Sylvamo Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 6 speakers on the call.

Operator

Good morning. Thank you for standing by. Welcome to Sylvamo's Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, you will have an opportunity to ask questions.

Operator

As a reminder, your conference is being recorded. I would now like to turn the Call over to Hans Bjorkmann, Vice President, Investor Relations. Sir, the floor is yours.

Speaker 1

Thanks, Greg. Good morning and thank you for joining our call today. Our speakers this morning are Jean Michel Rivierez, Chairman and Chief Executive Officer and John Sims, Senior Vice President and Chief Financial Officer. Slides 23 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.

Speaker 1

We will also present certain non U. S. GAAP financial information. Reconciliations of those figures to U. S.

Speaker 1

GAAP financial measures are available in the appendix. Our website also contains copies of the Q3 2023 earnings press release as well as today's presentation. With that, I'll turn the call over to Jean Michel.

Speaker 2

Thanks, Hans. Good morning and thank you for joining our call. Let's turn to Slide 4, please. In the 3rd quarter, we achieved $158,000,000 in adjusted EBITDA and generated strong free cash flow of $150,000,000 $155,000,000 sorry. We achieved adjusted operating earnings of $1.70 per share.

Speaker 2

Price and mix, operation and input transportation costs were all favorable to the outlook we provided in our 2nd quarter call. Our Q3 volume was short of our expectation, reflecting ongoing China inventory destocking and weaker than expected demand. We strengthened our financial position in the Q3 with net debt now at EUR796,000,000 And have a 1.2 times net debt to adjusted EBITDA ratio. We also deposited $60,000,000 in escrow To remove cash return limits related to the Brazil tax dispute in our credit agreement, while returning CAD 24,000,000 in cash to shareholders in the quarter. Slide 5 compares our 3rd quarter Financial metrics versus prior periods.

Speaker 2

In the Q3, our earnings were better than our outlook, and we took measures to maximize free cash flow, including selling administrative cost reduction, shrinking working capital and adjusting the timing of capital spending. I'm proud of how our teams collaborated to take care of our customer needs, while executing significant economic downtime, safety and as efficiently as possible. Now John will discuss our Q3 performance and more details. John?

Speaker 3

Thank you, Jean Michel. Good morning, everyone, and thanks for joining our call. Slide 6 shows our Q3 earnings bridge. As Jean Michel stated, we earned $158,000,000 of adjusted EBITDA in the quarter, which was slightly higher than our guidance of $130,000,000 to $150,000,000 Let's discuss the changes versus the 2nd quarter Adjusted EBITDA. Price and mix decreased by $55,000,000

Speaker 1

due primarily

Speaker 3

The lower paper prices in Europe and Latin America export markets as well as lower global pulp sales. Volume increased by $6,000,000 in the Americas, while Europe remained stable. Operations and other costs improved by $1,000,000 with better operating and supply chain results offset by $13,000,000 in higher unabsorbed fixed costs due to increased economic downtime. Planned maintenance outages costs decreased by $55,000,000 with no major planned outages in the quarter. Input and transportation costs improved by $27,000,000 driven by favorable fiber, chemical and transportation costs.

Speaker 3

Let's move to Slide 7. This slide shows world graphic paper demand at Just over 100,000,000 tons. Here you can see that uncoated free sheet is the largest and most resilient of all the graphic paper grades. What separates uncoated freesheet? It's quite simple.

Speaker 3

Uncoated freesheet has the highest number of end use applications and is used across all sectors of the economy. Uncoated free sheet is sustainable, portable and functional And we believe paper will remain an effective vehicle for education, communication, entertainment for a long time. Paper plays a critical role in education. Studies continue to show that students of all ages absorb more When reading on paper versus reading on digital screens. In fact, Sweden recently moved students off digital devices and back onto books and handwriting on paper.

Speaker 3

This is why total demand for uncoated pre sheet exceeds the sum of all the other printing and writing grades combined. Let's turn to Slide 8. We continue to believe that current uncoedepreciate consumption is better than the demand data suggests. The Pulp and Paper Products Council has published data that shows year over year changes in estimated consumption versus demand. And on this slide, you can see North American comparisons for 2021, 2022 and the first half of twenty twenty three.

Speaker 3

The Fulton Paper Products Council shares our view that coming out of the pandemic, customers were buying more paper than they were using. And this year, they're using more paper than they are buying. The situations in Europe and Latin America are similar. Moving to Slide 9. Current industry conditions are starting to show signs of improvement.

Speaker 3

U. S. Advertising is starting to pick back up and the U. S. Economy continues to show resilience.

Speaker 3

An uncredited free sheet With channel destocking nearly completed, we are starting to see increased order entry globally. Pulp inventory levels have improved significantly globally and prices are increasing globally. Slide 10, please. We expect to deliver 4th quarter adjusted $90,000,000 to $110,000,000 We project price and mix to decrease at a slower rate of $20,000,000 to $25,000,000 primarily reflecting prior paper price decreases in Europe and unfavorable geographic mix in the Americas. We expect volume to improve by $20,000,000 to $25,000,000 This reflects seasonally stronger volume in Latin America, the completion of destocking in Europe and North America as well as the new business we picked up in North America.

Speaker 3

Operations and other costs are projected to increase by $25,000,000 to $30,000,000 This is primarily due to higher seasonal operating costs in Europe and North America. We expect input and transportation costs to increase by $5,000,000 to $10,000,000 due to seasonally higher energy. Planned maintenance outages are projected to increase by $25,000,000 as we have outages in all our regions in this quarter. We project adjusted operating earnings of $0.55 to $0.90 per share. This level of 4th quarter adjusted EBITDA may be a bit less than expected and here's how I think about it.

Speaker 3

At current industry demand price and input costs, the quarter would be $15,000,000 to $25,000,000 higher adjusting for three factors. 1st, normalizing for planned maintenance outage. 2nd, adjusting for higher cold weather operating costs. And third, we're taking some down more downtime to reduce our inventories in the 4th quarter, especially in North America. Let's go to Slide 11.

Speaker 3

We compete as a low cost producer of commodity products sold in mature demand cyclical market. Become a leaner, stronger company, we initiated Project Horizon to streamline our organization and improve our cost structure. Before inflation, we are targeting a run rate savings of $110,000,000 by the end of 2024. About 2 thirds of the target will come from operational cost reductions in our mills and supply chains by improving efficiencies, So, we made our cost reduction capital spending pipeline and reducing direct variable and indirect cost. The remainder will come from selling administrative cost reductions, including the elimination of about 150 salaried positions globally or nearly 7% of our Saudi workforce.

Speaker 3

Let's move to Slide 12 to talk about how we are allocating cash to create value. Year to date, through the Q3, we have generated $190,000,000 Free cash flow. We will continue to maintain a strong balance sheet, return substantial cash to shareholders and create value by reinvesting in our business. Through the Q3 year to date, We repaid $36,000,000 of debt and in October, we repaid another 10,000,000 As of November 9, we have returned $110,000,000 in cash to share owners and plan to return $125,000,000 this year. Remember, we also deposited $60,000,000 in escrow in the Q3, so we could return more and $90,000,000 Our Board of Directors increased our regular dividend by 20% and declared a $0.30 per share special dividend.

Speaker 3

We paid both totaling $25,000,000 on October 17. The Board also authorized an incremental 100 and 50,000,000 share repurchase program at the end of the Q3, the May 2020 To in the September 2023 authorization collectively had $167,000,000 remaining. We will continue to look for opportunities to repurchase shares at attractive prices. Jean Michel, I'll turn it back to you. Thanks, John.

Speaker 2

I'm now on Slide 13. In October, we celebrated our 2 year Adversary. Who would have thought that we would go through such extreme industry cycles in the 1st 2 years? Being a low cost global producer with strong supply position and iconic brands has positioned us well. We have created significant shareowners value by managing what we can control.

Speaker 2

First, we have allocated cash to improve our financial position by reducing debt by 35% or $530,000,000 to strengthen our balance sheet. 2nd, we continue to deliver on our investment thesis. We have earned over $1,600,000,000 in adjusted EBITDA, which is a 19% margin. We also generated $568,000,000 in free cash flow and returned $200,000,000 to shareholders since our spin off. 3rd, we continue to reinvest in our business to strengthen our low cost asset.

Speaker 2

We have invested DKK 318,000,000 and are accelerating in investment in high return capital projects. I'll conclude my remarks on Slide 14. We are strengthening our ability to create shareholder values throughout the cycle. Sivamore remains a cash flow story And we are now projecting more than $270,000,000 in free cash flow this year. We are building on our strong supply position while we further develop our strategic channel partnership.

Speaker 2

Operational excellence remain key to our performance as we leverage our low cost assets And Brazilian correspondent. John walked you through our cost reduction initiative, Project Horizon, which will make us a leaner, stronger company. We understand that our efforts to reduce our global salary positions may affect our colleagues whose position will be eliminated. We will help these employees by providing transition service and want to thank them for the service. Financial discipline is extremely important to us.

Speaker 2

We will continue to leverage our strength to drive high returns on invested capital, generate free cash flow and use that cash to increase shareholders' value by maintaining a strong financial position, returning cash to shareholders and reinvesting in our business. We will create long term value, so our talented team, iconic brands and low cost mills in favorable location. We're confident in our future and motivated by the opportunities that lie ahead. With that, I'll turn the call back to Ham.

Speaker 1

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

Operator

Your first question comes from the line of George Staphos from Bank of America. Please go ahead.

Speaker 4

Thanks very much. Hi, everyone. Good morning. Thanks for the details. Hey, the first question I wanted to hit on is with Project Horizon.

Speaker 4

The deck speaks to about $22,000,000 of run rate savings from the salaried reduction, if I'm reading it correctly, the footnote correctly. In total, what net benefit do you think you'll be able to get from the program in 2024 recognizing obviously It affects a number of people who work with the organization for a long time and it's bittersweet. But what do you think the net benefit to the P and L would be from this program in 'twenty four.

Speaker 3

George, good morning. It's John. To answer your question, Yes, we're targeting $110,000,000 run rate by the end of 2024. And we do have on the slide, we're estimating that inflation for 2024, it's going to be approximately $50,000,000 So the net benefit in total will be 60,000,000 Yes, once we get to the full run rate. In 2024, we're expecting a net benefit about $10,000,000 to $15,000,000

Speaker 4

Okay. Thanks for that, John. Second question, what we've been seeing in volumes, while Maybe from an amplitude standpoint, is larger and therefore worse than expected. It's not unreasonable based on history. It's fairly consistent.

Speaker 4

We're seeing big drops in demand In very large economic downturns or decelerations, whether or not We're in a recession certainly from this company that I look at over the last year or so, the volumes have been such where I think packaging paper has been basically in a recession. And what you normally then see though is not a real rebound in demand, rather The world learns to be more productive, and you have a new demand level for uncoated freesheet. What do you think in terms of where we are right now in terms of any further demand destruction that we may see or may not? Hopefully, it's resolved. And what if you had to estimate at this juncture, what do you think your shipments, your demand will look like in 'twenty four by market year on year, if you can provide that.

Speaker 2

Hi, Joe. Jean Michel. Thanks for joining the call. I think, as you say, we've had in our cycles Some more strong numbers, sometimes it decreased due to economical factors, due To COVID, due to multiple factors. Even if you take 23 strong decrease, we Are still in our trend back to 4% to 6% in the U.

Speaker 2

S. Downtime and back to 3% to 4% down in Europe. I think we are on this trend and we're going to continue to be on this trend. What happens is When you have strong elements like the inventory correction you've seen this year, you could kind of think, is it much worse than this trend and Numbers show it's not. 2024, it's difficult to predict.

Speaker 2

What we do know in 2024 is to not expect to have The inventory correction again. So when you compare it to 2023, it should probably look better, but on the trend, Demand, I think there is no change. It's still a minus 5% delivery.

Speaker 5

Jean Michel, I'm going to

Speaker 2

sorry, go ahead, John.

Speaker 3

Yes. I was just going to add one more comment to that is Yes, this is I think we agree with what you're saying, and to the extent for North America and Europe. Latin America, the Demand is down, but most of that is all due to inventory correction. So I just must focus that for One part of our market, we're not seeing that recessionary type decline that you referenced.

Speaker 4

So should we expect on a year on year basis that demand should match consumption In 2024 or would you expect some inventory rebuild such that you might actually see some year on year increases in percentages for the grades. And my last one, I'll turn it over. Can you talk about the you indicated you had New wind in North America, if I heard you correctly, if you could talk to that, that'd be great and I'll be back in queue.

Speaker 2

Yes. So we do expect to be at least At level of consumption, I would say maybe some inventory correction would be an upside, but our expectation is to be more at Normal inventory normal demand consumption partner, with as you mentioned in the upside. If you remember in North America, we mentioned it, I think it was last quarter, the one before. With the closing of the Canton mill, There was opportunity to take some new businesses for us in North America and we did. So that's what we mean by that.

Speaker 4

Thank you. I'll turn it

Operator

over. Your next question comes from the line of Matthew McKeller from RBC Capital Markets. Please go ahead.

Speaker 5

Good morning and thanks for taking my questions. Maybe just picking back up with Project Horizon, So any more color you can give on what kind of opportunities you're seeing to reduce costs in the manufacturing supply chain sides in particular, including if there are any Mills or even geographies that you call out is presenting the best opportunities. And then are there is there a need to spend capital to achieve some of these savings?

Speaker 3

Yes, Matt, it's John. First of all, some of it is realization of capital that we've already spent in In terms of cost reduction, we also do have some cost reduction capital plan for next year that will yield some benefit. The other area is that we're just continuing to work on efficiencies around energy consumption, chemical consumptions and becoming more efficient in terms of our operations.

Speaker 2

I'll add to that. We have some probably a little bit of opportunities in supply chain, especially in North America. When we spin, We kept the network we had before mostly intact. We didn't look at what was The opportunities to ameliorate, optimize that network, I know that we have 2 years of experience and understand better the market and Well, we do we think we have opportunities to significantly improve our supply chain operation efficiency, Especially in North America, that's probably where we have the biggest supply chain. So there are good opportunities there too.

Speaker 5

Great. That's helpful. Thanks for that. Maybe next, it sounds like you're expecting channel inventory corrections to be largely complete by year end. Would that be the same Are they similar across geographies?

Speaker 5

Are there any areas where you call out as being a little bit different as you look from region to region? And in particular here, I'm thinking about Latin America, which I think you've said has kind of exhibited different demand trends and would be seasonally stronger in Q4?

Speaker 2

Yes. I think Latin America, the strongest we saw was not Brazil, other Latin America. And I will say with the other pattern we have right now, we can say this is behind us. I would say both Europe and North America, especially the last 4 weeks, when we see our other intakes and what our customers said That gives us good indication that inventory correction is done.

Speaker 5

Okay, thanks. That's all for me. I'll turn it back.

Speaker 2

Thank you.

Operator

Next, we'll go back to the line of George Staphos from Bank of America. Please go ahead.

Speaker 4

Thanks so much. So I want to come back. I think Matthew queued it up nicely on Project Horizon. So was this a Program that you developed internally either from existing learnings you had within Sylvamo or the predecessor company Or did you bring in somebody from outside the firm to sort of teach you whatever you're doing to get at these net savings over time. And then again, we've got supply chain, we've had efficiencies, That's all well and good and we wish you well in the program.

Speaker 4

But is there something sort of unique to this program relative to past cost reduction programs that you might have been associated with either at Sulfama or prior companies that we should keep in mind and give us more or less optimism on its prospects.

Speaker 3

Well, there's 2 things on that, George. First of all, we named it Project Horizon, because this is a project that talks about the future for SAVALMA. So we knew coming out of the spin that We could operate more efficiently, leaner, more focused and the plan was to get there as soon as we got The spend behind us. And so we did this internally. This is about focusing on our strategy and make sure that we have the organizations and the capabilities we need to execute going forward.

Speaker 3

So this is from an internal perspective. We did not Go to outside the resources for that. And the same is true for our operational side. And some of this has to do with us Continuing to ramp up our investments that we've been doing and showing in terms of our facilities, both in the maintenance and the cost reduction capital, but it's also more of a concerted effort and focus on Areas of opportunity we have to improve our operations. We set a short timeframe because we want to be able to execute this quickly And we wanted to be able to show that you ought to be able to see it on the bottom line Pretty quickly now, we talked about $10,000,000 to $15,000,000 in 2024,

Speaker 4

but this is going to be

Speaker 3

an exit rate, so you should be seeing it Beginning Q1 of 2024. If I may, Joe, I would just add just

Speaker 2

in supply chain when I was talking about Network Optimization, we did get some specialist of supply chain services to help us and we're continuing to have them I was thinking as we're designing our network and thinking about it different.

Speaker 4

Okay. But I actually just want to make sure I understood. So The $10,000,000 to $15,000,000 I took it as a net realized with the run rate being after inflation the $60,000,000 or so. Did I Get that incorrectly and if I got it correctly, does that mean then there's another $30,000,000 to $40,000,000 benefit you get in $25,000,000 based on the program?

Speaker 3

That's right. The net benefit is $10,000,000 to $15,000,000 after inflation and the $60,000,000 is net of inflation.

Speaker 4

Okay. And on the ops efficiencies, I mean, is it just purely you went machine by machine, boiler by boiler and just did Indexing and yield analysis or was there something else related to the program? I'm sure it's much more, but was that the fundamental that you were employing there.

Speaker 3

Yes. That's probably a good way to describe it. It was a bottoms up work With an extensive, let's say, extensive feedback or Information from everybody working in our facilities. Okay. And some

Speaker 2

of it is due also to our cost investment that John mentioned. We've invested in some equipment in some mills in much better online data analytics to get the capacity now Too much better understand variance and predictive them and act on them. So some of the cost programs we've done with this automation, I won't call it AI, it's too much, but I would call it data progress in the mills Analytics is helping us also a lot.

Speaker 3

And Tore, let me add. These are structural changes. So these are not we're not trying to push off or avoid. We're looking at $110,000,000 These are sustainable changes. So they do not include, for example, increased volume and So we're being yes, unabsorbed fixed costs that we had this year versus because of the lack of order downtime we took because of the inventory correction.

Speaker 3

So That's not included in this $110,000,000

Speaker 4

Interesting, John. One last quick for me and then I'll turn it back and try to get back in queue. I remember discussion about LATAM seeing Some improvement in volumes with the textbook program, did that materialize and how's the order book in LatAm going into 2024? Thank you guys.

Speaker 2

Yes, it did materialize mostly and all the book is good. It's a seasonality also, which is Always very good on the Q4. So Q4 in that time is the strongest one, Q1 is the weakest one, but that's just the seasonal demand.

Speaker 4

Thank you.

Operator

Mr. Staphos, please continue with your questions. Mr. Staphos, your line is open. Please go ahead.

Speaker 4

Thank you so much. Last one's for me. So share repurchase currently available authorization. Did you say 100 $60,000,000 And do you have an outlook on maintenance at this juncture, gentlemen, for 24th? Thanks and good luck in the quarter.

Speaker 3

Yes, we have, I think it's, I believe, 167,000,000 left on our authorization. And we have yet to we're still developing the plant for 2024 and we'll probably be sharing that maintenance I'll look with you and when we announce the Q4.

Speaker 4

Okay. At this juncture, would you expect relatively flat or could it be lower or likely higher?

Speaker 3

I would say right now relatively flat.

Speaker 4

Okay. Thank you, John.

Speaker 3

We're made.

Speaker 4

Yes, understood. Thank you, guys.

Speaker 2

Thank you, George.

Operator

And at this time, there are no further questions. I'd now like to turn the call back to Hans Bjorkmann.

Speaker 1

Thanks, Craig. Before I wrap up the call, Jean Michel, any closing comments?

Speaker 2

So first of all, thank you for joining our call. We remain a cash flow story. We're projecting more than CAD 270,000,000 In free cash flow this year, I remain committed to working $125,000,000 to shareholders. We remain confident in our ability to generate Stronger big time free cash flows throughout the cycle. We will exit this current industry down cycle as a leaner stronger company.

Speaker 2

We allocate capital to increase shareholder value. We use cash to maintain a strong balance sheet, return cash to shareholders and reinvest to strengthen our businesses. We're confident in the future. So thank you everybody.

Speaker 1

Thanks for joining our call today. We

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT and T Teleconference. You may now disconnect.

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