Sylvamo Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 9, 2024

There are 7 speakers on the call.

Operator

Good morning. Thank you for standing by. Welcome to Silvermall's Second 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, Colin. Good morning and thank you for joining our Sylvamo Corporation Q2 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 also available in the appendix. Our website 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. I'll begin with our sustainability highlights on Slide 4. Our first and greatest responsibility is to ensure the safety and well-being of our team members. We do this by putting people before paper always.

Speaker 2

We're also committed to operating as a sustainable corporation that creates profits for our shareowners, while protecting the environment and improving the lives of those with whom we interact. Continuing CIBAMO commitment for transparent reporting. In the Q2, we published our sustainability report in a new streamlined format. We also expanded the sustainability hub on silvamot.com to communicate sustainable news, regional content, certification and more. I encourage you to visit our website and learn about our sustainability effort.

Speaker 2

Let's go to Slide 5. Now let me go into some highlights of the quarter. We experienced improved uncoated freesheet and pulp conditions. Our mill system ran well as we successfully completed our heaviest plant maintenance outage quarter. We now have almost 75% of our planned maintenance outage for the year behind us.

Speaker 2

We generated strong cash flow and in May, we announced a 50% increase to our quarterly dividend from $0.30 to $0.45 per share that paid out at the end of July. Let's move to the next slide. Slide 6 shows our key financial metrics. We earn adjusted EBITDA of EUR 164,000,000 with a margin of 18%. Free cash flow generation was €62,000,000 and we generated adjusted operating earnings of 1 point $9.8 per share.

Speaker 2

I'm proud of how our teams delivered impressive results while taking care of our customers and successfully executing several plant maintenance colleges across our system. Now John will review our performance in more detail.

Speaker 3

Thank you, Jean Michel, and good morning, everyone. I'm on Slide 7. Over the first half of the year, uncoated pre seed conditions improved from last year. Looking at industry demand across our regions, Europe was up 14%, North America was up 3%. However, Latin America decreased 1%, but this was influenced by a significant drop in Argentina.

Speaker 3

Industry operating rates improved in North America when a supplier permanently converted approximately 4% of uncoated freesheet capacity to pulp at the end of June. A European competitor announced in May, they would close a machine in Germany by the end of the year. This closure will reduce European supply by about 5%. Pulp and vapor prices have moved up across our regions over the first half of the year as well. Excluding pulp, we also saw the stabilization of most input costs, although at a high level.

Speaker 3

Let's move to the next slide. Slide 8 contains our 2nd quarter earnings bridge. The $164,000,000 of adjusted EBITDA was better than our outlook of $145,000,000 to $160,000,000 Price and mix improved by $26,000,000 reflecting the implementation of pulp and paper price increases previously communicated in all regions as well as better mix in Latin America. Volume increased by $8,000,000 primarily driven by sequentially stronger demand in Latin America. Operations and other costs improved by $10,000,000 primarily reflecting a solid operation and seasonally lower cost in Europe and North America.

Speaker 3

Planned maintenance outage costs increased by $4,000,000 and input and transportation costs decreased by 6,000,000 dollars So let's move to Slide 9. We expect to deliver 3rd quarter adjusted EBITDA of $170,000,000 185,000,000 We project price and mix to be slightly unfavorable primarily due to mix. We expect volume to improve by $10,000,000 to $15,000,000 driven by Latin America and North America. Operations and other costs are projected to increase by $10,000,000 to $15,000,000 dollars primarily driven by higher unabsorbed fixed costs from economic downtime in North America and Europe as we continue to manage our production to our customers' demand. We expect input and transportation costs to increase by $5,000,000 to $10,000,000 due to unfavorable fiber in Latin America and energy in North America.

Speaker 3

Planned maintenance outages are projected to improve by $28,000,000 dollars as we have no major planned outages this quarter. We're making good progress on Project Horizon, our program to streamline overhead, manufacturing and supply chain costs. We're on track to achieve our year end run rate target of $110,000,000 in savings. Let's go to Slide 10. We are focused on uncoated freesheet and we will continue to create long term value through our talented team, iconic brands and low cost mills and favorable locations.

Speaker 3

Our capital allocation strategy to maintain a strong financial position, reinvest in our business to improve our competitive advantages and continue to return substantial cash to shareowners. Let's look at the next few slides and talk through each of these uses of cash. Last week, we announced the refinancing of our long term debt to extend our maturity profile. Details are in the 8 ks we filed on August 1 and also included in the appendix. Here on Slide 11, you can see before and after picture of our maturity profile after we redeemed all outstanding 7% notes on September 1.

Speaker 3

Our strong balance sheet provides us the flexibility to address macro conditions, downside risk and to invest in high return opportunities throughout the cycle. Let's move to Slide 12. We will continue to return substantial cash shareholders via dividends and share repurchases. As this graph shows, we initiated a dividend within the 1st year of our spin off after paying down significant debt and strengthening our financial position. In 2023, we more than doubled our regular dividend and then raised it again to $0.30 per share in the Q4.

Speaker 3

We also issued a special dividend of $0.30 per share. This year, we raised our regular dividend by 50 percent to $0.45 per share. Thus far in 2024, we have distributed $43,000,000 via the 3 quarterly dividends and have repurchased $30,000,000 in shares. Let's move to Slide 13. We continue to invest in high return projects to strengthen our business while increasing earnings and cash flow.

Speaker 3

On this slide, you can see how we have ramped up our spending in maintenance, reforestation and high return capital projects since our spin off. At the time of our spin off, we had line of sight on at least $100,000,000 of high return projects, about $70,000,000,000 of which we have funded but will have funded by the end of this year. We have now identified and starting to develop another $200,000,000 of high return capital projects to invest in the coming years. These projects of varying sizes are largely focused on our flagship mills, providing us with opportunities to grow our earnings and cash flow. We expect such investments to generate well above cost of capital return.

Speaker 3

With that, Jean Michel, I'll turn it

Speaker 2

back over to you. Thanks, John. I'll conclude my comments on Slide 14. Silvammo is a cash flow story, and we continue to deliver against our investment thesis. We will leverage our strengths to drive high returns on invested capital, generate free cash flow and use that cash to increase shareowner value.

Speaker 2

Financial discipline is a key component of our strategy. As John discussed, we have refinanced our long term debt to extend our maturity profile. We are committed to return at least 40% of our free cash flow to shareholders this year. We are reducing our cost structure and have a great pipeline of high return capital project, which will enable us to grow earnings and cash flow in the coming years. 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.

Speaker 1

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

Operator

Our first question is from Cole Hathorn with Jefferies. Your line is open.

Speaker 4

Good morning. Thanks for taking my question. 2 from my side. The first one is on wood costs. You called out a bit of cost inflation in Latin America.

Speaker 4

But in the Nordics, we've seen higher wood cost structurally. I'm just wondering what you're seeing in your other markets within Europe in your French mill. Are you seeing kind of a more stable wood basket? And just any colors color you can talk about on wood cost because I think that gives you a relative advantage versus some of the others? And then sticking with Europe, we've seen some changes in market structure with various paper distributors having financial issues and going bankrupt.

Speaker 4

Is that a positive or a negative for SilverBow going forward from here? Effectively, are you able to kind of cut out the middleman in that? I'd love your thoughts there. Thank you.

Speaker 2

So let me hi, and thanks for joining the call. Let me start by the wood cost. The wood cost increase in Brazil, you started by Brazil, is due to all the non the wood we buy. First, we for 2 to 3 years, we need to buy more wood because when we got Silvamu, there had been years where the investment in the forestry was not sufficient. So we made up for this investment and we've cut out.

Speaker 2

So not only we need to buy a little bit more price, but in wood, sorry, and in top of that, it's a little bit more expensive. In Europe, we've seen, as you mentioned, the wood cost of Scandinavia increase. There is some overall wood demand increase, which has impact and Russian Belarus stopped exporting wood chips, which has reduced the overall wood supply in Scandinavia. So increase in Sweden, some increase in Brazil, which will make up for it. Saia is roughly stable and the U.

Speaker 2

S. Is roughly stable on a high level. So that's for the wood side. But I agree with you, we have an advantage with our forester in Brazil and we have very good wood cost in the U. S.

Speaker 2

In the merchant side in Europe, I would say it's neutral to us. We have great partners in Europe and we're glad to have these customers. We're ready if there is some more changes in the merchant area or in the channels. If it has to be more direct, we would be, but I would call it neutral for us one way or another.

Speaker 4

And then if I could have a follow-up, which is just around the demand trends. We saw a lot of restocking across various end markets and graphic paper in general, including office paper saw some restocking. Where do we where do you see we are from an underlying demand perspective? Do you have any good visibility or items to call out on the demand trends by region in North America, Europe and Latin? Thank you.

Speaker 3

Yes, Kola, this is John. I'll talk a little bit about demand. So we have seen restocking in the first half and we talked about that's what drove some of the improvements. If you look at by region for looking at the industry, where we are year to date, we're up about 3% in North America, fourteen percent in Europe. And LatAm was relatively flat.

Speaker 3

Again, there was an issue around Argentina. Going forward, we expect that the demand will be positive for the full year and this is actually consistent with forecast we're seeing from other industry experts. Some of that is driven not because of the restocking, but because of the weak comps to second half. So I would characterize our demand now and particularly in North America and Western Europe is relatively stable. But from a comp perspective, easy comp perspective, it's going to be a positive relative to last year.

Speaker 3

So we're looking at probably Europe around 7%, full year, LatAm around up 3% full year and North America around 5%.

Speaker 2

And on the long trend, I think you talked about that also. We see returning in Europe and North America to long term trends, which is slightly decreased. Thank you.

Speaker 4

Thank you, Paul.

Operator

Our next question is from the line of Matthew McKellor with RBC Capital Markets.

Speaker 5

Hi, good morning. Thanks for taking my questions. I'd like to first just follow on Cole's question around fiber costs in Latin America. Could you maybe just give a little bit more color around what's happening with fiber costs and what your expectations are in terms of what happens with cost of purchase wind in Latin America over the next few quarters?

Speaker 3

Yes, Matthew, thanks. This is John Simms. So where we've seen and just kind of drove what we talked about in terms of valuation of our land in Brazil. We see increased cost of fiber in Brazil. And that's and that we expect that to continue, maybe at the inflation rate.

Speaker 3

But when you compare and when I talk about increased market price, so that's wood that we're not actually harvesting and growing, but when we have to go to the market, it's about 3 times the cost of our own wood. And so that's what's driving some of the cost increases we've seen down in Brazil is what Jean Michel talked about. Right now, our self sufficiency is lower than what we had been historically. We're probably supplying about 70% of our needs. We'd like to be around 85%.

Speaker 3

This is why we're reinvesting and increased our investments in our own plantations. But when you reach out for higher or for market wood, those prices are higher. We're also reaching out to further distances, so you have to pay the additional freight. So that's some of the things that are impacting us in Latin America. But as we said, this is why we're reinvesting or increasing our investments in reforestation.

Speaker 3

And finally, I think your question is the trend. We expect that to increase, continue to increase the cost of fiber down in Latin America.

Speaker 5

Okay, great. Thanks. That's helpful. Maybe next, you called out price mix is somewhat unfavorable for the sequential progression into Q3 mostly on mix. Can you provide us a bit more color there?

Speaker 5

Is that more export mix in paper sales? Is there maybe also an assumption around what happens with pulp prices in there? Any color would be helpful. Thank you.

Speaker 3

Matt, we can't really talk about future pricing, but that variance that we said is predominantly all mix and it is more export mix, particularly in North America. And where is that going? That's going to Mexico. You may be aware that Mexico companies like us that are based in the U. S.

Speaker 3

And companies like us that are based in the U. S. And we're taking advantage of that. So we're exporting more to Mexico and that's what's accounting for the mix change.

Speaker 5

Great. Thanks for the help. I'll turn it back and get in the queue.

Speaker 4

Thank you.

Operator

Next, we'll go to the line of George Staphos with Bank of America.

Speaker 6

Hi, everyone. Good morning. Thanks for the details. Can you hear me okay?

Speaker 2

Yes, George. Hi. Thanks for joining.

Speaker 6

Hey, Jean Michel. Hi, Jean. So two questions to start and I'll go back in queue. Can you give us a little bit more detail on the projects that are in the pipeline now relative to what you have been working on and what the return differential might be or are they basically all still above cost of capital, presumably they're all above cost of capital and the same spread. So any color on how this latest pipeline varies with what's been in the pipeline in terms of processes, approaches and return thresholds?

Speaker 6

That's question 1. Question 2, on the dividend, congratulations on raising the dividend. It was another sizable increase. How did you think about raising it to the degree you did on the regular side as opposed to maybe raising at a lesser amount and then doing a special dividend, what gave you the comfort to raise it the full 50%? Thank you.

Speaker 2

So I'll take maybe the first one and John take the second question, but we could also answer it, I guess. So yes, we still have a very high threshold of capital investment return. So all the projects we're looking at is a strict minimum of 20% return. So this is why it's very attractive. Those projects have of different size, some are very small and some are larger.

Speaker 2

We are studying them, they're in the pipeline and we're working with our Board to plan for the coming years on this investment. But they're very attractive and incremental on both cash and earnings to CIBAMO.

Speaker 3

Yes. And George, the second question goes back to our capital allocation strategy. 1st and foremost, and our priority is to have strong balance sheet. 2nd is, to reinvest back into business where we can grow our earnings and cash flow. And then the third is returning cash to shareholders.

Speaker 3

And core to that is a dividend, a dividend that we have believe and have confidence that we can sustain forever, if you will, and a dividend that doesn't restrict us from a strategic flexibility perspective. So we had a lot of confidence in terms of increasing the dividend and mostly driven by what your first question pertain to. We believe there's opportunities for us to increase earnings and cash flow in this business through smart reinvestments and high return projects going forward, which we're executing right now. And because we have a good line of sight on that and because of our, we believe, competitive advantages we have and in the markets that we operate and give us a lot of confidence to be able to sustain dividend that we put forth.

Speaker 6

John, maybe if I could sort of do a quick tag on and turn it over. Maybe I'm reading between the lines incorrectly, but does that suggest any next dividend increases maybe are more of the special side as you return once again to I mean your balance sheet is in great shape as we sit here at the moment. As you develop the next pipeline and increase presumably the cash generation of the business through reinvestment. Would that be the right way to think about the cadence in staging? Thank you.

Speaker 3

Yes. We don't want to foreshadow that. I think we will we review that and we think about that as we view our strategic strategic plans with the Board. And I think to the extent that we believe that we can sustainably increase the dividend that we'll do that or if we think that there may be better uses for cash such as buying back shares or reinvesting back in the business, we may do that prior to a special dividend or in the case like we did last year, we may issue a special dividend.

Speaker 6

Thank you so much.

Operator

And we'll go back to the line of Matthew McKeller with RBC Capital Markets.

Speaker 5

Thank you. As we get closer to the fall election, what are you seeing in terms of impacts to uncoated free sheet demand as far as you can discern?

Speaker 2

So the balance is always an opportunity for us, but it's not a big volume. So it's something we have largely the capacity between us and our competition in North America to supply. So it's an opportunity, but it's nothing very significant. It's a few sad and torns, not a big deal.

Speaker 3

Okay. Thank you. Matthew, in general, yes, we've seen less of an election impact on coated free seat demand. I mean, it used to be a pretty significant driver, but that's become less and less.

Speaker 5

Okay, fair enough. Thank you. Next, maybe shifting to imports. It looks like they continue to tick higher in North America. Could you just maybe provide some updated perspective here?

Speaker 5

Are imports more of a concern as it relates to how you're thinking about the market landscape today versus how you're maybe thinking about the market at the start of the year?

Speaker 2

So let me maybe give back the history. Imports in North America since 2018 have varied between 8% to 13%. And they really vary depending upon say on freight rates, home market, foreign exchange. So we have been in the same range since early 2023 and even this year. So I think we should always be on the 10%, 13%, something like that range, and I don't read more than that.

Speaker 2

And I think some of the importers to the U. S. Have been done due to freight, some have been done to local markets opportunity send spot. If you look at it, it's interesting because where the imports come in North America, it changes also through the years. It's not always the same regions because it's very opportunistic kind of.

Speaker 2

So I still see it opportunistic and on that range like we have today. Nothing significant change.

Speaker 5

Okay, thanks. That's helpful. And if I could just sneak one more in. I was a little bit surprised to see some economic downtime in the European pulp system in Q2. Could you just provide me a little color on what happened there?

Speaker 4

Say that again, I'm sorry.

Speaker 3

Yes. I'll answer that question. So yes, we had economic downtime both in Europe and North America. And that's just a matter of us matching our capacity to customer demand. So and you look in the outlook, we're expecting a little bit more in the 3rd quarter than we had in the 2nd quarter, but the 2nd quarter we had significant outages.

Speaker 3

So although volumes are up, we're still matching our supply to our customers' demand and we're being careful not to build unnecessary inventories.

Speaker 5

Okay. And just to confirm that that's true of the pulp side as well where it looks like you had a couple of 1,000 tons of economic downtime in Europe and recognizing it's fairly small volumes, but just wanted to confirm.

Speaker 3

I'm sorry, I misunderstood your question. You were asking about the pulp. And that was really driven just by some constraints that we had in balancing our the pulp production with our paper production and nothing more than that. There was plenty of demand for pulp in the Q2. It's just a matter of a misbalance, if you'd say, in our ability to move pulp that we produce to the pulp dryer, we didn't do it.

Speaker 3

So that's what that was. Okay.

Speaker 5

Thanks for everything. I'll call back.

Speaker 2

We can't set how we want involved in Europe. We have no issue at all.

Speaker 5

Thanks very much.

Operator

And we'll go back to the line of George Staphos with Bank of America.

Speaker 6

Thanks so much. So gentlemen, I want to return back to the project line of questioning. Can you talk to the regions that are more likely to see some of this capital? Number 1, I know it's going to be in all three regions. I know it's going to be a mixture, but if there's any way that you could maybe give us some view on where it might be a bit more weighted relative to the size of the business?

Speaker 6

Secondly, can you talk to the degree to which some of the investments will be moving Silvamo further down on the cost curve and that's a presumption. If that's true, what do you do with that benefit? Again, you have a really strong position in the market from a balance sheet standpoint. How are you levering that for the longer term competitively? Thank you.

Speaker 2

So let me answer the first question. We as we mentioned, we intend to invest essentially in our flagship mills. So we intend to invest in our lowest cost mills, which is mostly in North America, Eastover, as you know, and in Brazil, Luis Antonio and in Europe, New Molla. So those are the low cost mills. This is where we intend to continue to invest with high returns.

Speaker 2

In terms of the cash, as we said, we want to continue to give back cash to our shareholders. We have a policy right now of 40% of our free cash flow. If we had more cash, we could give back. We could also which is a good thing, even if we have a low debt right now, we could also reduce a little bit more debt. So we have plenty of opportunity of cash reuse.

Speaker 6

Jean Michel, I guess what I was asking if you can hear me, are some of these projects designed to put you at an even better position versus your peers in the market from a cost curve standpoint or not really? And

Speaker 2

okay? Completely. They are most of them are cost oriented or cost impact. So they are really on that direction. We're in the low cost and we want to be even lower cost.

Speaker 6

Thank you so much.

Speaker 2

Just maybe to finish the discussion with George, let me give you one example of a project we just did. So that gives you that was our Istover mill. We increased our woodchip capacity to boost the supply of low cost wood. This was a $1,200,000 investment. We forecasted to save €500,000 and actually we're saving about €1,000,000 on a yearly basis, it's 35%.

Speaker 2

It's purely cost. So that's one example of cost project we have. Sorry.

Operator

And we'll go back to the line of George Staphos. Your line is open.

Speaker 6

Thank you. Last question from me, gentlemen. So we spent a lot of time on costs and capital and the like and rightly so. What are your customers asking you for now relative to say 6 months and a year ago? How has it changed?

Speaker 6

How are you leveraging whatever commercial requests are coming in to appropriately, profitably at a high return, all that maintain and grow your presence in the market with your best customers? How are you turning that into commercial margin? Thank you.

Speaker 2

I'm trying to make sure I understand what your question, George. I think we've been

Speaker 6

what are your customers asking you for differently now Jean Michel that might have been the case 6 months ago or a year ago? And how are you turning that whether it's service, whether it's SKUs, whether it's whatever online ordering, I mean that's an old one. How are you turning it to higher revenue per ton? Thank you.

Speaker 2

So demand of customers is actually a little bit different in the regions. If you're in Europe, there is more and more demand around sustainability. And the key customers, they want to be aligned with the sustainable companies, which we are very well positioned, especially in Europe. In Brazil, it is more continuing to develop our brands and supporting the importance of the brands because they are our partners. A lot of the merchants in Brazil on cut side are exclusive because they are very common to the brand.

Speaker 2

In the U. S, I would say it's more and more around service. How can we optimize the service and having capacity worldwide and including strong capacity in the U. S. Allow us to bring this unique service and integrations of supply chain.

Speaker 2

I would say those are the trends, if it's what you were asking for.

Speaker 6

Yes. That's exactly it.

Speaker 2

Thank you. Thank you.

Operator

I'll now turn the call back over to Hans Bjorkmann for closing comments.

Speaker 1

All right. Thank you, Colin. Jean Michel, any closing comments?

Speaker 2

So first of all, thanks for joining our call and your question. We really appreciate it. Let me remind you that core to our strategy is managing a strong financial position, reinvesting in our business to increase our competitive advantages and returning cash to shareholders. We're confident in our ability to generate strong earnings and cash flow throughout the cycle. So again, thank you and have a good day.

Speaker 3

Thank you.

Operator

Once again, we would like to thank you for participating in Silvermost's Q2 2024 Earnings Call. You may now disconnect.

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