Q4 2023 Sylvamo Corp Earnings Call

Participants

Hans Bjorkman; VP of IR; Sylvamo Corp

Harman Dhatt; Analyst; RBC Capital Markets

Presentation

Operator

Good morning, and thank you for standing by. Welcome to Silver almost Fourth Quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, you will have an opportunity to ask questions to ask a question. Please press one then zero on your telephone keypad. To withdraw a question, please press one then zero. Again, as a reminder, your conference is being recorded. I would now like to turn the call over to Hans Bjork, Mann, Vice President, Investor Relations. Sir, the floor is yours.

Hans Bjorkman

Thanks, Greg. Good morning, and thank you for joining our fourth quarter and full year 2023 call today. Our speakers this morning are Jean-Michel Riviera's, Chairman and Chief Executive Officer. And Johnson, 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.

Thanks and good morning, and thank you for joining our call. Let's turn to Slide 4, please. 2023, we created value for shareowners by managing what we could control as we executed our three-pronged strategy of commercial excellence, operational excellence and financial discipline to strengthen our competitive advantages in our core uncoated freesheet market. First, we allocated cash to improve our financial position by repaying $76 million in debt, achieving a net debt to adjusted EBITDA of 1.2 times.
Second, we continued to deliver on our investment thesis. We earned $607 million, adjusted EBITDA generated $294 million in free cash flow and returned $127 million in cash to share owners.
Third, we reinvested to strengthen our low-cost assets. We invested $210 million and continued to accelerate investment in high-return capital projects. We also acquired the five and to Numara made in Sweden for $167 million. This is a great asset with a talented team. The mill is performing well and we are benefiting from the $40 million both mill modernization project that was completed just before the acquisition in a tough market. The mill generated about $50 million in cash before any allocated overhead.
Slide 5 highlights our 2023 full year key financial metrics. Our adjusted EBITDA was $607 million, which was a 16% margin. Our $294 million of free cash flow was more than $7 per share in 2023, our free cash flow was heavily weighted to the second half of the year. We generated almost 90% of free cash flow in the second half. You may recall that in 22, we generated about 75% of free cash flow in the second half of the year. Our adjusted operating earnings were $6.51 per share regarding our 20 C. financial results as solid considering uncoated freesheet industry conditions that were more favorable than expected as we enter 2024, we are confident in our ability to continue to create value well customers and share owners.
Slide 6 shows our fourth-quarter key financial metrics. Adjusted EBITDA was $117 million with a margin of 12%. We generated $104 million in free cash flow as we continue to optimize our working capital by adjusted operating earnings were $1.16 per share. This strong performance even during challenging industry conditions demonstrates our agility and ability to adapt. I'm proud of our teams collaborated to meet our customer needs and maximize cash.
Now John will review our fourth quarter performance in more detail. John?

Thank you, Jean-Michel. Good morning, everyone, and thanks for joining our call. Slide 7 shows our fourth quarter earnings, which are $117 million of adjusted EBITDA was higher than our outlook of $90 million to $110 million. Let's discuss the changes versus the third quarter. Price and mix decreased by $25 million, largely due to earlier paper price decreases in all regions as well as unfavorable mix in Latin America and North America. Paper prices was stable in the fourth quarter in all regions. Volume improved by $20 million due to seasonally stronger volume in Latin America and positive trends. And both Europe and Latin and North America operations and other costs increased by $12 million, primarily due to higher seasonal operating costs in Europe and North America, as well as unexpected reliability issue with a third-party energy provider at our Xi'an mill, which had a $5 million impact. This issue has been resolved, and we're working to recover the full amount. These negative impacts were partially offset by lower economic downtime cost versus the third quarter planned maintenance outage costs increased by $25 million with planned outages and all three regions and in transportation costs improved by $1 million, driven primarily by favorable chemical costs more than offsetting seasonally higher energy costs.
Let's move to Slide 8. So and industry conditions are showing signs of improvement in Europe and North America. We continue to see improving order book as well as lower import levels in Latin America, we expect seasonally weaker demand in the first quarter. Keep in mind in Latin America, historically, demand is sequentially stronger at each calendar quarter. We also expect improving demand for facility in exports to other Latin America and offshore markets.
Let's go to Slide 9. We expect to deliver fourth quarter adjusted EBITDA of $105 million to $125 million. We project price and mix decreased slightly, about $5 million to $10 million in the fourth quarter. We communicated pulp and paper price increases to our European and Latin American customers effective in January. We do, however, expect some price and mix erosion in North America and as usual, in the first quarter, we expected unfavorable seasonal mix impact and Latin America. We expect volume to decrease by $10 million to $15 million, reflecting seasonally weaker industry demand quarter and Latin America operations and other costs are projected to improve by $20 million to $25 million, primarily reflecting lower economic downtime. We expect input and transportation cost increased by $5 million to $10 million due to increased transportation costs, mostly in North America and higher fiber costs in Latin America. Planned maintenance outages are projected decreased by $3 million.
Moving forward, we will continue to provide quarterly earnings guidance and selected annual financial metrics as shown on Slide 17. In the appendix on the advice of our high conviction, long-term shareholders will no longer provide full-year guidance for earnings of free cash flow. They have encouraged us to discontinue annual guidance and to continue our focus on growing long-term shareholder value shareholder value.
But let's go to Slide 10. We continue to reinvest to strengthen our low-cost asset, and we'll find high return projects to increase our earnings and cash flow.
Our 2024 capital spending outlook includes $125 million to $130 million of maintenance and regulatory spending as low as $30 million to $35 million for high return projects for Brazilian forest land or significantly, our significant competitive advantages. The eucalyptus plantations provides a material cost advantage relative to most other global competitors. In 2023, we invested $34 million, and this year, we'll invest $35 million of forest land to increase our self-sufficiency and reduce our wood costs. We are also investing $20 million this year, $12 million in 2025 for a three year third-party wood supply agreement to ensure adequate supply in 2024.
Through Slide 26, let's look at slide 11 for additional detail. Our Brazilian forest land. We source the majority of our well in Brazil from our owned and managed wood and supplement that with open market purchases. Most of our wood needs comes from Martin Forrest Lennon from strategic long-term partnerships, our owned and managed would have the capacity to produce. I'll provide another 80% to 90% of our total would need employees land close to our mill. However, several years of reduced planning, combined with natural causes largely droughts and fires. What does the harvest to early these factors increase the amount of market would require to meet our needs. We are currently purchasing about 25% of our award from the open market, and this would cost two to three times our owned fluid, the increase in reforestation capital and a three year wood supply agreement will enable us to return to about 85% owned and managed was by 2027.
Let's move to Slide 12. In addition to providing global competitive advantages of Brazilian oil brands have significantly increased the value and the fourth quarter we commissioned a third party to appraise our forest land in December. They valued it at about $1 billion at the current exchange rate. The updated valuation reflects an increase of about $600 million from our 2021 appraisal done by the same firm increasing demand for land wood in Brazil has driven this increase in valuation. Our plans are not only towards the global competitive advantage, but also an enduring repository of shareowner value. Dermacell I'll now turn it back over to you.

Thank, Joe. I'm on slide 13. We are a cash flow story. We have generated substantial cash over the past two years. And importantly, returned $90 million in cash to shareholders in 22 and $127 million in 2023 last year. We also deposited $60 million in escrow, which allowed us to return more than the $90 million limit in our credit agreement.
Returning cash to shareowners remains a key component of our capital allocation strategy. In 2024, we expect to return at least 40% of free cash flow to shareholders.
Slide 14, please. We are confident in our ability to continue to create long-term shareholder value by executing our strategy and delivering on our investment thesis. We believe in the promise of paper for education, communication, entertainment, and we intend to increase our competitive advantages in the market we share. So we are a low-cost global producer with strong supply position, iconic brands and talented teams. We'll leverage our strengths to drive high returns on invested capital and generate free cash flow. We use that cash to increase shareholder value by maintaining a strong financial position, returning cash to shareowners and reinvesting in our business. We are confident in our future and motivated by the opportunities that lie ahead.
With that, I'll turn the call back to Hank.

Question and Answer Session

Hans Bjorkman

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

Operator

Okay. If you would like to ask a question, please press one then zero on your telephone keypad. To withdraw your question, press one then zero. Again, we do ask that you limit yourself to one question and one follow up question.
Thank you.
One moment, please, for your first question. Your first question comes from the line of George Staphos from Bank of America.
Please go ahead.

Hi, everyone.
Good morning. Can you hear me okay, again.

Morning, George.

How are you? Thanks for the details. I'll ask my two question and get back in queue. First of all, I know you're not giving guidance past the first quarter, but how repeatable are the trends and what you're doing and operations and other costs? They seem to have been a source even with some some offsets that you talked to seem to be a source of positive variance in the fourth quarter for you?
It's certainly a positive bridge item in the first quarter. You know how how much longer can that go and how much is the cost reduction program driving that? That's question number one, a question number two, to my recollection of the first time in a while that you've talked about the timberland values in Brazil and given our experience over the years covering the Latin American producers, that connection to Timberland is a source of competitive advantage, a source of process improvement. Are you suggesting that over time this would be something you could disconnect from the portfolio or do you see this as a reason why you should be able to maintain your position, grow, grow profitably and either way not being sort of underplayed is being underappreciated within the market? How should we think about what you're trying to say on timberlands here?

Thank you, Joe. always done by your second question and John will take the first one. So we thought our timberland is key to our competitiveness, and it's really a key advantage. The reason why we updated appraisal there is we think it was undervalued, and that's the only reason we continue to invest in it. And I think this is a base of exactly, as you mentioned, of long-term competitiveness, which we count out of fiber is key in our paper advantage.

Dominik will take your second question then comes the Australians number two when we have the bulletin board. So what we talked about, Tom, I think it's important to note is that our order books have improved across all regions sit here today. In fact, we're running full in both Europe and Lat-Am and with less significantly less economic downtime in North America. And that has driven a lot of the operational room because of order downtime, and we're absorbing more of the fixed costs that we had the first half of last year.
Second thing that we are continuing to start to get the benefit of some of this high return cost reduction capital that we started to invest in its sweet spot, but really didn't start ramping that up until next year.
And I think third, we talked about we called Project Horizon. That's our cost reduction program with both operations, supply chain and S&A. And we started seeing some benefit of that a little bit in the fourth. We expect to see a little bit in the first quarter, but really that's going to really start ramping up through the balance of the year.

Hey, John, forgive me just a point of clarification. You said on the reduction in unabsorbed costs. If I heard you correctly, you're going to see more of that this year or more I just want to make sure I heard the cadence on that correctly. The phone cut out.

Yes. So if you look at even in Q4 and you'll see in the appendix we took about 90,000 and that lack of order downtime in the fourth quarter.

Got it.

And what I said was in the first quarter of that is some what was driving the operations outlook that we gave because we're running more for right now in the first quarter than we were.

But. Okay. Thank you.
I've got that.

Operator

I'll be back if there are any additional questions, please press one than zero. Next we'll go to the line of Carmen Dahl from RBC Please go ahead.

Harman Dhatt

Hi, good morning. Thanks for taking my question. This is Harmon filling in for Matt. And the color on I guess one quick question I had was just around And apologies if this was mentioned in the first question, I had some technical difficulties. But with the high return projects that the Company looking out in 20, are you able to share any incremental details on what sort of things you're pursuing and and how that could shake out in terms of increased margins or even potentially supporting more cost reductions as you've outlined with the Project Horizon?

Yes. I mean and thanks for joining the call off to pass our congratulations over to Matthew. Understand quite well. Having a baby is they don't give you an example.
We have. So this also talks about really the agility. I think we have as a company because of a single focus on uncoated freesheet. But there was a large mill that was shut down and South Carolina and Charleston and it was a loyal consumer, of which one of them significant cost reduction projects we'll be investing in this year is increasing our capacity to handle ships and in our mill at East over so that we can take advantage of the increased supply now that come about because of that mill closure. And so those are some of the type of projects we have done. In fact, just recently, we completed it chemical recovery project in East Dover. That has also we've already started seeing results pretty significant returns in terms of cost reduction that we started experiencing here even in January. Typically, these projects that we have with targeted almost $30 million of high return projects will return to well over 20% returns are much higher than that, as you know.

Harman Dhatt

That's. That's great. That's helpful color on. And I suppose I'm just, I guess, more broadly on the Red Sea crisis, would you be seeing additional European product show up in North America given the increased cost of reaching Asian markets from Europe.
I guess last check we've received sort of said that North American outbound shipping costs have been somewhat flat, but inbound are up. So we were just hoping to get some more perspective on the at home.

And I'm sorry to tell them what the implications could be in terms of the growth, what we are seeing right now, Europe is decreased imports. It's some of the transit times coming from Asia. It's almost increased about four weeks, we would stand for it imports from Asia to get into the Europe. So that could have an impact of that actually decreased imports in Europe, which then means that more domestic supply has to be stay onshore to service that need. But down, I would say right now, it's hard to tell what the what the impact of the wet season can be it's certainly increasing freight costs. So all exporters see a decrease, freight costs as well as Victor.

And concerning what you asking about Europe export overseas, we export very little from Europe to overseas. We our production in Europe was the remaining Europe, and we have a very few going to Middle East Africa. So it's really not impacting us so far significantly.

Harman Dhatt

Got you. No, that's helpful. And yes, thanks again, Paul.
Come back.

Operator

Next we'll go back to the line of George Staphos from Bank of America. Please go ahead.

Yes, thank you very much just on that on that point, it was raised from just before I know you aren't really quantifying it, but is the impact from Asia if there is a positive on reduced imports into Europe, more on converted products on more or more on?
Yes, cut-size and graphic papers overall That in turn, is leading to better demand for you and or your customers?

Mostly, I would say, George, that cut size, this was the easier to export that mostly you see from Asia, our cut-size yesterday in the Wall and the offset business because of the various sizes that you have to have, it's much more difficult for any exporter. That Matter stays that way. It will be on the wall between the commercial pretty okay.

And John, Jean-Michel out my next question and I'll come back in queue again related point. So to the extent that we've seen pulp prices continuing to rise in Europe, recognizing Asia, we're starting to see them fade a bit. Has that cost curve, let me say differently, has the cost curve shifted sufficiently, where that's also beginning to have an impact on supply within Europe by either curve shifted. Some of your nonintegrated peers are having some difficulty producing or really that's that's not really having much of an effect at this juncture from what you can see?

I think, George, it's a good question. I think it's impacting new from the truck. The bulk prices in euro have gone up EUR160 from last year, trusted today. So it is for sure impacting the nonintegrated players in Europe. And that's maybe one of the the reason why we're seeing operating rates back up high in Europe and having a very strong demand, it might be impacted. We also know the inventory correction in Europe is behind us and the industry inventory are quite low, actually, right now in paper, so multiple factors. But pulp price has an impact, yes, change.

And ultimately, look, I realize it's our job, not yours, but to the extent that you have a view on this. Is there kind of a view in terms of how much now is kind of in the red in terms of industry production relative to the cost curve and if you don't have a view.
That's fine. I just thought I'd ask if you had any share.

I don't, but I would I don't have the number precisely. So all I can make is the noise maybe I guess a very high level, I guess, and it might be about 10%.

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

Operator

Once again, if you have a question, please press one than zero.
Yes. And we'll go back to the line of George Staphos.
Please go ahead.

I guess on to the extent that there's been some pricing reductions in North America as memory serves, at least in terms of published indices. How much of that if you can quantify recognizing you're not tied to receipt in your contracts per se, but how much of that is baked into your guidance on if anything, at all for the first quarter? And I know to the extent that you could size it broadly, how much would be something we need to make sure we model for over the rest of the year, recognizing you're not guiding on 2Q to 4Q?

So George, I cannot give you an exact price, but I can give you a trend. We still have the same reserve reports you did as you do you mention it, we do not report to our pricing to Visy. I will say on a trend we might have the direction correct. But we have seen in the past and in absolute value, we see differently so in our outlook, mostly from that quarter, actually, we explained that we expect slight erosion in North America, not a huge one. That's like one of the symptoms we expect because of two of price increases announced to our customers in Europe and in Brazil and LatAm, we expect price increase on the other regions.

Okay. And then back to Europe, and I'll turn it over to the performance for the quarter was somewhat below our expectations. Now that's neither here nor there that's our forecast versus your actual, but was performance in Europe as you had expected in terms of that loss? And what if we again, you're not guiding for the full year, but should we expect that ultimately Europe should be breakeven or better for this year? And what are the bigger bridge items two to get you there, if in fact that's your assumption. Thank you.

Yes. So 23, as you know, in Europe was difficult. It was addressed in terms of demand at the prices of pulp, which affect a lot of Oscient mill went down. We had an annual outage in Saia, which costed us $20 million with an annual outage in the fourth quarter and pneumonia. We had an issue with the turbine we mentioned in the SAG mill, which is our now which costed us $5 million, and it was really the trough of the cycle in terms of prices. So we clearly see 24 rebounding significantly and hope to very soon be talking about positive earnings for Europe. So we're quite positive about Europe. It's more cyclical than any other businesses. So sometimes it's a bit frustrating. But on average, we really believe Europe will be good, normalized, performing very well sized performing well on the order book, as I mentioned, is food and we've seen price increasing. So Europe is rebounding significantly. It's a tailwind for us for 24.
I do want just to add onto that. You know, how do you say that it was a trial, but it was a significant we think about in terms of demand decline that we had in Europe, it was even worse in COVID. We will forget how much volume on and shipments were down and also pulp prices value-added one-third of its capacities of facilities to a certain extent more exposed to the cyclical pulp prices than other than our other mills. But as a result of that, and we said earlier. We're currently running full right now in and in Europe and through that, that's a very positive. We also the price going up both the paper and pulp business. I think that's helped us with pulp prices going up already almost $160 per ton trough would indicate that Europe would be better.

Thank you, Dan.

Operator

Next we'll go back to the line of Herman Dahl from RBC.
Please go ahead.

Harman Dhatt

Hi, thanks.
I just had a couple of quick follow ups on the cost reduction plan and apologies if it was mentioned earlier, I had some technical difficulties at the start of the Q&A. But on for Curt, just I just had a quick clarify that $15 million reduction in overhead expenses is that factored into your $110 million target? Or is this on top of it? And I suppose, secondly, if there be an update to the prior inflation assumption I believe it was around $50 million with Q3 results.

Yes, yes. Element of the $50 million that we reported for the fourth quarter is additive or was not included in the $110 million target talked about when we pointed the third quarter and we have the inflation number that we provided. You correct. It was $50 million and that won't be update that we're still that's still a good number, gosh.

Harman Dhatt

Yes, that's all from my end.
Thank you.

Operator

And next we'll go back to the line of George Staphos.
Please go ahead.

I guess last one for me. I know you're not the only company in South America that's talked about having it go farther from its own mills for wood and do a bit more third-party wood and a lot of the Company in particular I'm thinking of is more packaging grade production, but is there a broader issue that's been affecting the producers has it been just the droughts or has there been something else that's gone on either in terms of maybe over harvesting or underinvesting that not just for Savanna, you've seen elsewhere just some quick thoughts there, and I'll turn it over.

I think you saw some of our competitors talked about the same thing we did on some plantations about the six to seven years ago, where does plantation have suffered under the seven year cycle of drug?
Our natural causes, which are in fact impacted that has impacted all Brazilians, forestry plantation. So we're not the only one. This is not the case anymore, but it's been two years. And we also specifically more significantly from our past companies. We reduced some of our investments in the Phase three during those years, which we are six, seven year cycle. So we're seeing the impact of that now, which is why we've had to do a more US land market than we usually do. And we wanted to solidify the neither would because there is a strong demand of wood in in Brazil right now. So the demand is clearly strong so the demand press, the natural causes, which have reduced the productivity of plantation is an impact we're feeling and our strategic investment in the very valuable forest plant. We have the wind make up for that.

I mean we're starting to see a little bit of an uptick in South America overall and box shipments. Obviously, that's a bit more softwood, but to the extent that we see a bit of a rebound there, does that put your wood position maybe make it a bit more precarious and mean that next quarter or quarter down the road, you're talking about further inflation that you're contending with or are you as much as you got your route relatively well set for the rest of the year.

With the investments we've made. We feel like we're well set.

Okay.
Thank you, Jean-Michel. Good luck in the quarter.
Thank you, John.

Thank you.

Operator

And at this time, there are no further questions I'd now like to turn the call back to Hans Bergman for any closing comments.

Hans Bjorkman

Thanks, Greg. Before we wrap up the call, Jean-Michel, any closing comments?

Yes, just the thank you first of all, for joining the gold, we are a cash flow story. In 23. We generated $294 million in free cash flow and returned $127 million to shareholders. We allocate capital to increase shareowner value. We use cash to maintain a strong balance sheet and return cash to shareowners, and we invest to strengthen our business, and we are confident in our ability to generate strong earnings and free cash flow through the cycle. We are confident for 2024.

Hans Bjorkman

Thank you, Jean-Michel, and thanks, everyone, for joining us today. We appreciate your action since Obama, and we look forward to continued conversations in the coming weeks and months ahead.

Operator

Thank you so much.
Once again, we would like to thank you for participating in silver almost Fourth Quarter 2023 earnings call. You may now disconnect.