Sylvamo Q3 2024 Earnings Call Transcript

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November 12, 2024

There are 7 speakers on the call.

Operator

Good morning. Thank you for standing by. Welcome to Savama's 3rd Quarter 2024 Earnings 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'd now like to turn the call over to Hans Bjorkman, Vice President, Investor Relations. Sir, the floor is yours.

Speaker 1

Thanks, Audra. Good morning and thank you for joining our Q3 2024 earnings call. Our speakers this morning are Jean Michel Rivieris, Chairman and Chief Executive Officer and John Simms, 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 earnings release as well as today's presentation. With that, I'd like to turn the call over to Jean Michel.

Speaker 2

Thanks, Hans. Good morning and thank you for joining our call. I'll begin on Slide 4. We had a really strong Q3. Our teams executed very well delivering strong commercial and operational performance.

Speaker 2

Our mill system ran well, and we continue to see relatively stable input costs. We continue to make good progress with Project Horizon, our cost reduction program to streamline overhead, manufacturing and supply chain costs. We are on target to exceed our €110,000,000 year end run rate saving goal by up to $10,000,000 Lastly, this combined performances by our teams resulted in very strong earnings and outstanding cash flow in the quarter. Let's move to the next slide. Slide 5 shows our key financial metrics.

Speaker 2

We earned adjusted EBITDA of CAD 193,000,000 with a margin of 20%. Free cash flow generation was CAD 119,000,000 and we generated adjusted operating earnings of $2.44 per share. I'm proud of how our teams delivered impressive results while taking care of our customers. More importantly, I'm proud of our team's commitment to putting people before paper to ensure everyone returns home safe at the end of each day. We are focused on building a resilient safety culture by involving every team member in our efforts to proactively eliminate risk and create a safe environment for everyone every day.

Speaker 2

Now John will review our performance in more detail.

Speaker 3

Thank you, Jean Michel, and good morning, everyone. Slide 6 contains our Q3 earnings bridge versus the 2nd quarter. The $193,000,000 of adjusted EBITDA was better than our outlook of $170,000,000 to $185,000,000 and almost $30,000,000 higher than the prior quarter. Price and mix was unfavorable by $4,000,000 driven by North America mix. Volume increased by $10,000,000 driven by North America.

Speaker 3

Operations and other costs were stable and better than projected, reflecting solid operations across our mill system. Planned maintenance outages costs decreased by $28,000,000 as we had new major land outages in the quarter. Input and transportation costs increased by $4,000,000 as negative fiber costs in Latin America more than offset positive in energy and transportation in North America. I'd also like to commend our teams for their very strong all around performance that resulted in a 20% margin. Let's move to Slide 7.

Speaker 3

We expect to deliver 4th quarter adjusted EBITDA of $150,000,000 to $165,000,000 We project price and mix to be unfavorable by $20,000,000 to $25,000,000 This is due to pulp and paper price decreases in Europe, higher export mix in Latin America and customer mix effect in North America. We expect volume to improve by $15,000,000 to $20,000,000 mainly due to stronger volume in Latin America. Operations and other costs are projected to increase slightly due to an $8,000,000 operating expense or a planned 10 year turbine generator maintenance event at our Eastover Mill. This will be partially offset by better fixed cost absorption from less economic downtime in North America. We expect input and transportation costs to increase by $5,000,000 to $10,000,000 mostly due to transportation and seasonally higher energy.

Speaker 3

Planned maintenance outages are projected to increase by $17,000,000 as we have a planned outage at Eastover this quarter. Let's go to Slide 8. An important part of our strategy is to be a low cost producer. This time last year, we initiated Project Horizon, a cost reduction program to streamline overhead, manufacturing and supply chain costs. As Jean Michel mentioned earlier, before inflation, we're on target to exceed our $110,000,000 year end run rate savings goal by up to 10,000,000 dollars This will continue to be a focus for us moving forward and we will provide more details in our next earnings call when we wrap up 2024.

Speaker 3

Let's move to Slide 9. As was announced 2 weeks ago, Savamo and International Paper have agreed to mutually terminate the Georgetown supply agreement in December. International Paper has also announced that the Georgetown mill will cease production by the end of the year. We have plans to support customers through this transition as they find alternative suppliers. Of the approximately 250,000 tons we expect Georgetown to supply us this year, we will exit about 150,000 tons.

Speaker 3

This will have roughly a negative $400,000,000 I'm sorry, dollars 40,000,000 earnings impact, assuming 2024 margins, I. E, no change in operating costs, prices, input costs, etcetera. We retained about 100,000 tons of the most profitable products. These products have largely been qualified and transitioned to our Ticonderoga and East River Mills, which will reduce economic downtime in our North America business. The combination of optimizing our mix of products, segments and customers, while leveraging efficiencies from a simplified footprint will help us mitigate the loss of volume.

Speaker 3

As a result of the Georgetown closure, our North America business will become leaner and more productive. Also, we are continuing to focus on strategic initiatives to simplify the business, unlock efficiencies and drive earnings growth. Let's move to Slide 10. With the Georgetown mill closing by the end of December, in addition to the capacity reductions announced earlier this year, North America uncoated free sheet capacity will be reduced by approximately 10%. On this slide, you can see the effect of these capacity reductions.

Speaker 3

The left hand side shows the supply position as of the end of the first half of the year. And on the right hand side, you have the view after all announced capacity reductions have been removed. Consistent with our strategy and our investment thesis, we are committed to the uncoated freesheet business and are very well positioned

Speaker 2

to

Speaker 3

help our customers win in their respective areas. Let's go to Slide 11. Uncoated freesheet industry conditions are improving in Europe and North America as seen on this slide. Next year, European demand is estimated to decline 2%. However, supply is expected to drop by 7% after 2 uncoated free sheet closures later this year.

Speaker 3

Latin America demand and supply are both expected to be stable in 2025. Lastly, North America demand is estimated to decline 3%. However, supply is expected to drop by 10%. As industry conditions evolve, we are well positioned to serve our customers for the long run through our talented teams, iconic brands and our low cost global footprint. I'll conclude my comments on Slide 12.

Speaker 3

I want to wrap up with some encouraging news as it relates to Brazil goodwill tax dispute. Last month, a Brazilian federal regional court ruled in our favor on a court case covering 2 thirds of the disputed amount. As a result of this, we are currently discussing with our lenders the possibility of eliminating the $60,000,000 escrow requirement that we funded in 2023. The Brazilian tax authorities will appeal the court ruling and it could be several years before there is a final resolution on this matter. As of now, that's all we have to report on this.

Speaker 3

We will keep you posted on any material changes as we progress and there is also more detail in the appendix. I'll now turn the call back over to Jean Michel.

Speaker 2

Thanks, John. I'll conclude my comments on Slide 13. This VAMO is a cash flow story and we are creating shareowner value through strong cash generation and disciplined capital allocation. I continue to be impressed with our teams as we work to take care of our customer needs and remain the supplier of choice. We generated outstanding free cash flow in the Q3.

Speaker 2

We're reducing our cost structure and are reinvesting in our business with great pipeline of high return capital projects, which will enable us to grow earnings and cash flow in the coming years. We are simplifying our North America business to become leaner and more agile to drive earning growth. We are committing to return at least 40% of our cash flow to shareholders this year. Looking forward, we are encouraged by the uncoated freesheet conditions across our regions. We're confident in our future and motivated by the opportunities that lie ahead.

Speaker 2

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

Speaker 4

Thanks, Jean Michel, and thank you, John.

Speaker 1

Okay, Audra, we're ready to take the questions.

Operator

Thank you. We'll take our first question from Daniel Harriman at Sidoti and Company.

Speaker 5

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

Speaker 2

Yes. So hi, Daniel. Thanks for joining the call. Since we started the spin off of IP and started Silvamu, we've been preparing for that. So we know it will happen.

Speaker 2

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

Speaker 5

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

Speaker 2

Yes, it's all been transferred. It's ready.

Speaker 5

Okay. Thanks guys.

Speaker 2

Thank you.

Operator

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

Speaker 6

Hi, everyone. Good morning. Thanks for the details. Congratulations on a very strong quarter, guys. My two questions to start.

Speaker 6

Can you talk about what offset you may have from tightening the footprint, etcetera, that would help to offset the, if you will, the gross impact from Georgetown and those 100,000 tons. So said differently, of the $40,000,000 currently based on current operating margins or margins, what do you think the net would be all else equal in 2025 given all the other things that you're working on? That's question number 1. Question number 2, Sylvamo has been a cash flow story since it's been to its credit and you've certainly been very singular in executing your strategy here and elsewhere. When we look at free cash flow for the Q4 based on where EBITDA is, based on CapEx and interest expense and then tax affecting that, we're coming up with something around $65,000,000 to $75,000,000 for free cash flow.

Speaker 6

Could you talk to that? I don't know if there's a comment in the slides around that in terms of whether that's a reasonably good estimate or other things that we should be thinking about. Thank you.

Speaker 3

Yes. George, this is John Simpson. Thanks for joining the call. On your first question Good morning, John. Hey, good morning.

Speaker 4

We're going

Speaker 2

to be careful.

Speaker 3

We're not going to project anything in terms of pricing and impact that they have next year. But certainly as we put out, the capacity closure, if you will, of the Georgetown mill is going to be a net positive for the industry and on top of that with the other closures that have occurred. So again, the $40,000,000 impact we have is based on 2024 margins, not projecting 2025 margins. Of course, there's other things other than the impact of pricing that could impact that, cost and other things like that. I also want to mention, we talked about Project Horizon.

Speaker 3

We are slightly exceeding our target of $110,000,000 We're now projecting $120,000,000 run rate. Now that's remind you that is before inflation, we estimated about $50,000,000 of inflation this year and we're running ahead of that. So, we think that also we did horizon in anticipation of Georgetown and so that also helps us mitigate the impact of the Georgetown.

Speaker 6

John, I understand. I guess, maybe what I'm saying is, could you help us with the reduced economic downtime, the improved mix and streamlining SKUs? Does holding everything else constant, we understand why you need to do that. Does that add back $5,000,000 $10,000,000 or too hard to say or it's modest enough that we should just think about $40,000,000 And then my other question is actually, thanks.

Speaker 2

Yes,

Speaker 3

I understand your question now. That's factored into the $40,000,000 net impact. I see. Okay. Yes, it factors in the reduction of the simplification of the business and reduction of lack of order downtime.

Speaker 6

Okay. And on free cash flow for the Q4?

Speaker 3

Yes, free cash flow for the Q4, I think you said, estimate about $65,000,000 And I would say that that's not approximately I mean, that's not out of the realm of possibility, yes. Okay.

Speaker 6

Thanks so much. I'll turn it over. Go ahead. Thank you. Sorry.

Speaker 3

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

Speaker 6

Thank you.

Operator

We'll go next to Matthew McKellor at RBC Capital Markets.

Speaker 4

Hi, good morning. Thanks for taking my questions. I'd like to ask about planned maintenance in Europe in 2025, which you've communicated I think will be in the $30,000,000 to $40,000,000 range across Syed and NIMALA. Could you first maybe just remind us of where those outages will fall in the year? And then I'd assume Europe is the largest moving parts year over year, but how do you expect your total maintenance outage cost in 2025 to compare to the 73 you're guiding to in 2024?

Speaker 2

So hi, Matt. I'm Michel speaking. Thanks for joining the call. We will deliver a more precise estimate in our next earnings. But directionally, the thing is our European mills are mostly on a 24 month cycle, which means 1 year you have average cost and the other year we don't have average cost.

Speaker 2

That's probably the biggest change with this year. Then there will be some small one there and there, but and that's €40,000,000 impact because we are on the year with audited at both Syed and Istob and Namurah, sorry, next year. So I don't have the exact number, but I would say when we finish the budget, we'll form them to you. But directionally, you take what we've done historically and you had the $40,000,000 and that would be good. Post outage, by the way, will be on the first half of the year, the 2 European outlets.

Speaker 1

Okay.

Speaker 4

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

Speaker 2

So I think it's always the same things. Intention of the EEGI is a good one. We are very in favor of controlling the wood and making sure we use appropriate wood, we know deforestation. We do that all the times and I've always done it. Specific of the rules still needs clarification.

Speaker 2

We've got some improvement in understanding what Europe is expecting. I think that's why it's been moved. It's not because people don't want to do it. It's because we need to be clear on how the law will impact some of the things we do every day, which we don't know it's going to be treated. Considering potential import in Europe, I think it's a little bit early to say, because it will depend on the details of the ruling, but it could have an impact, which would be positive for us being a European producer.

Speaker 4

Great. Thanks very much. And if I could just sneak one last one in on capital allocation. Can you share any updated perspective on how you may be evaluating a resumption of share repurchase this year with where the shares are today versus how you potentially think about a special dividend?

Speaker 2

We haven't changed our strategy in terms of capital allocation. We maintain a strong balance sheet. We have a strong dividend, which is the foundation of our cash return. And as long as we find the repurchase share price attractive, we will share back. And on special occasions, it could be we do a one time, but I would say, we've got still a lot of opportunities on repurchasing share.

Speaker 2

So we're looking at it like we look at all the elements, but we're committed to our 40% for this year turned back to shareholders.

Speaker 4

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

Speaker 2

Thanks, Matt.

Operator

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

Speaker 6

Hi. Thank you very much. So as we look at your 4th quarter bridge versus 3rd quarter and thanks for doing that work for us. Are there any things that we should particularly consider as continuing into the first half of twenty twenty five on that waterfall, particularly on Slide 7, does price mix stay unfavorable recognizing that sequential not year on year? But nonetheless, do we have to worry about a little bit of pressure into the first half of the year based on what you can see right now?

Speaker 6

And then secondly, we've been seeing generally pulp prices heading lower. Certainly, you have some effect in terms of merchant sales of your pulp, but what's that doing to the cost curve and how the markets are developing on paper, particularly in Europe? Thank you, guys.

Speaker 3

Yes. Let me George, I'll take that. So from if you look at the price and mix, certainly the pulp price and the European pricing as a result, because that does a strong correlation between the 2. We expect that to continue and that will be offset somewhat by some things that from a mix perspective. Remember also that the Q1 is typically our lowest volume in LatAm and then it increases throughout the year.

Speaker 3

So we're going to go from a very strong quarter. Typically, we have for LatAm volume into seasonally a little bit slower going into the Q1. I think from operations and costs, both the Q4 and the Q1 were burdened by with a little bit more operating costs due to colder temperatures in the Northern Hemisphere being offset somewhat by the warmer temperatures in LatAm. I do want to call your attention and we called this out that burdening our ops and this outlook is a turbine generator outage. It's a 50 day outage.

Speaker 3

It shows up in ops. It's a 10 year inspection that we have. And so, what it means is that while that turbine generator is being inspected, we're purchasing energy that we normally would be making and that's about a negative $8,000,000 impact that won't repeat into the Q1.

Speaker 2

Okay. And John, maybe if I can just sneak one in to

Speaker 6

use a phrase. So overall, again, you've given us the guide for the Q4. Should Latin America be up given the uptick in volume or will the mix effect with exports be an offset? Said differently, if LATAM is flat to up, then North American holding more of the burden. Would that be fair or have us how would you have us think about that?

Speaker 6

Thank you.

Speaker 3

Yes. Latin America in the Q4 is up in volume. The mix is let's say, slightly negative and that meaning, because of Brazil. So Brazil demand is slightly down, where the rest of the LatAm is up. So that's having a little bit offsetting effect in the Q4 outlook.

Speaker 3

So we're seeing a negative mix impact in LatAm, but that's showing up in a positive volume, which you can see in our outlook, because of seasonally stronger in LatAm.

Speaker 6

Okay. Thank you.

Operator

And we'll take a follow-up from Daniel Herriman at Sidoti and Company.

Speaker 5

Hey, guys. Thanks again. Just a quick one. How should we think about economic downtime in Europe moving forward? Obviously, it was up both in Europe and North America in 3Q, which based on comments in the Q2 call was not unexpected.

Speaker 5

But North America is going to benefit from reduced capacity from Georgetown, but should we expect the same in Europe as capacity leaves the system in 2025?

Speaker 2

Yes. Hi, Daniel, it's Jean Michel. As we've shown it to you before, there is reduction in capacity in Europe also. In total, there is 2 mills which are 2 machines which are shutting down, which effect would be by the year end. So we expect for both North America and Europe to have stronger capacity reduction versus demand decrease.

Speaker 2

So net should be good for volume. And if we have better volume, we have less LO in these two regions.

Speaker 3

Yes, Daniel. If you recall from our statements around the Q4 outlook, we actually talked about less lack of order downtime in our operations and other costs, and that's across the board, both North America and Europe. So, we're already seeing less lack of order downtime in the European system.

Speaker 5

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

Operator

We'll go back to George Staphos at Bank of America.

Speaker 6

Hi, guys. I know, no guarantees in this certainly, but my last question, if you're looking at demand both for North America and Europe that are however you pitched it flat to up, should shipments be comparable with your demand outlook? Or do you expect shipments might track above or below? And if so, what would be the reasons that you see at this juncture? Thank you.

Speaker 2

I think we expect about the same number.

Speaker 6

Okay. And I forgive me, I misspoke. You're looking for demand to be down

Speaker 3

a little bit in Europe

Speaker 6

and in North America. Yes. So, it was either way, shipment should be the same. What's that?

Speaker 2

Yes. I just want to make

Speaker 3

sure, you're talking about the 2025 comment we made?

Speaker 6

Correct. I'm on Slide 11, with demand down, call it 23 in Europe and North America, you expect shipments should be comparable from what you can see right now.

Speaker 3

Yes.

Speaker 6

Okay. Thank you, guys.

Operator

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

Speaker 1

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

Speaker 2

Thanks, everybody, for joining our quarter our call. It was, as we said, a good quarter. We intend to continue to maintain a strong financial position. We intend to continue to return cash to shareholders. And one thing which we've talked a lot and maybe not progressed as fast as we wanted to know, but it's going to accelerate is reinvesting in our business to increase our competitive advantages.

Speaker 2

As we've told you before, we have a pipeline of greater than EUR 200,000,000 of high return projects. As we are preparing our budget for next year, we're looking at some high return projects that are nearing finalization of engineering work and even preparation for Board approval. So we expect to be able to invest and ultimately get the increased returns from this project relatively soon for some of these $200,000,000 So lastly, we're confident in our ability to generate strong earnings and cash flows through the cycle. So we're looking at the upcoming quite positive. Thank you to all of you for joining today.

Operator

Once again, we'd like to thank you for your participating in Savama's 3rd quarter 2024 earnings call. You may now disconnect.

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