quarter. And we realized that in the first quarter. And we're implementing a second increase for the second quarter, which we should start realizing in May. And in Europe, we communicated a 4% increase to our customers in the first quarter. And in Europe, we actually saw prices go down in the first part, January. And then we started to see, realize this 4% increase And we'll get about half of it through April. And that's probably about all we're going to get from that first increase. However, we communicated the second increase of 8% effective in May. And we expect to start realizing that in the second quarter.

Okay, but you'd rather not give, and you'd rather not give us a dollar number for 2Q versus 1Q at this juncture given all of that. That's right. Yep. Okay. Thank you.

Your next question comes from the line of Matthew McKellar with RBC Capital Markets. Matthew, your line is open. Please go ahead.

Good morning. Thanks for taking my question. A couple just on cost. Could you speak to the input and transportation cost pressures you're seeing in Compared to where you were at the start of the year, what does that incremental headwind look like on an unmitigated basis, and what amounts do you expect to be able to mitigate in some way? And then just circling back on Nemo and DeBarker, what's the ongoing cost impact there? And so you can address that in Q4. And is that just a cost issue, or are there constraints on production as well? Thank you.

Hey, thank you, Matt. This is Don. I'll take those questions. So relative to cost and input and transportation, so the cost in Q1 was relatively small. But as we look forward, and for Q2 in particular, we think it'll be about $15 million. And that's across things like chemicals, energy, and distribution. And it's split fairly evenly across our region. So roughly $5 million per region. And for new a lot, so this debarking drum issue, it occurred in March. We're incurring about $1 million to $2 million a quarter of additional cost. And the plan is to do the repair in September. And so the fourth quarter, we should see improved costs. And really what we're doing is we have no impact to production. as we're sourcing external chips, and that's the incremental cost.

Okay, thanks. And maybe just as a follow-up there, the $15 million you called out, is that essentially the sequential impact that we should expect quarter on quarter? Would you describe, I guess, the run rate cost impact any differently based on current costs? Thank you.

It would be roughly that amount. sequentially in Q2, yes.

And Matt, these are costs that are due to the, you know, the Iran war, the situation in Harvard. So how that plays out, you know, going forward, it's, you know, seen by his guests, but that's what we see essentially for the first quarter, or second quarter.

And Matt, we had less than $2 million, $1 to $2 million of what we would call war-related inflation in Q1. So it's 15 versus one, call it. So roughly incremental.

Okay. Okay. Fair enough. And then one more from me, and I'll jump back in the queue. Pretty high-level question. You've talked about having the potential to generate $300 million of annual free cash flow. When we think about your investments and expansion at Eastover, investment in LATAM Fiber Supply, lean transformation and now prices inflecting in all regions, particularly maybe in North America where conditions seem quite tight, what else still needs to change in the markets or at Sodomo specifically to drive you to that $300 million level in 2027, at least on a run rate basis, particularly if we strip out some of the remaining $15 million or so of Eastover spend? I think you said... trickles into next year and maybe any ramp up of your investments as well.

Thanks. Yeah. So, Matt, I think you captured, you know, most of the big items. So certainly the Eastover investments and what we're doing there, the better mix in Latin America, you know, shipping exports from to the U.S., improving mid-cycle margins, particularly in Europe, but also down in Brazil and the Ola markets, the other Latteo markets, improvement there. Lower costs and improved productivity, which we're going to be driving through the lean transformations, the work that we're doing, increasing reliability and workforce planning and training. Lower wood costs, particularly in Europe, and that's really driven by new model because we're seeing those decreases right now coming through. We've talked about it, but we'll provide probably more detail around what we're doing with digital transformation as it pertains really to our mill system as well as on the commercial area. We haven't really explained a lot of that, but we intend to do that, you know, future earning calls. And then capital spending will normalize. You know, we, this is after the investment at Eastover, you know, we'll see capital spending come back to normal on level.

Okay. So, I mean, is it fair to say it's kind of continued execution of some of the programs within your control, and then markets getting a little better in other LATAM and European kind of regions?

That's right. Yes, I think that's correct.

Okay. Thanks. I'll turn it back. I'll get into the queue. Thank you.

Your next question comes from the line of Daniel Harriman with Sidoti. Daniel, your line is open. Please go ahead.

Hey, guys. Good morning. Thanks for taking my questions. I just wanted to follow up on Matt's last question. I think the $300 million cash flow target for 27 came out prior to these price increases across all three of your regions. So, Just wanted to get a sense from you of where you see the stock's valuation right now and other uses of that cash. I know there hasn't been any share repurchases in the past two quarters. Not sure if that has to do with a leverage ratio you want to get to prior to getting back into the market. And then also around tariff sensitivity. Based on the 10% tariff that's in place through July 24th, I'm just curious how you're thinking about the second half, if that tariff structure changes either way or gets worse. Would you go back to importing from Europe, or are you exploring other opportunities as well? Thanks a lot.

Daniel, let me talk about the 300. So if you remember, even from my CEO letter, based on that was expectations that we expected the markets and margins, particularly in Europe, would normalize. It wasn't sustainable with where the margins are in Europe and also in the other LATAM markets. So that was built into some of the, you know, when we think about the 300, achieving the $300 million of cash flow.

I would add to that, Daniel, that, a large portion of the path to this 300 is Eastover. We pointed out in our previous earnings call in February, the one times that we're experiencing, but you're also, we'll also see the benefits of additional, additional volume from Eastover, which is our lowest cost mill. So a large portion of the 300 will be Eastover operating after the speed up in the new sheeter. And that's a, significant portion of the 300 and relative to, we, we never said 2027. I think this 300 is a goal for us in the future is the way John stated in his CEO letter. Yeah. But within three to five, within three to five years. Yeah. So relative to, to the stock, you know, where we see the stock value and, you know, if I step back and think about our cash situation and, for the year and our capital allocation strategy philosophy. You know, we look at 2026, we've got big commitments, both in Eastover, you know, prior year, we returned last year, 350% of our free cashflow to share owners. We're managing cash levels, you know, as we focus on executing the Eastover footprint transition, we're making big strategic investments at Eastover. We want to make sure we have a strong balance sheet through 2026. I think our philosophy around share buybacks is the same, and it's that if we believe it's our intrinsic value, the share is trading less than our intrinsic value, then we will do buybacks. I think 2026, we're being prudent to manage through a very uncertain year with tariff changes, with... economic changes and the Middle East conflict impacts as well. I think we've got to navigate 2026.

But, Daniel, let's be clear. We believe that our share price right now doesn't reflect the intrinsic value of the company. We believe it's undervalued. But we're taking a very conservative approach to cash just because of it. The issues, not the issues, but the fact that, you know, we're in this transition period, so there's big use of cash in the first half of this year. We've got a war in uncertainty, so we're taking a conservative approach with our balance sheet. And so we're deferring more to that than we are to, you know, taking an opportunity to buy back our shares.

And I think to your last question, Daniel, Today, relative to the tariffs, today the paper products from Brazil are subject to a 10% tariff under the Section 122. And it's consistent with the tariff applied to other countries. But as of today, that expires late in July, July 24th. We expect the administration will apply new tariffs on Brazil before that expiration of the Section 122 tariff. So it's difficult to predict. what level the Brazil tariffs will be set. There was a Trump and Lula meeting yesterday. Preliminary feedback is positive, but it still doesn't give an indication. I think that the way we're thinking about this is we have flexibility. At the 10% level, it makes a lot of sense for us, and we'll continue to do that. If it goes to a different rate, we'll have to reconsider what we're doing for the balance of the year after July.

All right. Thanks again, guys. I'll get back in queue.

Your next question comes from the line of Michael Roxland with Truist Securities. Michael, your line is open. Please go ahead.

Yeah. Hi, guys. This is Nico Pacino from Mike Roxland. Thanks for taking the questions. First off, you know, in Europe, I think you've mentioned in the past that business has been more of a bet on the future, right? And I'm just wondering how you see the path to improving earnings there and your thoughts on the business, especially as your peers in the area are either contracting or reorganizing given the weaker supply-demand dynamics. And then how is the – when is that slated to begin the kind of lean transformation process?

So, thank you for your question, but can you repeat your second one? I'm not sure.

What was your second question? Yeah, so when does that fall and the lean transformation process that you're already doing in Latin America and are going to start doing in North America in 2Q?

So let me address the first question about the Europe question. So yeah, it's a bet on the future because we believe that over time the industry will CONTINUE TO CONSOLIDATE AND BECOME MORE HOSPITABLE TO EARNING ABOVE COST OF CAPITAL RETURNS IN EUROPE AS IT DOES CONSOLIDATE AS THE MARKET DECLINES. AND THAT, OF COURSE, ISN'T RIGHT NOW THE CASE. IT'S A MARKET THAT IS VERY FRACTURED AND MARGINS ARE LOW. WHAT WE ARE FOCUSING ON IS WHAT WE CAN CONTROL AND IT'S REALLY two of our facilities. So in Asaiat, we've been focusing on significantly reducing fixed costs and also improving our mix of products, shifting more out of commodity cut size into more of the value-added wool business, which has higher margins, and also into other type of grades there. And we're executing that. And that is going actually better than planned in terms of the mix improvement. At our new mill, it's about reducing our wood cost. When we purchased that mill, there was an agreement that the wood was going to be supplied from a joint venture, Sodra. We have moved away from that, taking control of our own sourcing of our own wood. We've seen wood costs come down. and we're expecting that to continue to move. We're also increasing the yield and working on, you know, consuming less wood. We've also exported in cheaper wood from the local sources, putting a lot of efforts into reducing our wood costs there and also improving our operational efficiency at our new mill. We believe that these moves with the increasing pricing and margins there will improve your business going forward. And I think your second question was around the lean transformation. And where we started, we expect the lean transformation to be a three-year process, but we expect to get immediate and significant report results in the areas that we start to implement that. You know, we started at the Moji Wasu Mill here just recently. We've already got target improvements in certain areas that it's, you know, around almost a 50% improvement in certain areas. As I shared with you in the presentation, we're rolling that out here and going to be in North America at the corporate areas. We'll be going back to Brazil and then Next year, early next year, we'll be in Europe as well as at the Eastover. I'm not sure if that answers your question, but from a lean transformation.

Yeah, no, that's helpful. Thank you. I appreciate it. I just had two additional follow-ons. One is on the mix issue in North America in the first quarter, given that that's related to the Eastover 4Q issue, downtime and the Riverdale conversion, should that change quarter to quarter, like Q1 to Q2? I apologize if I missed that earlier. And then the second one is if you can comment how your relationship is with your large shareholder.

Yeah, Nicolau, I will take the first question relative to the mix. We do expect that to continue into Q2. And so what we're doing is we're making sure we have the inventory to enable us to serve customers as we get through as the Riverdale supply agreement goes away. And as I said, the Eastover speed up and sheeter installation in Q4. So we're preparing to get through that big outage, which is 45 days at Eastover. So we'll build more inventory in Q2. It'll look similar.

And then I think your second question was around our largest shareholder. I'm happy to take that. Actually, in the first quarter, I did meet with them. And I'll share with you that they expressed to us they continue to support our strategy and have confidence in the management change. They were very supportive of my CEO letter. They thought we were spot on in terms of what we're focusing on. And the long-term value creation targets are greater than $300 billion of free cash flow and a 15% return on investment capital. So I would characterize the relationship with Atlas as very positive, and they continue to be very supportive of our strategy. And in fact, we continue to meet on almost a quarterly basis. We expect to meet this quarter. where we continue to get their feedback guidance and, you know, on the company. And we do appreciate their feedback.

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

As a reminder, if you would like to ask a question, please press star 1 to raise your hand. And to withdraw your question, press star 1 again. Our next question comes from George Staffos with Bank of America Securities. George, your line is open. Please go ahead.

Hey, thanks very much. Hi, guys. A few follow-ons. So first of all, Eastover, are you still on track for $50 million? Should we expect that in 2027? How is that going in terms of the value generation from that?

Yeah, so, George, thanks for asking the question on Easter. Yeah, everything is on track, as we said. So everything is moving on schedule within the budget that we plan from the capital spending, and we're expecting installation, you know, in the fourth quarter. And as we said, the sheeter is actually going to be landing here shortly, and we'll start to install that and start to ramp up and the training of the crew and getting that ready. to operate by the time the East Uber is ramped up. And so, you know, we do have a ramp up schedule. So the 50 million, we still are 100% behind that number. It will ramp, you won't see the full 50 in the first year because it will be a ramp up period. But we'll see a significant portion of that in 2027.

And, George, as a – $40 million, you know, would that be significant as you see it, John? Sorry about that, Don. Yeah.

Yeah, that's probably – Yeah, and just to add to that, George, the reminder of the one-times go away. So you have the ramp up of the benefits, and then the one-time costs go away. So Eastover improvement next year is significant. Okay. So – The one-times that we refer to in here.

Yes, the 85, which is now 65, if I'm correctly refraining. Okay, great. Reminding. Okay, perfect. Second question. So with lean programs, right, my time covering the sector, usually you put in lean programs when things are relatively smooth, right, continuous improvement. At, you know, at Sylvana right now, I know you're working on this, but you've got a lot of individual fires you're trying to put out. You've got the digester and power issues in South America. You've got debarking issues. You're trying to bring up Eastover. Why are you putting in a lean program now? Wouldn't it be better to wait a year when everything is established and then you can do continuous improvement on a baseline?

George, I think the way we think about it is that... First of all, we're going to have reliability issues. We want to minimize that as much as we can, but we believe that right now where we are with our operations and our facilities, we certainly can fully implement the LEED management system going forward. We have a very engaged, highly engaged crew and team we believe there's a lot more opportunity to really tap into the talent of those teams. And that's what lean does because it's an employee driven continuous improvement. When I talk about, you know, being a legendary in pursuing world-class excellence, we need every employee to be able to help us do that. And that's why we're implementing the lean is it's the best mechanism we think from a cultural perspective to really tap into the talents, And we do have a very talented team. I think that's one of our strengths.

Yeah. John, no doubt about that.

We would think it's a miss, George.

Yeah.

Yeah, we think it would be a miss for us not to tap into it now to wait. And, you know, in general, we believe that, you know, we're not in a crisis mode, right? It's we have the issues that hit us really hard in the first quarter. But it's not a systemic issue that we would want to wait to implement our lien journey. Okay.

I appreciate that. What incremental benefit should we get out of lien? You've had other cost reduction programs. What do you get next year incremental from lien to the bottom line at Silvamo? And what do you think you get on an ongoing basis?

Well, we think that we could achieve probably double the improvement rate that we have been achieving but that's when we fully implement it so we're looking at three to five years so as we ramp it up we think we can we can double the improvement rate which you know george we need to do i mean uh what we've been faced with is it's not just us but across the industry and it's across the industrial sectors um is increased rates of inflation and costs that's making the previous rates of improvements is not at the levels that it needs to be sustained margins.

Yeah, John, I appreciate that. And we applaud that you're taking care of the house, no matter the environment. But I was just trying to get a sense of know what's behind the program what benefit i and i know you said you can get 2x the improvement but what does that mean in terms of dollars then kind of my last question on this round i appreciate your uh you're taking all these questions does it get to a point and when when europe just becomes i don't know how to say it but too much of a drag relative to the performance you're seeing elsewhere in your in your operations and you need to think even more significantly about its place in the portfolio. So how much benefit from a lien dollar-wise, and when does Europe become too big of a direct? Thank you, guys. Good luck in the quarter.

George, from a dollar-wise to your question on the lien, you know, we really haven't really talked about and publicly disclosed what our improvement levels are from a year-over-year and what our targets are. So I'm hesitant to do that going forward. In terms of Europe, you know, I think you, you know, the, you know, we always, and we have to, we continuously evaluate our portfolio as part of our capital allocation strategy and philosophy. And when we look at it, as we, I think I talked about in the last call, and also we're looking at all options. We have to. We're looking at, can we operate differently? How fast can we accelerate the improvements? Are there things that we can do differently? And I think the question you raised is something we've got to continue to do, and that's look at the portfolio. Does it make sense, and is it the right to be in Europe? Because ultimately, we want to drive value for our shareholders. But I can tell you right now, as we sit today, we believe that we have the right strategy that we're pursuing in Europe. And we think we've got the right leadership team. We're committed to our customers there, which we have very strong customers and relationships with. So we, you know, our strategy right now is to continue to improve the performance of that business.

Your next question comes from the line of Matthew McKellar with RBC Capital Markets. Matthew, your line is open. Please go ahead.

Hi, thanks. Just one follow-up, please. With how tariffs have evolved and assuming, I guess they don't change in magnitude from here, so whatever happens after Section 122 marks something like the 10% levels, Would you expect to continue to supply some amounts of Latin American paper in the North American markets even after the Eastover expansion ramps up? Maybe just relatedly, what's your sense of how imports into the U.S. might be evolving more broadly just at an industry level with tariffs resetting lower? Thank you.

Yeah, Matthew, I'll take the first part of your question relative to the Brazil imports. So we do, if the tariffs are in the right range for us, and 10% is it works, we'll continue to import from Brazil into North America. It's part of the supply plan, even after the Eastover speed up. So it'll be part of the plan. And it makes more sense for us if you think about low margins of Brazil exporting into Middle East and Africa versus bringing it to North America. And we have a pretty wide range on what makes sense from a tariff standpoint. So we'll continue to import.

Matthew, I think you asked, did you ask what is the import situation in North America with the trend? Was that your second question?

Yes. That's right, just at an industry level and post the IEPA tariffs coming off.

Thanks. Yeah, so we did see imports increase in the beginning part of the year. They got up to around 16% of demand, but we've seen a steady decrease of imports coming into North America, and it's roughly dropped down. to the lower end of what's, you know, been typical, the lower end of the range, around 10% of total demand. And some of that is driven because of the tariffs. The other is, you know, some of it is impacted by the Iran war. So it's increasing freight costs, but also, you know, there was a mill that exported to the U.S. from that area that's not operating as a result of the war.

Okay, so even over the past month or so, there doesn't seem to be any kind of inflection in import activity that you're aware of, despite, I guess, those tariffs moving forward. You kind of attribute that to the war in Iran and maybe transportation costs downstream of that?

That's right. So that's right. We've actually seen imports continue to decrease, and we expect that to happen. There's a mill also in Finland that was exporting not a lot of volume, I think 30 or 30,000 tons annually to the U.S., and that mill has been indefinitely idled as of November last year. So there's some little bit of things like that that also have decreased the imports.

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

We have reached the end of our Q&A session. Thank you. I'll now turn the call back over to Hans Bjorkman for closing comments.

All right. I'll let John do a quick wrap-up here, and then we'll let you get on to the rest of your day.

Yeah, thanks, Hans. And again, thank you for joining the call. You know, as I said, 2025 and 2026 will be low points in our free cash flow generation, as 2026 is a transition year for us. And it also will be a year of two halves. You know, in the first half, we'll be impacted by the transition cost plus input cost, while the second half should see improved pricing and margins and mixed improvements across all our regions. This will be a year where we're executing our most significant investments in our East River Mill that will drive a lot of value in the years to come. We have launched our lane transformation and focusing on exceeding our customers' expectations and driving improvement across our operations. We are focused on long-term value creation that will generate strong and sustainable results by executing our flagship growth strategy and discipline capital allocations. And as I said, as industry conditions turn, our capital spending normalizes and the benefits from our investments begin to materialize. We believe we have the potential to generate greater than $300 million in free cash flow. and greater than 15% return on invested capital. So again, thank you for joining. I hope everybody has a good day. Bye. Thank you.

Thank you for participating in Silvamo's first quarter 2026 earnings call. You may now disconnect.