Q2 2023 Sylvamo Corporation Earnings Call
Okay.
Yeah.
Good morning, Thank you for standing by welcome to silver almost a second quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the Speakers' remarks, you will have an opportunity to ask a question to ask a question. Please press one then zero on your telephone keypad.
Had to withdraw a question press one zero again as a reminder, your conference is being recorded.
I'd now like to turn the call over to Hunt Bjorkman, Vice President of Investor Relations, Sir the floor is yours.
Thanks, Leah good morning, and thank you for joining our call today.
Our speakers. This morning are John Michel revered Chairman and Chief Executive Officer and Joe.
Johnson Senior Vice President and Chief Financial Officer.
Slides, two and three contain important information, including certain legal disclaimers for.
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 second quarter 2023 earnings press release as well as today's presentation.
With that I'll turn the call over to John Michelle Thanks Ann.
Good morning, and thank you for joining our call.
Let's turn to slide four please.
In the second quarter, we generated adjusted earnings of $1 14 per share and we achieved and then 24 million in adjusted there'd be that.
Both at the high end.
For our guidance range.
We generated 32 million of free cash flow and returned 41 million in cash to shareholders via dividend and share repurchases in the second quarter.
Price mix operation and input and transportation costs were all favorable.
We provided in our first quarter call.
Our second quarter volume was short of expectations, reflecting continued channel inventory correction and weaker than projected demand John will discuss the industry demand in more detail.
Okay.
Slide five compares second quarter key financial metrics versus prior periods.
In the second quarter, we had 124 million and adjusted EBITDA After 58 million in planned maintenance outage expenses.
Operating teams match, our production to our customer demand, while executing to set a photo of a plant maintenance outage is about 2023.
I'm proud of our teams that completing these allergies safe.
See you.
If we normalize planned maintenance outage expense second quarter, adjusted EBITDA margin would have been 17%.
Now John will discuss our second quarter performance in more detail John .
And thank you John Michelle and good morning, everyone and thank you for joining our call.
Slide six shows our second quarter earnings bridge.
Michelle stated, we earned 124 million of adjusted EBITDA in the quarter.
Which was in line with our guidance of 115 to 125 million.
So, let's discuss the changes versus the first quarter adjusted EBITDA.
Price and mix decreased by $38 million due to lower paper prices in Europe , let's.
A favorable mix in Latin America, and North America.
And lower global pulp prices.
Volume was the one area that was significantly different than our outlook and I will discuss more about this on the next few slides.
Operations and other costs increased by $10 million.
Primarily driven by 15 million and higher Unabsorbed fixed costs.
Due to increased economic downtime.
Yeah.
Planned maintenance outages cost increased by $58 million.
As we conducted four major allergies versus no outages in the first quarter.
Yeah.
Input and transportation costs improved by 24 million driven by favorable energy chemical and transportation cost.
The next slide I'll discuss industry demand and our volume projections, which are central to our revised outlook. So it's worth spending a few minutes on them. So let's move to slide seven.
Yeah.
Okay.
In the first half of this year, a parent demand for all printing and writing papers, including uncoated freesheet declined significantly.
Firstly in Europe , and North America.
The dark bars on this slide show the demand for the first half of 2023 versus demand for the first half of 2022.
The lighter bar it shows the demand over the last 12 months versus demand over the prior 12 month period.
We regard the lighter bars to be more representative of a parent demand.
In the second half of 2020 to Europe , and North America experienced surges in uncoated free sheet imports and.
And customers built inventories well above normal levels.
At the same time uncoated freesheet demand began to slow down at some European economies entered recession.
And North America companies pulled back on advertising some in anticipation of a recession.
This impacted direct mail and commercial printing, which contributed to reduced orders for uncoated freesheet in the first half of this year.
The next few slides, so uncoated freesheet demand data by region and provide context to the recent regional demand trends.
So in summary, we believe that in 2022 customers were buying more paper than they were using.
And in 2023, you're using more paper than they're buying.
In other words, reducing their inventories significantly.
Let's move to slide eight.
Yeah.
Yeah.
Let's look at Europe first.
But on average even industry demand declined 5% annually over the last four years.
Despite the significant swing the full year trend is similar to the long term demand trend.
We now expect channel inventory corrections in Europe to be completed by the end of the year.
As many of our customers are targeting lower inventory levels than historical averages.
So the balance of the year, we expect the demand to remain weak.
The slower European economy.
This will continue to put pressure on our volume and price and mix in Europe .
Yeah.
With respect to changes in supply recently, one producer permanently shut down 175000 ton uncoated free sheet machine in Austria.
And another producer announced the start of a process that may lead to the permanent shutdown of 220000 ton paper mill in Germany.
Okay.
Let's turn to slide nine to discuss the North America Uncoated freesheet demand picture.
Over the past four years on average North America industry demand declined at 3% per year, which is also close to the long term demand trend.
We expect North American channel inventory correction to be largely completed by the end of the third quarter.
The U S economy appears more resilient than many were expecting U S advertising spend recently for the first time in nearly a year.
Assuming this trend continues we would expect demand to improve in the second half year.
With respect to changes in supply okay.
On competitors shut down of 240000 ton uncoated freesheet mill in May.
We have started to supply the new business, we gained as a result of that permanent shutdown.
Okay.
Let's turn to slide 10 to discuss Latin America.
Okay.
Over the past four years on average Latin American industry Uncoated freesheet demand was up 3%, which is slightly better than the long term demand trend.
As you can see on this slide Latin America has a very strong seasonality pattern with the second half being stronger than the first half.
First half 2023 demand was a bit lower than we expected as customers.
Customers were also adjusting their inventories throughout Latin America.
Let's turn to slide 11 to summarize our views on them to free sheet demand trends.
Yeah.
The European and North America first half demand declines were driven by four factors number one.
The 2022 surge in imports.
And as you May know imports returned to normal levels by the first quarter in the United States.
And in the second quarter in Europe .
Okay.
Number two significant channel inventory corrections we.
Now expect these collections to be completed in the third quarter in North America, and the fourth quarter in Europe .
Number three well.
Advertising in U S. Some in anticipation of a recession.
As the recession has not occurred and the economy continues to be more resilient than many of our expected than many expected.
And finally number four the slowing economic growth in Europe , We expect continued low economic growth in Europe .
Yeah.
Now, let's turn to slide 12 to review our third quarter outlook.
Okay.
Okay.
Okay.
We expect to deliver third quarter adjusted EBIT of 130 to 150 million.
We project price and mix of decreased by $60 million to $65 million.
Primarily reflecting paper price decreases in Europe .
And the realisation acquire price decreases for pulp across the globe.
We expect volume to improve by 15 to 20 million.
Reflecting seasonally stronger volume in Latin America, and North America.
And our recent new business, we've gained in North America.
Yeah.
Okay.
Operations and other costs are projected to increase by $5 million to $10 million, primarily due to higher unabsorbed fixed costs as we continue to match supply to our customers demand.
We expect input and transportation cost and improved by $15 million to $20 million with favorable trends in fiber and chemicals.
Planned maintenance outages are projected to decrease by 54 million.
We project adjusted operating earnings of one dollar in 'twenty.
So $1 55 per share.
Yeah.
Let's turn to slide 13 to review our revised 2023.
Annual outlook.
Okay.
Based on the slower than expected demand recovery, we now project adjusted EBITDA of 560 to 600 million for the full year.
This revised outlook reflects.
Lower volume and higher Unabsorbed fixed costs from economic downtime in Europe , and North America.
Less favorable price and mix in Europe and in Latin America.
Favorable input and transportation cost.
And favorable operations and other costs.
We now project free cash flow of $220 million to $250 million.
This revised estimate reflects lower adjusted EBITDA offset by lower cash taxes, and a significant reduction in working capital.
We continue to focus on generating cash flow remain a cash flow story.
Our revised outlook indicates continued strong free cash flow of about five to $6 per share.
And importantly.
We remain committed to returning 125 million in cash to our shareholders. This year.
Yeah.
Yeah.
Let's turn to slide 14 please.
Yeah.
We will continue to maintain a strong balance sheet returned substantial cash to shareowners and create value by reinvesting in our business.
We will continue to reduce debt and we've acquired amortization.
We plan to deposit and $60 million in SQL, which will allow us to return more than the 90 million limit in our credit agreement.
Okay.
$125 million in dividends and share repurchases will be an increase of about 40% versus the 9 million 90 million. We returned in 2022.
In the first half of this year, we have already returned $61 million to shareowners.
Okay.
So Michelle I'll turn it back to you.
Thanks, John .
Let's put this into perspective I'm on slide 15.
The remaining the supplier of choice.
Onto our success in the second half.
We will continue to supply the products our customers need.
When and where they need them.
We're also committing to matching our production to our customer demand, which will help us reduce working capital.
And we will continue our efforts to reduce operating costs and selling and administrative expenses.
We expect earnings to remain under pressure.
Our Latin America, and North American results continued to be resilient.
I'll conclude our prepared remarks on slide 16, despite the difficult industry demand environments in Europe , and North America, we are confident our ability to create shareholders value throughout the cycle.
We have reduced debt significantly since the spin off.
And our financial position is robust at one two times net debt to adjusted EBITDA.
Our free cash flow generation is strong and we plan to return 125 million to shareholders. This year.
We're also reinvesting in our business to reduce costs.
Strengthening our low cost position, so that we can exit the downturn in an even stronger competitive position.
With that I'll turn the call back to Hans.
Thanks, John Michelle and thank you John Okay, Lisa we're ready to take questions.
Thank you, ladies and gentlemen, as a reminder, if you would like to ask a question you May press. One then zero on your telephone keypad.
One moment please.
Yeah.
And we go to a question from George Staphos with Bank of America. Please go ahead.
Hi, Thank you very much hi, everyone. Good morning, Thanks for the details.
I wanted to start John Michelle John Hans If you could have us think how about how you think.
What the demand trajectory will be once we're through this week period and I know that's a.
To some degree up there with world piece, but you know do you think there is a demand snapback.
After were through this let's call it recessionary period.
Stocking period or do you think.
The trajectory on demand goes back to what had been the CAGR for North America for Europe for South America, what what is your expectation what would you at least try to convince yourself from your vantage point in terms of the long term demand trajectory. After this period.
Or was that the intermediate pretty rate I should say thank you.
Yeah. Good morning, gentlemen, thanks for joining the call.
We are we really believe we're going to group.
Latin and North America, and Europe , sorry to return to long term trends.
The difficulty we have is to put a time back.
Demand will come back.
Inventory correction is at the end.
So as you can see on the long term we've added a lot of ups and down then it's more brutal sometimes than we expect including Covid, but the trend has not changed the trend actually if we take the last four years is significant I mean, it's a little bit better than we expected.
So to answer your question we are expecting.
To go back to longer trend.
We had in the past.
I guess, maybe Relatedly and and you don't show. This here on the slide and I'd have to go back and look at my numbers, but I seem to remember you know after the financial crisis and here I'm, just thinking about North America.
Uncoated freesheet demand really didn't snap back it didn't decline at the rate.
That had been experienced during.
That recession.
So that was an improvement, but it didn't really snapped back. So if you agree with that premise and maybe you don't why should it go back to more of a trend this time around.
Yeah. So.
I think there's two comments in that one and I don't want to be wrong in my comments that back to prior level.
I'm not sure we're going to get there I think we will have some snap back because we loved the inventory correction behind us.
The trend will be the same.
Okay.
Yeah, I think one thing George I would say also just remember we're looking at it apparent demand.
Sometimes apparent demand and give.
No no not reviewed because apparent demand is calculated by domestic shipments minus exports plus imports. So I think we tried to say this a little earlier is that we think in 2022 actually demand, which grew in the north and U S.
On.
So the reported but that was probably overstated.
And today, if you look at what's being reported year to date demand is down almost 17% in the U S. But that is probably overstating the decline.
And that's being driven because of the inventory corrections, but we do believe that there is some pullback we've seen that.
So I guess, what I'm trying to say is that.
Yeah when you are.
Thinking about where is it going to bounce back to I think.
17% decline number is.
It's too low given where we think.
Because of this.
The way, it's calculated with parents bad okay.
Okay.
Two maybe one last question for me I'll turn it over.
I realize you're not guiding on the fourth quarter, though implicitly you are because of the full year in the third quarter and.
And when we just do the simple algebra its not even analysis you wind up with a relatively wide range for what's implied for EBITA for fourth quarter.
And yes, it's going to be driven by volume by pricing and so on we get that but what specifically.
It could be somewhat granular here.
About you know either end markets regions.
Pricing.
Would be the key factors in terms of you know whether you wind up towards the higher end of your guidance range implied both third quarter for sure and then fourth quarter or.
At the lower end again, once we get to the fourth quarter you know.
That ranges between $70 million I think at 149 in terms of EBITDA. Thank you guys.
Yes, George this is John .
Thanks for that question I think we gave the revised range of $5 60 to 600, which is a $40 million range.
And then if you look at our range for.
For the third quarter, it's it's $20 million range $1 30 to 150.
You subtract what we earned in the first half, which is 332 million really get a range of the fourth quarter about $20 million plus $100 million to $120 million.
And what's driving our revised outlook both in the third quarter and the full year I think we talked about it but it's it's really demand driven mostly in north.
Europe .
Slower because of the slower economic conditions that are in that we're seeing in Europe and that's also haven't implications in terms of our views about pricing in the second half.
<unk> in Europe .
It also incorporates our views on pulp pricing.
We've already seen.
But we're going to see the full impact of that in the <unk>.
Second half.
And then also reflects as we talked about a little bit lower view demand view in North America.
I will say for the year right now.
During the first half of the year pricing has been relatively stable in North America.
And in Latin America, we do see a seasonal increase in volume and that reflects also.
Our views on pricing and the export markets.
Okay. Thank you so much I'll turn it over.
And ladies and gentlemen, as a reminder, if you would like to ask a question. Please press one then zero on your telephone keypad.
And we have a question from Paul Quinn with RBC capital markets. Please go ahead.
Yes, thanks, very much good morning, guys. Thanks.
Thanks for the color on that.
It.
The machine shut.
You know you've noticed in North America, and Europe , maybe.
Maybe the question I've got is is what kind of volume needs to come out to stabilize pricing in your opinion and in both those markets.
Oh, Hi, Paul John Michel speaking.
I would just start by saying in North America.
Prices stable.
But we don't have a calculation on what kind of volume has to be taken off I don't have a number to give you.
What is true which is very volatile in Europe .
In terms of volume is a non integrated producer.
In Europe , they are much more important than it might be in Latin America, and North America.
And right now with the very low cost of bold and very low cost of gas goes.
<unk> says, we sometimes sign the market, sometimes so im not in the market are much more competitive so we see them, which sometimes you don't so there is a viable here, which.
She is ready if he could.
To answer your question because it depends of raw materials.
Okay. That's fair and then maybe the second question I had you've stated 125 million return of cash to shareholders.
What do you think about that level going forward, what's your ability to increase that.
Okay.
Thanks, Paul.
We said that core to our capital allocation strategy and goal is to continuously increase cash returns to shareholders. So core to the.
<unk> is our dividend and we want to do is be able to provide stable stable dividend that grows over time.
The balance of it in terms of share buybacks and it's going to be really based on the opportunistic view, but our first priority and I shouldn't say maintain a strong balance sheet. So that we can invest in your cycle.
And.
Our stable growing dividend in the long term.
I think the short answer to your question what are you trying to get at it really takes the.
Sense of where.
Where we think each year in terms of the free cash flow that we generate.
Terms of.
How much.
Whether we can increase it above the 125 or <unk>.
Or not going forward.
Yeah.
Okay. That's all I had thanks guys.
Thank you.
And we go back to the line of George Staphos with Bank of America. Please go ahead.
Yeah.
No.
Mr. Staphos do you have your phone muted we don't hear you at this point.
Yeah.
Yeah.
Mr. Staphos, if you can hear us we are unable to hear you.
Okay.
With the inability to hear Mr. Staphos at this point in time, we don't have any further questions in queue you may continue.
Alright, Thanks, Leah George will follow up with you after the call, but before I wrap up John Michel any closing comments. Thank you and thanks, everybody for joining the call.
We remain a cash flow story.
We remain committed to returning $125 million via dividends and share repurchases in 2023.
<unk> confident in our ability to generate stronger EBITDA and free cash flows through the cycle.
We allocate capital increased to increase shareowner value, we use cash to maintain a strong balance sheet, returning cash to shareowners and reinvest to strengthen our business.
In short, we stood very confidence through the cycle.
Survival.
John Michel and thanks, everyone for joining us today, we appreciate your interest in <unk> and we look forward to continuing our discussions in the days and weeks ahead that concludes our call for today. Thank you.
Yeah.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.
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