Q3 2023 Sylvamo Corp Earnings Call
Yeah.
Okay.
Good morning, Thank you for standing by welcome to Silver almost third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the Speakers' remarks, you will have an opportunity to ask questions to ask a question. Please press. One then zero on your telephone keypad to withdraw your question. Please press one zero again.
As a reminder, your conference is being recorded I would now like to turn the call over to Hans Bjorkman, Vice President Investor Relations, Sir the floor is yours.
Thanks, Greg Good morning, and thank you for joining our call today. Our speakers. This morning are John Michel <unk>, Chairman and Chief Executive Officer.
John served as 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 bigger U S. GAAP financial measures are available in the appendix.
Our website also contains copies of the third quarter 2023 earnings press release as well as todays presentation.
With that I'll turn the call over to John Michelle Thanks.
Good morning, and thank you for joining our call.
Let's turn to slide four please.
Third quarter, with 158 million and adjusted EBITDA and generated strong free cash flow other than $50 million.
Right.
We achieved adjusted operating earnings of $1.70 per share.
Price and mix operation and you put transportation cost.
Oh yeah.
Right now we've taken quite a cold.
Our third quarter volume was short of our expectation.
Ongoing shadow inventory destocking and weaker than expected demand.
We strengthened our financial position and even third quarter with net debt of 706 million another one or two times net debt to adjusted EBITDA reached.
We also deployed 60 million in this group to remove cash returned it needs related to gratitude.
And our credit agreement.
While returning $24 million in cash to shareholders in the quarter.
Yeah.
Slide five compares third quarter key financial metrics. This is right up there yet.
In the third quarter earnings were better than our outlook.
And we took measures to maximize free cash flow.
Looting setting administrative cost reduction shrink.
Shrinking working capital and then adjusting the timing of capital spending.
And product teams collaborated to take care of our customer needs, while executing significant they couldn't be done safely and as efficiently as possible.
Now John will discuss our third quarter performance multi pit.
Yes.
Thank you Michele good morning, everyone and thanks for joining our call.
Slide six shows our third quarter earnings Bridge Zelle, Michelle stated, we earned $158 million of adjusted EBITDA in the quarter.
It was slightly higher than our guidance of $130 million to $150 million.
Let's discuss the changes versus the second quarter adjusted EBITDA.
Price and mix decreased by $55 million.
Primarily lower paper prices in Europe, and Latin America export markets as.
As well as lower global wholesale.
Volume increased by $6 million in the Americas.
Europe remained stable.
Operations and other costs improved by $1 million with better operating and supply chain results.
The 13.
$13 million and higher unabsorbed fixed costs due to increased economic downtime.
Planned maintenance outages cost decreased by 55 million with no major planned outages in the quarter.
Important transportation costs improved by $27 million, driven by favorable fiber chemical and transportation costs.
So let's move to slide seven.
Yeah.
This slide shows well graphic paper demand at just over 100 million tonne.
Here you can see the uncoated freesheet is the largest and most resilient of all the graphic paper grades.
What separates uncoated freesheet.
It's quite simple.
<unk> is the highest number of end use applications.
It's used across all sectors of the economy.
Okay appreciate it sustainable affordable and functional.
And we believe paper will remain an effective vehicle for education communication entertainment for a long time.
Favorite plays a critical role in education.
He is continuing to show that students of all ages absorbed more when reading on paper versus reading on digital screens screens.
In fact.
Sweden recently moved students of digital devices and back onto books and Hyatt handwriting on paper.
This is why total demand for uncoated freesheet exceed the sum of all of the other printing and writing grades combined.
Let's turn to slide eight.
We continue to believe the current uncoated free sheet consumption is better than the band data suggests.
The pulp and paper products Council published and shows the year over year changes in Essen.
The basic consumption demand.
And on this slide you can see North America comparisons for 2021 22 in the first half of 'twenty three.
Pulp and paper products counsels here is our view that coming out of the pandemic customers were buying more paper than they were using.
And this year.
Using more paper than they are buying.
Situations in Europe, and Latin America.
<unk>.
Moving to slide nine.
Current industry conditions are starting to see signs of improvement U S advertising is starting to pick back up in.
In the U S economy, continuing to serve facility.
And then I've got a <unk> with channel Destocking newly completed.
We are starting to see increased order entry globally.
Well inventory levels have improved significantly globally and prices are increasing globally.
Slide 10 please.
We expect to deliver fourth quarter, adjusted EBITDA of $90 million to $110 million.
We project price and mix decreased at a slower rate of 20% to $25 million.
Primarily reflecting prior paper price decreases in Europe.
An unfavorable geographic mix in the Americas.
We expect volume to improve by 2000 $25 million.
This reflects seasonally stronger volume in Latin America.
The completion of Destocking in Europe, and North America.
As well as the new business, we picked up in North America.
Operations and other costs are projected to increase by $25 million to $30 million.
And this is primarily due to higher seasonal operating cost in Europe, and North America.
Okay.
We expect input and transportation cost to increase by $5 million to $10 million due to seasonally higher energy.
Planned maintenance outages are projected to increase by $25 million as we have outages in all our regions this quarter.
We project adjusted operating earnings of <unk> 50.
<unk> 90 per share.
This level of fourth quarter, adjusted EBITDA may be a bit less than expected and here's how I think about it.
At current industry demand price and input costs.
It would be $15 million to $25 million higher adjusting for three factors.
First normalizing a planned maintenance outage.
Second adjusting for higher cold weather operating costs.
And third.
We're taking.
Some down more downtime to reduce our inventories in the fourth quarter, especially in North America.
Let's go to slide 11.
We compete as a low cost producer of commodity products sold or mature demand cyclical market.
It's become a leaner stronger company.
We initiated project horizon to streamline our organization.
And improve our cost structure.
Before inflation, we are targeting a run rate savings of $110 million by the end of 2024.
Yeah.
About two thirds of the target will come from operational cost reductions in our mills and supply chains by improving efficiencies.
Selling cost reduction capital spending pipeline and.
And reducing direct variable and indirect cost.
The remainder will come from selling administrative cost reductions, including the elimination of about 150 salaried positions globally.
Or nearly 7% of our salaried workforce.
Let's move to slide 12, and talk about how we are allocating cash to create value.
Year to date through the third quarter, we have generated $190 million in free cash flow.
We will continue to maintain a strong balance sheet.
Returned substantial cash to shareholders and create value by reinvesting in our business.
During the third quarter year to date.
We repaid $36 million of debt in October we repaid another $10 million.
As of November nine.
We have returned $110 million in cash to shareowners.
And plan to return $125 million this year.
Remember, we also deposit is $60 million in escrow in the third quarter.
So we can return more than.
And $90 million.
Our board of directors increased our regular dividend by 20% and declared a <unk> 30 per share special dividend.
We paid both totaling $25 million on October 17.
The board also authorized an incremental 150 million share repurchase program.
At the end of the third quarter.
In May 2022 in the September 2023, authorizations collectively had $167 million remaining.
And we'll continue to look for opportunities to repurchase shares at attractive prices.
So Michelle I'll turn it back to you. Thanks.
Thanks, John.
I know on slide 13.
Next tebo, we celebrated our two year anniversary.
We would have thought that would go through such extreme industrial <unk> in the first two years.
Being a low cost global producer with strong supply position and iconic brands.
Well.
We have created significant shareholder value.
Imagine what we can control.
But we have allocated cash to improve our financial position.
Reducing debt by 35% or $530 million to strengthen our balance sheet.
Second we continued to deliver on our investment thesis we.
Yes.
One 6 billion and adjusted EBITDA, which is a 19% margin.
We also generated 568 million.
Cash flow and returned 200 million to ship orders since our spin up.
Said, we continued to reinvest in our business to strengthen our low cost asset.
We have invested $318 million and accelerating investments in high return capital.
Capital project.
I'll conclude my remarks on slide 14.
We are strengthening our ability to create shareholder value throughout the cycle.
<unk> remains a cash flow story, and we are now projecting more than 270 million of that industry.
Yes.
We are building on our strong supply position, while we further developed Australia channel partnership.
Hope rational and hence remain key to our performance as we leverage our low cost assets and Brasilia.
John will walk you through our cost reduction initiative.
The ryzen, which will make us a leaner stronger company.
We understand that.
It's to reduce our global salaried positions.
Good eats was position would be eliminated.
We will have this employees by providing transition services and we want to thank them for their service.
Furniture dissipating strength important to us.
We continue to leverage our strength to drive it.
John So on invested capital.
Generate free cash flow and use that cash to increase shareholder value.
Ending a strong financial position, returning cash to shareholders and reinvesting in our business.
We will create long term value saw a talented team.
Thanks, Brad and good question, Hey, everybody location.
With confidence.
And motivated.
Is that like with heads.
With that I'll turn the call back to <unk>.
Thanks, Michelle and thank you John Okay, Greg we're ready to take questions.
Okay, ladies and gentlemen, if you'd like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command if youre using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question. Please press one zero at this time and one moment. Please for your first question.
Your first question comes from the line of George Staphos from Bank of America. Please go ahead.
Thanks, very much hi, everyone. Good morning, Thanks for the details.
The first question I wanted to hit on is with.
Project Horizon, the deck speaks to about $22 million of run rate savings.
From the salaried.
A reduction if I'm reading it correctly the footnote correctly.
In total what net benefit do you think you'll be able to get from the program in 'twenty four recognizing obviously.
It affects a number of people who work with the organization for a long time, and it's bittersweet, but what do you think the net benefit to the P&L would be from this program in 'twenty four.
And George Good morning, Jon to answer your question.
We're talking $110 million run rate by the end of 2024.
On this slide we are estimating that inflation for 2020 with approximately $50 million.
So the net benefit in total will be $60 million.
Once we get to the full run rate in 2024.
Expected, a net benefit of about $10 million to $15 million.
Yeah.
Thanks for that John.
Second question.
What we've been seeing in volumes, while maybe from a from a and.
And amplitude standpoint.
Is is larger and therefore worse than expected.
It's not unreasonable based on history, it's fairly consistent with.
With thing big drops in demand.
In very large economic downturns or deceleration.
Whether or not we're in a recession certainly from this company that I look at over the last year or so the volumes had been touch where I think packaging paper has been basically in a recession.
And.
What you normally then see though is not a real rebound in demand rather the world learn to be more productive.
And you have a new demand level for uncoated freesheet.
What do you think in terms of where we are right now in terms of any further demand destruction that we may see or may not hopefully it's resolved.
But if you had to.
Estimate at this juncture, what do you think your shipments Youre demand will look like in 'twenty four by market year on year. If you can provide that.
Hi, Joe Thanks for joining the call.
I think as you say we've had in our cycles.
Some more.
Well number of that decrease.
Due to economic factors.
Fact, two currently.
Matt.
The fact that you might need to take to Sweden.
A strong decrease we are still in our shred back too.
46% in the U S dollar.
Back to.
What does that mean you Rob.
I think.
All of this trend and we're going to continue to build on this strength what happens.
When you have strong elements that the inventory correction.
Yes, you could kind of thing.
Rich was in distress then nonetheless, it's not.
So any fall.
It's difficult to predict what we do know in 'twenty choice and do not expect to have.
The inventory correction again.
So when you're comparing to 23.
But we do better.
Yeah.
Matt.
Jeep.
I think there is no change.
5% globally.
Michelle.
Sorry go ahead John.
Yes.
Comment to that.
Yes. This is I think we agree with what Youre, saying.
To the extent towards North America and Europe.
Latin America.
Demand is down but most of that is all due to inventory correction.
But just let's focus that.
One part of our market.
We're not seeing that recessionary type decline that you referenced.
Okay.
So should we expect on a year on year basis that demand should match consumption in 'twenty four or would you expect some inventory rebuild such that you might actually see some year on year increases in percentages.
The great and my last one and I'll turn it over.
Can you talk about the you indicated you had a new win in North America. If I heard you correctly, if you could talk to that that'd be great and I'll be back in queue.
Yes, so we do expect to get lease.
Nevertheless consumption that we've seen maybe some inventory correction, we've got an upside that expectations to be more normalized inventory.
Demand consumption right now.
We did as you mentioned the upset if you remember.
Remember in North America, we mentioned last.
Last quarter, the one before with the closing of the 10th Avenue.
<unk> takes off in your business as far as the North America, and we did so.
What.
Okay.
Thank you I'll turn it over.
Your next question comes from the line of Matthew Mckellar from RBC capital markets. Please go ahead.
Good morning, and thanks for taking my questions, maybe just picking back up with project horizon. So any more color you can give on what kind of opportunities you're seeing to reduce cost and the manufacturing supply chain side in particular.
If there are any specific mills or even geographies that you call out as presenting the best opportunities and then are there.
Is there a need to spend capital to achieve some of these savings.
Yes, Matt a couple of them first of all some of it is realization of capital spent in terms of cost reduction and then we also do have firmed cost reduction capital plan for next year that will yield some benefit.
The other areas is that.
Continuing to work on efficiencies.
<unk> consumption chemical Consumptions and becoming.
More efficient in terms of our operations.
Okay.
I'll add to that.
We have some.
Opportunities in supply chain, especially North America, when we spin we kept the network we had before mostly impact we looked at what.
The opportunities to ameliorate optimize that network.
I know that we have two years of experience and understand better the market.
Well, we do we think we are.
Opportunities to significantly improve our supply chain operation efficiencies, especially in North America, that's the big.
So biogen.
Good opportunities to add too.
Great. That's helpful. Thanks for that.
Let me next at Sao.
Sounds like Youre expecting channel inventory correction to be largely complete by year end.
Would that be the same.
Similar across geographies are there any areas, where you call out as being a little bit different as you look from region to region and in particular here Im thinking about Latin America, which I think you've said is kind of exhibit a different demand trends in would be seasonally stronger in Q4.
Yeah I think.
In Latin America.
The strongest we saw was.
Brazil, Other Latin America, and I would say with the order back down and we have right now we can say this is John.
I will see booths, Europe, and North America, especially the last four weeks.
When we see how all of that.
The apex and what our customers say, thank you you bet.
Indications that inventory correction.
Okay. Thanks, that's all for me I'll turn it back.
Thank you.
Next we will go back to the line of George Staphos from Bank of America. Please go ahead.
Thanks, so much so I wanted to come back I think Matthew cute it up nicely on project Horizon. So was this a program that you've developed internally either from existing learnings you had within <unk> or the predecessor company or did you bring in somebody.
From.
Outside the firm to sort of teach you whatever you're doing to get these these net savings overtime and then.
Again, we've got supply chain, we've have efficiencies.
That's all well and good and we wish you well in the program, but is there something.
So were unique to this program relative to past cost reduction programs that you might have been associated with either <unk> or prior companies that we should keep in mind and give us more or less optimism monitor.
Its prospects.
Well two things on that.
George first of all we named it project Horizon, because this is a project yet.
It talks about the future for <unk>, So we knew coming out of the spin.
That we.
Okay.
More efficiently leaner more focused.
And the plan was to get there as soon as we got.
The spend behind us and so we did this internally this is about focusing on.
Focusing on our strategy and make sure that we have the organization and the capabilities, we need to execute going forward. So this is from an internal perspective.
Did not.
Go to outside resources.
And the same is true for operational side.
And some of this has to do with us.
Tuning to ramp up our investments that we've been doing and selling it in terms of our facilities both on the maintenance.
And in.
And the cost reduction capital, but it's also more of a concerted effort and focus on.
Areas of opportunity, we have to improve our operations.
We set a short timeframe.
We want to be able to execute this quickly.
We wanted to be able to so that you ought to be able to see it on the bottom line.
Pretty quickly now we talked about $10 million to $15 million in 2024, but this is going to be an exit rate.
<unk> seen it.
Beginning first quarter of 2020.
If I may John I would just add just in supply chain. When I was talking about network optimization, we did get some specialty stuff supply chain services to help us and we're continuing to have been helping us with designing on network and thinking about it.
Yeah.
Okay.
But I actually I just wanted to make sure I understood. The 10% to 15 I took that as a net realized.
With the run rate being after inflation, the $60 million or so did I did I get that correctly and if I got it correctly does that mean then there is another.
$30 million to $40 million benefit you get <unk> 25 based on the program.
That's the way the net benefits in 2015 after inflation and.
$60 million.
In place.
Okay and on the ops efficiencies.
I mean is it just purely you went machine by machine boiler bipolar and just did.
Indexing and yield analysis or was there something else related to the program I'm sure. It's much more but we've got the fundamental that you were.
Employing there.
Yes.
Probably a good way to describe it it was a bottoms up.
We work with.
Incentive.
Let's see.
Extensive feedback.
Information from everybody working in our facilities.
And some of it is you all sorts of op cost investment that Joe mentioned.
We have invested in some equipment installed mills at much better online data analytics tool.
So when we get the capacity now.
Much better than volumes and predictive them and act on them. So some of the cost program.
Asia I won't call. It AI, it's too much but that would go away.
Progress in the mills.
And I'll, let <unk> is helping US also at La <unk>.
There were some yet.
These are structural changes these are not.
Not trying to push it off of a void.
We're looking at $110 million.
These are sustainable changes that they do not include for example.
Increased volume and absorbing.
Absorb fixed costs that we had this year versus because of the lack of order downtime, we took inventory correction.
That's not included in the $110 million.
No interesting John.
One last quickie for me and then I'll turn it back and try to get back in queue.
I remember discussion about Latam seeing some improvement in volumes with the textbook program did that materialize and how is the order book in Latam going into 'twenty four thank you guys.
Yes, it did materialize mostly.
Although book is good.
Seasonality also which is always very good at the fourth quarter, so fourth quarter and that that would be the strongest one first quarter weakest west but thats it.
Matt.
Okay.
Thank you.
Yeah.
Mr. Staphos. Please continue with your questions.
Okay.
Mr. Staphos. Your line is open. Please go ahead.
Thank you so much last ones from me so share repurchase currently available authorization did you say $160 million and do you have an outlook on maintenance at this juncture gentlemen for twenty-four thanks and good luck in the quarter.
Yes, we are.
<unk> hundred $67 million.
Authorization.
And we have yet we are still developing.
Plans for 2024, and we'll probably be sharing day maintenance outlook with you in.
Now in the fourth quarter.
Okay.
At this juncture would you expect relatively flat or could it be lower or likely higher.
I would say right now are relatively flat.
Yes.
Thank you John.
Yep understood.
Thank you guys.
Thank you Joanna.
At this time there are no further questions I'd now like to turn the call back to Hans Bjorkman.
Thanks, Craig before I wrap up the call John Michel any closing comments. So first of all thank you for joining our call.
Remainder of cash flow story.
Protecting more than 200 million and free cash flow this year and remain committed to seeing handler.
And then to shareholders.
We remain confident in our ability to generate strong EBITDA and free cash flow throughout the cycle.
We will exit this industry down cycle.
Okay.
We allocate.
Capital to increase shareholder value we.
We used cash to maintain a strong balance sheet, returning cash to shareholders and reinvest to strengthen our business in.
With confidence into the future. So thank you everybody.
Thanks for joining our call today, we appreciate your interest in survival and we look forward to the discussions in the coming weeks and months ahead. Thank you so much.
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