Sylvamo Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 6 speakers on the call.

Operator

Good morning. Thank you for standing by. Welcome to Silvamo's Second Quarter 2023 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 Bjorkmann, Vice President of Investor Relations. Sir, the floor is yours.

Speaker 1

Thanks, Leah. Good morning and thank you for joining our call today. Our speakers this morning are Jean Michel Rivieras, 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 We will also present certain non U.

Speaker 1

S. GAAP financial information. Reconciliations of those figures The U. S. GAAP financial measures are available in the appendix.

Speaker 1

Our website also contains copies of the Q2 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 Q2, we generated adjusted operating earnings of $1.14 per share, and we achieved $124,000,000 in adjusted EBITDA, both at the high end of our guidance range. We generated EUR 32,000,000 of free cash flow and returned CAD 41,000,000 in cash to shareholders via dividend and share repurchases in the 2nd quarter.

Speaker 2

Price mix, operation and input and transportation costs were all favorable to the outlook we provided in our Q1 call. Our Q2 volume was short of expectations, reflecting continued channel inventory correction and weaker and projected demand. John will discuss the industry demand in more detail. Slide 5 compares our 2nd quarter key financial metrics versus prior periods. In the 2nd quarter, we had CAD 124,000,000 in adjusted EBITDA After $58,000,000 in planned maintenance outages expenses, operating teams match our production to our customer demand, While executing 2 third of our total planned maintenance outages for 2023.

Speaker 2

I'm proud of our teams that completed these outages safely and efficiently. If we normalize planned maintenance outages expense, our 2nd quarter adjusted EBITDA margin would have been 17%. Now John will discuss our 2nd quarter performance in more detail. John?

Speaker 3

Thank you, Jean Michel, and good morning, everyone, and thank you for joining our call. Slide 6 shows our 2nd quarter earnings bridge. As Jean Michel stated, We earned $124,000,000 of adjusted EBITDA in the quarter, which was in line with our guidance of $115,000,000 to $125,000,000 So let's discuss the changes versus the Q1 adjusted EBITDA. Price and mix decreased by $38,000,000 Due to lower paper prices in Europe, less favorable mix in Latin America and North America and lower global pulp prices. Volume was one area that was significantly different than our outlook, and I will discuss more about this on the next few slides.

Speaker 3

Operations and other costs increased by $10,000,000 primarily driven by $15,000,000 in higher unabsorbed fixed costs Due to increased economic downtime, planned maintenance outages cost increased by 58,000,000 as we conducted 4 major outages versus no outages in the Q1. Input and transportation costs improved by 20 In the first half of this year, apparent demand for all printing and writing papers, including uncoated Free sheet declined significantly, especially in Europe and North America. The dark bars on this slide show the demand for the first half of 2023 versus demand for the first half of twenty twenty two. The lighter bar shows the demand over the last 12 months versus demand over the prior 12 month period. We regard the lighter bars to be more representative of apparent demand.

Speaker 1

In the

Speaker 3

second half of twenty twenty two, Europe and North America experienced surges in uncoated freesheet imports and customers built inventories well above normal levels.

Speaker 4

At the

Speaker 3

same time, uncoated freesheet demand began to slow down As some European economies entered recessions and North America companies pulled back on advertising, some in anticipation of a recession. This impacted direct mail and commercial printing, which contributed to reduced orders for uncoated freesheet in the first half of this year. The next few slides show UNCO depreciate demand data by region and provide context to the recent regional demand trends. In summary, we believe that in 2022 customers were buying more paper than they were using. And in 2023, they're using more paper than they're buying.

Speaker 3

In other words, reducing their inventory significantly. Let's move to Slide 8. Let's look at Europe first. On average, industry demand declined 5% annually over the last 4 years. Despite the significant swings, the full year trend is similar to the long term demand trend.

Speaker 3

We now expect channel inventory corrections in Europe For the balance of the year, we expect the demand to remain weak due to the slower European economies. This will continue to put pressure on our volume and price and mix in Europe. With respect to changes in Recently, one producer permanently shut down 175,000 tonne uncoated freesheet machine in Austria And another producer announced the start of a process that may lead to the permit shutdown of 220,000 tonne paper mill in Germany. Let's turn to Slide 9 to discuss the North America uncutted freesheet demand picture. Over the past 4 years, on average, North America industry demand declined at 3% per year, which is also close to the long term demand trend.

Speaker 3

We expect North America channel inventory corrections to be largely completed by the end of the third quarter. The U. S. Economy appears more resilient than many were expecting and U. S.

Speaker 3

Advertising spend recently grew for the first time in nearly a year. Assuming this trend continues, we would expect paper demand to improve in the second half of the year. With respect to changes in supply, our one competitor shut down a 240,000 tonne uncoated freesheet mill in May. We have started to supply the new business we gained as a result of that permanent shutdown. Let's turn to Slide 10 to discuss Latin America.

Speaker 3

Over the past 4 years on average, Latin American Uncutted freesheet demand was up 3%, which is slightly better than the long term demand trend. As you can see on this slide, Latin America has a very strong seasonality pattern with the second half being stronger than the first half. First half twenty twenty three demand was a bit lower than we expected as customers were also adjusting their inventories throughout Latin America. Let's turn to Slide 11 to summarize our views on uncoated freesheet demand trends. The European and North America first half demand declines were driven by 4 factors.

Speaker 3

Number 1, The 2022 surge in imports. And as you may know, imports returned to normal levels By the Q1 in the United States and in the second quarter in Europe Number 2, significant channel inventory corrections. We now expect these corrections to be completed in the Q3 in North America and the Q4 in Europe. Number 3, reduced advertising in the U. S, some in anticipation of a recession.

Speaker 3

As recession has not occurred and the economy continues to be more resilient than many are expected than many expected. And finally, number 4, the slowing economic growth in Europe. We expect continued low economic growth in Europe. Now let's turn to Slide 12 to review our 3rd quarter outlook. We expect to deliver 3rd quarter adjusted EBITDA of $130,000,000 to 150,000,000 We project price and mix to decrease by $60,000,000 to $65,000,000 primarily reflecting paper price decreases in Europe and the realization of prior price decreases for pulp across the globe.

Speaker 3

We expect volume to improve by $15,000,000 to $20,000,000 reflecting seasonally stronger volume in Latin America and North America and a recent new business we've gained in North America. Operations and other costs Projected to increase by $5,000,000 to $10,000,000 primarily due to higher unabsorbed fixed costs as we continue to match supply to our customers' demand. We expect input and transportation costs to improve by $15,000,000 to $20,000,000 The favorable trends in fiber and chemicals. Planned maintenance outages are projected to decrease by 54,000,000 We project adjusted operating earnings of $1.20 to $1.55 per share. Let's turn to Slide 13 to review our revised 2023 annual outlook.

Speaker 3

Based on the slower than expected demand recovery, we now project adjusted EBITDA of $560,000,000 to $600,000,000 for the full year. This revised outlook reflects Lower volume and higher unabsorbed fixed costs from economic downtime in Europe and North America, less favorable pricing mix in Europe and In Latin America, favorable input and transportation costs and favorable operations and other costs. We now project free cash flow of $220,000,000 to $250,000,000 This revised estimate Reflects lower adjusted EBITDA offset by lower cash taxes and a significant reduction in working capital. We continue to focus on generating cash flow and remain a cash flow story. Our revised Outlook indicates continued strong free cash flow of about $5 to $6 per share.

Speaker 3

And importantly, we remain committed to returning $125,000,000 in cash to our shareholders this year. Let's turn to Slide 14, please. We will continue to maintain a strong balance sheet, return substantial cash to shareholders and create value by reinvesting in our business. We will continue to reduce debt through required amortization. We plan to deposit $60,000,000 in escrow, which will allow us to return more than the $90,000,000 limit in our credit agreement.

Speaker 3

Dollars 125,000,000 in dividends and share repurchases will be an increase of about 40% versus the $90,000,000 we returned in 2022. In the first half of this year, we have already returned $61,000,000 to shareholders. Jean Michel, I turn it back to you.

Speaker 2

Thanks, John. Let's put all of this into perspective. I'm on Slide 15. Remaining the supplier of Choice is paramount to our success in the second half. We will continue to supply the products our customers need when and where they need them.

Speaker 2

We're also committing to managing our production to our customer demand, which will help us reduce working capital. And we will continue our efforts to reduce operating costs and selling and administrative expenses. We expect European earnings to remain under pressure, while our Latin America and North American results continue to be resilient. I'll conclude our prepared remarks on Slide 16. Despite the difficult industry demand environment in Europe and North America, We are confident in our ability to create shareowners' values throughout the cycle.

Speaker 2

We have reduced debt significantly since the spin off And our financial position is robust at 1.2 times net debt to adjusted EBITDA. Our free cash flow generation is strong, And we plan to return EUR 135,000,000 to shareholders this year. We are also reinvesting in our business to reduce cost, Strengthening our low cost position so that we can exit the downturn in an even stronger competitive position. With that, I'll turn the call back to Hans.

Speaker 1

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

Operator

And we go to a question from George Staphos with Bank of America. Please go ahead.

Speaker 4

Hi, thank you very much. Hi, everyone. Good morning. Thanks for the details. I wanted to start Jean Michel, John, Hans, if you could Have us think how about how you think what the demand trajectory will be once we're through this week period.

Speaker 4

I know that's To some degree, up there with World Peace. But do you think there is a demand snapback After we're through this, let's call it recessionary period, destocking period, or do you think The trajectory on demand goes back to what had been the CAGR for North America, for Europe, for South What is your expectation? What would you at least try to convince us of from your vantage point in terms of the long term demand trajectory after this period or the intermediate pre IRID, I should say. Thank you.

Speaker 2

Yes. Good morning, George. Thanks for joining the call. We really believe we're going to go Latin and North America and Europe, sorry, to return to long term trends. The difficulty we have is to put a time back, but demand will come back.

Speaker 2

Inventory correction is at the end. So as you can see, on the long term, we've had a lot of Ups and down, and it's more brutal sometimes than we expect, including COVID. But the trend has not changed. The trend actually, if we take the last 4 years, Significantly, I mean, it's a little bit better than we expected. So to answer your question, we are expecting To go back to longer trends, the same we had in the past.

Speaker 4

I guess, maybe relatedly, And you don't show this here on the slide and I'd have to go back and look at my numbers, but I seem to remember after The financial crisis and here I'm just thinking about North America, uncoated freesia demand really didn't snap back. It didn't decline at the rate that had been experienced during that recession. So that was an improvement, But it didn't really snap back. So if you agree with that premise and maybe you don't, why should it go back to more of a trend this time around?

Speaker 2

Yes. So I think there's 2 comments in that one, and I don't want to be wrong in my comments. Snap back to prior level, I'm not sure we're going to get there. I think we will have some snapback because we'll have the inventory correction behind us. But the trend Will be the same.

Speaker 2

Okay.

Speaker 3

Yes. I think one thing George, I would say also just remember we're looking at apparent demand. Sometimes apparent demand can give not an accurate view because apparent demand is calculated by domestic shipments minus exports Plus imports. So I think when we tried to say this a little earlier is that we think in 2022 actually demand which grew in the North and U. S.

Speaker 3

Based on those that reported, but that was probably overstated. And today, If you look at what's being reported year to date, demand is down almost 17% in the U. S, but that is probably overstating the decline. And that's being driven because of the inventory corrections. I mean, we do believe that there is some pullback.

Speaker 3

We've seen that. So, I guess what I'm trying to say is that, when you're thinking about where is it going to bounce back to, I think the 17% decline number is too low given what we think because of The way it's calculated with the parent demand. Okay.

Speaker 4

Maybe one last question for me, I'll turn it over. So I realize you're not guiding on the Q4, though implicitly you are because of the full year and the Q3. And when we just do the simple Algebra, it's not even analysis. You wind up with a relatively wide range for what's implied for EBITDA for Q4. And yes, It's going to be driven by volume, by pricing and so on.

Speaker 4

We get that. But what specifically, if you could be somewhat granular here About either end markets, regions, pricing Would be the key factors in terms of whether you wind up towards the higher end of your guidance range Both 3rd quarter for sure and then 4th quarter or at the lower end. Again, as we get to the 4th quarter, That range is between $70,000,000 I think and $140,000,000 in terms of EBITDA. Thank you guys.

Speaker 3

Yes, George, it's John. Thanks for that question. I think we gave the revised range of $560,000,000 to $600,000,000 which is a $40,000,000 range.

Speaker 2

Yes.

Speaker 3

And then if you look at our range, for the Q3, it's 20 $1,000,000 range $130,000,000 to $150,000,000 You subtract what we earned in the first half, which is $332,000,000 You really get a range of 4th quarter, about $20,000,000 $100,000,000 to $120,000,000 And what's driving our revised outlook, Both in the Q3 and the full year, I think we talked about it, but it's really demand driven mostly in Europe, Because of the slower economic conditions that are in that we're seeing in Europe. And that's So having implications in terms of our views about pricing in the second half of uncoated freesheet in Europe. And also incorporates our views on pulp pricing, which we've already seen, but we're going to see the full impact of that In the second half. And then also reflects, as we talked about a little bit lower view, DemandView and North America, I will say for the year right now, Through the first half of the year, pricing has been relatively stable in North America. In Latin America, we do see a seasonal increase in volume and that reflects also Our view is on pricing in the export markets.

Speaker 4

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

Operator

And we have a question from Paul Quinn with RBC Capital Markets. Please go ahead.

Speaker 5

Yes. Thanks very much. Good morning, guys. Thanks for the color on The machine shuts that you noticed in North America and Europe, maybe The question I've got is, is what kind of volume needs to come out to stabilize pricing in your opinion in both those markets?

Speaker 2

Hi, Paul. Jean Michel speaking. I would just Start by saying in North America, we've seen our prices stable, but we don't have a calculation on What kind of volume has to be taken off? I don't have a number to give you. What is true, which is very volatile in Europe In terms of volume, he's a nonintegrated producer.

Speaker 2

In Europe, they are much more important than it might be in Latin America or North America. And right now, with the very low cost of pulp and very low cost of gas, those Producers, we sometimes are in the market, sometimes are not in the market, are much more competitive. So we see them, which sometimes you don't. So there is a variable here, Which is very difficult to answer your question because it depends on raw materials.

Speaker 5

Okay. That's fair. And then maybe the second question I had, you've stated $125,000,000 return of cash to shareholders. What do you think about that level going forward? And what's your ability to increase that?

Speaker 3

Thanks, Paul. We said that core to our capital allocation Our strategy and goal is to continuously increase cash returns to shareholders. So core to that is our dividend. And what we want to do is be able to provide a stable dividend that grows over time. The balance of it in terms of share buybacks It's going to be really based on opportunistic view.

Speaker 3

But our first priority, and I should say, maintain a strong balance sheet so that we can invest through the cycle And then provide a stable growing dividend in the long term. So I think the short answer your question, Tia, where you're trying to get it, it really takes a sense of where we think each year in terms of the free cash flow that we generate In terms of how much whether we can increase it above the 125 or not going forward.

Operator

And we go back to the line of George Staphos with Bank of America. Please go ahead. Mr. Staphos, if you can hear us, we are unable to hear you. With the inability to hear Mr.

Operator

Staphos at this point in time, we don't have any further questions in queue. You may continue.

Speaker 1

All right. Thanks, Leah. George, we'll follow-up with you after the call. But before I wrap up, Jean Michel, any closing comments?

Speaker 2

Thank you, Hans, and thanks, everybody, for joining the call. We remain a cash flow story, and we remain committed to returning $125,000,000 Dividend and share repurchases in 2023. We remain confident in our ability to generate stronger EBITDA and free cash flows through the cycle. We allocate capital increase to increase shareholders' value. We use cash to maintain a strong balance sheet, Return cash to shareholders and reinvest to strengthen our business.

Speaker 2

In short, we're still very confident through the cycle Albert Silvamo?

Speaker 1

Thank you, Jean Michel, and thanks everyone for joining us today. We appreciate your interest in Silvamo, and we look forward to continuing our discussions in the days weeks ahead. That concludes our call for today. Thank you.

Powered by Quartr
Earnings Conference Call
Sylvamo Q2 2023
00:00 / 00:00