Q3 2024 Sylvamo Corp Earnings Call
Speaker Change: Good morning. Thank you for standing by. Welcome to SILVAMA's third quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks you will have an opportunity to ask questions. To ask a question press star 1 on your telephone keypad. To withdraw a question press star 1 again.
As a reminder, your conference is being recorded.
Speaker Change: I'd now like to turn the call over to Hans Bjorkman, Vice President, Investor Relations. Sir, the floor is yours.
Hans Bjorkman: Thanks, Audra. Good morning and thank you for joining our third quarter 2024 earnings call. Our speakers this morning are Jean-Michel Rivieres, Chairman and Chief Executive Officer, and John Sims, Senior Vice President and Chief Financial Officer.
Hans Bjorkman: Slides 2 and 3 contain important information including certain legal disclaimers.
Hans Bjorkman: For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties.
We'll also present certain non-U.S. GAAP financial information.
Hans Bjorkman: Reconciliations of those figures to U.S. GAAP financial measures are available in the appendix.
Hans Bjorkman: Our website also contains copies of the earnings release as well as today's presentation.
Speaker Change: With that, I'd like to turn the call over to Jean-Michel.
Jean-Michel Rivieres: Thanks, Hans. Good morning and thank you for joining our call.
I'll begin on slide four.
We had a really strong third quarter.
Jean-Michel Rivieres: Our teams executed very well, delivering strong commercial and operational performance.
We continue to make good progress with Project Horizon.
Jean-Michel Rivieres: our cost reduction program to streamline overhead, manufacturing and supply chain costs.
Jean-Michel Rivieres: We are on target to exceed our 110 million yuan run rate saving goal by up to 10 million dollars.
Jean-Michel Rivieres: Lastly, these combined performances by our teams resulted in very strong earnings and outstanding cash flow in the quarter. Let's move to the next slide.
Slide 5 shows our key financial metrics.
Jean-Michel Rivieres: We earned adjusted EBITDA of $193 million with a margin of 20%.
Pre-cash flow generation was $119 million.
And we generated adjusted operating earnings of $2.44 per share.
Jean-Michel Rivieres: I'm proud of how our team delivered impressive results while taking care of our customers.
Jean-Michel Rivieres: More importantly, I'm proud of our team's commitment to putting people before paper to ensure everyone returns home safe at the end of each day.
Jean-Michel Rivieres: We are focused on building a resilient safety culture by involving every team member in our efforts to proactively eliminate risk and create a safe environment for everyone, every day.
Now John will review our performance in more detail.
Thank you so much, Jill, and good morning, everyone.
John Sims: Slide 6 contains our 3rd Quarter Earnings Bridge versus the 2nd Quarter.
John Sims: Price and mix was unfavorable by $4 million, driven by North America mix.
Volume increased by 10 million.
Driven by North America.
Operations and other costs were stable and better than projected.
reflecting solid operations across our mill system.
John Sims: Planned maintenance outages caused a decrease by $28 million as we had no major planned outages in the quarter.
Input and transportation costs increased by $4 million.
as negative fiber costs in Latin America.
John Sims: more than offset positives in energy and transportation in North America.
John Sims: I'd also like to commend our teams for their very strong all-around performance that resulted in a 20% margin.
Let's move to slide 7.
John Sims: We expect to deliver fourth quarter adjusted EBITDA of $150 to $165 million.
We project price and mix to be unfavorable.
by 20 to 25 million.
John Sims: This is due to pulp and paper price decreases in Europe.
Higher export mix in Latin America.
and customer mix effect in North America.
We expect volume to improve by 15 to 20 million.
mainly due to stronger volume in Latin America.
John Sims: Operations and other costs are projected to increase slightly due to an eight million dollar operating expense.
John Sims: for a planned 10-year turbine generator maintenance event at our Eastover Mill.
John Sims: This will be partially offset by better fixed-cost absorption from less economic downtime in North America.
John Sims: We expect input and transportation costs to increase by $5 to $10 million, mostly due to transportation.
and Ceasely Higher Energy.
Planned maintenance outages are projected to increase by 17 million.
as we have a planned outage at Eastover this quarter.
John Sims: An important part of our strategy is to be a low-cost producer.
John Sims: This time last year we initiated Project Horizon, a cost reduction program to streamline overhead, manufacturing, and supply chain costs.
Speaker Change: As Jean-Michel mentioned earlier, before inflation, we're on target to exceed our $110 million year-end run rate savings goal by up to $10 million.
Speaker Change: This will continue to be a focus for us moving forward.
Speaker Change: And we will provide more details in our next earnings call when we wrap up 2024.
Speaker Change: As was announced two weeks ago, Savamo and International Paper have agreed to mutually terminate the Georgetown Supply Agreement in December.
Speaker Change: International paper has also announced that the Georgetown Mill will cease production by the end of the year.
We have plans to support customers through this transition.
as they find alternative suppliers.
Speaker Change: Of the approximately 250,000 tons we expect Georgetown to supply us this year,
Speaker Change: This will have roughly a negative 400, I'm sorry, a 40 million earnings impact.
Speaker Change: assuming 2024 margins, i.e. no change in operating costs, prices, input costs, etc.
We retained about 100,000 tons of the most profitable products.
The End
Speaker Change: These products have largely been qualified and transitioned to our Ticonderoga and Eastover mills.
which will reduce economic downtime in our North America business.
Speaker Change: The combination of optimizing our mix of products, segments, and customers
while leveraging efficiencies from a simplified footprint.
will help us mitigate the loss of volume.
Speaker Change: As a result of the Georgetown closure, our North America business will become leader and more productive.
Also, we are continuing to focus on strategic initiatives.
to simplify the business.
Unlock Efficiencies
and Drive Earnings Growth.
Speaker Change: With the Georgetown Mill closing by the end of December, in addition to the capacity reductions announced earlier this year,
Speaker Change: North America uncoated free sheet capacity will be reduced by approximately 10%.
Speaker Change: On this slide, you can see the effect of these capacity reductions.
Speaker Change: The left-hand side shows the supply positions as of the end of the first half of the year.
and on the right-hand side
Speaker Change: You have the view after all announced capacity reductions have been removed.
Consistent with our strategy and our investment thesis,
Speaker Change: We are committed to the Uncoded Free Sheet business and are very well positioned
to help our customers win.
and their respective areas.
Let's go to slide 11.
Speaker Change: Uncoded free sheet industry conditions are improving in Europe and North America as seen on this slide.
Speaker Change: Next year, European demand is estimated to decline 2%. However, supply is expected to drop by 7%.
after two uncoated free seat closures later this year.
Speaker Change: Latin America demand and supply are both expected to be stable in 2025.
Lastly, North America demand is estimated to decline 3%.
However, supply is expected to drop by 10%.
Speaker Change: As industry conditions evolve, we are well-positioned to serve our customers for the long run through our talented teams, iconic brands, and our low-cost global footprint.
I'll conclude my comments on slide 12.
Episode 2
Speaker Change: I want to wrap up with some encouraging news as it relates to the Brazil goodwill tax dispute.
Speaker Change: Last month, a Brazilian federal regional court ruled in our favor on a court case covering two-thirds of the district.
Speeches of the Mouth.
Speaker Change: As a result of this, we are currently discussing with our lenders the possibility of eliminating the $60 million escrow requirement that we funded in 2023.
Speaker Change: The Brazilian tax authorities will appeal the court ruling and it could be several years before there is a final resolution on this matter.
Speaker Change: As of now, that's all we have to report on this.
We will keep you posted on any material changes.
the graph and
and there is also more detail in the appendix.
I'll now turn the call back over to Zah Masel.
Thanks, John. I'll conclude my comments on slide 13.
Speaker Change: His Vamo is a cash flow story, and we are creating share on a value.
to Strong Cash Generation and Disciplined Capital Allocation.
Speaker Change: I continue to be impressed with our teams as we work to take care of our customer needs and remain the supplier of choice.
who generated outstanding free cash in the third quarter.
Speaker Change: We are reducing our cost structure and are reinvesting in our business through a great pipeline of high return capital projects.
Speaker Change: which will enable us to grow earnings and cash flow in the coming years.
Speaker Change: We are committing to retain at least 40% of our cash flow to shareholders this year.
Speaker Change: Looking forward, we are encouraged by the uncoated free sheet conditions across our regions.
With that, I'll turn the call back to Hans.
Speaker Change: Thanks, Jean-Michel, and thank you, John. Okay, Audra, we're ready to take the questions.
Audra: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw a question, press star 1 again. We do ask that you limit yourself to one question and one follow-up question. Thank you.
Audra: We'll take our first question from Daniel Harriman at Sidotian Company.
Hey, good morning guys. Thanks for taking my call.
Audra: With the upcoming closure of Georgetown and then the announced strategy changes at IP,
Audra: To the extent that you can, could you provide any comment or ideas about how the capacity reduction has any impact on how you think about the Riverdale agreement that you have going forward with the company?
Yes, so, hi Daniel, thanks for joining the call.
Audra: You know, since we started the spin-off of IP and started Silvamo, we've been preparing for that.
Audra: So we know it will happen. We have no information on when. We've not been noticed of anything, but we're prepared.
Audra: The one thing which is important to understand with Riverdale which is different than Georgetown is Riverdale grades are grades we produce in all of our other mills.
So, if we were then going to go down...
Audra: We believe that the mixed improvement we will realize at current margins would essentially mitigate any potential negative impact to our earnings.
Audra: So Riverdale for us, we're ready, we're prepared, and if it was to happen, we'd probably be a break-even with the benefits we would have from it.
Speaker Change: Perfect, thank you. And then with the 100,000 tons that you are retaining of that business, has that all been transitioned over to your existing footprint or is that still ongoing?
Yeah, it's all been transferred. It's ready.
Okay, thanks guys.
Thank you.
We'll move next to George Stathos at Bank of America.
George Stathos: Hi everyone, good morning. Thanks for the details. Congratulations on a very strong quarter guys. My two questions to start, can you talk about what offset you may have
George Stathos: from, you know, tightening the footprint, et cetera, that would help to offset the, if you will, the gross impact from Georgetown and those 100,000 tons. So said differently, of the 40 million currently based on current operating margins or margins,
George Stathos: What do you think the net would be, all else equal, in 2025, given all the other things that you're working on? That's question number one.
George Stathos: When we look at free cash flow for the fourth quarter, based on where EBITDA is, based on CapEx and interest expense.
George Stathos: and then tax affecting that, we're coming up with something around $65 to $75 million for free cash flow. Could you talk to that? I don't know if there's a comment in the slides around that in terms of whether that's a reasonably good estimate or other things we should be thinking about. Thank you.
Speaker Change: Yeah, George, this is John Sims. Thank you for your joining the call. On your first question, and good morning, I'm going to be careful. We're not going to project anything in terms
Speaker Change: in terms of pricing and impact that they have next year. But certainly, as we put out,
The capacity
Speaker Change: closure, if you will, of the Georgetown Mill. It's going to be a net positive for the industry and on top of that with the other closures that have occurred. So again, you know, the $40 million impact we have is based on a
Speaker Change: 2024 margins, not projecting 2025 margins. Of course, there's other things other than
the impact of pricing that could impact that.
Speaker Change: Costs and other things like that. I also want to mention though, you know, we talked about Project Horizon
We are slightly exceeding our target of 110.
Speaker Change: We're now projecting a $120 million run rate. Now that reminds you that is before inflation. We estimated about $50 million of inflation this year.
Speaker Change: And we're running ahead of that, so we think that, you know, that also, we did horizon.
Speaker Change: in anticipation of Georgetown and so that also helps us mitigate the impact.
of the Georgetown.
John Sims: John, I understand. I guess maybe what I'm saying is, could you help us with, you know, the reduced economic downtime, the improved mix, and streamlining SKUs? Does, you know, holding everything else constant, we understand.
John Sims: While you need to do that does that add back five million, ten million, or too hard to say, or it's modest enough that it should, we should just think about forty million? And then my other question. I like that. Thanks. Yeah, I understand your question. Now that's factored into the forty million now.
John Sims: that impact. I see. Okay. Yes, it factors in the reduction of the simplification of the business and reduction of lack of order downtime.
Okay.
and on free cash flow for the fourth quarter.
Yeah, I would say that that's
That's approximately, I mean, that's.
Not out of the... Okay.
The realm of possibility, yes.
Okay, thanks so much. I'll turn it over.
Go ahead. Thank you.
Speaker Change: No, I'm just saying, we don't usually give an outlook on cash flow this way.
Speaker Change: I'm a little bit hesitant, but I don't, I don't see.
Anything that's wrong with your estimate?
Speaker Change: And as a reminder, if you would like to ask a question, please press star 1. We'll go next to Matthew McKellar at RBC Capital Markets.
Hi, good morning. Thanks for taking my questions.
Speaker Change: I'd like to ask about planned maintenance in Europe in 2025, which you've communicated I think will be in the $30 to $40 million range across SIAP and EMLA. Could you first maybe just remind us of where those outages will fall in the year? And then I'd assume Europe is the largest moving part year over year, but how do you expect your total maintenance outage costs in 2025 to compare to the 73 you're guiding to in 2024?
Jean-Michel Rivieres: So hi Matt, Jean-Michel speaking, thanks for joining the call. We will deliver a more precise estimate
in our next earnings. But directionally,
Jean-Michel Rivieres: The thing is, our European mills are mostly on a 24-month cycle, which means one year you have outage costs and the other year we don't have outage costs. That's probably the biggest change with this year.
Jean-Michel Rivieres: then there will be some small ones there and there but...
Jean-Michel Rivieres: and that's 40 million impact because we are on the year with allergies at both mills, Syad and Numbula next year.
Jean-Michel Rivieres: So, I don't have the exact number, but I would say when we finish the budget we'll phone them to you, but directionally.
Jean-Michel Rivieres: You take what we've done historically and you add the 40 million and...
Jean-Michel Rivieres: and that would be, that would be good. Both outage, by the way, would be on the first half of the year, the two European outage.
Speaker Change: Okay, thanks very much for the help there. Next I'd like to ask about the implementation of the European Union Deforestation Regulation, which has been pushed out a year, but what is your view on how its eventual implementation will affect the European Uncoded Free Sheet markets and maybe imports into Europe in particular?
So, yeah, I think...
Speaker Change: It's always the same thing. The intention of the EUGIs is a good one.
is we are.
Speaker Change: very in favor of controlling the wood and making sure we use appropriate wood with no deforestation. We do that all the time and I've always done it.
We've got some improvement in understanding what Europe is expecting.
I think that's why it's been moved, it's not because...
Speaker Change: people don't want to do it. It's because we need to be clear on how the law will impact some of the...
Speaker Change: things we do every day which we we don't know it's going to be treated.
Speaker Change: Considering potential import in Europe, I think it's a little bit early to say because it will depend on the details of the ruling, but it could have an impact, which would be.
positive for us being a European producer.
Speaker Change: Great, thanks very much and if I could just sneak one last one in on capital allocation. Can you share any updated perspective on how you may be evaluating resumption of share purchases here with where the shares are today versus how you potentially think about a special dividend?
Speaker Change: We haven't changed our strategy in terms of capital allocation. We maintain a strong balance sheet.
Speaker Change: We have a strong dividend which is the foundation of our cash return and as long as we find the repurchase share price attractive we will share back.
Speaker Change: And on special occasions, it could be we do one time, but I would say we've got still a lot of opportunities on repurchasing shares.
Speaker Change: So, we're looking at it like we look at all the elements, but we're committed to a 40% for this year, turned back to shareholders.
Okay, thanks very much. I'll turn it back.
Thanks, Pat.
Speaker Change: And we'll take a follow-up from George Staffos at Bank of America.
George Staffos: Hi, thank you very much. So as we look at your fourth quarter bridge versus third quarter
And thanks for doing that work for us.
George Staffos: Are there any things that we should particularly consider as continuing into the first half of 25 on that waterfall, particularly, you know, on slide seven, you know,
This price mix day
unfavorable recognizing that sequential not year-on-year.
George Staffos: But nonetheless, we have to worry about a little bit of pressure into the first half of the year based on what you can see right now.
Speaker Change: And then secondly, you know, we've been seeing generally pulp prices heading lower. Certainly you have some effect in terms of merchant sales of your pulp, but what's that doing to the cost curve and how the markets are developing on paper, particularly in Europe? Thank you, guys.
George Staffos: Yeah, let me, George, I'll take that. So from, if you look at the price and mix, certainly the full price and the European pricing as a result, because that does have a strong correlation between the two, we expect that to continue and
That'll be offset somewhat.
by some things that
and Lad Tam.
George Staffos: And then it increases throughout the year, so we're going to go from a very strong quarter, typically we have for lat-temp volume, into seasonally a little bit slower going into the first quarter.
I think from operations and costs, both...
George Staffos: The fourth quarter and the first quarter were burdened but with a little bit more operating costs due to colder temperatures in the northern hemisphere.
George Staffos: being offset somewhat by the warmer temperatures in LATAM. I do want to call your attention, and we call this out, that burdening our ops in this outlook is a turbine generator.
George Staffos: outage. It's a 50-day outage. It shows up in Ops. It's a 10-year inspection that we have and so what it means is that while that turbine generator is being inspected we're purchasing energy.
George Staffos: that we normally would be making and that's about a negative eight million dollar impact that won't repeat into the into the first quarter.
Okay.
Speaker Change: And John, maybe if I can just sneak one in to use a phrase, so overall again you've given us the guide for the fourth quarter.
Speaker Change: Should Latin America be up, given the uptick in volume, or will the mixed effect with exports be an offset? Said differently, if flat-TAM is flat to up, then North American Europe are holding more of the burden. Would that be fair? How would you have us think about that? Thank you.
Speaker Change: Yes, Latin America in the fourth quarter is up in volume. The mix is, um...
Speaker Change: let's say slightly negative, and that meaning because of Brazil. So Brazil demand is slightly down.
where the rest of the LATAM is up.
So that's having a little bit offsetting effect.
Speaker Change: in the fourth quarter outlook. So we're seeing a negative mixed impact in LATAM, but that's showing up in a positive volume.
Speaker Change: which you can see in our grid, or our outlook, because of the seasonally stronger land town. Okay.
Speaker Change: And we'll take a follow-up from Daniel Harriman at Sidotian Company.
Hey guys, thanks again. Just a quick one.
Speaker Change: North America is going to benefit from reduced capacity from Georgetown, but should we expect the same in Europe as capacity leaves the system in 2025?
Yes, I'm Daniel Jean-Michel, as we've
Speaker Change: I will show it to you before. There is reduction in capacity in Europe also.
Speaker Change: In total, there are two machines which are shutting down, which effect will be by the year-end. So we expect for both...
North America and Europe.
to have.
but demand decreased.
Speaker Change: So net should be good for volume, and if we have better volume, we have less LO in these two regions.
Speaker Change: and our operations and other costs, and that's across the board.
but North America and Europe.
Speaker Change: So we're already seeing less lack of order downtime in the European market.
The End System.
Speaker Change: Great. Thanks so much, guys, and best of luck in the quarter.
Thank you.
Speaker Change: And as a final reminder to ask a question press star 1. We'll go back to George Stathos at Bank of America
George Stathos: Hi guys, I know no guarantees in this certainly, but my last question
George Stathos: You know, if you're looking at demand, you know, both from North America and Europe that are, however you pitched it, flat up, should shipments be comparable with your demand outlook?
George Stathos: or do you expect shipments might track above or below and if so you know what would be the reasons that you see at this juncture? Thank you.
I think we expect about the same number.
Okay.
Speaker Change: and I forgive me I misspoke you you're looking for a demand to be down a little bit in Europe and in North America yes it should be the same what's that yes
Speaker Change: Yeah, I just want to make sure you're talking about the 2025 comment we made. Correct. I'm on slide 11. With demand down, call it 2 and 3 in Europe and North America, you expect shipment should be comparable from what you can see right now.
Yep.
Okay.
Thank you guys.
Speaker Change: And that concludes the question and answer session. I'll now turn the call back over to Hans Bjorkman for closing comments.
Hans Bjorkman: Thanks, Audra. Before we wrap up the call, I'll turn it back over to Jean-Michel for some closing thoughts.
Jean-Michel Rivieres: Thanks everybody for joining our quarter, our call. It was, as we said, a good quarter.
We intend to continue to maintain a strong financial position.
We intend to continue to return cash to shareholders.
Jean-Michel Rivieres: And one thing which we've talked a lot, and maybe not progressed as fast as we wanted to know, but it's going to accelerate, is reinvesting in our business to increase our competitive advantages.
Jean-Michel Rivieres: As we've told you before, we have a pipeline of greater than 200 million of high-return projects.
Jean-Michel Rivieres: As we are preparing a budget for next year, we are looking at some high-return projects that are nearing finalization of engineering work and even preparation for board approval.
So, we expect to...
Jean-Michel Rivieres: be able to invest and ultimately get the increased returns from this project.
relatively soon, for some of those 200 million dollars.
Jean-Michel Rivieres: So lastly, we're confident in our ability to generate strong earnings and cash flows through the cycle.
So we're looking at the upcoming quite positive.
Thank you to all of you for joining today.
Speaker Change: Once again, we'd like to thank you for your participating in Salvama's 3rd Quarter 2024 Earnings Call. You may now disconnect.
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