Q2 2022 Sylvamo Corp Earnings Call
Slide eight summarizes our performance for the first half of the year.
We delivered an adjusted EBITDA of $335 million achieved.
Achieving an adjusted EBITDA margin of 19, 3%.
We generated $71 million in free cash flow after several substantial one time spin related payments.
And we continue to strengthen our balance sheet by paying down $81 million of debt.
This strong performance demonstrates our ability to continue to deliver on our investment thesis.
Our team has performed well creating value for all of our stakeholders.
I'll now turn it over to John to discuss our second quarter performance in more detail John .
Thanks, John Michel Good morning, everyone, let's turn to slide nine.
As John Michel mentioned, we generated $189 million and adjusted EBITDA with a margin of 27%.
Again this was a 290 basis point improvement over the first quarter as our gains in pricing commercial excellence and operational excellence.
Are you seeing cost inflation.
We improved price and mix by $73 million as price realizations exceeded our forecast and we have benefited from several mix optimization initiatives.
Volumes increased by $2 million with stronger seasonal demand in Latin America is back to school book publishing was strong.
Order backlogs remain strong in all regions.
Operations and costs also improved by $2 million.
Overall operations ran well.
We successfully conducted planned maintenance outages at our eastover and Ticonderoga mill and spent $17 million more on outages than in the first quarter.
Input and transportation costs increased by $16 million.
With the rising costs with rising cost of chemicals energy fiber and distribution.
Let's take a look at our regional results on slide 10.
Each region continues to perform very well demonstrating the strength and resilience of our talented teams our low cost mills iconic brand as.
As well as favorable industry conditions.
We continue to win with customers and increase our positions in key segments. For example in Brazil, we are expanding our presence in high margin food retail channel in North America, we are growing on demand book publishing.
We remain focused on earning the right to be our customer's supplier of choice.
Our volumes remained strong in all regions and we continued to outperform industry shipments.
Our commercial performance reflects our compelling customer value proposition as well as continued price increase realizations.
Operations were good in all regions, while executing two large annual outages in North America.
Supply chain costs remain under pressure.
However, we are seeing and truck availability starting to improve in North America.
One of the competitive advantages of <unk> is our global footprint and I want to remind you that our European team has been selling product from Brazil into Europe for over a decade.
Now that our Russian business is in discontinued operations. The Brazilian volume represents a much higher percentage of our total European sales and impacts our reported EBITDA margins in Europe .
So if we exclude the Brazilian volume sold by our European team, where they only receive a sales commission.
Europe's second quarter, adjusted EBITDA margin would have been closer to 20%.
The appendix contains additional details on our regional performance, so, let's turn to slide 11.
Six months into the year global uncoated free sheet industry conditions continued to be favorable as demand.
<unk> continues to rebound from the effects of Covid and operating rates remained tight, particularly in the regions, where we operate.
It should be noted that industry inventory levels are below historical levels across all our regions due to tight supply conditions.
Year to date through June North America industry demand growth of 2%.
While Latin American industry demand growth is positive 16%.
Western Western Europe industry demand declined two 7% in the first half of the year.
But the prior shutdown of high cost capacity is still result in favorable supply and demand balance there.
It is believed that this tight supply is negatively impacting European demand.
Selling prices remained favorable and we expect to continue to realize price increases throughout the third quarter.
Our price and mix improvements continue to more than offset input and transportation costs.
So let's move to slide 12, and look at our third quarter outlook.
And the third quarter, we expect to deliver an adjusted EBITDA of $205 million to $215 million.
Price and mix is projected to improve by 40% to $45 million as we continued to realize price increases already communicated to our customers in all regions.
We expect volume to improve by $5 million to $10 million with seasonally stronger volume in North America.
Operations and costs are projected to increase by $5 million to $10 million.
We expect input and transportation cost to increase by $35 million to $40 million.
Largely due to higher chemicals energy fiber and transportation costs.
Maintenance outage expenses are projected to decrease by $14 million.
As we conduct less planned maintenance outage this quarter.
Slide 22 contains further details on additional financial metrics for the third quarter outlook.
Now, let's turn to slide 13.
I want to remind you how we are planning to allocate cash to create value.
This slide claims up how we plan to allocate our capital we intend to use our cash to strengthen our balance sheet invest in high return projects and return cash to shareowners.
Let's start by diving into how we plan to strengthen our balance sheet on slide 14.
Last quarter I shared with you that we are now targeting gross debt of $1 billion. We believe this will achieve the following reduces our risk and our cost of capital.
It reduces our interest expense puts us in a position to invest in businesses throughout the cycle and.
And increases our flexibility for other value creation opportunities through the through the business cycle.
As you can see on the slide we have repaid $225 million in debt since our spin.
And we have steadily driven down our gross debt to adjusted EBITDA ratio every quarter.
In addition to the $48 million repaid in the second quarter. We also repaid another $20 million in the month of July .
This now puts our gross debt level below $1 3 billion.
We were able to accomplish all of this within our first 10 months of being a standalone public company.
Here on slide 15.
We will take a closer look at how we plan to invest in high return projects to improve our business lower our cost and make our asset even more competitive.
We are developing a portfolio of high return cost reduction and strategic volume and mix related capital projects.
Over $100 million of capital projects with high returns.
<unk> so far.
13 costs were cost reduction projects have been approved at this point with a total capital cost of $33 million.
These projects will be executed over the balance of 2022 and 2023.
This slide shows six of these projects to illustrate some of what we're working on.
We expect to achieve in excess of $12 million in annual savings from these investments with most of the projects starting to return savings in the second half of 2023.
All of these projects are focused on reducing energy fiber and chemical costs as well as indirect cost savings.
These projects have an investment range of $200000 up to $2 5 million and have internal rate of returns ranging from 20% to 80%.
Let's turn to slide 16 to discuss returning cash to shareowners.
On our last call. We mentioned that we were conducting board level discussions around returning cash to shareowners.
In May our board approved a quarterly dividend of 11, and a quarter cents per share that was paid in July .
Our board also authorized a share repurchase program of up to $150 million.
Let's turn to slide 17.
So if we look at the balance of the year and beyond you can see that our debt maturity profile that we do not have any significant maturities due until 2027.
It is also important to note that we have $128 million of spend related payments in 2022 that will not repeat.
This includes $77 million of day, one Riverdale and Georgetown inventory inventory payments.
$9 million of one time spinoff expenses.
And $22 million of transition service agreement costs.
We will also benefit from our high return project pipeline as <unk>.
It ramps up.
As we now have the option to Opportunistically buy back shares to help create further value.
Also note that in Brazil, a settlement program became available for dispute over the amortization of goodwill and an expired in July .
International paper, which directs our goodwill tax dispute there determined not to settle the dispute the program.
I'll now turn the call back over to <unk>.
Thanks, John I'll conclude our remarks on slide 18.
We are well positioned to continue to create value in 2022 and beyond.
We remain committed to generating strong earnings and cash flow and.
I am confident in our ability to achieve pre pandemic earnings levels.
2022.
In fact, we are increasing our food your adjusted EBITDA guidance.
I'm a range of 725 to 775 million to 742 $780 million.
We are also increasing our full year free cash flow guidance.
From a range of $1 $60 million to $180 million.
To 170 $219 million.
Our reasoning is as follows.
We see fairburn industry conditions and expect that to remain in the second half.
Our customer value proposition has continued to strengthen.
We continue to have excellent commercial and operational execution are.
Price mix continues to outpace inflation.
In the second half, we expect improving adjusted EBITDA margins and strong sustainable free cash flow.
Our strategy has not changed.
Also we are new targeting a good debt level of $1 billion.
We're accelerating our return project and we continue to work to.
To strengthen our company and improve the business.
Our ability to navigate dynamic industry conditions and.
And achieve success is because of our talented and engaged teams.
We appreciate their dedication to working safely while delivering on our promises to our employees.
And share owners.
We are committing to delivering value for all our stakeholders by continuing to deliver on our investment thesis.
We remain confident in our ability to achieve our vision of being the employer supplier and investment of choice.
That I will turn the call back over to Ann.
Thanks, John Michelle and thank you John Okay, Tony we're now ready to take questions.
Thank you if you wish to ask a question. Please press one then zero on your telephone keypad.
I would like to withdraw your question. Please repeat the one zero command.
We do ask that you limit yourself to one question and one follow up.
Thank you.
Our first question will come from the line of Paul Quinn with RBC capital markets. Please go ahead.
Yes, thanks, guys and good morning.
Just a question on price increase that I've seen a number of competitors in North America.
Introduced September price increases in the marketplace, just wondering if you've followed suit and what's the status in Guatemala.
I think we don't comment on pricing, but there's been some.
Right.
Media, especially switch.
Informal price.
So I think it's a big nice for North America.
Okay, and then just maybe as a bonus question here just on guidance.
Wrong last quarter, but essentially you've moved up guidance by $10 million drawn at this point right.
Right.
Let's assuming that Q.
Q1 as reported 187 was.
In your guidance as opposed to the 143 that ex Russia right.
Yes. This is all ex Russia and Youre correct.
We've upgraded especially at the midpoint by about $10 million Big Mall.
Alright, Thats all I had thanks.
Thanks, Bob.
Yes.
Thank you as a reminder, if you wish to ask a question. Please press one zero on your telephone keypad.
Thank you I'll now turn the call back over to Hans Bjorkman for closing comments all one moment, we do have a last mile. My question that just came in.
And Thats from call had horn with Jefferies. Please go ahead.
Good morning, Thanks for taking my question I, just like to follow up on the.
The wood cost trends that youre seeing by by region, particularly interested in hearing what youre seeing in the European markets for wood costs. Some of your competitors are calling out.
Cost inflation.
And then following up on that.
Here are a little bit more vaults.
So office paper demand trends that you're seeing.
In Europe relative to to North America or are you seeing any divergence from your customer base in the strength of those office paper order books. Thank you.
Yeah, Colin on the wood cost, we're seeing wood costs increase across all our regions, but mostly it is driven by transportation costs due to diesel the diesel is going down it it's lagged because mostly its index that in particular to Europe .
Our sources of wood is.
On the <unk> mills in France.
And we actually have a wood harvesting operation there, we're not seeing the pressures that you see in other places, particularly legacy in Poland and other places.
That's being impacted either because of the western ban wood to the Nordics and some other things that are going there. So we're not seeing.
That.
Increased other than transportation cost.
And.
In Europe and <unk>.
<unk>.
In terms of your question around uncoated freesheet demand in Europe . It is as we mentioned the demand for and Western Europe Uncoated free sheet is down it's down two 5%.
And as we also mentioned on the call.
And we believe that the conditions.
Despite conditions are so tight there that you have a lot of stock out and sell and we reported that.
Some of that availability.
Paper is not there we think that that is impacting.
The band and how much we don't really have a view on that.
But we do think that that is impacting it.
The most significant demand decline, we're seeing is in eastern Europe , and Thats, mostly driven because of the Ukrainian situation I believe thats been reported almost down 10%, but it really doesn't impact us.
Hi.
I'm sorry.
Which are shipments there.
Predominantly.
And in Europe .
Thank you Tim had one follow up.
Given your regional producing in France, I imagine you don't have any.
The water level or drought issues are you seeing any.
Water level issues impacting some of potentially some of your competitors production.
For the market.
Any color on that would be helpful. Yeah, we don't know but competition on <unk>.
There is as you know in France, some drive folks who might not be as bad as some other countries of Europe . There is a lot of.
People, making attention and government given instruction on on water. So we're not too affected rhino, but we're paying attention to that.
The one thing, which we are paying more attention.
Which is not impacting us directly yet but.
Good is the fire the wood fire <unk> as you know this.
Push any one big one in the south.
With our friends.
There's been a lot this summer.
And Thats created some disruptions so far we've been able to manage it but he has created some disruption in the Woodside.
Thank you.
Okay.
Thank you as a reminder, if you have a question or comment today. Please press one then zero on your telephone keypad.
And we do have a question from the line of Jonathan <unk> with Eagle Capital Partners. Please go ahead.
Hey, guys. Thanks for taking my question good morning.
Yes.
The first question I have is maybe just talking about Europe and the energy situation can you just.
Walk us through your exposure there.
Yes, Jonathan this is John .
We're well positioned if you will with our site on mill, because we're integrated mill and produce most of our energy needs. We do have some demand for gas there, but it really represents almost 10% of.
Our energy needs.
Perfect.
Now that Russia is part of the discontinued operation can you maybe talk to us a little bit about.
What the business would have looked like without Russia. If we went back to 2019 2020 pre pandemic and.
The business the guidance this year and how it relates to <unk>.
Ex Russia.
Yes, Jonathan let me I think and we mentioned it is that our earnings even without Russia is.
<unk> are actually.
Better than almost than pre pandemic levels, even back in 2019.
Where we had.
We actually had another machine we had on Riverdale 15 machine that was producing.
Today, we are projecting to produce more earnings and have higher EBITDA margins than we did back then.
So if you think about Russia contributed in terms of EBITDA margin.
During that timeframe pre pandemic.
With north of 102125.
<unk>.
Okay.
That's very helpful. And then just a last question from me if you could talk about the competitive environment.
Given the margins are pretty attractive now pricing is off are you seeing people try and turn on machines or sell some incremental capacity.
And to the market what are you seeing there.
We are not seeing any major changes.
And.
I think.
You are in the non integrated position in Europe with the.
Energy.
And <unk> price and the bulk price I know.
Our position remains.
Because I would say probably.
And a new changing capacities in the other main region. So we're not seeing anything significant right now operating rates remains very high in every regions we operate.
Alright, well. Thank you so much thank you.
Okay.
Thank you I'll now turn the call back over to Hans New York men for closing comments.
Thank you Tony and thank you everyone for joining US today, we do appreciate your interest in <unk> and we look forward to continuing the conversations in the coming days weeks and months ahead have a great day. Thank you.
Once again wed like to thank you for participating in Silvano second quarter 2022 earnings call you may now disconnect.