Q2 2025 Sylvamo Corp Earnings Call
Speaker #1: Good morning and thank you for standing by. Welcome to Sylvamo's second quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise.
Speaker #1: After the speakers' remarks, you have an opportunity to ask questions. To ask a question, please press star, then the number one on your telephone keypad.
Speaker #1: To withdraw your question, press star, then one a second time. As a reminder, your conference is being recorded. I'd now like to turn the call over to Hans Bjorkman, Vice President Investor Relations.
Speaker #1: Sir, the floor is yours.
Speaker #3: Thanks, Virginia. Good morning and thank you for joining our second quarter 2025 earnings call. Our speakers this morning are Jean-Michel Ribiras, Chairman and Chief Executive Officer; John Sims, Senior Vice President, Chief Operating Officer; and Don Deblin, Senior Vice President and Chief Financial Officer.
Speaker #3: 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.
Speaker #3: We will also present certain non-US GAAP financial information. Reconciliations of those figures to US GAAP financial measures are available in the appendix. Our website also contains copies of the earnings release as well as today's presentation.
Speaker #3: With that, I'd like to turn the call over to Jean-Michel.
Speaker #4: Thanks, Hans. Good morning and thank ou for joining our call. I'll start on slide four with our second quarter highlights. Our teams are committed to the success of our customers and are partnering with them to be the supplier of choice every day.
Speaker #4: Our operational performance improved during the second quarter, and the challenges we run in first quarter are no largely behind us. We completed the largest planned maintenance audit quarter, with add-in over five years.
Speaker #4: Lastly, we returned nearly $40 million in cash to shareholders with distributed $18 million via the second quarter dividend, and we repurchased $20 million in shares in the quarter.
Speaker #4: Let's move to the next slide. Slide five shows our second quarter key financial metrics. We earned adjusted EBITDA of $82 million, with a margin of 10%, in line with our expectations.
Speaker #4: This reflects having almost $70 million of planned maintenance outages in the quarter, which is the largest in recent history. We now have almost 85% of our planned intenance outage for the year behind us.
Speaker #4: We generated adjusted operating earnings of $37.00 per share. Free cash flow was negative $2 million. The variance to the second quarter last year is due to lower adjusted EBITDA and slightly higher capital spending.
Speaker #4: Keep in mind that our free cash flow is heavily weighted to the second half of the year. In the last two years, we generated almost 90% of our free cash flow the second half.
Speaker #4: Now, I will turn it over to Dom to review our performance in more detail.
Speaker #5: Thank you, Jean-Michel, and good morning, everyone. Slide six contains our second quarter earnings bridge, versus the first quarter. The $82 million of adjusted EBITDA was in line with our outlook of 75 to 95 million.
Speaker #5: Excluding the $13 million in FX headwinds in quarter, we would have been at the high end of our outlook. Price and mix was favorable by 12 million.
Speaker #5: Driven by a better mix in North America and Latin America, with lower export sales from both regions. Volume decreased by 9 million, mostly in North America.
Speaker #5: About half was due to less volume from IPs Riverdale Mill than planned. Over the last three quarters, they've produced about 80% of their 27,000-ton per month plan, and we expected that to continue into the third quarter.
Speaker #5: The other half was partially due to our own operational challenges we experienced in second quarter. Operations and other costs were favorable by 23 million.
Speaker #5: Driven by $18 million in improved operational performance in North America, and Europe. We continued to make progress in resolving the operational issues experienced in the first and second quarters.
Speaker #5: Other costs were also favorable by 18 million. Primarily due to green energy credits in Europe, and lower overhead costs. This more than offset the unfavorable impact of 13 million from FX.
Speaker #5: Planned maintenance outage costs increased by 39 million, largely as expected as we conducted complex outages in five of our mills. Input and transportation costs were favorable by 5 million, primarily due to energy in North America.
Speaker #5: Let's move to slide seven. Looking at industry conditions for the first half of 2025 versus the first half of 2024. In Europe, demand remained sluggish and is down 8% year over year.
Speaker #5: Industry capacity was reduced by 7% after two uncoded free sheet machines closed late last year. Paper prices stabilized in the second quarter but are under pressure entering the seasonally slower third quarter.
Speaker #5: Pulp prices in Europe significantly decreased in the first half of this year, contributing to uncoded free sheet pricing pressure. In Latin America, demand is down 2% year over year, with demand down 6% in other Latin American countries.
Speaker #5: However, Brazil is up 6%, due to strong publishing demand. Industry capacity across the region remains stable. In North America, reported apparent demand is stable year over year.
Speaker #5: Driven by higher imports, which were up nearly 40%. Much of this increase in imports is in converting and printing rolls, we believe that real demand will be down 3% to 4% this year.
Speaker #5: Industry supply was reduced by 10% after a few machines, including IPs Georgetown Mill, closed in the second half of last year, in addition, Pixel announced they will close their chill coffee Ohio mill in August.
Speaker #5: This will further reduce uncoded free ET capacity in North America by approximately 6%. Let's go to slide eight. We continue to monitor the U.S. tariff situation.
Speaker #5: And the potential challenges and opportunities that may unfold. In the first half of the year, we saw some shifts in uncoded free sheet and trade flows.
Speaker #5: This is one of the main reasons why imports into the US were up almost 40% through the first half. We're also keeping an eye on several cross-regional themes, for example, currency fluctuations with the US dollar devaluation against many currencies.
Speaker #5: Regarding our major capital spending plans for the year, the business cases for these projects included the possibility of higher tariff costs, which are not expected to be material at this point.
Speaker #5: We're staying close to our ustomers to understand their needs and opportunities to help them be successful. And we are focused on what we can control improving productivity, reliability, and leveraging our cost initiatives.
Speaker #5: Let's move to slide nine. Looking ahead, we expect to deliver third-quarter adjusted EBITDA of $145 to $165 million. We project price and mix to be unfavorable by $15 to $20 million.
Speaker #5: This is primarily due to paper and pulp prices in Europe. We expect volume to be favorable by 15 to 20 million. This is primarily due to stronger seasonality in both Latin America and North America.
Speaker #5: Operations and other costs are projected to be favorable, up to $5 million, due to improved operational performance. We expect input and transportation costs to be stable. Planned maintenance outages will improve by $66 million, as we have no outages planned in the quarter.
Speaker #5: We expect a significantly better adjusted EBITDA performance in the second half, this is due to much lower planned maintenance outage expenses. Improving volumes and better operations.
Speaker #5: Now I'll turn it over to John to talk about our capital allocation plans.
Speaker #6: Thank you, Don, and good morning, everyone. I'll pick up on slide 10. A long-term capital allocation strategy drives shareholder value. We are focused on maintaining a strong financial position, reinvesting in our business, and returning cash to shareholders.
Speaker #6: This allows us to stay focused on our customers, helping them win through commercial excellence efforts. It enables reinvesting in our business, enhancing our reliability, productivity, and improving our service through operational excellence initiatives.
Speaker #6: And our healthy financial position preserves the flexibility to return cash to shareholders. We'll continue to evaluate opportunities to repurchase shares at attractive prices with a $42 million available in our current share repurchase authorization.
Speaker #6: Let's move to slide 11. This slide shows how the de-leveraging of our balance sheet has enhanced our financial position. We have reduced our debt by about half, including more than $150 million last year, which we did in anticipation of the potential uncertainties in 2025.
Speaker #6: Our net debt to adjusted EBITDA now stands at $1.3 times. We have no major maturities due until 2027, plus we have almost $400 million available in our revolver.
Speaker #6: Our strong balance sheet and available cash on hand provide us with the ability to focus on our customers' run our business and invest in our future throughout the cycle.
Speaker #6: Let's go to slide 12. Our teams continue to develop our high return project pipelines with returns greater than 20%. We're investing in high return projects to generate earnings and cash flow.
Speaker #6: We want take this opportunity to highlight our 2026 and 2027 capital spending outlook. The purple shaded bars on this chart show our high return investments.
Speaker #6: The light purple is for our Easter investments, and the dark purple is for all other high return projects. As disclosed on our fourth quarter 2024 earnings call back in February, we are investing $145 million in strategic projects at our flagship mill in Eastover South Carolina.
Speaker #6: These investments will be spent from 2025 through 2027, with the majority of spending taking place next year. Overall, our capital spending increasing in 2026, but then dropping back down to prior levels in 2027.
Speaker #6: This outlook should provide you with a good sense of our capital spending for the next few years, and we will continue to update you as we refine our plans.
Speaker #6: Let's go to slide 13. We feel the importance of the strategic investments at our Easter mill warrants a quick refresh of our exciting plans.
Speaker #6: We have three high return projects that will reduce costs while improving efficiency and mix of the most competitive uncoded free sheet mill in North America.
Speaker #6: First, we are investing to optimize one of our two paper machines. The enhancements will allow us to reduce costs while improving our product mix across both paper machines.
Speaker #6: This investment should result in an incremental $60,000 of uncoded free sheet capacity. Second, we are replacing existing cut-sized sheet with a brand new state-of-the-art sheeter.
Speaker #6: This will lower our sheeting costs by up to 15%, reduce waste by maximizing paper machine trim, while providing incremental cut-sized capacity. This sheeter will allow us to provide improved reliability and additional flexibility to better serve our customers.
Speaker #6: Detail engineering work continues in many of the orders for the parts and equipment that have already been placed. All plans are on track. Once completed, these combined investments should create incremental adjusted EBITDA of more than $50 million per year.
Speaker #6: Resulting in additional cash flows and an internal rate of return of greater than 30%. Lastly, we are partnering the price companies, an industry leader in wood yard operations, to modernize our wood yard and improve our efficiency.
Speaker #6: This will result in more efficient, reliable, and cost-effective wood processing operations and allow us to avoid about $75 million in capital over the next five years.
Speaker #6: This wood yard modernization project is progressing as planned, and remains on schedule to begin the startup in early 2026, and will be completed by the end of 2026.
Speaker #6: Let's go to slide 14. Our strategy is to be seemingly focused on uncoded free sheet paper because we believe uncoded free sheet will be needed for a long, long time.
Speaker #6: Uncoded free sheet remains the largest and most resilient segment in the graphic paper space, and we view and we view uncoded free sheet industry landscape as an opportunity.
Speaker #6: We're investing to strengthen our competitive advantages to generate earnings and cash flows. We view these investments as high return and low risk, as we are staying in our core product line of uncoded free sheet and reinforcing our position as a supplier of choice for our customers.
Speaker #6: We will leverage our strengths to our talented teams, iconic brands, strategic channel partnership, and low-cost mills that drive high returns on invested capital. I'll now turn it back over to Jean-Michel.
Speaker #7: Thanks, John. I conclude my remarks on slide 15. We will create shareholders' value by partnering with customers so we remain the supplier of choice, maintaining a ong financial position to provide flexibility and reinvesting in our business through a great pipeline of high return capital projects.
Speaker #7: Enabling us to grow our earnings and cash flow. Sylvamo is creating shareholders' value through strong cash generation and disciplined capital allocation. Including share repurchases at prices well below our interesting value.
Speaker #7: And we are progressing well. We are still and see a full transition with John and Don. As we prepare for my retirement at the end of the year.
Speaker #7: We are confident in our future and motivated by the opportunities that lie ahead. With that, I'll turn the call back to Hans.
Speaker #5: Thank you, Jean-Michel. John and Don, okay, Regina, we're ready to take questions.
Speaker #8: If you would like to ask a question, simply press star, then the number one on your telephone keypad. To withdraw your question, press star, then one a second time.
Speaker #8: We do ask that you limit yourself to one question and one follow-up question. Our first question will come from the line of George Stavos with Bank of America.
Speaker #8: Please go head.
Speaker #9: Hi, everyone. Good morning. Thanks for all the ails. I guess the question I had for you is, can you talk a little bit about what the outlook is for South America in the third quarter?
Speaker #9: To the extent that you can talk about EBITDA and how things are trending, that would be helpful. And the second question would be, I remember from last quarter, I seem to recall that you were expecting North and South America on a combined basis.
Speaker #9: To be up in EBITDA versus '24. Is that still the outlook? And, and what are the puts and takes there? Thanks, guys.
Speaker #10: Hey, George. thanks. Looks so for our outlook, for our third quarter on that term, we're ecting that you'll see, you know, continued improvement. First of all, we have seasonally increasing shipments, and we've seen that typically and we expect that again to occur this year, and you'll see that in the third quarter.
Speaker #10: Second, of course, we don't have any outages. We had two significant major outages in the second quarter, down in Latin America, and so that is behind us.
Speaker #10: Our shipments were slightly lower than at we expected in, the second quarter because we were slow to come out in both of those outages that cost us about $10,000.
Speaker #10: But that, of course, that's behind us. and we'll be moving forward with that. The, the, second question you had was around, the combined earnings.
Speaker #10: And, in general, you ow, it's, it is, we don't give a, a full year outlook as you know, and these current market conditions, with the tariffs provides a lot of uncertainty.
Speaker #10: But right now, we believe that the combined earnings of both North America and Latin America could be slightly less than what they were last year.
Speaker #10: And this is mostly due to a kind of a change in position because of some of the, weakness that we've seen in other Latin American markets pricing.
Speaker #10: and that's really driven by, by the impacts of the tariffs and increase imports into those markets. And also, weaker demand. So in particular, in some of our Latin America markets, as we talked , other than Brazil, Brazil is up 6%, demand is strong there.
Speaker #10: And the other Latin America markets, demand generally is down 6%. And that's mostly driven by really Mexico. now, we 't ship into Mexico because of the tariffs they implemented, against Brazil there.
Speaker #10: But it does have a knock-on impact, to the other regions.
Speaker #9: Thanks, John. I'll turn it over. Appreciate that.
Speaker #8: Our next question will come from the line of Daniel Harryman with Sidoti. Please go head.
Speaker #11: Thank you. Hey, good morning, guys. Thank you for taking my estions. first, I just wanted start with Europe, and then the last quarter you spent quite a bit of time talking some changes that were made there.
Speaker #11: Obviously, the, the region continues to suffer from soft demand and lower pulp prices. And I'm just wondering if you could update us on what needs to happen either commercially or operationally to kind of stabilize performance there heading into 2026.
Speaker #10: Yeah, Daniel. The, Europe is a different, difficult market conditions. this is also driven a lot by the tariff impacts, particularly the impact it's had on market pulp.
Speaker #10: due to weak demand in China, as you ow, market pulp prices were going up in the first, first quarter, but then significantly decreased in the second quarter.
Speaker #10: And pulp pricing, is a driver of uncoded free sheet prices in, Europe. because of the level of non-integrated capacity that is there. So we're seeing akness in, in both pulp and uncoded free sheet pricing in there.
Speaker #10: Certainly, we need the, the market could, conditions to improve, you know, with pulp going up would be, part of stabilization. for the pricing there.
Speaker #10: But what we're really focused on, we talked about it is the factors that we can control, and that's improving our, our, our competitive cost position.
Speaker #10: so we're focused on and Saayat, around mix improvement as well as fixed cost reduction. And our new melon mill is reducing wood costs and, improving our operations there.
Speaker #10: Those are the ings that we're, we're focused on. we've got we believe the right leader, driving that. We've got the talented teams that are focused on that, and that's what the, the team is working .
Speaker #11: Okay. Thanks so much, John.
Speaker #8: Our next question comes from the line of Matthew McKeller with RBC Capital Markets. Please go head.
Speaker #12: Good morning. Thanks for taking my estions. you mentioned shifting trade flows and coded free sheet to the first half the year. Could you be just give us a sense of what the latest is that you're seeing on that front and how trends excuse me through the past couple of months, and into August have looked in particular?
Speaker #12: what are you seeing by market? Thanks.
Speaker #10: Yeah, Matthew. So relative to the first half of this year, we've seen a significant increase in trade in rolls, mainly coming into North America.
Speaker #10: And we believe it's in advance of, you know, the tariff, uncertainties. And so it's had an impact in creating making more supply available in North America.
Speaker #10: And primarily rolls.
Speaker #11: Okay. and, are you seeing any I guess changes in trends in Europe at this point?
Speaker #10: We, we've seen some pressure also from, importers trying to get into the European market, where we see it is some which have anticipated to have no access to US or difficult access with tariff.
Speaker #10: Trying to go to Ola. John was mentioning to you that prices in Ola were under pressure, and partially because of some countries trying to import at very low prices to Ola.
Speaker #10: And we didn't have that before. So, Ola is out of Latin America to be sure when—what I mean by Ola. So, we've seen it, as we said, in North America, especially in the first half, and we're seeing it a lot in Ola and the Middle East.
Speaker #10: So some of the traditional people who were used to sell to the US will today try to find other avenues and this is where we call with the flows impact.
Speaker #11: Okay, thanks very much for that detail. Next, let me just zoom out a bit here. What is your outlook for how uncoded free sheet demand in Latin America evolves over the next couple of years?
Speaker #11: Thanks.
Speaker #10: Yeah, we think that Latin America will continue to be maybe flat or slightly down. you know, think what we're seeing today, if you look at it, il's up 6%.
Speaker #10: So actually, Brazil demand year to date is, is up 6%. It's other Latin America markets that are down. And that's really, as I said earlier, is being driven by Mexico.
Speaker #10: And, you know, that's being driven mostly, we think, because of the tariff uncertainty that's occurring, you know, that's just driving through the economy in Mexico.
Speaker #10: We also see it in a couple of the other con, countries, in Brazil. But in general, we believe, we believe I'm sorry. Not Brazil, but in other Latin American markets.
Speaker #10: But in general, we believe the long-term trend will be flat to slightly down. And, and the whole, Latin America market.
Speaker #11: Thanks very much. And if I could just sneak one last one in here. I recognize that Eastover spending will be ramping into 2026.
Speaker #11: But how do you think about opportunity to lead into share repurchases with where the share price is at? Particularly with the balance sheet in good shape in the second half of '25 likely to be stronger from a free cash perspective.
Speaker #11: Thanks.
Speaker #10: Yeah, I think it's clear we have a pretty strong balance sheet. So we have a lot of, you know, capacity to take advantage and opportunistically buy back our shares when they're significantly undervalued.
Speaker #10: If have, a little bit over $40 billion that are still authorized from the board of directors. And so, we think we have plenty of capacity.
Speaker #10: Take advantage of repurchasing our shares.
Speaker #11: Thanks very much. I'll turn it back.
Speaker #8: Again, if you would like to ask a question, simply press star, followed by the number one on your telephone keypad. And our next question is a follow-up from the line of George Stavos with Bank of America.
Speaker #8: Please go ahead.
Speaker #9: Thanks, everyone. could you talk about the green energy credits that you received in 2Q? What was the amount? Are they non-recurring? And then, you ow, to the extent that you can comment, the fact that you're seeing so much in the way of imports into North America, is that affecting any of your tactics?
Speaker #9: And for that matter, the behavior of, you know, producers in the region, you ow, vis-à-vis their, their margin efforts? And then I guess relatedly, you're saying imports, I believe, into Europe as well from what I heard from you, Jean-Michel.
Speaker #9: You know, I recognize it's slow, but is it changing behavior at all? and how are ou contending with that? Thank you.
Speaker #13: George, this is Don too. Your first question, relative to the green credits in Q2, they were 8 million.
Speaker #9: Okay.
Speaker #13: And this is a current.
Speaker #9: It's, it's.
Speaker #13: Yeah, it's a something that recurs throughout year.
Speaker #9: Okay. Got it. Thank you for that.
Speaker #13: And the second set of.
Speaker #9: Behavior and what's going on? Thank you.
Speaker #13: Yeah. Well, you ow, with the import situation in the US, just to, you know, our view was that, a lot of that in the first quarter was due to anticipation of the tariffs being in, implemented.
Speaker #13: Given where we stand today with the tariffs, we're expecting imports to decrease into the US because of the high level of tariffs that are being applied, particularly on those countries that where those imports will be coming into.
Speaker #13: So in general, we believe North America, that with the closure of the chill coffee mill and the uction in imports, operating rates are gonna improve.
Speaker #13: Probably gonna be in the mid, 90s on the second half of the year. in terms of our tactics, no. I mean, think that our strategy, continues to be as we said to be, focused on uncoded free sheet.
Speaker #13: We want to be the supplier of choice for our customers. We're continuously working to improve our, our cost positions our competitive advantages and the values that our brands in this, you know, what we provide to the customers.
Speaker #13: this is why it's so important for us. We believe to debottleneck the Eastover mill so that we can produce more uncoded free sheet. and, you know, the timing's gonna look, we believe, pretty good on that given, where we think that the, operating rates where we think the import situation's gonna be, near term and also longer term.
Speaker #9: Yeah. I mean, John, I appreciate that. Have you seen, looking at Q2 and to date Q3, recognizing you can't comment on a forward basis, did the fact that you had more supply, perhaps from imports, change any of the competitive activity on pricing?
Speaker #9: as it a little bit more intense on pricing than you would've expected? I ink from your, your waterfall was a little bit worse than you would've ected.
Speaker #9: So if you can talk a little about that, you know, across the regions.
Speaker #10: Yes. I mean, I think the, candid answer is, you know, we put a price increase on, announcement to our customers in the first part of this year, and we realized much less than what we expected.
Speaker #10: And that was due we, we attributed to the increase in the imports. And also the fact that, with the announced closure of the chill coffee, there was an effort by, them to, sell their inventory at very low prices, which.
Speaker #9: Right.
Speaker #10: Impacted our ability to get the price increase that we would've expected. And so, yes, that did impact us in the short term.
Speaker #9: Okay. Thank you, John. I'll turn it .
Speaker #8: I'll now turn the call back over to Hans Bjorkman for any closing comments.
Speaker #14: All right. Thank you. I'm going to let Jean-Michel do a quick wrap-up. So, thank you, first of all, for all joining our call. We're in the center of facing some difficult industry conditions.
Speaker #14: But we've faced them before, so we have a very strong position financially, and we think we can continue to perform very strongly through the cycles.
Speaker #14: We're committed to our long-term strategy of reinvesting in our business to increase our competitive advantages. And returning cash to shareholders. We're in the process of executing seamless CO and CFO transition plan, which John and Don, as we prepare for my retirement.
Speaker #14: Our long-term strategy investment, thesis, remain intact. So we're really confident in our ability to generate strong earnings and cash flow. Through the cycle. Thank you for joining again.