Sylvamo (SLVM) Q4 2023 earnings call transcript

Transcript SYLVAMO: Fourth Quarter 2023 Earnings Call February 15, 2024/9:00 a. m. CST SPEAKERS Hans Bjorkman – Vice President, Investor Relations Jean-Michel Ribiéras – Chairman and CEO John Sims – Senior Vice President and CFO ANALYSTS George Staphos – Bank of America Harmon Dhatt – RBC Capital Markets PRESENTATION Moderator Good morning and thank you for standing by.

Hans Thanks, Greg. Good morning and thank you for joining our fourth quarter and full year 2023 call today. Our speakers this morning are Jean-Michel Ribieras, Chairman and Chief Executive Officer and John Sims, Senior Vice President and Chief Financial Officer. Slides 2 and 3 contain important information including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non US GAAP financial information. Reconciliations of those figures to US GAAP financial measures are available in the appendix. Our website also contains copies of the earnings release as well as today's presentation.

With that, I'll turn the call over to Jean Michel.

SYLVAMO Host: Hans Bjorkman February 15, 2024/9:00 a. m. CST Page 2 Jean-Michel Thanks, Hans. Good morning and thank you for joining our call. Let's turn to slide 4 please. In 2023, we created value for shareowners by managing what we could control as we executed our three-pronged strategy of commercial excellence, operational excellence and financial discipline to strengthen our competitive advantages in our core uncoated freesheet market.

First, we allocated cash to improve our financial position by repaying $76 million in debt, achieving a net debt to adjusted EBITDA of 1.2 times. Second, we continued to deliver on our investment thesis. We earned $607 million adjusted EBITDA, generated $294 million in free cash flow, and returned $127 million in cash to shareowners.

Third, we reinvested to strengthen our low cost assets. We invested $210 million and continue to accelerate investment in high return capital projects. We also acquired the 500,000-ton Nymolla Mill in Sweden for $167 million. This is a great asset with a talented team. The mill is performing well and we are benefiting from the 40 million pulp mill modernization project that was completed just before the acquisition. In a tough market, the mill generated about $50 million in cash before any allocated overhead. Slide 5 highlights our 2023 full year key financial metrics. Our adjusted EBITDA was $607 million, which was a 16% margin. Our $294 million of free cash flow was more than $7 per share. In 2023, our free cash flow was heavily weighted to the second half of the year.

We generated most 90% of free cash flow in the second half. You may recall that in ‘22, we generated about 75% of free cash flow in the second half of the year. Our adjusted operating earnings were $6.51 per share. We regard our ‘23 financial results as solid considering uncoated freesheet industry conditions that were more unfavorable than expected. As we enter 2024, we are confident in our ability to continue to create value for our customers and shareowners. Slide 6 shows our fourth quarter key financial metrics. Adjusted EBITDA was $117 million with a margin of 12%. We generated $104 million in free cash flow as we continued to optimize our working capital. Our adjusted operating earnings were $1.16 per share.

The strong performances during challenging industry conditions demonstrate our SYLVAMO Host: Hans Bjorkman February 15, 2024/9:00 a. m. CST Page 3 agility and ability to adapt. I'm proud of how our teams collaborated to meet our customer needs and maximize cash. Now, John, will review our fourth quarter performance in more detail. John.

John Thank you Jean-Michel. Good morning, everyone. Thanks for joining our call. Slide 7 shows our fourth quarter earnings bridge, our $117 million of adjusted EBITDA was higher than our outlook of $90 million to $110 million. Let's discuss the changes versus the third quarter. Price and mix decreased by $25 million, largely due to earlier paper price decreases in all regions, as well as unfavorable mix in Latin America and North America. Paper prices were stable in the fourth quarter in all regions. Volume improved by $20 million due to seasonally stronger volume in Latin America, and positive trends in both Europe and North America. Operations and other costs increased by $12 million, primarily due to higher seasonal operating costs in Europe and North America, as well as unexpected reliability issue with a third party energy provider at our Saillat mill, which had a $5 million impact.

This issue has been resolved and we're working to recover the full amount. These negative impacts were partially offset by lower economic downtime costs versus the third quarter. Planned maintenance outage costs increased by $25 million, with planned outages at all three regions. Input and transportation costs improved by $1 million driven primarily by favorable chemical costs more than offsetting seasonally high energy costs. Let's move to slide 8. Current industry conditions are showing signs of improvement. In Europe and North America we continue to see improving order book as well as lower import levels. In Latin America, we expect seasonally weaker demand in the first quarter. Keep in mind, in Latin America historically demand is sequentially stronger in each calendar quarter.

We also expect improving demand for Brazilian exports to other Latin America and offshore markets. SYLVAMO Host: Hans Bjorkman February 15, 2024/9:00 a. m. CST Page 4 Let's go to slide 9. We expect to deliver first quarter adjusted EBITDA of $105 million to $125 million. We project price and mix to decrease slightly, about $5 million to $10 million. In the fourth quarter, we communicated pulp and paper price increases to our European and Latin American customers effective in January. We do, however, expect some prices and mix erosion in North America. And as usual, in the first quarter, we expected unfavorable seasonal mix impact on Latin America. We expect volume to decrease by $10 million to $15 million, reflecting seasonally weaker industry demand quarter in Latin America.

Operations and other costs are predicted to improve by $20 million to $25 million, primarily reflecting lower economic downtime. We expect input and transportation costs increased by $5 million to $10 million due to increased transportation costs mostly in North America, and higher fiber costs in Latin America. Planned maintenance outages are projected to decrease by $3 million. Moving forward, we will continue to provide quarterly earnings guidance and selected annual financial metrics as shown on slide 17 in the appendix. On the advice of our high conviction and long term shareowners, we’ll no longer provide full year guidance for earnings or free cash flow. They have encouraged us to discontinue annual guidance and to continue our focus on growing long term shareowner value.

Let's go to slide 10. We continue to reinvest to strengthen our low cost assets and will fund high return projects to increase our earnings and cash flow. Our 2024 capital spending outlook includes $125 million to $130 million in maintenance and regulatory spending, as well as $30 million to $35 million for high return projects. Our Brazilian forest lands are a significant competitive advantage. These eucalyptus plantations provide a material cost advantage relative to most other global competitors. In 2023, we invested $34 million and this year we'll invest $35 million in our forest lands to increase our self-sufficiency and reduce our wood costs. We're also investing $20 million this year, $12 million in 2025 for a three year, third party wood supply agreement to ensure adequate wood supply in 2024 through 2026.

Let's look at slide 11 for additional detail on our Brazilian forest lands. We sourced the majority of our wood in Brazil from our owned and managed wood and supplement that with open market purchases. Most of our wood SYLVAMO Host: Hans Bjorkman February 15, 2024/9:00 a. m. CST Page 5 needs comes from our forest land and from strategic long term partnerships. Our owned and managed wood has the capacity to provide 80% to 90% of our total wood needs from forest lands close to our mills. However, several years of reduced planning, combined with natural causes, largely droughts and fires, forced us to harvest trees early. These factors increased the amount of market wood required to meet our needs.

We are currently purchasing about 25% of our wood from the open market. And this wood costs two to three times our owned wood. The increase in reforestation capital and a three year wood supplier agreement will enable us to return to about 85% owned and managed wood by 2027. Let's move to slide 12. In addition to providing global competitive advantages, our Brazilian forest lands have significantly increased in value. In the fourth quarter, we commissioned a third party to appraise our forest lands. In December, they valued it at about $1 billion at the current exchange rate. The updated valuation reflects an increase of about $600 million from our 2021 appraisal done by the same firm. Increasing demand for land and wood in Brazil has driven this increase in valuation.

Our forest lands are not only a source of global competitive advantage, but also an enduring repository of shareowner value. Jean-Michel, I’ll now turn it back over to you.

Jean-Michel Thanks, John. I'm on slide 13. We are a cash flow story. We have generated substantial cash over the past two years, and importantly returned $90 million in cash to shareowners in ‘22 and $127 million in 2023. Last year, we also deposited $60 million in escrow, which allowed us to return more than the $90 million limit in our credit agreements. Returning cash to shareowners remains a key component of our capital allocation strategy. In 2024, we expect to return at least 40% of free cash flow to shareowners. Slide 14, please. We are confident in our ability to continue to create long term shareowner value by executing our strategy and delivering on our investment thesis. We believe in the promise of paper for education, communication, entertainment, and we intend to increase our competitive advantages in the markets we serve.

So we're a low cost global producer with strong supply position, iconic brands and talented teams. We leverage SYLVAMO Host: Hans Bjorkman February 15, 2024/9:00 a. m. CST Page 6 our strengths to drive higher returns on invested capital and generate free cash flow. We use that cash to increase shareowner value by maintaining a strong financial position, returning cash to shareowners and reinvesting in our business. We are confident in our future and motivated by the opportunities that lie ahead.

With that, I’ll turn the call back to Hans.

Hans Thanks, Jean-Michel and thank you, John. Okay, Greg, we're ready to take questions.

Hans Yes, we can.

Jean-Michel Good morning, George.

Jean-Michel George, I will start with your second question, and John will take the first one. So our timberland is key to our competitiveness and it's really a key advantage. The reason why we updated the appraisal is we think it was undervalued, and that's the only reason. We continue to invest in it, and I think this is a base as exactly as you mentioned, of long term competitiveness, which we count on. Fiber is key in our paper advantage.

John I’ll take your second question in terms of the ops variance and how much runaway we have going forward, what we talked about I think that’s important to note is that our order books have improved across all our regions as we sit here today. In fact, we're running full in both Europe and LatAM, and with significantly less economic downtime in North America. And that has driven a lot of the operational improvement because we are taking less lack of order downtime and we're absorbing more of the fixed costs that we had last year. Second thing is we are continuing to start to get the benefit of some of this high-return cost reduction capital that we started to invest in.

As soon as we spun we really didn't start ramping it up until next year. And I think third, we talked about what we call Project Horizon. And that's our cost reduction program. It was both operational supply chain and S&A, and we started seeing some benefit of that a little bit in the first, we expect to see a little bit in the first quarter. But really that's going to really start ramping up through the balance of the year.

John Yes. So if you look at even in the fourth quarter, you'll see in the appendix, we took about 90,000 tons less lack of order downtime in the fourth quarter. And what I said within the first quarter, that is somewhat what's driving the operations outlook that we gave, because we're running more full right now in the first quarter than we were even in the fourth quarter.

John Yes, Harmon and thanks for joining the call. Also pass our congratulations over to Matthew. I understand his wife is having a baby. That's exciting. I'll give you an example of what we have. So this also talks about really the agility I think we have as a company because we're singularly focused on long uncoated freesheet, but there was a large mill that was shut down in South Carolina and Charleston, and it was a large consumer of wood chips. And one of the significant cost reduction projects that we'll be investing in this year is increasing our capacity to handle chips at our mill at Eastover, so that we can take advantage of the increased supply now that’s come about because of that mill’s closure.

So those are some of the type of projects we have done. In fact, just recently, we completed a chemical recovery project in Eastover. Also, we've already started seeing results of pretty significant returns in terms of cost reductions that we started experiencing here, even in January. Typically, these projects that we have, we've targeted almost $30 million of high return projects, these returns are well over 20% returns, even much higher than that.

SYLVAMO Host: Hans Bjorkman February 15, 2024/9:00 a. m. CST Page 9 John Harman, it's hard to tell what the implications is going to be in terms of the Red Sea crisis, but what we are seeing right now is Europe is decreasing imports. And some of the transit times coming from Asia, it's almost increased about four weeks, as we understand, for imports from Asia to get into the Europe. So it could have an impact that actually decreased imports in Europe, which then means that more domestic supply has to stay on shore to serve that need. But I would say right now, it's hard to tell what the impact of the Red Sea is going to be.

It's certainly an increase in freight costs. So all exporters are seeing an increase in freight costs as well as lead times.

Jean-Michel Concerning what you were asking about Europe, export overseas, we export very little from Europe to overseas. Our production in Europe mostly remain in Europe and we have very few going to Middle East, Africa. So it's really not impacting us so far, significantly.

So mostly you see from Asia are the cut sizes. And the roll and the offset business because of the various sizes that you have to have, it's much more difficult for any exporter, for that matter, not just for Asia.

I think it's impacting from the trough, the pulp prices in Europe have gone up 160 euros from last year to today. So it is SYLVAMO Host: Hans Bjorkman February 15, 2024/9:00 a. m. CST Page 10 for sure impacting the non-integrated players in Europe, and that's maybe one of the reason why we're seeing operating rates back up high in Europe and having very strong demand, it might impact it. We also know the inventory correction in Europe is behind us. And industry inventory are quite low, actually, in paper. So multiple factors, but pulp price has an impact.

I just thought I'd ask if you had and you’d share it Jean-Michel I don't, I don't have the number of precisely so all I can make is maybe a guess, a very high level guess, and it might be about 10%.

We saw the same RISI reports you did. As you mentioned it, we do not report our pricing to RISI. I would say on a trend, RISI might have the direction correct, but we have seen in the past and in absolute value we see it differently. So in our outlook mostly from third quarter, actually, we expect slight erosion in North America. Not a huge one, a slight one. And at the same time, we expect because of two of price increases announced to our customers in Europe and in Brazil, and LatAM, we expect price increase on the other regions.

Jean-Michel So, ‘23, as you know, in Europe was difficult. It was a trough in terms of demand. The prices of pulp, which affect a lot our Saillat mill went down. We had an annual outage in Saillat which costed us $20 million. We had an annual outage in the fourth quarter in Nymolla. We had an issue with a turbine we mentioned in the same mill, which is over now, which costed us $5 million. And it was really the trough of the cycle in terms of prices. So we clearly see ‘24 rebounding significantly and hope to very soon be talking about positive earnings for Europe. So we're quite positive about Europe. It's more cyclical than any other businesses, so sometimes it's a bit frustrating.

But on average, we really believe Europe would be good, Nymolla’s performing very well. Saillat is performing well. The order book, as I mentioned, is full. And we've seen price increasing so Europe is rebounding significantly.

It's tailwind for ‘24 John Just to add on to that, you say it was a trough. It was significant. You think about in terms of demand decline that we had in Europe, it was even worse than COVID. You forget how much volume and shipments were down and also pulp prices. Saillat is 1/3 of its capacity is pulp, so it is, to a certain extent, more exposed to the cyclical pulp prices than our other mills. But as Jean-Michel said, and we said earlier, we're currently running full right now in Europe, and so that's a very positive. We also have prices going up both in paper and pulp. I think that's helped us with pulp prices going up, already almost $160 per ton versus trough would indicate that Europe would be better.

And where the inflation number that we provided you was $50 million, that won't be updated. That is still a good number.

Jean-Michel I think you saw competitors talked about the same thing we did on some plantations, about six to seven years ago, where those plantation have suffered under the seven-year cycle of drought, natural causes, which impacted, that has impacted all Brazilian forestry plantations. So we're not the only one. This is not the case anymore, but it's been two years. And we also specifically bought significantly from our past company, reduced some of our investments in the forestry during those years, which we are it's a six, seven year cycle. So we're seeing the impact of that now. Which is why we've had to go more outside market than we usually do. And we wanted to solidify the need of wood because there is a strong demand of wood in Brazil right now.

So the demand is clearly strong. So the demand plus the natural causes which have reduced the productivity of plantation is an impact we're feeling and our strategic investment in the very valuable forest land, we’ll make up for that. George I mean, we're starting to see a little bit of an uptick in South America overall and box shipments. Obviously, that's a bit more soft wood. But to the extent that we see a bit of a rebound there, does that put your wood position maybe make it a bit more precarious and mean that next quarter SYLVAMO Host: Hans Bjorkman February 15, 2024/9:00 a. m. CST Page 13 or quarter down the road you're talking about further inflation that you're contending with?

Or are you relatively well set for the rest of the year? Jean-Michel With the investment we've made, we feel like we're well set.

Hans Thanks, Greg.

Before we wrap up the call, Jean-Michel, any closing comments? Jean-Michel Yes, thank you, first of all, for joining the call. We are a cash flow story. In ’23, we generated $294 million in free cash flow and returned $127 million to shareowners. We allocate capital to increase shareowner value. We use cash to maintain a strong balance sheet, return cash to shareowners and we invest to strengthen our business and we're confident in our ability to generate strong earnings and free cash flow through the cycle. We are confident for 2024.

Hans Thank you, Jean-Michel. And thanks everyone for joining us today. We appreciate your interest in Sylvamo and we look forward to continued conversations in the coming weeks and months ahead. Thank you so much.