Sylvamo - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 came in line with internal outlook but below Street: net sales $0.794B, diluted EPS $0.37, adjusted EBITDA $82M (10.3% margin). EPS, revenue, and EBITDA were modest misses vs S&P Global consensus, largely due to FX (-$13M), heavy outages (+$39M), and North America volume shortfalls; EPS/Revenue/EBITDA consensus shown below*.
• Management guided a strong H2 recovery: Q3 adjusted EBITDA $145–$165M, no planned outages (–$66M q/q), better volumes (+$15–$20M), and continued operational improvements; price/mix headwinds expected in Europe (–$15–$20M).
• Regional mix: North America improved on costs and mix (OP $66M), Europe weakened on outages/FX/volume (OP –$38M), Latin America soft on outages/FX (+$2M OP).
• Capital allocation remains supportive: $38M returned in Q2 via dividends and buybacks; $42M remained on the 2023 program at Q2, and a new $150M repurchase authorization was approved Sep. 15, 2025, alongside continuing $0.45 quarterly dividends.
• Near-term stock catalysts: execution on Q3 EBITDA ramp, tariff-driven import normalization improving NA operating rates, and Europe stabilization steps; watch price/mix pressure in Europe and FX volatility.

What Went Well and What Went Wrong

What Went Well

• Operational performance improved across mills; operations and other costs were favorable by $23M despite $13M FX headwinds, and input/transport costs improved by $5M (energy).
• North America operating profit rose to $66M on lower operating/input costs, favorable mix, and less economic downtime; adjusted EBITDA margin held ~10% overall.
• Strong H2 setup: 85% of annual outages completed by Q2, Q3 guide $145–$165M adjusted EBITDA with no outages and seasonal volume uplift in NA/LatAm.
• Quote: “We delivered second quarter earnings in line with our outlook… positioned for a stronger performance in the second half of the year” — Jean‑Michel Ribiéras.

What Went Wrong

• Europe weakened: OP –$38M q/q due to higher outages, unfavorable FX, and lower volumes (price/mix only partially offset); price/mix pressure expected to continue in Q3.
• Volume shortfalls in North America, including less supply from IP’s Riverdale mill (about 80% of plan over three quarters) and operational challenges contributed to the revenue/EPS miss.
• Imports and price dynamics: heavy import flows (up ~40% in H1) and a competitor’s inventory clearance muted realization of announced price increases; FX impact was –$13M.

Transcript

Speaker 1

Good morning and thank you for standing by. Welcome to Sylvamo's second quarter 2025 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 star, then the number one on your telephone keypad. To withdraw your question, press star, then one a second time. 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 2

Thanks, Virginia. Good morning and thank you for joining our second quarter 2025 earnings call. Our speakers this morning are Jean-Michel Ribiéras, Chairman and Chief Executive Officer, John Sims, Senior Vice President, Chief Operating Officer, and Don Devlin, Senior Vice President and Chief Financial Officer. Slides two and three 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 earnings release, as well as today's presentation. With that, I'd like to turn the call over to Jean-Michel.

Speaker 0

Thanks, Hans. Good morning and thank you for joining our call. I'll start on slide four with our second quarter highlights. Our teams are committed to the success of our customers and are partnering with them to be the supplier of choice every day. Our operational performance improved during the second quarter, and the challenges we ran in the first quarter are now largely behind us. We completed the largest planned maintenance earnings quarter we've ever had in over five years. Lastly, we returned nearly $40 million in cash to shareholders. We distributed $18 million via the second quarter dividend, and we repurchased $20 million in shares in the quarter. Let's move to the next slide. Slide five shows our second quarter key financial metrics. We earned adjusted EBITDA of $82 million with a margin of 10%, in line with our expectations.

This reflects having almost $70 million of planned maintenance outages in the quarter, which is the largest in recent history. We now have almost 85% of our planned maintenance outage for the year behind us. We generated adjusted operating earnings of $0.37 per share. Free cash flow was negative $2 million. The variance to the second quarter last year is due to lower adjusted EBITDA and slightly higher capital spending. Keep in mind that our free cash flow is heavily weighted to the second half of the year. In the last two years, we generated almost 90% of our free cash flow in the second half. Now, I will turn it over to Don to review our performance in more detail.

Speaker 4

Thank you, Jean-Michel, and good morning, everyone. Slide six contains our second quarter earnings bridge versus the first quarter. The $82 million of adjusted EBITDA was in line with our outlook of $75 to $95 million. Excluding the $13 million in FX headwinds in the quarter, we would have been at the high end of our outlook. Price and mix was favorable by $12 million, driven by better mix in North America and Latin America, with lower export sales from both regions. Volume decreased by $9 million, mostly in North America. About half was due to less volume from International Paper's Riverdale Mill than planned. Over the last three quarters, they've only produced about 80% of their 27,000 tonnes per month planned, and we expected that to continue into the third quarter. The other half was partially due to our own operational challenges we experienced in the second quarter.

Operations and other costs were favorable by $23 million, driven by $18 million in improved operational performance in North America and Europe. We continued to make progress in resolving the operational issues experienced in the first and second quarters. Other costs were also favorable by $18 million, primarily due to green energy credits in Europe and lower overhead costs. This more than offset the unfavorable impact of $13 million from FX. Planned maintenance outage costs increased by $39 million, largely as expected, as we conducted complex outages in five of our mills. Input and transportation costs were favorable by $5 million, primarily due to energy in North America. Let's move to slide seven. Looking at industry conditions for the first half of 2025 versus the first half of 2024. In Europe, demand remains sluggish and is down 8% year over year.

Industry capacity was reduced by 7% after two uncoated freesheet paper machines closed late last year. Paper prices stabilized in the second quarter but are under pressure, entering the seasonally slower third quarter. Pulp prices in Europe significantly decreased in the first half of this year, contributing to uncoated freesheet paper pricing pressure. In Latin America, demand is down 2% year over year, with demand down 6% in other Latin American countries. However, Brazil is up 6% due to strong publishing demand. Industry capacity across the region remains stable. In North America, reported apparent demand is stable year over year, driven by higher imports, which were up nearly 40%. Much of this increase in imports is in converting and printing rolls. We believe that real demand will be down 3 to 4% this year.

Industry supply was reduced by 10% after a few machines, including International Paper's Georgetown Mill, closed in the second half of last year. In addition, Pixelle announced they will close their Chillicothe Mill in Ohio in August. This will further reduce uncoated freesheet capacity in North America by approximately 6%. Let's go to slide eight. We continue to monitor the U.S. tariff situation and the potential challenges and opportunities that may unfold. In the first half of the year, we saw some shifts in uncoated freesheet and trade flows. This was one of the main reasons why imports into the U.S. were up almost 40% through the first half. We're also keeping an eye on several cross-regional themes, for example, currency fluctuations with the U.S. dollar devaluation against many currencies.

Regarding our major capital spending plans for the year, the business cases for these projects included the possibility of higher tariff costs, which are not expected to be material at this point. We're staying close to our customers to understand their needs and opportunities to help them be successful. We are focused on what we can control, improving productivity, reliability, and leveraging our cost initiatives. Let's move to slide nine. Looking ahead, we expect to deliver third-quarter adjusted EBITDA of $145 to $165 million. We project price and mix to be unfavorable by $15 to $20 million. This is primarily due to paper and pulp prices in Europe. We expect volume to be favorable by $15 to $20 million. This is primarily due to stronger seasonality in both Latin America and North America.

Operations and other costs are projected to be favorable, up to $5 million due to improved operational performance. We expect input and transportation costs to be stable. Planned maintenance outages will improve by $66 million as we have no outages planned in the quarter. We expect a significantly better adjusted EBITDA performance in the second half. This is due to much lower planned maintenance outage expenses, improving volumes, and better operations. Now I'll turn it over to John to talk about our capital allocation plans.

Speaker 0

Thank you, Don, and good morning, everyone. I'll pick up on slide 10. A long-term capital allocation strategy drives share owner value. We are focused on maintaining a strong financial position, reinvesting in our business, and returning cash to shareholders. This allows us to stay focused on our customers, helping them win through commercial excellence efforts. It enables reinvesting in our business, enhancing our reliability, productivity, and improving our service through operational excellence initiatives. Our healthy financial position preserves the flexibility to return cash to shareholders. We'll continue to evaluate opportunities to repurchase shares at attractive prices, with the $42 million available on our current share repurchase authorization. Let's move to slide 11. This slide shows how the deleveraging of our balance sheet has enhanced our financial position.

We have reduced our debt by about half, including more than $150 million last year, which we did in anticipation of the potential uncertainties in 2025. Our net debt to adjusted EBITDA now stands at 1.3 times. We have no major maturities due until 2027, plus we have almost $400 million available on our revolver. A strong balance sheet and available cash on hand provide us with the ability to focus on our customers, run our business, and invest in our future throughout the cycle. Let's go to slide 12. Our team continues to develop our high-return project pipelines with returns greater than 20%. We're investing in high-return projects to generate earnings and cash flow. We want to take this opportunity to highlight our 2026 and 2027 capital spending outlook. The purple shaded bars on this chart show our high-return investments.

The light purple is for our ETF investments, and the dark purple is for all other high-return projects. As disclosed on our fourth quarter 2024 earnings call back in February, we are investing $145 million in strategic projects at our flagship mill in Eastover, South Carolina. These investments will be spent from 2025 through 2027, with the majority of spending taking place next year. Overall, our capital spending is increasing in 2026, but then dropping back down to prior levels in 2027. This outlook should provide you with a good sense of our capital spending for the next few years, and we will continue to update you as we refine our plans. Let's go to slide 13. We feel the importance of the strategic investments at our Eastover Mill warrants a quick refresh of our exciting plans.

We have three high-return projects that will reduce costs while improving efficiency and mix of the most competitive uncoated freesheet mill in North America. First, we are investing to optimize one of our two paper machines. The enhancements will allow us to reduce costs while improving our product mix across both paper machines. This investment should result in an incremental 60,000 tons of uncoated freesheet capacity. Second, we are replacing an existing cut-size sheeter with a brand new state-of-the-art sheeter. This will lower our sheeting costs up to 15%, reduce waste by maximizing paper machine trim, while providing incremental cut-size capacity. This sheeter will allow us to provide improved reliability and additional flexibility to better serve our customers. Detailed engineering work continues, and many of the orders for the parts and equipment have already been placed. All plans are on track.

Once completed, these combined investments should create incremental adjusted EBITDA of more than $50 million per year, resulting in additional cash flows and an internal rate of return of greater than 30%. Lastly, we are partnering with Price Companies, an industry leader in wood yard operations, to modernize our wood yard and improve our efficiency. This will result in more efficient, reliable, and cost-effective wood processing operations and allow us to avoid about $75 million in capital over the next five years. This wood yard modernization project is progressing as planned and remains on schedule to begin the startup in early 2026 and will be completed by the end of 2026. Let's go to slide 14. Our strategy is to be singly focused on uncoated freesheet paper because we believe uncoated freesheet will be needed for a long, long time.

Uncoated freesheet remains the largest and most resilient segment in the graphic paper space, and we view the uncoated freesheet industry landscape as an opportunity. We're investing to strengthen our competitive advantages to generate earnings and cash flows. We view these investments as high return and low risk as we are staying in our core product line of uncoated freesheet and reinforcing our position as supplier of choice for our customers. We will leverage our strength, our talented teams, iconic brands, strategic channel partnerships, and low-cost mills that drive high returns on invested capital. I'll now turn it back over to Jean-Michel. Thanks, John. I'll conclude my remarks on slide 15.

We will create shareholders' value by partnering with customers so we remain the supplier of choice, maintaining a strong financial position to provide flexibility, and reinvesting in our business through a great pipeline of high-return capital projects, enabling us to grow our earnings and cash flow. Sylvamo is creating shareholders' value through strong cash generation and disciplined capital allocation, including share repurchases at prices well below our intrinsic value. We are progressing well with our CEO and CFO transitions with John and Don as we prepare for my retirement at the end of the year. We are confident in our future and motivated by the opportunities that lie ahead. With that, I'll turn the call back to Hans.

Speaker 2

Thank you, Jean-Michel, John, and Don. Okay, Regina, we're ready to take questions.

Speaker 1

If you would like to ask a question, simply press star, then the number one on your telephone keypad. To withdraw your question, press star, then one a second time. We do ask that you limit yourself to one question and one follow-up question. Our first question will come from the line of George Staphos with Bank of America. Please go ahead.

Hi, everyone. Good morning. Thanks for all the details. I guess the question I had for you is, can you talk a little bit about what the outlook is for South America in the third quarter, to the extent that you can talk about EBITDA and how things are trending? That would be helpful. The second question would be, I remember from last quarter, I seem to remember that you were expecting North and South America on a combined basis to be up in EBITDA versus 2024. Is that still the outlook? What are the puts and takes there? Thanks, guys.

Speaker 0

Hey, George, thanks. For our outlook for our third quarter in Latin America, we're expecting that you'll see continued improvement. First of all, we have seasonally increasing shipments, and we've seen that typically, and we expect that again to occur this year, and you'll see that in the third quarter. Second, we don't have any outages. We had two significant major outages in the second quarter, down in Latin America, and that is behind us. Our shipments were slightly lower than what we expected in the second quarter because we were slow to come out in both of those outages that cost us about 10,000 tons, but that's behind us, and we'll be moving forward with that. The second question you had was around the combined earnings.

In general, we don't give a full-year outlook, as you know, and these current market conditions with the tariffs provide a lot of uncertainty. Right now, we believe that the combined earnings of both North America and Latin America could be slightly less than what they were last year. This is mostly due to a kind of a change in position because of some of the weakness that we've seen in other Latin American markets' pricing, and that's really driven by the impact of the tariffs and increased imports into those markets and also weaker demand. In particular, in some of our Latin American markets, as we talked about, other than Brazil, Brazil is up 6%. Demand is strong there. In the other Latin American markets, demand generally is down 6%, and that's mostly driven by really Mexico.

We don't ship into Mexico because of the tariff that they implemented against Brazil there, but it does have a knock-on impact to the other regions.

Thanks, John. I'll turn it over. Appreciate that.

Speaker 1

Our next question will come from the line of Daniel Harriman with Sidoti & Company. Please go ahead.

Thank you. Hey, good morning, guys. Thank you for taking my questions. First, I just wanted to start with Europe. In the last quarter, you spent quite a bit of time talking about some changes that were made there. Obviously, the region continues to suffer from soft demand and lower pulp prices. I'm just wondering if you could update us on what needs to happen either commercially or operationally to kind of stabilize performance there heading into 2026.

Speaker 0

Yeah, Daniel, Europe is a different, difficult market conditions. This is also driven a lot by the tariff impacts, particularly the impact it's had on market pulp, due to weak demand in China. As you know, market pulp prices were going up in the first quarter, but then significantly decreased in the second quarter. Pulp pricing is a driver of uncoated freesheet prices in Europe because of the level of non-integrated capacity that is there. We're seeing weakness in both pulp and uncoated freesheet pricing in there. Certainly, we need the market conditions to improve, you know, with pulp going up would be part of stabilization for the pricing there. What we're really focused on, we talked about it, is the factors that we can control, and that's improving our competitive cost position.

We're focused on, and SIOT, around mix improvement as well as fixed cost reduction in our New Milan mills, reducing wood costs, and improving our operations there. Those are the things that we're focused on. We've got, we believe, the right leader driving that. We've got the talented teams that are focused on that, and that's what the team is working on.

Okay. Thanks so much, John.

Speaker 1

Our next question comes from the line of Matthew McKellar with RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking my questions. You mentioned shifting trade flows and uncoated freesheet through the first half of the year. Could you maybe just give us a sense of what the latest is that you're seeing on that front and how trends through the past couple of months and into August have looked in particular? What are you seeing by markets? Thanks.

Speaker 4

Yeah, Matthew. Relative to the first half of this year, we've seen a significant increase in trade in rolls, mainly coming into North America. We believe it's in advance of the tariff uncertainties. It's had an impact in making more supply available in North America, and primarily rolls.

Are you seeing any, I guess, changes in trends in Europe at this point?

Speaker 0

We've seen some pressure also from importers trying to get into the European market. Where we see it is some which have anticipated to have no access to the U.S. or difficult access with tariffs, trying to go to OLA. John was mentioning to you prices in OLA were under pressure, and partially it's because of some countries trying to import at very low prices to OLA, and we didn't have that before. OLA is out of Latin America, to be sure, what I mean by OLA. We've seen it, as we said, in North America, especially in the first half, and we're seeing it a lot in OLA and the Middle East. Some of the traditional people who were used to sell to the U.S., Europe today try to find other avenues, and this is where we call with the flows impact.

Okay. Thanks very much for that detail. Next, let me just zoom out a bit here. What is your outlook for how uncoated freesheet demand in Latin America evolves over the next couple of years? Thanks.

Yeah, we think that Latin America will continue to be maybe flat or slightly down. I think what we're seeing today, if you look at it, Brazil's up 6%. So that's in Brazil demand year to date is up 6%. It's other Latin American markets that are down. That's really, as I said earlier, being driven by Mexico. That's being driven mostly, we think, because of the tariff uncertainty that's occurring, that's driving through the economy in Mexico. We also see it in a couple of the other countries, not Brazil, but in other Latin American markets. In general, we believe the long-term trend will be flat to slightly down in the whole Latin American market.

Thanks very much. If I could just sneak one last one in here, I recognize that ETF spending will be ramping into 2026, but how do you think about the opportunity to lead into share repurchases with where the share price is at, particularly with the balance sheet in good shape in the second half of 2025, likely to be stronger from a free cash perspective? Thanks.

I think it's clear we have a pretty strong balance sheet. We have a lot of capacity to take advantage and opportunities to buy back our shares when they're significantly undervalued. We have a little bit over $40 million that are still authorized from the board of directors. We think we have plenty of capacity to take advantage of repurchasing our shares.

Thanks very much. I'll turn it back.

Speaker 1

Again, to ask a question, simply press star followed by the number one on your telephone keypad. Our next question is a follow-up from the line of George Staphos with Bank of America. Please go ahead.

Thanks, everyone. Could you talk about the green energy credits that you received in 2Q? What was the amount? Are they non-recurring? To the extent that you can comment, the fact you're seeing so much in the way of imports into North America, is that affecting any of your tactics and, for that matter, the behavior of producers in the region, you know, vis-à-vis their margin efforts? I guess, relatedly, you're seeing imports, I believe, into Europe as well. From what I heard from you, Jean-Michel, I recognize it's slow, but is it changing behavior at all? How are you contending with that? Thank you.

Speaker 4

George, this is Don too. Your first question relative to the green credits in Q2, they were $8 million.

Okay.

Speaker 0

This is a true end.

Speaker 4

Yeah, it's something that recurs throughout the year.

Okay. Got it. Thank you for that.

Your second question.

For the behavior and what's going on, thank you.

Yeah.

Speaker 0

With the import situation in the U.S., our view is that a lot of that in the first quarter was due to anticipation of the tariff being implemented. Given where we stand today with the tariff, we're expecting imports to decrease into the U.S. because of the high level of tariffs that are being applied, particularly on those countries where those imports will be coming into. In general, we believe in North America that with the closure of the Chillicothe Mill and the reduction in imports, operating rates are going to improve, probably be in the mid-90% range in the second half of the year. In terms of our tactics, no, I mean, I think that our strategy continues to be, as we've said, to be focused on uncoated freesheet. We want to be the supplier of choice for our customers.

We're continuing to work to improve our cost positions, our competitive advantages, the values of our brands, and what we provide to the customers. This is why it's so important for us, we believe, to de-bottleneck the Eastover Mill so that we can produce more uncoated freesheet. The timing is going to look, we believe, pretty good on that given where we think that the operating rate, where we think the import situation is going to be near-term and also longer-term.

Yeah, I mean, John, I appreciate that. Have you seen, looking at 2Q and today 3Q, recognizing you can't comment on a forward basis, did the fact that you had more supply, perhaps, from imports change any of the competitive activity on pricing? Was it a little bit more intense on pricing than you would have expected? I think from your waterfall, it was a little bit worse than you would have expected. If you can talk a little bit about that, you know, across the regions.

Yeah, I mean, I think the candid answer is, you know, we put a price increase announcement to our customers in the first part of this year, and we realized much less than what we expected. That was driven, we attribute it to the increase in the imports and also the fact that, with the announced closure of the Chillicothe Mill, there was an effort by them to sell their inventory at very low prices, which impacted our ability to get the price increase that we would have expected. Yes, that did impact us in the short term.

Okay, thank you, John. I'll turn it over.

Speaker 1

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

Speaker 0

All right. Thank you. I'm going to let Jean-Michel do a quick wrap-up. Thank you, first of all, for all joining our call. We understand we're facing some difficult industry conditions, but we've faced them before. We have a very strong position financially, and we think we can continue to perform very strongly through the cycles. We're committed to a long-term strategy of reinvesting in our business to increase our competitive advantages and returning cash to shareholders. We're in the process of executing a seamless CEO and CFO transition plan with John and Don as we prepare for my retirement. Our long-term strategy and investment thesis remain intact. We're really confident in our ability to generate strong earnings and cash flow through the cycle. Thank you for joining again.

Speaker 1

Once again, we would like to thank you for participating in Sylvamo's second quarter 2025 earnings call. You may now disconnect.