Sylvamo Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2024

There are 6 speakers on the call.

Operator

Good morning and

Speaker 1

thank you for standing by. Welcome to Silvamo's 4th Quarter 2023 Earnings Call. As a reminder, your conference is being recorded. I'd now like to turn the over to Hans Bjorkman, Vice President, Investor Relations. Sir, the floor is yours.

Operator

Thanks, Greg. Good morning and thank you for joining our Q4 and full year 2023 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 certain legal disclaimers. For example, during this call, we will make forward looking statements that are subject to risks and uncertainties.

Operator

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

Operator

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.

Speaker 2

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 3 pronged strategy of commercial excellence, operational excellence and financial discipline to strengthen our competitive advantages in our core uncoated free sheet market. First, we allocated cash to improve our financial position by repaying €76,000,000 in debt, achieving a net debt adjusted EBITDA of 1.2x.

Speaker 2

2nd, we continue to deliver on our investment PPE. We earned €607,000,000 adjusted EBITDA, generated €294,000,000 in free cash flow and returned EUR127,000,000 in cash to shareholders. 3rd, we invested to strengthen our low cost assets. We invested $210,000,000 and continued to accelerate investment in our return capital project. We also acquired the 572 NU MOLAMIL in Sweden for €167,000,000 This is a great asset With a talented team, the mill is performing well and we are benefiting from the $40,000,000 bulk mill modernization project That was completed just before the acquisition.

Speaker 2

In a tough market, the mill generated about $50,000,000 in cash before any allocated overhead. Slide 5 Highlights of 2023 full year key financial metrics. Our adjusted EBITDA was $607,000,000 which was a 16% margin. Our $294,000,000 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.

Speaker 2

We generated almost 90% of free cash flow in the second half. You may recall that in 2022, we generated about 75% of our free cash flow in the second half of the year. Our adjusted operating earnings were $6.51 per share. We got our 2023 Financial results are solid considering uncoated prefi 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 shareholders.

Speaker 2

Slide 6 shows our 4th quarter key financial metrics. Adjusted EBITDA was €117,000,000 With a margin of 12%, we generated €104,000,000 in free cash flow as we continue to optimize our working capital. Our adjusted operating earnings were $1.16 per share. This strong performance during challenging industry conditions demonstrate our agility and ability to adapt. I'm proud of how our teams collaborated to meet our customer needs maximize cash.

Speaker 2

Now, John will review our 4th quarter performance in more detail. John?

Speaker 3

Thank you, Jean Michel. Good morning, everyone, and thanks for joining our call. Slide 7 shows our 4th quarter earnings bridge. Our $117,000,000 of adjusted EBITDA was higher than our outlook of $90,000,000 to 110,000,000 Let's discuss the changes versus the Q3. Price and mix decreased by 25,000,000 largely due to earlier paper price decreases in all regions as well as unfavorable mix in Latin America and North America.

Speaker 3

Paper prices were stable in the 4th quarter in all regions. Volume improved by $20,000,000 due to Operations and other costs increased by $12,000,000 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 Syott mill, which had a $5,000,000 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 3rd quarter. Planned maintenance outage costs increased by $25,000,000 with planned outages in all three regions.

Speaker 3

Input and transportation costs improved by $1,000,000 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 books as well as lower import levels. In Latin America, we expect seemingly weaker demand in the Q1.

Speaker 3

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. Let's go to Slide 9. We expect to deliver 1st quarter adjusted EBITDA of $105,000,000 to $125,000,000 We project price and mix decreased slightly, about $5,000,000 to $10,000,000 In the Q4, we communicated pulp and paper price increases to our European and Latin American customers effective in January. We do, however, expect some price mix erosion in North America.

Speaker 3

And as usual in the Q1, we expected unfavorable seasonal mix impact on Latin America. We expect volume to decrease by $10,000,000 to $15,000,000 reflecting seasonally weaker industry demand quarter in Latin America. Operations and other costs are projected to improve by $20,000,000 to $25,000,000 primarily reflecting lower economic Downtime. We expect input and transportation costs to increase by $5,000,000 to $10,000,000 due to increased transportation costs mostly in North America and higher fiber costs in Latin America. Planned maintenance outages are projected to decrease by $3,000,000 Moving forward, we will continue to provide quarterly earnings guidance selected annual financial metrics as shown on Slide 17 in the appendix.

Speaker 3

On the advice of our high conviction, long term shareholders will 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 shareholder value. So 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 $125,000,000 to $130,000,000 in maintenance and regulatory spending as well as $30,000,000 to $35,000,000 for high return projects.

Speaker 3

Our resilient forest lands are significant competitive advantage. These eucalyptus plantations provide a material cost advantage relative to most other global competitors. In 2023, we invested $34,000,000 and this year we'll invest $35,000,000 in our forest land to increase our self sufficiency and reduce our wood costs. We're also investing $20,000,000 this year, dollars 12,000,000 in 2025 for a 3 year 3rd 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 land.

Speaker 3

We source the majority of our wood in Brazil from our own and managed wood and supplement that with open market purchase. Most of our wood needs comes from our forest land, from strategic long term partnerships. Our owned and managed wood has the capacity to produce or provide rather 80% to 90% of our total wood needs from forest lands close to our mill. However, several years of reduced planting combined with natural causes, largely droughts and fires forced us to harvest trees early. These factors increase the amount of market wood required to meet our needs.

Speaker 3

We are currently purchasing about 25% of our wood from the over market and this would cost 2 to 3 times our owned wood. The increase in reforestation capital and a 3 year wood supply 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 Q4, we commissioned a 3rd party to appraise our forest land.

Speaker 3

In December, they valued it at about 1,000,000,000 dollars at the current exchange rate. The updated valuation reflects an increase of about 600,000,000 from our 2021 appraisal done by the same firm. Increasing demand for land and wood in Brazil has driven this Our forest lands are not only a source of global competitive advantage, but also an enduring repository of shareowner value. John Massaro, I'll now turn it back over to you.

Speaker 2

Thanks, John. I'm on Slide 13. We are a cash flow story. We have generated substantial cash over the past 2 years. And importantly, we returned €90,000,000 in cash to shareholders in 2022 and €127,000,000 in 2023.

Speaker 2

Last year, we also deposited $60,000,000 in escrow, which allowed us to return more than the $90,000,000 limit in our credit agreement. Returning cash to shareholders remains a key component of our capital allocation strategy. In 2024, we expect to return at least 40% of free cash flow to shareholders. Slide 14, please. We are confident in our ability to continue to create long term share on a value by executing our strategy and delivering our investment thesis.

Speaker 2

We believe in the promise of paper for education, Communication Entertainment, and we intend to increase our competitive advantages in the market we share. We are a low cost global producer with strong supply position, iconic brands and talented teams. We leverage our strengths to drive high returns on invested capital and generate free cash flow. We use that cash to increase our owner value by maintaining a strong financial position, returning cash to shareholders and reinvesting in our business. We are confident in our future and motivated by the opportunities that lie ahead.

Speaker 2

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

Operator

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

Speaker 1

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

Speaker 4

Hi, everyone. Good morning. Can you hear me okay?

Speaker 2

Yes, we can. Good morning, George.

Speaker 4

How are you? Thanks for the details. I'll ask my two questions and get back in queue. First of all, I know you're not giving guidance past the Q1, but how repeatable Are the trends and what you're doing in operations and other costs, they seem to have been a source even with some offsets That you talked to seem to be a source of positive variance in the Q4 for you. It's certainly a positive bridge item in the Q1.

Speaker 4

How much longer can that go? And how much is the cost reduction program driving that? That's question number 1. Question number 2, to my recollection, the first time in a while that you've talked about the Timberland values in Brazil. Given our experience over the years covering the Latin American producers that connection To Timberland is a source of competitive advantage, a source of process improvement.

Speaker 4

Are you suggesting that over time This would be something you could disconnect from the portfolio? Or do you see this as a reason why You should be able to maintain your position grow, grow profitably and either way not being Sort of under it's being underappreciated within the market. How should we think about what you're trying to say on Timberlands here? Thank you.

Speaker 2

George, I will start by your second question and John will take the first one. So we thought Our timberland is key to our competitiveness, and it's really a key advantage. The reason why we updated 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 of exactly as you mentioned, of long term competitiveness, which we count on. Fiber is key in our paper advantage.

Speaker 3

Yes, George, I'll take your second question in terms of the ops variance and how much runway we have that going forward. So what we talked about, I think it's important to note is that our order books have improved across all our regions of Exitio today. In fact, we're running full in both Europe and LatAm and with a lot significantly less economic downtime in North America. And that has driven a lot of the operational improvement because we're taking the last quarter of downtime And we're solving more of the fixed costs that we had in the first half of last year. Second thing is We are continuing to start to get the benefits of some of this high return cost reduction capital that we started to invest in.

Speaker 3

Yes, we did 60 weeks on, but we really didn't start ramping that up until next year. And I think third, we've talked about our, we call Project Horizon, that's our cost reduction program with both operational supply chain and S and A. And we started seeing some benefit of that a little bit in the first we expect to see a little bit in the Q1, Really, that's going to really start ramping up through the balance of the year.

Speaker 4

Hey, John, forgive me. Just a point clarification. You said On the reduction in unabsorbed costs, if I heard you correctly, you're going to see more of that this Here or more I just want to make sure I heard the cadence on that correct because the phone cut out.

Speaker 3

Yes. So if you look at even in the Q4, and you'll see in the appendix, we took about 90,000 Tons less lack of order downtime in the Q4.

Speaker 4

Got it.

Speaker 3

And what I said within the Q1, That is somewhat what's driving the operation outlook that we gave because we're running more full right now in the Q1 than we were even.

Speaker 4

Okay. Thank you. I've got that. I'll be back.

Speaker 1

Next, we'll go to the line of Harman Dodd from RBC. Please go ahead.

Speaker 5

Hi, good morning. Thanks for taking my question. This is Harmon filling in for Matt McKellar. I guess one quick question I had was just around and apologies if this was mentioned in the first question. I had some technical difficulties.

Speaker 5

But With the high return projects that the company is looking at in 2020, are you able to share any incremental details on what sort of things you're pursuing and How that could shake out in terms of increased margins or even potentially supporting more cost reductions as you've outlined with Project Horizon?

Speaker 3

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

Speaker 3

So those are some of the type of projects we have done. In fact, just recently, we completed a chemical recovery project And Eastover, that has 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 $30,000,000 of high return projects. These returns are well over 20% returns, even much higher than that.

Speaker 5

Awesome. No, that's great. That's helpful color. And I suppose, Just I guess more broadly, with the Red Sea crisis, Would you be seeing additional European products show up in North America, given the increased cost of reaching Asia markets from Europe? I guess, our last check with RISI sort of said that North American outbound shipping costs have been somewhat flat, but inbound or up.

Speaker 5

So we were just hoping to get some more perspective on there?

Speaker 3

Yes, Harmon, it's hard to tell what the implication is going to be in terms of The Red Sea, right? What we are seeing right now in Europe is decreasing imports. And some of the transit times coming from Asia, It's almost increased about 4 weeks, we understand, for imports from Asia to get into the Europe. So it could have an impact that actually decreased import in Europe, which then means that more domestic supply has to be stay onshore to service 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.

Speaker 3

So all exporters are seeing an increase Freight cost as well as fleet of.

Speaker 2

And 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 a very few going to Middle East Africa. So it's really not impacting us so far significantly.

Speaker 5

Got you. No, that's helpful. And, yes, thanks again. I'll jump back.

Speaker 1

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

Speaker 4

Yes. Thank you very much. Just on that point that was raised just before, I know you aren't really quantifying it, but is the impact from Asia, if there is a positive on reduced imports into Europe more on converted products or more on Cut size and graphic papers overall, that in turn is leading to better demand for you and or your customers?

Speaker 3

Mostly, I would say, Georgia cut size, that's what's easier to export. So mostly you see from Asia are the cut size and the role in the offset business because of the various sizes that you have to have, it's much typical for any exporter that matter not just the export, there will be The whole business, the commercial credit business.

Speaker 4

Okay. And Jean and Jean Michel, my next question and I'll come back in queue again. Related point, so to the extent that we've seen pulp prices continue to rise in Europe, recognizing Asia, we're starting to see them fade a bit. Has that cost curve or let me say it differently, has the cost curve shifted sufficiently where that's also beginning to have an impact on apply within Europe by either curve shifted some of your non integrated peers are having some difficulty producing or really That's not really having much of an effect at this juncture from what you can see.

Speaker 2

I think, George, it's a good question. I think it's impacting from the trough, The pulp prices in euro have gone up EUR 160 from last year, throughout to today. So it is for sure impacting the non integrated players Europe, and that's maybe one of the reason why we're seeing operating rates Back up high in Europe and having a very strong demand, it might impact it. We also know the inventory correction in Europe is behind us and the industry inventory are quite low actually right now in paper. So multiple factors, but pulp price has an impact.

Speaker 4

Yes. Jean Michel, ultimately, look, I realize it's our job, not yours. But to the extent that you have a view on this. Is there kind of a view in terms of how much now is Kind of in the red in terms of industry production relative to the cost curve. And if you don't have a view, that's fine.

Speaker 4

I just thought I'd ask if you had and you bought Sherrick.

Speaker 2

I don't, but I would I don't have the number precisely. So all I can make is No worries. Maybe a guess, a very high level guess, and it might be about 10%.

Speaker 4

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

Speaker 1

And we'll go back to the line of George Staphos. Please go ahead.

Speaker 4

Hi, guys. To the extent that there's been some pricing reductions in North America as memory serves, at least in terms of published indices, How much of that if you can quantify recognizing you're not tied to RISI in your contracts per se, But how much of that is baked into your guidance, if anything at all for the Q1? And to the extent that you could size it broadly, how much would be something we need to make sure we model for over the rest of the year, recognizing you're not guiding on 2Q through 4Q?

Speaker 2

So George, I cannot give you an exact price, but I can give you a trend. We saw the same results you did. As You mentioned it, we do not report to our pricing to Wizzi. I would say on a trend, Wizzi might have The direction correct, but we have seen in the past that in absolute value, we see it differently. So in our outlook, mostly from Q3, actually, we expect slight erosion In North America, not a huge one, a slight one.

Speaker 2

And at the same time, we expect because of 2 Our price increase we've announced to our customers in Europe and in Brazil and LatAm, we expect price increase on the other regions.

Speaker 4

Okay. And then back to Europe and I'll turn it over. The performance for the quarter was somewhat below our expectations now. That's not here nor there. That's our forecast versus your actual.

Speaker 4

But was performance in Europe as you had expected in terms of that loss? And What if we again, you're not guiding for

Speaker 3

the full

Speaker 4

year, but should we expect that ultimately Europe should be breakeven or better for this year and what are the bigger bridge items to get you there if in fact that's your assumption? Thank you.

Speaker 2

Yes. So 2023, as you know, in Europe was difficult. It was a trough in terms of demand. The prices of pulp, which affected our Saya Mill, went down. We had an annual outage in Saya, which costed us $20,000,000 We had an annual outage in the Q4 in Mimola.

Speaker 2

We had an issue with the turbine we mentioned in the same mill, which is over now, which costed us $5,000,000 and it was really the trough of the cycle in terms of prices. So we clearly see 2024 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.

Speaker 2

Nuumola is performing very well. Saia is performing well. The order book, as I mentioned, is Food and we've seen price increasing. So Europe is rebounding significantly. It's tailwind for 2024.

Speaker 3

Yes, George, just to add on to that, you say that it was a trough, but it was a significant. If you think about in terms of demand decline that we had In Europe, it was even worse than COVID. We forget how much volume and shipments were down and also pulp prices at Syed is 1 third of its capacity is pulp, so it is To a certain extent, more exposed to the cyclical pulp prices than other 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.

Speaker 3

We also have prices going up, both in paper and pulp. So the reason The thing that's helped us with pulp prices going up already almost $160 per tonne versus

Speaker 1

Next, we'll go back to the line of Harman Dodd from RBC. Please go ahead.

Speaker 5

Hi, thanks. I just had a couple of quick follow ups on the cost reduction plan. And apologies if it was mentioned earlier, had some technical difficulties at the start of the Q and A. But Just had a quick clarifier, that $15,000,000 reduction in overhead expenses, is factored into your $110,000,000 target or is this on top of it? And I suppose secondly, would there be an update to the prior inflation assumption?

Speaker 5

I believe it was around $50,000,000 with Q3 results.

Speaker 3

Yes, Harmit, the $50,000,000 that we reported for the 4th quarter It's additive but was not included in the 110 targets we talked about when we reported the 3rd quarter. And the inflation number that we provided, you're correct, it was $50,000,000 and that won't be updated. That's still a good number.

Speaker 5

Got you. Yes, that's all from my end. Thank you.

Speaker 1

And next we'll go back to the line of George Staphos. Please go ahead.

Speaker 4

Hi guys. Last one for me. Now you're not the only company in South America that's talked about having to go farther from its own Mills for wood and do a bit more 3rd party wood. And although the company in particular I'm thinking of is more packaging Great production. But is there a broader issue that's been affecting the producers?

Speaker 4

Has it been just droughts or has there been something else that's gone on either in terms of maybe over harvesting or under investing that not just for Sylvamo, you've seen elsewhere. Just some quick thoughts there and I'll turn it over.

Speaker 2

I think you Some of our competitors talked about the same thing we did on some plantations about 6 to 7 years ago, where Goose Plantation have suffered under the 7 year cycle of drought, Natural causes, which have, in fact, 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 2 years. And we also specifically more significantly from our past companies, reduced some of our investments in the forestry during this year, which we are It's a 6, 7 year cycle. So we think 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.

Speaker 2

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 plant we have will make up for that.

Speaker 4

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 softwood. 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 or quarter down the road, you're talking about further inflation that you're contending with? Or are you as much as you can, You're relatively well set for the rest of the year.

Speaker 2

With the investment we've made, we feel like we're well set.

Speaker 4

Okay. Thank

Speaker 1

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

Operator

Thanks, Greg. Before we wrap up the call, Jean Michel, any closing comments?

Speaker 2

Yes, just thank you, first of all, for joining the call. We are a cash flow story. In 2023, we generated EUR294,000,000 in free cash flow and return EUR 127,000,000 to shareholders. We allocate capital to increase shareowner value. We use cash to maintain a strong balance sheet, return cash to shareholders and we invest to strengthen our business.

Speaker 2

And we are confident in our ability to generate strong earnings and free cash flow Sudhakar, we are confident for 2024.

Operator

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

Speaker 1

Once again, we would like to thank you for participating in Sovammo's 4th quarter 2023 earnings call. You may now disconnect.

Powered by Quartr

Key Takeaways

  • Full-year 2023 results: Delivered €607 million of adjusted EBITDA (16% margin), generated €294 million in free cash flow, returned €127 million to shareholders, repaid €76 million of debt and achieved net debt/EBITDA of 1.2x.
  • Q4 outperformance: Reported €117 million of adjusted EBITDA (12% margin), €104 million in free cash flow and $1.16 adjusted operating earnings per share, beating guidance of €90–110 million.
  • Q1 2024 outlook: Forecasting €105–125 million of adjusted EBITDA, with modest price/mix declines and seasonal volume weakness offset by €20–25 million of operational cost improvements; full-year guidance has been discontinued at shareholders’ request.
  • Strategic investments: Invested $210 million in low-cost assets, acquired the 572 NU Mölla Mill in Sweden for €167 million, earmarked €30–35 million for high-return projects and plans $35 million of forestland reinvestment in 2024.
  • Industry trends: Seeing improving order books and lower imports in Europe and North America, while Latin America faces Q1 seasonality but anticipates stronger export demand and pulp prices support non-integrated peers.
AI Generated. May Contain Errors.
Earnings Conference Call
Sylvamo Q4 2023
00:00 / 00:00