Q1 2022 Sylvamo Corp Earnings Call
Okay.
Good morning, and thank you for standing by welcome to <unk> first quarter 2022 earnings call. All lines have been placed on mute to prevent background noise. After the Speakers' remarks, you will have an opportunity to ask questions to ask a question press star one on your telephone keypad to withdraw question press the pound key.
I'd now like to turn today's conference over to tons Dorfman, Vice President Investor Relations.
Thanks, Nate good morning, and thank you for joining our call today.
Our speakers. This morning are John Michel reverse chairman and Chief Executive Officer.
And John <unk>, 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.
It is important to note that all earnings and figures include our split of course mill and Russian business unless otherwise noted.
We will also present certain non U S GAAP financial information.
Reconciliations of those figures to U S. GAAP financial measures are also available in the appendix.
Our website contains copies of the first quarter 2022 earnings press release as well as todays presentation.
With that I will now turn the call over to John Michelle.
Thanks, and good morning, and thank you for joining our call.
I'll begin my comments on slide four.
Before we discuss our first quarter results allow me to share some thoughts on 2022.
We are well positioned to continue to create value this year.
Giving all the moving parts in our business.
I want to share guidance on a full year 2022 key metrics.
We expect to generate strong results despite input cost inflation.
Hi, Tien challenges and the impacts of Russia envision or to create.
In fact, we're on a path to achieve pre pandemic EBITDA level in 2022, even if we exclude our Russian business for the full year.
We expect to generate $725 million to $775 million and adjusted EBITDA.
And $160 million to $180 million in free cash flow. This year, if we exclude our Russian business for the food yet.
Slide five provides an update on Russia business.
Our path forward in Russia is driven by our primary value to always do the right things in the right ways for the right reason.
We will not operate in an environment that is inconsistent with our values.
We have made the decision to exit, Russia, and where to do so in an orderly manner.
That said, we are not implementing a full suspension of operations.
Primarily because we want to maintain full control of our assets as we work to exit Russia.
We're conducting a process to sell our Russian business and that we received a significant numbers of non binding offers.
We are working to reach an agreement and plan to complete this process promptly.
Including obtaining approval from our board as well as the required government approvals to execute the transaction.
Please keep in mind that the situation in Russia changes frequently and we will provide periodic updates as appropriate.
In the meantime, we continue to comply with all regulation and sanctions.
I'm now on slide six.
We continue to execute our three pronged strategy of commercial excellence operational excellence and financial discipline.
Which resulted in a 19, 1% adjusted EBITDA margin in the first quarter.
Global demand for uncoated free sheet continued to strengthen in Latin America, and North America.
Our schools and offices reopen.
Our volumes remained strong.
And we ran at full capacity in all three regions.
We also continue to realize the benefit of prior price increases resulted in price and mix outpacing input cost inflation.
We operated well in a challenging supply chain environment.
I am proud of our teams navigated through continued input costs and transportation challenges and work to take care of each other as well as our estimates.
Implementing this strategy generated free cash flow of $73 million, enabling us to pay down $33 million in debt and to increase our cash balance by 49 million.
Now another strong performance by our team dynamic industry conditions.
Slide seven highlights our key performance metrics for the quarter.
First quarter net sales were $977 million.
Reflecting seasonally slow volume in eastern Europe , and Latin America.
We generated an adjusted EBITDA of $187 million.
Our first quarter was light maintenance outage quarter if.
If we had normalized maintenance outage expenses.
Adjusted EBITDA margin would have been 18% for the quarter.
We generated $73 million in free cash flow and adjusted operating earnings of $1 97 per share.
Okay, John would you discuss our first quarter performance in more detail.
Thanks, Michelle and good morning, everyone, let's turn to slide eight.
In the first quarter, we generated $187 million and adjusted EBITDA.
This amount includes our Russian business, which contributed 34 million of adjusted EBITDA.
We improved price and mix by $53 million.
As price increase realizations in Europe , and North America exceeded our forecast.
As expected volume decreased by $17 million due to slower seasonal demand in eastern Europe , and Latin America.
Order backlogs remain strong everywhere outside of Russia.
Operations and costs increased by $22 million.
These higher costs reflect the absence of a favorable fourth quarter LIFO adjustment in North America.
And an unfavorable foreign exchange charge in Latin America.
Overall, our operations ran well.
As Michel mentioned, we successfully conducted planned maintenance outages at our <unk> and <unk> Mills.
Spent $26 million less on outages than in the fourth quarter.
Input and transportation costs increased by $24 million with rising cost for chemicals due to energy impacts along with higher fiber and distribution cost.
I want to recognize and thank our regional teams, who worked hard to offset the impact of input cost inflation, especially our <unk> mill teams, we're acting quickly to reduce the impact of record high European natural gas prices.
Let's look at our regional results on slide nine each region performed well.
<unk> the strength of our talented team low cost mill.
<unk> brands.
Our commercial teams deserve credit for their contributions to these results.
We remain focused on strengthening our customer value propositions and ensuring that we remain the supplier of choice.
Strong regional performances reflect continued price increase realizations.
Volumes remained strong in all regions.
And we continue to outperform industry shipments.
Operations were good in all regions.
And we started to see some improvement in the supply chain bottlenecks.
Our Latin America margin was negatively impacted.
By about 400 basis points due to FX headwinds in the quarter as well as the seasonally lower volume.
The appendix contains additional details on our regional performance.
Let's turn to slide 10 to discuss uncoated freesheet in the industry conditions in the markets we serve.
Supply and demand balances are favorable in all our regions and operating rates remained strong.
North America industry demand is now forecasted to grow at one 1% this year versus the prior forecast of one.
Four 4% decline.
Latin American industry demand is projected to improve by two 6%, which is in line with prior projections.
European industry demand is down in 2020 team, but the shutdown of high cost capacity has resulted in favorable supply and demand balances.
Selling prices remain favorable and we expect to continue to realize higher increases throughout the second quarter.
Price and mix improvements continue to more than offset input and transportation cost increases.
Let's move to slide 11, and look at the results of some of our commercial excellence efforts.
Yes.
Commercial excellence is a key driver of our earnings and we continue to make progress.
In Europe , our non price initiatives are improving earnings.
We have increased our mix of branded products and are developing relationships with new customers.
For example, we gained premium notebook business.
And expect more than 10000 tons of this new volume.
Latin America commercial excellence initiatives have led to more than 20, new customers and we're improving our domestic cut size of it.
You also have landed new publishing business benefited from strong offset sales.
North America, we continued to outperform industry shipments.
We also continued to simplify our product offering.
And have realized improved margins from our value added services.
I am now on slide 12.
In light of the current challenges in Europe , and one in <unk>.
Besides that we remain confident in our ability to succeed in Europe .
Our 2022 earnings outlooks with flex the increasing profitability of our <unk> mill.
We expect our European earnings to improve each quarter this year.
Hi market pulp prices and elevated energy costs to put tremendous pressure on non integrated producers.
Which represents about 25% of the total uncoated freesheet supply in Europe .
These cost increases have resulted in a significant steepening of the uncoated freesheet cost curve, there, which works in our favor.
Our SIOP mill produces its own pulp.
Benefits from a favorable energy position and generate excess carbon credits. We also maintained strong channel partners ships across Europe .
I also note that we serve European customers from <unk> as well as our low cost Brazilian mills.
So let's move to slide 13, and review our second quarter outlook.
Yes.
Given our intent to exit Russia, where you are.
Providing second quarter guidance, including and excluding our Russian business.
I will limit my comments to the guidance that excludes Russia.
In the second quarter, we expected delivered adjusted EBITDA of $170 million to $180 million.
We project price and mixed improve by $50 million to $55 million as we continued to realize price increases already communicated to our customers.
And all regions.
We expect volume to be relatively flat with seasonally stronger Latin America volume offsetting more maintenance outages in North America.
We expect operations and cost increased by $5 million to $10 million.
We expect input and transportation costs increased by $10 million to $15 million.
Largely due to the higher cost of natural gas in North America, and increasing diesel costs affecting the delivery of fiber in Latin America.
We project maintenance outage expenses to increase by $15 million as we conduct more planned maintenance outages.
To be clear.
We continue to own and operate our Russian business, while we pursue a sale we are showing our EBITDA, including and excluding lesser so you can understand how we expect to perform in either scenario.
Once the sale has been approved by our board, we would report our weapons business as discontinued operations for the entire year.
Let's turn to slide 14.
As John Michel and I discuss industry fundamentals remained favorable our competitive advantages position us to benefit from the industry conditions shown on this slide.
Alright key advantages include low cost mills and attractive region.
The world's strongest paper brands.
<unk> channel partnerships.
And our talented teams.
<unk> unique strengths combined with our focus three pronged strategy and our strong regional positions are driving the growth in our earnings and cash.
Let's turn to slide 15 to discuss free cash flow and.
How we allocate cash with discipline.
We remain focused on generating cash as Michel mentioned, we generated strong free cash flow in the fourth quarter $73 million.
Even after we paid $36 million to international paper for the day, one Riverdale inventory.
You may recall that our fourth quarter cash flow reflected the benefit of extended payment terms to IP for the day, one inventories at both the Georgetown and Riverdale mill.
We will use our cash to fund $175 million of capital spending in 2022.
Since we will not spend capital on that of course recovery boiler, we will increase spending on other high return projects outside of Russia.
Further improve our business.
We will pay IP the final incremental $41 million of the day, one Georgetown inventory in the second quarter.
Additionally, we will pay $57 million of one time and transition service costs.
This amount, though it's $15 million less than our last estimate of $72 million as we've been successful in reducing one Tom spinoff expenses.
So we expect to see a step change in free cash flow starting in the fourth quarter. After all day, one inventory one time spin off and transition service costs are being completed.
We also intend to continued debt reduction, which I'll further discuss on the next slide so let's go to slide 16.
To review, how we will judiciously allocate cash in 2022.
As I mentioned, we are generating sufficient cash.
This year to fund more than $300 million in capital spending inventory payments on one tonnes spinoff costs.
With all Thats going on and increasing uncertainty of the macro environment, we will continue to prioritize debt reduction.
We have set a targeted gross debt level of $1 billion.
This will reduce risk and increase our flexibility improved free cash flow generation.
It should increase our equity value.
In addition to the 33 billion, we repaid in the first quarter, we repaid $15 million in April resulting in long term debt of just under 1.35 billion.
Our 2022 capital spending plan includes $20 million for high return cost reduction and strategic projects.
With internal rate of returns of greater than 25% and in fact, some of these projects have <unk> over 50%.
Since we will not proceed with the 2200 $20 million <unk> recovery boiler project.
We're advancing high return projects outside of Russia to.
To be included in our strategic plans going forward.
Importantly, we are conducting board level discussions about returning cash to shareowners, and we'll continue that dialogue with them.
Let's turn to slide 17 for a brief update of the Brazilian goodwill tax dispute.
During our last call. We told you that we did not expect tax amnesty legislation be enacted during the presidential election year in Brazil. This year.
However on May 3rd the Brazilian internal revenue service issued as a specific rule that will allow companies to settle goodwill tax disputes.
Keep in mind that the ball is international paper's court they have the sole right to decide whether or not to apply for a settlement.
Also as a reminder, our maximum liability is $120 million.
I'll now turn the call back over to Michelle.
Thanks, John I'll conclude our remarks on slide 18.
We are well positioned to continue to create value into 2022.
We remain committed to generating strong earnings and cash flow and confidence in our ability to achieve pre pandemic earnings leverage in 2022, even if we exclude our Russian business for their food yet.
We made a principal based decision to exit Russia, but we remain committed to increasing our earnings and free cash flow.
Our strategy has not changed although we are targeting a gross debt level of 1 billion data and we're accelerating other high return projects.
Even excluding Russia for the full year, we are on a path to generate $725 million to $775 million in adjusted EBITDA for the full year, and we project $160 million to $180 million and free cash flow.
Our success is made possible by our employees.
We worked through the global pandemic hub to plan and execute the spin off and continue to navigate through input cost inflation and supply chain challenges and impact from the war on Ukraine.
We appreciate their working safely and serving our customers.
We remain confident in our ability to achieve our vision of being the employer supplier and investment of choice.
With that I'll turn the call back over to <unk>.
Thank you Tom Michelle and thank you John .
We're now ready to take your questions.
As a reminder to ask a question press star one to withdraw question press the pound key again Thats star one to ask a question, we'll pause a moment to hop Q&A roster.
Our first question comes from the line of George Staphos from Bank of America. Your line is open.
Thanks, very much hi, everybody. Good morning, Thanks for all the details and congratulations on the progress so far.
Obviously in a very challenging environment.
I wanted to ask.
To start more of a nitty gritty question.
Im trying to bridge from adjusted EBITDA to cash from operations and using kind of the midpoint of guidance.
If I remember correctly.
Our midpoint of about $750 million, you are targeting ex Russia.
Tax I think you said, there's roughly about 128 interest is about 67, recognizing I think those are the book numbers will use them as tax.
You mentioned that Georgetown Riverdale on the onetime transition costs are another $1 35.
And so that would get you to basically like $420 million and we.
To get to cash from operations of $3 45 should we assume the rest is just working capital or is there something else that I'm missing either in the GAAP <unk> and my calculation to begin.
And I had a couple of follow ons. Thanks, guys.
Hey, George you guys take into account the capital spending.
Well I am going to cash from operations. So.
Yes, yes.
Yes, so it's working capital okay.
Very good and then the next thing I wanted to check in on you said.
Did a great job of.
This is me paraphrasing this isn't your wording, but Ava.
Avoiding as fast as possible.
Energy cost increases can you talk to.
Out sharing enhance proprietary what you did what they did to accomplish that.
I wanted to cover it gives you the rest of this year.
So a couple of things I wanted to.
So all your attention to well is.
It's where the.
It's an integrated mill and for the most part we produced oil and energy.
Biofuels. So we don't use a lot of gas legit about 15% of clue that we do.
<unk> of.
Gas.
And there was significant increases.
In Europe due to the of course, the Wesson situation Ukrainian escalation.
The <unk>.
Team did is.
They developed a.
Sophisticated model so that they could.
Adjust different energy supplies as well as consumption.
To mitigate how much gas they absolute burned in their operations.
And it's caused us significant savings.
The other thing yet.
To point out about <unk>.
We kind of alluded to it in our comments.
Sure.
Yes.
<unk> increases that we're seeing in Europe is carbon gas tax.
Yes.
The EU, it's been ranging from 60 to 80.
<unk>.
Our saw mills, absolutely a net.
Net seller of credits so we actually have credits and so we were able to use that to offset some of the energy cost.
But on that and Thats, great John but that's not a new development or were you able to generate more credits. This quarter, which then also helped to offset the pressure, yes, George the that's not a new.
More of the model that they used and implemented in the first quarter in terms of.
Flexing their gas consumption and also knowing where to conserve.
Energy consumption.
Okay.
Last one from me and I'll turn it over.
One you mentioned that the bottlenecks are starting to improve on transportation can you.
Comment to that and in relation to I think you said you expect higher earnings in Europe over the rest of the year in each quarter was that a do you expect sequentially improving earnings each quarter or year on year earnings to improve.
And each of the quarters, Thanks, guys Hi.
Show me shattered and thanks for joining the call.
Yes.
<unk> seen.
In the U S, especially.
Some improvement in the direct business.
Not in the input costs, but we are seeing.
Quite some improvement in terms of availability of threat, we haven't seen it yet on rail, but it is significant TV tracks, we really.
It's more fluid.
During our earnings of <unk> I would say, we expect both year over year improvement and we expect every quarter is easier to get better.
That's great John Michelle Thank you I'll turn it over thanks.
Yes.
Our next question comes from Paul Quinn of RBC Capital. Your line is open.
Yes, thanks very much good morning, guys, just given the positive demand environment right now and the significant cost pressure or you or anybody else in the industry and.
Anticipating further price increase in 'twenty two.
We don't comment on future prices good morning, first Im sorry, Paul.
But we.
We can't make comments on future prices, but we are realizing in second quarter price increase that we've announced.
All around the globe with the exception of Russia. So we see that more realization in the second quarter as you can see now outlook to.
To come.
Okay, but nobody else is.
<unk> announced the price increase in Latin America or for Europe that we don't have great exposure to rate.
I cannot comment on our competitors' higher biotech.
Okay.
And then the process too.
To just sell the mill in Russia, do you expect that to be.
Done in Q2.
So there is two part of the process one is to find an agreement with a potential buyer.
That we think could happen in Q2, then you have the process to get it off the rise through the Russian government and Thats.
More complex process, which the timing could be longer than that.
Okay and then.
Just lastly on the transition services agreement with with IP, what is the ongoing cost of that after the <unk>.
I guess, the 57 million, one time and transition services, what do we expect it.
After that is paid.
The ongoing amount.
Well the TSA agreement in October and that's what the target dangerous for us.
To exit that and its about $8 million a quarter.
That's all I had best of luck guys. Thanks.
Thank you.
Again to ask a question. Please press star one on your telephone keypad, but do you have a follow up question from George Staphos from Bank of America. Your line is open.
Thanks very much.
Two from me can you talk a bit more about what youre doing on commercial excellence how much is left in the tank so to speak use whatever cliche her matter for you want to use a third inning eighth inning half full half empty.
Particularly as regards Europe and are you finding your bottom slicing at all in terms of your customers and Skus given how tight the market is or is it too.
Truly around some of the products that you said you are rolling out a new premium well youre not rolling them out you've won.
New premium notebook pads and things like that if you could give some color there that'd be great.
So it's all in the above if I may say, George we are seeing a lot of improvement that we see there are a lot of opportunities and we're seeing it in different categories. You mentioned skus rationalization, that's one of them.
We are seeing it in product mix.
We're seeing new products innovation.
We are also seeing intensive business rules with the customers. So we've got a.
Large range of initiatives.
Which we've started to implement and we're continuing so I would say, we probably have gone 40% of the potential still quite some to come.
Okay. Thanks for that.
The percentage there.
Quick one back to.
<unk> was doing.
What was the benefit from model in the first quarter. If you can talk to how it helped you sort of avoid some of these cost if you can share it and you might choose not to I understand.
And then can you talk a little bit about.
You expect if I read your release and heard you correctly to grow 10% better than the industry in North America did I hear you correctly or see that correctly.
How are you developing your benchmark, which I think you said is for up one 6% for the industry and again correct anything that I Miss phrase there. Thanks guys.
So on the <unk> I can give you on it.
Our normal gas consumption was about 15% and we've gone down to 10% above.
Exactly so as you can see these metrics is.
Significant.
In North America, or improvement with 10% versus the market in Q1.
So we are we.
We are winning with.
I would call the winning customers and we're aligned.
Okay.
What did you think the industry.
Go ahead, I'm, sorry about that.
I want to recall the industry number Chad if you could give me a few seconds.
In North America was 2% for first quarter.
If you take all of the regions. It was one 5% I'm talking about our regions.
Understood. Thanks, Shawn Michelle I'll turn it over.
Our next question comes from Jonathan loss from Eagle Capital Partners. Your line is open.
Hey, guys. Thanks for taking my question and.
Great results.
The first question I'd Love to ask you guys.
What's kind of the new products, particularly in Latin America.
Yes on the notebook and stuff can you talk about.
Why youre, winning that business or people shutting down capacity or do you have a better product like what's happening there.
Good morning, Jonathan and thanks for joining the call I would say, it's a mix of what you said I mean.
Some people exiting and we're taking the opportunity to develop new product and replaces exit.
Once these segments, where we were not present up to now.
And we've developed the products to feed do segments and.
And also I would say.
We've been managing.
Not perfectly because nobody can manage perfectly what's going on with supply chain and everything but we've maintained our level of services.
We're talking specifically Latin America.
Importantly to our customers.
We try to be reliable and I think our customers see we our long term goal.
To be the World paper company, and I think customers like to be aligned with a long term player in this area. So I think all of those things make the difference why we're winning some new contracts on new businesses.
That's terrific.
And given your comments about the cost advantage you mentioned in Europe could you maybe talk about what youre seeing in capacity in both North America and in Europe are people, adding capacity given the profitability or people are taking.
What are you seeing there.
Recently, we have seen in booth in the last two years in North America and in Europe quite a lot of capacity, sometimes shutdown, but also move to packaging. So from uncoated freesheet to packaging, we have seen no new capacity of uncoated freesheet, just dumped out restarting one.
Paper machine this year, but net net still a decrease.
Boost in North America, and Europe quite a lot.
And Jonathan this is John .
Said this before but we're also seeing very tight markets in other paper markets, particularly like in coated and uncoated free sheet.
Which has caused.
<unk> customers to move to uncoated freesheet because of the lack of supply of coated free sheets, which has increased <unk>.
Demand for our products. So it's not only it's uncoated free sheet been shut down are converted but also 30 freesheet in other paper markets.
And impact and we're seeing that across.
While dollar wages.
Okay.
Yes.
Great.
And then I guess another impact to Johnson pointed out is the western situation. So Russia did export we did we exported out of Russia into Europe , but and then of course, that's all stopped so.
That supply went away.
<unk>.
Because of the vessel situation.
Okay Gotcha.
And just one last question for me, which is can you maybe talk about.
Inventories and your situation I mean, given.
Given your growth relative to the industry are you building inventories are where our inventories relative to historical norms.
Our inventories between normal to low depending of the regions.
But certainly not building.
Yeah.
Alright, great.
Great results and I will turn it over thank you so much. Thank you.
Again to ask a question press star one on your telephone keypad, we have a follow up question from George Staphos from Bank of America. Your line is open.
Hi, Thanks, guys last couple for me.
And recognizing that you might not be able to share too much here. Nonetheless, we wanted to ask first Shawn Michelle can you talk to.
<unk>.
Type of interested party and this further <unk> mill are you finding interest more from local.
Market purchasers.
Or local.
Investors in the business or is it really dispersed between Russian and non Russian potential.
Buyers and then the last question I had.
For you is.
Can you talk at all about how the <unk>.
<unk> return discussions.
The priorities.
May have changed can you remind us again, how you would think about value return as you.
Obviously, delever and what your preferences for.
Increasing buyback versus dividend over time, thanks, guys and good luck in the quarter.
So just to make sure I answer it correctly.
We are in EMEA of the complex process the process in Russia is a bit complex. So.
Being in the middle of the process you will understand I don't want to comment on that well understood everybody when we can.
Our priorities have not changed we have the same strategy long term.
We choose to de leverage I mean, we.
We think we can with the uncertainty.
Everybody getting a little bit nervous with what might happen with the economy, we wanted to accelerate a little bit and continue our debt reduction that's our priority number one.
Once we've done that we want to invest and continue to invest in our high return projects. We have some high return projects we've mentioned before.
We're seeing really high high return short term, so everything especially around cost saving.
We actually.
I would like to be able to do more than we can because it takes time to do all of this project.
And then we are talking and have started the discussion to talk with our board, but returning cash to shareholders.
Through buybacks or dividends, so that has not been decided yet but that's the next step so priority to debt repayment.
High return projects.
Looking at options and talking with our board for the next steps.
Buyback dividend.
Thank you very much.
Thank you I'll now turn the call back over to Hans for Boardman for closing comments.
Thanks again, everyone for joining us today, we truly appreciate your interest in Silvano and we look forward to continued conversations in the coming days weeks and months ahead have a great day and a great week.
Thank you for participating in <unk> first quarter 2022 earnings call you may now disconnect.
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