Sylvamo Corporation (NYSE:SLVM) Q3 2023 Earnings Call Transcript

Sylvamo Corporation (NYSE:SLVM) Q3 2023 Earnings Call Transcript November 9, 2023

Sylvamo Corporation beats earnings expectations. Reported EPS is $1.7, expectations were $1.29.

Operator: Good morning. Thanks for standing by. Welcome to Sylvamo’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, your conference is being recorded. I would now like to turn the call over to Hans Bjorkman, Vice President, Investor Relations. Sir, the floor is yours.

Hans Bjorkman: Thanks, Greg. Good morning, and thank you for joining our call today. 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-U.S. GAAP financial information. Reconciliations of those figures to U.S. GAAP financial measures are available in the appendix. Our website also contains copies of the third quarter 2023 earnings press 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. In the third quarter, we achieved $158 million in adjusted EBITDA and generated strong free cash flow of $150 million — $155 million. We achieved adjusted operating earnings of $1.70 per share. Price and mix, operation and input transportation costs were all favorable to the outlook we provided in our second quarter call. Our third quarter volume was short of our expectations reflecting ongoing China inventory destocking and weaker-than-expected demand. We strengthened our financial position in the third quarter with net debt of $796 million another 1.2x net debt to adjusted EBITDA ratio. We also deposited $60 million in escrow to remove cash return needs related to the Brazil tax dispute in our credit agreement while returning $24 million in cash to shareholders in the quarter.

Slide 5 compares our third quarter key financial metrics versus prior periods. In the third quarter, our earnings were better than our outlook, and we took measures to maximize free cash flow, including selling and administrative cost reduction, shrinking working capital and adjusting the timing of capital spending. I’m proud of our teams collaborated to take care of our customer needs while executing significant economic downtime safely and as efficiently as possible. Now John will discuss our third quarter performance in more detail. John?

John Sims: Thank you, Jean-Michel. Good morning, everyone, and thanks for joining our call. Slide 6 shows our third quarter earnings bridge. As Jean-Michel stated, we earned $158 million of adjusted EBITDA in the quarter, which was slightly higher than our guidance of $130 million to $150 million. Let’s discuss the changes versus the second quarter adjusted EBITDA. Price and mix decreased by $55 million due primarily to lower paper prices in Europe and Latin America export markets as well as lower global pulp sales. Volume increased by $6 million in the Americas, while Europe remained stable. Operations and other costs improved by $1 million with better operating and supply chain results offset by $13 million in higher unabsorbed fixed costs due to increased economic downtime.

Planned maintenance outage costs decreased by $55 million with no major planned outages in the quarter. Input and transportation costs improved by $27 million, driven by favorable fiber, chemical and transportation costs. So let’s move to Slide 7. This slide assumes world graphic paper demand at just over 100 million tons. Here, you can see that uncoated freesheet is the largest and most resilient of all the graphic paper grades. What separates uncoated freesheet? It’s quite simple. Uncoated freesheet has the highest number of end-use applications and is used across all sectors of the economy. Uncoated freesheet is sustainable, affordable and functional. And we believe paper will remain an effective vehicle for education, communication and entertainment for a long time.

Paper plays a critical role in education. Studies continue to show that students of all ages absorb more when reading on paper versus reading on digital screens. In fact, Sweden recently moved students off digital devices and back on to books and handwriting on paper. This is why total demand for uncoated freesheet exceeds the sum of all the other printing and writing grades combined. Let’s turn to Slide 8. We continue to believe that current uncoated freesheet consumption is better than the demand data suggests. The Pulp and Paper Products Council has published data that shows year-over-year changes in estimated consumption versus demand. And on this slide, you can see North American comparisons for 2021, ’22 and the first half of ’23. The Pulp and Paper Products Council, shares our view that coming out of the pandemic, customers were buying more paper than they were using.

And this year, they’re using more paper than they are buying. The situations in Europe and Latin America are similar. Moving to Slide 9. Current industry conditions are starting to show signs of improvement. U.S. advertising is starting to pick back up and the U.S. economy continues to show vitality. And uncoated freesheet with channel destocking nearly completed, we are starting to see increased order entry globally. Pulp inventory levels have improved significantly globally and prices are increasing globally. Slide 10, please. We expect to deliver fourth quarter adjusted EBITDA of $90 million to $110 million. We project price and mix to decrease at a slower rate of $20 million to $25 million primarily reflecting prior paper price decreases in Europe and unfavorable geographic mix in the Americas.

We expect volume to improve by $20 million to $25 million. This reflects seasonally stronger volume in Latin America, the completion of destocking in Europe and North America as well as a new business we picked up in North America. Operations and other costs are projected to increase by $25 million to $30 million, and this is primarily due to higher seasonal operating costs in Europe and North America. We expect input and transportation costs to increase by $5 million to $10 million due to seasonally higher energy. Planned maintenance outages are projected to increase by $25 million as we have outages in all our regions in this quarter. We project adjusted operating earnings of $0.55 to $0.90 per share. This level of fourth quarter adjusted EBITDA may be a bit less than expected, and here’s how I think about it.

At current industry demand, price and input costs the quarter would be $15 million to $25 million higher, adjusting for three factors. First, normalizing for planned maintenance outages. Second, adjusting for higher cold weather operating costs, and third, we’re taking some more downtime to reduce our inventories in the fourth quarter, especially in North America. Let’s go to Slide 11. We compete as a low-cost producer of commodity products sold to mature demand cyclical market. To become a leaner, stronger company, we initiated Project Horizon to streamline our organization and improve our cost structure. Before inflation, we are targeting a run rate savings of $110 million by the end of 2024. About 2/3 of the target will come from operational cost reductions in our mills and supply chains by improving efficiencies, accelerating our cost reduction capital spending pipeline, and reducing direct variable and indirect costs.

The remainder will come from selling and administrative cost reductions, including the elimination of about 150 salaried positions globally or nearly 7% of our salaried workforce. Let’s move to Slide 12 to talk about how we are allocating cash to create value. Year-to-date, through the third quarter, we have generated $190 million in free cash flow. We will continue to maintain a strong balance sheet, return substantial cash to shareholders and create value by reinvesting in our business. During the third quarter, year-to-date, we repaid $36 million of debt and in October, we repaid another $10 million. As of November 9, we have returned $110 million in cash to shareholders and plan to return $125 million this year. Remember, we also deposited $60 million in escrow in the third quarter so we can return more than $90 million.

Our board of directors increased our regular dividend by 20% and declared a $0.30 per share special dividend. We paid both totaling $25 million on October 17. The Board also authorized an incremental $150 million share repurchase program. At the end of the third quarter, the May 2022 and the September 2023 authorization collectively had $167 million remaining. We will continue to look for opportunities to repurchase shares at attractive prices. Jean-Michel, I’ll turn it back to you.

Jean-Michel Ribiéras: Thanks, John. I’m now on Slide 13. In October, we celebrated our two-year anniversary. Who would have thought that we would go through such extreme industry cycles in the first two years. Being a low-cost global producer with strong supply position and iconic brands has positioned us well. We have created significant shareowner value by managing what we can control. First, we have allocated cash to improve our financial position by reducing debt by 35% of $530 million to strengthen our balance sheet. Second, we continue to deliver on our investment thesis. We have earned over $1.3 billion in adjusted EBITDA which is a 19% margin. We also generated $568 million in free cash flow and returned $200 million to shareholders since our spinoff.

Third, we continue to reinvest in our business to strengthen our low-cost assets. We have invested $318 million and are accelerating investment in high-return capital projects. I’ll conclude my remarks on Slide 14. We are strengthening our ability to create shareowner value throughout the cycle. Sylvamo remains a cash flow story, and we are now projecting more than $270 million in free cash flow this year. We are building on our strong supply position while we further develop our strategic channel partnerships. Operational excellence remains key to our performance as we leverage our low-cost assets and Brazilian forestlands. John walked you through our cost reduction initiative, Project Horizon, which will make us a leaner, stronger company.

We understand our efforts to reduce our global strategic position may affect our colleagues whose position would be eliminated. We will help these employees by providing transition service and want to thank them for their service. Financial discipline is very important to us. We will continue to leverage our strength to drive high returns on invested capital, generate free cash flow and use that cash to increase shareowners’ value by maintaining a strong financial position, returning cash to shareholders and reinvesting in our business. We will create long-term value through a talented team, iconic brands and low-cost mills in favorable location. We’re confident in our future and motivated by the opportunities that lie ahead. With that, I’ll turn the call back to Hans.

Hans Bjorkman: Thanks, Jean-Michel, and thank you, John. Okay, Greg, we’re ready to take questions.

Operator: [Operator Instructions] Your first question comes from the line of George Staphos from Bank of America. Please go ahead.

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Q&A Session

George Staphos: Thanks very much. Hi everyone. Good morning. Thanks for the details. The first question I wanted to hit on is with Project Horizon. The deck speaks to about $22 million of run rate savings from the salaried reduction, if I’m reading it correctly, the footnote correctly. In total, what net benefit do you think you’ll be able to get from the program in ’24, recognizing, obviously, it affects a number of people who worked with the organization for a long time and it’s bittersweet, but what do you think the net benefit to the P&L would be from this program in ’24?

John Sims: George, it’s John. To answer your question, we’re talking $110 million run rate by the end of 2024 and we do have on the slide, we’re estimating that inflation for 2024 can be approximately $50 million. So the net benefit in total will be $60 million once we get to the full run rate. In 2024, we’re expecting a net benefit of about $10 million to $15 million.

George Staphos: Second question, what we’ve been seeing in volumes will maybe from an amplitude standpoint is larger and, therefore, worse than expected. It’s not unreasonable based on history, it’s fairly consistent. We’re seeing big drops in demand in very large economic downturns or deceleration. Whether or not we’re in a recession, certainly from the companies that I look at over the last year or so, the volumes have been such where I think packaging paper has been basically in a recession. And what you normally then see though is not a real rebound in demand, rather, the world learns to be more productive and you have a new demand level for uncoated freesheet. What do you think in terms of where we are right now in terms of any further demand destruction that we may see or may not.

Hopefully, it’s resolved. And what — if you had to estimate at this juncture, what do you think your shipments, your demand will look like in ’24 by market year-on-year if you can provide that?

Jean-Michel Ribiéras: It’s Jean-Michel. Thanks for joining the call. I think, as you said, we’ve added in our cycle some more strong numbers sometimes decrease due to economical factors, due to COVID, due to multiple factor. Even if you take ’23 strong decrease, we are still in our trend back to 4% to 6% in the U.S. downturn and back to 3% to 4% down in Europe. I think we are on this trend, and we’re going to continue to be on this trend. What happens is when you have strong elements like inventory correction you’ve seen this year, you could kind of think it is much worse than this trend and numbers show it’s not. ’24, it’s difficult to predict. What we do know in ’24 is we do not expect to have the inventory correction again. So when you compare it to ’23, it should probably look better, but on the trend, demand deep, I think there is no change. It’s still a minus 5% globally.

George Staphos: Sorry, go ahead, John.

John Sims: I was just going to add one more comment to that is this is — I think we agree with what you’re saying. And to the extent for North America and Europe, Latin America, the demand is down, but most of that is all due to inventory corrections. So I just must focus that for one part of our market, we’re not seeing that recessionary type decline that you referenced.

George Staphos: So should we expect on a year-on-year basis that demand should match consumption in ’24? Or would you expect some inventory rebuild such that you might actually see some year-on-year increases in percentages for the grades? And my last one, I’ll turn it over. Can you talk about the — you indicated you had a new win in North America, if I heard you correctly, if you could talk to that? That would be great. And I’ll be back in queue.