Sylvamo Q1 2024 Earnings Call Transcript

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May 10, 2024

There are 6 speakers on the call.

Operator

11. We spent $25,000,000 on planned maintenance outages in the Q1 and expect to spend $28,000,000 in the 2nd quarter. By mid year, we'll have spent about 3 quarters of the total annual planned maintenance outages cost for this year.

Operator

In the Q2, we'll conduct outages in Latin America and North America. We have no planned maintenance outages scheduled for our European mills in 2024. Let's move to Slide 12. We are focused on uncoated and will continue to create long term value through our talented team, iconic brands and low cost mills in favorable locations. Our capital allocation strategy is to maintain a strong financial position, reinvest in our business to improve our competitive advantages and continue to return substantial cash to share owners.

Operator

Let's look at the next few slides for some additional color on each of the cash. Slide 13 shows our commitment to maintaining a strong financial position to allow us to operate and invest throughout the cycle. We have reduced our gross debt by 580,000,000 dollars almost 40% since the spin off and remain below our $1,000,000,000 target. This healthy position allows us to retain flexibility to address macro conditions, downside risk and to invest in high return opportunities across the cycle. Let's look at the cash returns to shareholders on Slide 14.

Operator

We will continue to return substantial cash to shareholders via dividends and share repurchases. On this graph as this graph shows, since 2022, we have returned 170,000,000 opportunistic share repurchases. We have repurchased almost 3,500,000 shares or 8% of our initial shares outstanding at an average price of just over $49 per share. These repurchases show a return of 35% based on a share price of $65 We will continue to look for opportunities to repurchase shares at attractive prices and to also return cash via regular and special dividends. All right.

Operator

So let's shift gears and discuss reinvesting in our business on Slide 15. We will continue to invest in high return projects to strengthen our business and increase our cash flow. At the time of our spin off, we projected at least $100,000,000 of high return projects, about $70,000,000 of which we have funded we'll have funded by the end of this year. We have now identified another $200,000,000 of high return capital projects, which will allow us to grow our earnings and cash flow in the future. We expect such investments to generate well above cost of capital returns.

Operator

This slide highlights 3 specific projects, 2 at Eastover that are already ramping up and 1 in Luis Antonio that will start up later this year. In Eastover, we had the opportunity to take advantage of a new supply of low cost wood chips. This project started up in the Q1 and we project annual savings of $500,000 with an IRR of 35%. We also started up the evaporator heat recovery system in the East. This project will allow us to capture and reuse evaporator heat.

Operator

We expect annual savings of $1,000,000 with a return of 33%. The third example is a new turbine generated in Louis Antonio. This will increase our self generated power and reduce annual maintenance expenses. We expect annual savings of $2,000,000 with a return of 24%. Jean Michel, I'll turn it back over to you.

Operator

Thanks, John.

Speaker 1

We are strengthening our ability to create shareholder value throughout the cycle. Silvano is a cash flow story and continues to deliver against our investment thesis. Uncoated free sheet conditions are strengthening across our region. Our system is still running near full capacity and our price and mix continues to improve. As a result, our earnings are improving from the bottom of the cycle.

Speaker 1

Financial discipline is a key component of our strategy. We continue to leverage our strength to drive high returns on invested capital, generate free cash flow and use that cash to increase shareowner value. As John discussed, we are reducing our cost structure and we see opportunities to grow earnings and free cash flow. We're confident in our future and motivated by the opportunities that lie ahead. With that, I'll turn the call back to Hans.

Speaker 2

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

Speaker 3

Thank you. And our first question is from George Staphos with Bank of America. Please go ahead.

Speaker 4

Hi, everyone. Good morning. Thanks for the details. I want to go to Slide 6, where you have the waterfall. And look, at the end of the day, your performance was in line with your expectations.

Speaker 4

The guidance looks at least in line for 2Q with where the Street is. So congratulations on all that. But on ops and other costs, there was a slight sort of miss, if you will, versus the midpoint of the range. And just because of the performance being in line or better elsewhere, just curious what was driving that? And then if you could maybe to start off and warm up, across the regions, how was performance relative to your expectations across North America, Europe, Latin America, any things to call out either positive or negative?

Speaker 4

Thank you, guys.

Operator

George, it's John. Thanks for your question. We were slightly below our range in ops and we had a couple of things that were not planned or not forecasted. 1 was a tax laying down in Brazil. And then we had an inventory revaluation that occurred in Europe.

Operator

So those two things were roughly about $4,000,000 that would have put us closer into our range. In terms of expectations by regions, we were close to where we thought we were across all the regions a little bit better, maybe in Europe and also in North America, a little bit less. And still, mostly because of a mix issue, we ended up selling more into export markets and less into Brazil than we expected. But in general, pretty much in line with what we expected.

Speaker 1

Yes. Hi, George. Thanks for joining.

Speaker 4

Hi, Jonny.

Speaker 1

In terms of outlook, you were asking, I think we have a continued momentum of what we've seen in Q1, which is improvement in every one of the regions. Latin America, the Q1 seasonally always the weakest one, so it should come up. The rest is just continuing to progress and you can see it in our outlook. Thank you.

Speaker 3

And next we go to the line of Matthew McKellar with RBC Capital Markets. Please go ahead. Mr. McKellar, do you have your phone muted?

Speaker 5

Hi, thanks. Good morning. Thank you for taking my questions. First, could you provide a little bit more color on the $200,000,000 of high return capital projects you've Is there anything you can share over what time frame you'd expect to invest in these projects? What share of the project set would maybe be associated with each geographic segments?

Speaker 5

And then if there's anything you can share around weighted average IRRs across the pipeline of projects that would be helpful.

Operator

Thank you. Sure, Matthew. I think we said on the call that by the end of this year, we'll have invested in about $70,000,000 If you look at next year, we probably will spend about $115,000,000 on high return projects. If you look at the weighted average returns across those projects, it's almost greater than 35%, so even higher than what we're showing return on our share repurchases. But I think the project if you think about in terms of what we're spending on an annual basis, it's about that trajectory.

Operator

So it took us about 3 years to go through $100,000,000 return projects. Now we've identified another $200,000,000 We'll probably generally continue with that rate. There are most of these projects when you look at them on average is about $2,000,000 a capital project on average, returning well above 20% internal rates of returns. There are several projects that we need to continue to evaluate and of course, get Board approval that may be above $15,000,000 $20,000,000 but those are things that we're still looking at.

Speaker 5

Okay, thanks. That's helpful. As a follow-up, would that $70,000,000 for this year be encompassed within Project Horizon? And then just on Project Horizon more generally, could you maybe talk about how much you may be achieved on an annualized run rate basis in Q1 and how much incremental benefit you might expect in Q2?

Operator

Yes. Some of these high return projects are driving cost reductions that we're seeing, particularly in our manufacturing. So they are incorporated into our targets for Horizon and also will be part of our strategy going forward as we say we're doing this to strengthen our competitive positions in our core assets across the region. In terms of the benefit of what we saw in the Q1, remember we shared this last time, we clearly expect about bottom line $10,000,000 to $15,000,000 this year. So because of $50,000,000 roughly of inflation.

Operator

So we said Horizon, we're going to deliver $110,000,000 of run rate by the end of this year. We'll be at that run rate. Dollars 50,000,000 of inflation will have to be netted against that. So we expect $10,000,000 to $15,000,000 this year. And most of that's back end loaded towards the second half of the year as we implement these projects and also reduce position.

Operator

So the bottom answer is that we probably didn't see much in the first nor the second quarter will be back end loaded.

Speaker 3

And we have a follow-up from George Staphos with Bank of America. Please go ahead.

Speaker 4

Hi. Thanks for taking my question. I know it's a little difficult to talk about this sort of thing live Mike, but some of the other producers in North America have either scaled back and or we've heard from our trade contacts had some operating issues in the Q1 where they had outages, perhaps not planned. Has that been a material driver of your business? And if so, should we be

Speaker 1

to the

Speaker 4

extent possible maybe trying to build in some cushion should that business leave that entered earlier in the year, leave you later in the year and into 20 25? How would you have us think about that conceptually? And then second question I had and then I'll turn it over. I know you're not guiding on Q3 yet. We do know what the maintenance guide is.

Speaker 4

Are there any other significant bridge items that you would have us at least conceptually think about as we think about 2Q to 3Q? Thank you.

Speaker 1

George, if you don't mind, I'll ask you to repeat your first question because I think I didn't get the first question. I can answer the second question. On the high level. So the math thing is the math math, as you said. The other thing, as we always say, is the second half is a much better seasonality in Latin America than the first half.

Speaker 1

So if I had to guide on 2 things, which maybe is important, I'll lose 2. And then, of course, the continuation of improvement that we've seen in the first half or first quarter of this year. So the momentum, LatAm and the outage is probably a good way to look at it. And I'm sure

Speaker 4

Jean Michel, you mean momentum, LatAm and what was the other thing you said?

Speaker 1

Momentum in general in the Suez region. Yes. And the RAG, as you mentioned. Yes.

Speaker 4

Yes. No, my first point, we had heard some of the other free sheet producers had some operating issues in the 1st portion of the year. I think there was one that was in the press with an I think an unplanned outage. Did any of that business accrue to you? And if it did, does it go away once those producers are back running more normally?

Speaker 4

I guess, is a substance of the question?

Speaker 1

Yes. We heard about it too, and we just saw the first estimate of operating rate for the month of April and the statistic is saying it was 96%, which is very high. But I don't think we can put a direct relation between our order book and what happens to our competitors. I think those 2 are independent. Okay.

Speaker 1

Thank you.

Speaker 3

And we go back to a follow-up with Matthew McKeller with RBC Capital Markets. Please go ahead.

Speaker 5

Hi, thanks. I think you talked about upward pressure on the cost of your wood fiber in Sweden in 2023. And I think you also mentioned expecting continued headwinds on the cost of fiber in Latin America, at least in the near term here. Can you talk about what the latest trends are in each country and maybe talk about whether you expect any moderation in wood fiber costs as 2024 progresses?

Operator

Yes, Matt. It's the situation in Sweden, the wood cost continues to be elevated. Remember, we said that the reason for that is higher demand for wood for bioenergy and also the Russian situation and a lack of exports from wood. It is stabilized, but it's stabilized at a higher level. So we're not seeing increases in Sweden, but we're not seeing where we're seeing decreases, so it's pretty much stabilized there.

Operator

And same thing in Brazil. Brazil wood prices have certainly increased on the open market side. And that also is stabilized, but stabilized at higher rates.

Speaker 5

Thanks. That's helpful. And if I could sneak one more in, are you seeing new opportunities in Mexico that you could serve from either the U. S. Or Brazil with Mexico imposing import duties and uncoated free sheet from China and Indonesia?

Speaker 1

So the Mexico side is a balance for us because we had some export from Brazil, which is going to be taxed and it's created opportunity from North America. So net net, I think it's when we looked at it, it's more opportunities than anything, but it's been a balance between the 2. But yes, you're correct. That's probably an opportunity which we are seeing to export more from North America to Mexico.

Speaker 5

Okay. Thanks for the color. I'll turn it back.

Speaker 3

We do have another follow-up from George Staphos. Please go ahead.

Speaker 4

Hi, everyone. Just last one for me. Just number 1, if possible, could you give us a quick snapshot on capacities by region, paper versus pulp? And if it's in the deck or in the coming Q, we'll wait and or look. But if you had that quickly, that'd be great.

Speaker 4

And then what did you say the headcount reduction is with Horizon for this year in total? I recognize a third is already done from what you said, but what was the number that you cited for the year? Thank you guys.

Operator

George, for the number for the I'll answer the Horizon question first, 150 positions and that is the cost globally. And from the capacity perspective, we have it by region is, for uncoated, so I'll give these numbers to you. So for uncoated papers in Europe, it's 765 1,000 for market pulp in Europe, it's 130. In Latin America, it's 1,100,000 for uncoated free sheet, dollars 165 for market pulp. And in North America, for our facilities, it's $975,000 for uncoated freesheet and $115,000 for market pull.

Operator

But remember, we have a supply agreement with International Paper. So with the supply agreements for both Georgetown and Riverdale, it's 600 and 55,000 of uncoated free sheet.

Speaker 4

Thank you so much. And that

Operator

is in the appendix. Yes.

Speaker 4

Thanks very much.

Speaker 3

We have no other questions. I'll now turn the call back over to Hans Bjorkmann for closing comments.

Speaker 2

Thanks, Leah. Before we wrap

Speaker 1

up the call, Jean Michel, any closing thoughts? Just a few. So first of all, thank you for joining the call. As we've demonstrated since this spin off, we've maintained a balance between a healthy financial position, returning cash to shareholders and reinvesting in our business, and we continue to go to the same direction. 4th to our strategy is reinvesting in our business to increase our competitive advantages.

Speaker 1

We're confident in our ability to generate strong earnings and cash flows throughout the cycle and looking forward for the Q2 and this year. Thank you very much.

Speaker 2

Thanks for joining us today. We appreciate your interest in Sylvamo and we look forward to continued conversations in the coming weeks months.

Speaker 3

Once again, we'd like to thank you for your participating in Silvamo's Q1 2024 earnings call. You may now disconnect.

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