Sylvamo - Q1 2024

Transcript

John Sims (CEO)

Seven. 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 cost for this year. In the second quarter, 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 freesheet, and we're continuing to create long-term value through our talented team, iconic brands, and low-cost mills in favorable locations.

Our capital allocation strategies 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 for some additional color on each of these key tasks.

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 risks, and to invest in high return opportunities across the cycle. Let's look at the cash returns to shareowners on slide 14. We will continue to return substantial cash to shareowners 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'll 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 are already ramping up, and one in Luiz Antônio 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 first quarter, and we project annual savings of $500,000 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 a new turbine generator in Luiz Antônio. This will increase our self-generated power and reduce 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 (U.S. - Brazil CEO)

Thanks, John. We are strengthening our ability to create shareowner value throughout the cycle. Sylvamo is a cash flow story and continues to deliver against our investment thesis. Uncoated freesheet 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. Financial discipline is a key component of our strategy. We continue to leverage our strengths 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 flows.

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 (VP of Investor Relations)

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

Operator (participant)

Thank you, ladies and gentlemen. As a reminder, if you would like to ask a question, please press one, then zero on your telephone keypad. If your question has already been answered, you may withdraw by pressing the one, zero again. We do ask that you limit yourself to one question and one follow-up question. One moment, please. Our first question is from George Staphos with Bank of America. Please go ahead.

George Staphos (Managing Director)

Hi, everyone. Good morning. Thanks for the details. I wanna go to slide six, where you have the waterfall. And, you know, look, at the end of the day, 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? Any things to call out, either positive or negative? Thank you, guys.

John Sims (CEO)

Yeah, George, 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. One was a tax payment 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 Brazil than we expected.

But in general, pretty much in line with what we expected.

George Staphos (Managing Director)

Thank you.

Jean-Michel Ribiéras (U.S. - Brazil CEO)

Yes. Hi, George. Thanks for joining.

George Staphos (Managing Director)

Hey, Jean-Michel.

Jean-Michel Ribiéras (U.S. - Brazil CEO)

In terms of outlook, you were asking, I think we have a continuing momentum of what we've seen in first quarter, which is improvement in every one of the regions. Latin America, you know, the first quarter, 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 (Managing Director)

Thank you.

Operator (participant)

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

Matthew McKellar (VP)

Hi, thanks. Good morning. Thank you for taking my questions. 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 on what time frame you expect to invest in these projects? What share of the project set would maybe be associated with each geographic segment? And then if there's anything you can share around weighted average IRRs across the pipeline of projects, that would be helpful. Thank you.

John Sims (CEO)

Sure, Matthew, I think, we said on the call that, by the end of this year, we'll have invested in about $70 million. If you look at next year, we probably will spend about $150 million on high return projects. If you look at the weighted average returns across those, those projects, it's almost greater than 35%, so even higher than what we're showing in return on our share repurchases. But I think the project, you know, if you think about in terms of what we're spending 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've identified another $200 million. We'll probably be generally continue with that rate.

There are most of these projects, when you look at them on average, is about $2 million of a capital project on average, returning well above 20% with internal rates of return. There are several projects that we need to continue to evaluate, and of course, get board approval that may be above, you know, $15 million-$20 million, but those are things that we're still looking at.

Matthew McKellar (VP)

Okay, thanks. That, 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 maybe achieved on an annualized run rate basis in Q1, and how much incremental benefit you might expect in Q2?

John Sims (CEO)

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, you know, 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 first quarter, now, remember, we shared this last time. We clearly expect about bottom line, $10 million-15 million this year, so because of $50 million, roughly, of inflation. So we said Horizon, we're 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-$15 million this year, and most of that's back and 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. It'll be back and loaded.

Matthew McKellar (VP)

Okay, that's, that's helpful, color. Thanks. I'll turn it back and get back in the queue.

Operator (participant)

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

George Staphos (Managing Director)

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 first quarter where they had outages, perhaps not planned. Has that been a material driver of your business? And if so, should we be, to the 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 2025? How would you have us think about that, conceptually? And then a second question I had, and I'll turn it over. You know, I know you're not guiding on third quarter yet.

We do know what the maintenance guide is. 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.

Jean-Michel Ribiéras (U.S. - Brazil CEO)

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 a high level.

George Staphos (Managing Director)

Yeah. Sure.

Jean-Michel Ribiéras (U.S. - Brazil CEO)

So the main thing is the method, 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. So if I had to guide on two things, which may be is important, are those two. And then, of course, the continuation of improvement that we've seen in the first half or first quarter of this year.

George Staphos (Managing Director)

Yeah.

Jean-Michel Ribiéras (U.S. - Brazil CEO)

So the momentum, Latam, and the outage is probably a good way to look at it. And I'm sure-

George Staphos (Managing Director)

Sure. Jean-Michel, give me momentum, LatAm, and what was the other thing you said?

Jean-Michel Ribiéras (U.S. - Brazil CEO)

Momentum in general, in the three regions.

George Staphos (Managing Director)

Yeah.

Jean-Michel Ribiéras (U.S. - Brazil CEO)

And the outage, as you mentioned.

George Staphos (Managing Director)

Yep. Yep.

Jean-Michel Ribiéras (U.S. - Brazil CEO)

This we have-

George Staphos (Managing Director)

No, my first point, we had heard some of the other freesheet producers had some operating issues in the first portion of the year. I think there was one that was in the press with, I think, an unplanned outage. Did any of that business-

Jean-Michel Ribiéras (U.S. - Brazil CEO)

Yeah

George Staphos (Managing Director)

... accrue to you? And if it did, does it go away once those producers are back running more normally? I guess, is the substance of the question.

Jean-Michel Ribiéras (U.S. - Brazil CEO)

Yeah, 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 two are independent.

George Staphos (Managing Director)

Okay. Thank you.

Operator (participant)

We go back to a follow-up with Matthew McKellar with RBC Capital Markets. Please go ahead.

Matthew McKellar (VP)

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?

John Sims (CEO)

Yes, Matthew. The situation in Sweden, the wood cost continues to be elevated. You 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, you know, at a higher level. So we, we're not seeing increases in Sweden, but we're not seeing... nowhere we're seeing decreases, so it's pretty much stabilized there. And same thing in Brazil. Brazil, wood prices have certainly increased on the open market side, and that also is stabilized, but stabilized at a higher rate.

Matthew McKellar (VP)

Thanks. 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 on uncoated freesheet from China and Indonesia?

John Sims (CEO)

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 two. But yes, you, you're correct. That's probably an opportunity which we are seeing, to export more from North America to Mexico.

Matthew McKellar (VP)

Okay, thanks for the color. I'll turn it back.

Operator (participant)

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

George Staphos (Managing Director)

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

John Sims (CEO)

... Yeah, George, for the, I'll answer the Horizon question first. 150 positions, and that is across globally. And from the capacity perspective, what we have it by region is, for uncoated. So I'll give it, these numbers to you. So for uncoated papers in Europe, it's EUR 765,000. For Market Pulp in Europe, it's EUR 130. In Latin America, it's $1.1 million for uncoated freesheet and $165 for Market Pulp. And in North America, for our facilities, it's $975,000 for uncoated free sheet and $115,000 for Market Pulp. But remember, we have a supply agreement with International Paper, so the supply agreements for both Georgetown and Riverdale is $655,000 of uncoated free sheet.

George Staphos (Managing Director)

Thank you so much.

John Sims (CEO)

That is in the appendix.

George Staphos (Managing Director)

Yep. Thanks very much.

Operator (participant)

Ladies and gentlemen, for any additional questions, please press 10 at this time. We have no other questions, and I'll turn the call back over to Hans Bjorkman for closing comments.

Hans Bjorkman (VP of Investor Relations)

Thanks, Leah. Before we wrap up the call, Jean-Michel, any closing thoughts?

Jean-Michel Ribiéras (U.S. - Brazil CEO)

Yeah, just a few. So first of all, thank you for joining the call. As we've demonstrated since the 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. Core to our strategy is reinvesting in our business to increase our competitive advantages. We're confident in our ability to generate strong earnings and cash flows throughout the cycle, and looking forward for the second quarter and this year. Thank you very much.

John Sims (CEO)

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

Operator (participant)

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