Sylvamo Corporation (NYSE:SLVM) Q1 2024 Earnings Call Transcript

Sylvamo Corporation (NYSE:SLVM) Q1 2024 Earnings Call Transcript May 10, 2024

Sylvamo Corporation misses on earnings expectations. Reported EPS is $ EPS, expectations were $1.05. SLVM isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Thank you for standing by. Welcome to Sylvamo’s First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] 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.

Hans Bjorkman: Thanks Liya. Good morning, and thank you for joining our First Quarter 2024 Earnings Call. Our speakers this morning are Jean-Michel Ribiéras, Chairman and Chief Executive Officer; and John Sims, Senior Vice President and Chief Financial Officer. Slides 2 and 3 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. We will also present certain non-US GAAP financial information. Reconciliations of those figures to US 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.

Jean-Michel Ribiéras: Thanks, Hans. Good morning, and thank you for joining our call. Let’s turn to Slide 4, please. As anticipated we experienced improving uncoated freesheet and pulp condition in the first quarter, which resulted in improved order book. Our mill system remain near full capacity and our earnings reflect much less economic downtime. We are making good progress with Project Horizon, our program to streamline overhead manufacturing and supply chain costs. We are on track to meet our year-end run rate target of $110 million in savings. We also continue to return substantial cash to shareholders. We distributed $12 million via the first quarter dividend. And as of today, we’ve repurchased 20 million in shares this year.

Let’s move to the next slide. Slide 5 shows our key financial metrics. We generated adjusted EBITDA of $118 million with a margin of 13%. As expected free cash flow was lower than the fourth quarter due to the timing of year-end payments and non-repeat of the fourth quarter inventory reduction benefit and the payment of annual incentive compensation in the first quarter. Keep in mind that our free cash flow is heavily weighted in the second half. In 2023, we generated almost 90% of free cash flow in the second half, and in 2022 about 75% in the second half. We generated adjusted operating earnings of $1.07 per share. Now John will review our first quarter performance in more detail. John?

John Sims: Thank you, Jean-Michel, and good morning, everyone. On Slide 6, which contains our first quarter earnings bridge. The $118 million of adjusted EBITDA we earned was within our outlook of $105 million to $125 million. Price and mix were better than projected. This reflects the implementation of pulp and paper price increases that we had communicated late in the fourth quarter and early in the first quarter in all regions. Volume decreased by $12 million driven by the normal seasonally weaker demand in Latin America. Volume trends in Europe and North America were favorable as we projected. Operations and other cost improved by $19 million, primarily reflecting lower economic downtime across all regions. Planned maintenance outage costs decreased by $3 million, and input and transportation costs increased by $9 million.

Let’s move to Slide 7. This graph shows our economic downtime over the last five quarters. In the first quarter this year, we took 11,000 tons of economic downtime, which was an 80% decrease from the first quarter of 2023 and nearly a 95% reduction from the peak in the third quarter of last year. Let us move to Slide 8. Uncoated freesheet conditions continue to improve. Our order books have strengthened across all regions versus 2023 levels. We implemented previously communicated price increases in both paper and pulp at all regions as well. We are also experiencing a stabilization of input costs. Let us move to Slide 9. We expect to deliver second quarter adjusted EBITDA of $145 million to $160 million. We project price and mix to improve by $15 million to $20 million primarily reflecting price increase realizations across all regions.

We are also expecting a favorable mix impact in Latin America. We expect volume to improve by $5 million to $10 million driven by seasonally stronger demand in Latin America, plus continued momentum in Europe and North America. Operations and other costs are projected to improve by $5 million to $10 million primarily due to lower operating costs in Europe and North America, as well as lower economic downtime in North America. We expect input and transportation costs to improve by up to $5 million due to better transportation and energy costs in North America, partially offset by unfavorable fiber costs in Latin America. Planned maintenance outages projected to increase by $3 million. Let’s go to Slide 10. In order to remain a low-cost producer of commodity products sold in [mature demand] (ph), cyclical markets, we must become a leaner and stronger company.

That’s why we initiated Project Horizon to streamline our organization and improve our cost structures. We are on track to deliver $30 million overhead cost reductions and to reduce our manufacturing supply chain cost by $80 million before inflation. We have communicated 150 position eliminations globally. Approximately one-third of these have already occurred and nearly all the rest will be completed by the end of the third quarter. We are on track to meet our run rate savings targets by the end of this year. Let’s move to Slide 11. We spent $25 million on planned maintenance outages in the first quarter and expect to spend $28 million in the second quarter. By mid-year, we’ll have spent about three-quarters of the total annual planned maintenance outages costs for this year.

In the second quarter, we will conduct outages in Latin America and North America. We have no planned maintenance outages scheduled for our European mills in 2024. Let us move to Slide 12. We are focused on uncoated freesheet and will continue to create long-term value through our talented teams, iconic brands and low-cost mills in favorable locations. 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 share owners. Let us look at the next few slides for some additional color on each of these 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 million almost 40% since the spin-off and remain below our $1 billion 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 us look at the cash returns to share owners on Slide 14. We will continue to return substantial cash to share owners via dividends and share repurchases. On this graph — as this graph shows since 2022, we have returned $170 million in cash via opportunistic share repurchases. We have repurchased almost 3.5 million 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. 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 million of high-return projects, about $70 million of which we have funded we will have funded by the end of this year. We have now identified another $200 million 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. This slide highlights three specific projects, two at Eastover that we’re already ramping up and one at Luis Antonio that we’ll 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 first quarter, and we project annual savings of $0.5 million with an IRR of 35%. We also started up the evaporator heat recovery system in Eastover. This project will allow us to capture and reuse evaporator heat. We expect annual savings of $1 million with a return of 33%. The third example is the New Turbine Generator in Luis Antonio. This will increase our self-generated power and reduced annual maintenance expenses. We expect annual savings of $2 million with a return of 24%. Jean-Michel, I’ll turn it back over to you.

Jean-Michel Ribiéras : Thanks, John. We are strengthening our ability to create shareholder value throughout the cycle. Sylvamo is a cash flow story, and continues to deliver against our investment thesis. Uncoated freesheet conditions are strengthening across all regions. 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. 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 share owner value. As John discussed, we are reducing our cost structure and we see opportunities to grow earnings and free cash flow. We are confident in our future and motivated by the opportunities that lie ahead. With that, I will turn the call back to Hans.

Hans Bjorkman: Thanks, Jean-Michel, and thank you, John. Okay. Liya we are now ready to take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. And our first question is from George Staphos with Bank of America. Please go ahead.

George Staphos : Hi everyone good morning. Thanks for the details. I want to go to Slide 6 where you have the waterfall. And to look at the end of the date, your performance was in-line with your expectations. 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? Anything to call out either positive or negative? Thank you guys.

John Sims: George, it’s John. Thank you 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. One was a tax paying down in Brazil. And then we had an inventory revaluation that occurred in Europe. So those two things were roughly about $4 million 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 our — into Brazil than we expected. But in general, pretty much in-line with what we expected. Hi George, thanks for joining.

Jean-Michel Ribiéras: [indiscernible] were asking, I think we have a continued momentum of what we have seen in first quarter, which is improvement in every one of the regions. Latin America, the first quarter is 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.

George Staphos: Thank you.

Operator: And next, we go to the line of Matthew McKellar with RBC Capital Markets. Please go ahead.

Matthew McKellar: Hi, thanks. Good morning. Thank you for taking my question. First, could you provide a little bit more color on the $200 million of high-return capital projects you’ve identified? Is there anything you can share over — over what time frame you expect to invest in these projects? What share of the project set would maybe be associated with each geographic segments? And then if there is anything you can share around weighted average IRRs across the pipeline of projects? That would be helpful. Thank you.

John Sims: Sure, Matthew. I think we said on the call that by the end of this year we will have invested in about $70 million. If you look at next year, we probably will spend about $115 million on high-return projects. If you look at the weighted average returns across those projects, it is almost greater than 35% or even higher than what we are showing in return on our share repurchases. But I think the — if you think about — in terms of what we’re spending on — on an annual basis, it’s about that trajectory. So it took us about three years to go through $100 million return projects. Now we have identified another $200 million. We will probably be generally continue at that rate. There are — most of these projects when you look at them on average is about $2 million of 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 getting Board approval that may be above $15 million to $20 million, but those are things that we are still looking at.

Matthew McKellar: Okay. Thanks. That’s helpful. As a follow-up, would that $70 million 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?

John Sims: Yes, some of these high-return projects are driving cost reductions that we are 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 are doing this to strengthen our competitive positions in our core assets across the regions. In terms of the benefit of what we saw in the first quarter, remember, we shared this last time, we clearly expect about bottom line, $10 million to $15 million this year because of $50 million roughly of inflation. So we said Horizon we are going to deliver $110 million of run rate. By the end of this year, we’ll be at that run rate, $50 million of inflation will have to be netted against that.

So we expect $10 million to $15 million this year. And most of that is back-end loaded towards the second half of the year. As we implement these projects and also reduce position. So the bottom answer is that we probably didn’t see much in the first nor the second quarter will be back-end loaded.

Matthew McKellar: Okay, that’s helpful color. Thanks. I will turn it back and get back in the queue.