Sylvamo Corp (SLVM) Q1 2025 Earnings Call Transcript

Thank you for standing by. Welcome to Sylvamo's first quarter 2025 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, please press star one on your telephone keypad. To withdraw a question, simply press star one again. As a reminder, your conference is being recorded. I'd now like to turn the call over to Hans Bjorkman, Vice President, Investor Relations. Sir, the floor is yours.

Thanks, Sarah. Good morning, and thank you for joining our first quarter 2025 earnings call. Our speakers this morning are Jean-Michel Rivieres, Chairman and Chief Executive Officer, and John Sims, Senior Vice President and Chief Operating 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 figures to U.S. GAAP financial measures are available in the appendix. Our website also contains copies of the earnings release, as well as today's presentation. With that, I'd like to turn the call over to Jean-Michel.

Jean- Thanks, Anne. Good morning, and thank you for joining our call. I'll start on slide four, highlighting some news we announced a few weeks ago. After over three decades of working in the paper and packaging industry, I have decided to retire at the end of the year. Serving as the chairman and CEO of Sylvamo for the past four years has been one of the greatest highlights of my career. I'm pleased that John seems to become the next CEO of Sylvamo. John was elected chief operating officer, effectively one, and will lead our commercial and operational functions. Following my retirement, John will assume the role of the CEO on January 1, 2026. As you know, John has served as a CEO of Sylvamo since the spin-offs and has been instrumental in our work to build the world's paper company and drive our company's strong performance. John Devlin was then Senior Vice President and Chief Financial Officer, effectively one, and is with us here for today's call. You'll hear more from Don in future earnings calls. He joined us on international paper after 27 years of the company. Don has extensive international leadership experience with a track record of building teams, developing strategic plans, and delivering results in diverse and challenging environments. He served in a variety of Leadership Rules, including Finance Director for European Papers, Chairman and CEO of IPs and Cotid Freesheet Business in India, and most recently, Vice President's Finance and Strategy for IP Industrial Packaging. I'm excited to have both John and Don in their new leadership rules to drive the company forward for future success.

Slide 5 shows our first quarter highlights.

First, we successfully completed a heavy plant maintenance outage quarter in Europe and North America. Also, these outages were executed well. We ran into some separate non-outage-related operational challenges, primarily in North America. John will talk more about the financial impact in a few slides. We also began implementing the previously communicated uncoated free sheet price increases to customers in Brazil and North America. Lastly, we returned nearly $40 million in cash to share owners. We distributed $18 million via the first quarter dividend, and as of today we have repurchased $20 million in shares this year. Let's move to the next slide. Slide 6 shows our first quarter key financial metrics we earn adjusted a bit of 90 million dollars with a margin of 11 percent in addition to having almost 30 millions of land maintenance auditive costs the first quarter is our weakest demand quarter every year in latin america we generated adjusting operating earnings of 68 cents per share as expected free cash flow was lower than the fourth quarter due to the timing of year end payment, one-time cash benefit in the fourth quarter from the monetization of working capital related to the closure of IP Joystone Mills, and the payment of annual incentive compensation in the first quarter. Keep in mind that our free cash flow is heavily weighted to the second half of the year.

The last two years, we generated almost 90 percent our free cash flow in the second half now john will review our performance in more detail thank you john michelle and good morning everyone i also want to thank uh don who's sitting right next to me um we're in a transition of moving the cfo roll quickly over to him i look forward to working in the future with don slide seven contains our first quarter earnings bridge versus the fourth quarter, the $90 million of adjusted EBITDA was in line with our outlook of $85 to $105 million. As Jean-Michel mentioned, we had some operational issues in North America, which impacted us by roughly $10 million, half from lower sales volume and half from operations and other costs. This also includes less volume from IP's Riverdale mill than was planned. Price and mix was unfavorable by $10 million, driven by the expected seasonally unfavorable mix in Latin America, lower pulp prices, and paper price decreases in Europe and in our export regions. These were partially offset by paper price increase realizations in North America and Brazil. Volume decreased by $30 million, driven by the seasonally weakest demand quarter in Latin America, lower North America volume from IP's Georgetown mill exit, and the operational challenges in North America. Operations and other costs were unfavorable by $12 million, primarily driven by unfavorable FX plus the North America operational challenges you mentioned earlier. Planned maintenance outage costs increased by $9 million as we executed major outages at our SIAD and Eastover mills. Input and transportation costs increased by $6 million, primarily driven by seasonally higher energy prices and the longer than expected extreme cold weather across the United States in the first quarter. Let's move to slide eight. We expect to deliver second quarter adjusted EBITDA of $75 to $95 million. We project price and mix to be favorable by $5 to $10 million. This is primarily due to favorable mix in Latin America and North America. We expect volume to be stable, volume would have been sequentially higher as we have the orders, but anticipate being unable to fill them all during the quarter. This is due to low inventory levels in North America as a result of our operational issues. In addition, we expect to get less volume from IP's Riverdale mill in the quarter. Therefore, some of our orders may get pushed into the third quarter. Operations and other costs are projected to be favorable by 10 to 15 million due to better operations and seemingly lower operating costs in north america and europe we expect input and transportation costs to improve by 5 to 10 million primarily due to energy planned maintenance outages are projected to increase by 36 million as we execute the heaviest outage quarter of the year across all three regions let's go to slide nine this slide illustrates the planned maintenance outage scheduled for the year full year we spent 27 million in the first quarter and expect to spend 63 million in the second quarter at mid-year we'll spend over 80 percent of the total annual planned maintenance outage cost unlike last year we had no major planned maintenance outages in In Europe, this year we have outages in both mills in the first half of the year.

Let's move to slide 10.

I'll now shift to talk about overall uncoated free sheet conditions across our region. In Europe, demand is down 7% year-over-year through the first quarter while imports appear stable. As a reminder, industry supply was reduced by 7% after two uncoated free sheet machines closed late last year. In Latin America, demand is up 3% year-over-year through the first quarter, with most of the increase in Brazil, largely due to strong demand in the publishing segment. In North America, apparent demand is down about 1% year-over-year through the first quarter, driven by higher imports. This brings imports to almost 15% of overall North America's supply, which is on the higher end of historical ranges we still believe that real demand will be down about three to four percent this year as another reminder domestic industry supply was reduced by 10 percent after a few machines including ip's georgetown mill closed in the second half of last year we have strong order books across our region and all of our mills are running full we have more demand that we can supply right now due to our commercial team success combined with the supply issues we've been dealing with in North America. Consequently, going forward, we're going to take advantage of our global footprint to improve our mix and serve our customers in North America. As a result, we expect to have less exports to non-core markets. We are not going to give a full-year guidance with all the uncertainty. However, we do expect a significantly better adjusted EBITDA performance in the second half. This is due to lower planned maintenance outage expenses, improved commercial results, and better operations. Tariff uncertainty aside, we expect 2025 Latin America and North America combined full-year adjusted EBITDA to be slightly better than 2024. Europe's 2025 performance will be significantly worse than 2024 due to the $39 million of planned maintenance outage this year and worse market conditions as we're seeing signs of the pulp market weakening. Let's go to slide 11.

I want to take some time to discuss our European business.

As we look back on the Numele Mill acquisition, the mill generated about $70 million of free cash flow before overhead allocations in its first two years as part of CIVAMO. We exceeded over $20 million run rate synergy target by $5 million. The pulp mill modernization project exceeded its projected benefits as well. Unfortunately, compared to 2022, last year the mill experienced a $41 million increase in wood costs and a cumulative $63 million over the last two years. This increase in wood costs is due to the war, with Russia and Belarus stopping the export of wood fiber, reducing overall wood supply to the region. Additionally, high demand from the energy sector in the Nordics increased overall wood Stepping back and looking at our entire European business, our earnings performance is below our expectations. In addition to numerous escalated wood costs, high input costs, and challenging industry conditions have impacted demand and pricing. We're not satisfied with our performance and have installed a new Senior Vice President and General Manager effective May 1 to lead our talented team, further develop our strong customer relationship, and improve our performance. We are focusing on reducing costs across the region. We'll be improving our products mix by upgrading some capabilities at SIOT. We are working to reduce wood costs and are targeting best-in-class efficiency at the Noumela mill. I'll now turn the call back over to Jean-Michel.

Jean- Thanks, Jean. I'm now on slide 12. We understand that one of the main risks from today's environment is a global economic slowdown due to the current tariff situation, which could impact uncoated free sheet demand. Some shift in uncoated free sheet and post-trade flows are already starting to materialize. We also anticipate higher risk of inflation on our raw material, transportation, and capital spending. While this represents possible challenges, these risks currently appear manageable. Our global sourcing teams are already working on mitigation strategies as well as alternative sourcing options for some room materials plus optimizing modes of transportation. Regarding our major capital spending plans for the year, the business cases for this project include the possibility of higher costs, which are not expected to be material at this point. Let's move to slide 13. Although there is a lot of uncertainty around the tariffs and the impact on the economy, we are well positioned to manage through this environment. Over 90% of our raw materials are sourced locally, with very little coming from China. Regarding our shipments, the majority stay within their respective regions, In Europe and North America, more than 90% of our shipments stay within their respective regions. In Latin America, 80% of our shipments remain in the region. Although we export about 20% of our products from Latin America, we are well positioned as our Brazilian mills are some of the world's most competitive and low-cost and coated-free sheet facilities. Lastly, I want to remind everyone that even though imports tend to rise and fall for a variety of reasons, imports historically represent less than 15% of uncoated free-sheet industry supply in each of our three regions. Let's move to slide 14. I will take this opportunity to remind everyone of all the work we did to deliver our balance sheet over the past three years. After launching with close to 1.4 million net debt and a leverage ratio of 2.6 times, we have reduced our debt by about half, and our leverage ratio is now 1.1 times. We have no major maturities until 2027, plus we have availability on a revolver of 400 Our strong balance sheet, available cash on hand, plus the ability on our revolver, provides us with the ability to take care of our customers, run our business, and invest in our future. Our capital allocation strategy is to maintain a strong financial position. We invest in our business to improve our competitive advantages and return cash to shareholders. Our position of financial strength allows us to navigate this uncertain environment without changing our thoughtful, long-term approach to capital allocation. It allows us to serve customers while navigating economic headway. It also enables us to invest in our business even during times of uncertainty. And it preserves the flexibility to return cash to shareholders. We will continue to evaluate the opportunity to repurchase shares at an attractive price, with the $62 million available on our current share repurchase authorization. I'll conclude my remarks on slide 16. All of the work we have done to strengthen our financial position the past few years is providing us with flexibility. Our financial strengths and regional businesses have us well positioned to navigate the current tariff uncertainty. We are reinvesting in our business through a great pipeline of high-return capital projects, which will enable us to grow our earnings and cash flow in the coming years. Still, VAMO is creating shareholder value through strong cash generation and disciplined capital allocation. And we are in the process of executing a seamless CU and CFO succession plan as we prepare for my retirement at the end of the year. We are confident in our future and motivated by the opportunities that lie ahead. With that, I'll turn the call back to Hank.

Thanks, Jean-Michel, and thank you, John. Okay, Sarah, we're ready to take questions.

Thank you. Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. We do ask that you limit yourself to one question and one follow-up question. Thank you. Your first question comes from George Staffos with Bank of America. Your line is open.

Hi, everyone. Good morning. Thanks for the details. Jean-Michel, John, and Don, congratulations and all the best in the next chapters. And Jean-Michel, thanks for all the help, obviously. And you're not retiring yet, but thanks for all the help with our research, for everybody on this call since you've been public. I guess the question I had, I didn't really follow what the operational issues were. If you could give us a bit more detail in terms of what happened. And then I know you're not guiding on third quarter, but you mentioned you won't be in a position to recover some of the orders in 2Q. It sounds like some of that might be pushed into 3Q. Is there a way for you to size what that benefit might be as you recapture some of those orders, particularly as regards, you know, seasonality? You know, Brazil typically picks up to the third quarter as well.

Yeah, George, and thank you. The issues we had with, actually, the multiple reliability issues, both at our ticonderoga mill and our easter mill the majority of that is behind us we do have one issue that's intermittent so it makes it hard to troubleshoot on one paper machine at east over that actually is in our outlook uh in the second quarter and you know we think we're going to have that resolved uh we should have that resolved uh by this quarter the other thing i'll make a point about is um the impact of the the riverdale volume um because that doesn't show up in the operations but it's certainly showing up in the volume in fact um they've obviously been having some runnability issues themselves and it really started in the fourth quarter translated into when it continued into the first and it's also continuing into the second quarter that in itself has been about almost 30% of what they should be supplying us we haven't been getting so you can see it actually kind of build up in the first quarter we said the impact of all these issues was roughly about 10 million dollars I would say that the Riverdale conditions also are continuing into the second quarter, and, you know, some of that is in our outlook, but if you're trying to get to a number of what would, you know, what would the improvement be in the third quarter, something a little bit less than $10 million. Okay. Thank you.

And- So that'll show up in both ops and volume. Okay. And the related question that I had there was, Just in general, can you remind us then seasonally what goes well, third quarter versus 2Q? As I recall, LATAM volumes pick up. Is there a way to size that for us? No, you're not guiding on 3Q, but as we're trying to build out our bridges or refine them.

Yeah, George, you know, the best thing I would do is just look at what we've done historically. Okay. And we break it down by region, and we don't see much difference in that. Thank you, John.

Once again, if you have a question, it is star one on your telephone keypad. Your next question comes from Matthew McKellar of RBC Capital Markets. Your line is open.

Jean-Michel, congratulations on your upcoming retirement and congratulations also to John and Don for their appointments.

Hi, Matt. Thank you, Matt.

I'd like to start by asking, just around the changes at Syat and Nibala, can you tell us maybe just a bit more about what the upgrades to your capabilities at Syat entail and the market opportunity that's leading you to reposition your product mix? Maybe whether that's entirely serving demand in North America or if there's anything else going on there. And then at Nibala, what levers do you have to reduce your wood costs and improve efficiency? And as we kind of think about putting this all together, how do you have us think about how financially meaningful these changes could be and over what timeline?

Hey, Matt. So in SIA, to answer your first question, we've invested on the new and revised winder. This is giving us the capability to sell roles in SIA in interesting segments, small specialty role segments in Europe. We are quite a different position. I don't know if you've got that in mind. In Numera, we sell 50% of our business in roles, and we are very successful, and 50% in cut size. In Saia today, we sell 90% in cut size and only roughly 10% of roles. This is going to give us the capability to sell much more roles and enter into the specialty segment. So I hope I'm answering your first question. On Europe, in general, in Numola, we have great opportunities in operation. We don't run Numola mills at the same bench, OEE, or if you want cost performance, that we run the other mills. We've done some investment in capital, but also in people, and we're continuing to do that and that gives you quite a lot of cost opportunities to improve numela and in SAIA it's mostly mixed and also looking at our fixed cost mostly.

Yeah and I'll just add to that after you asked about the leverage that we have in reducing the wood cost so when we purchased the numela mill there was an agreement that we would continue to source the wood wood from a company that's owned by a store. One of the options we have is to go that directly right to the landowners, which cuts out some of the costs around that. The other opportunities we have is actually importing in the lower cost wood. And then there's operational improvements where we increase the yield and reduce the consumption of wood going forward. Those are some of the levers that we're pulling. In terms of the levers, how much and what we're targeting for is, you know, we're looking at and targeting at least a 10% reduction.

I think, Matt, you asked also a question on Europe profitability in general. And as we mentioned, we're clearly not satisfied. We are clearly expecting a significant improvement in 2026, and now building programs to be back to cost of capital in 2027. So that's the plan we have as of today.

That's helpful. Thank you for all the detail. Last one for me. There was a comment that some shifts in uncoded free sheets and pulp trade flows are already starting to materialize. Could you just elaborate on what you're seeing and kind of how that's affecting you by market? Thanks.

Yeah, I'll take that one. This is what makes it difficult around trying to assess the impact of tariffs because some of it is probably the most impactful to us could potentially be the secondary effects of the negotiations that are ongoing. And give you some examples that we've seen, like we talked about increased imports into the U.S. Some of that we believe could be due to pre-buying or getting ahead of the tariffs in North America as an example. We also have seen in Europe just reported this month by fast markets or Reese's that pulp prices decreased almost 40 euros a ton on on BEK coming out of Brazil, and that's really driven because of this significant decrease in pulp demand in China, and then that's coming over to Europe. So, that's some of the impacts that we're seeing as a result of this tariff situation here in the U.S.

Thanks, Gerald DeGaller. I'll turn it back.

Your next question comes from Daniel Harriman with Sidoti. Your line is open.

Thank you. Good morning, guys. And I echo the congratulations given by Matt and George. I had a question about your capital spending for the balance of the year. If we look at what you spend in the first quarter, that run rate won't get you to your guidance of 220 to 240 for the year.

So I'm just curious how we should think about that over the last three quarters understanding that you don't guide to cash flow but just trying to get a sense of what we should what we should be looking for uh the last nine months yeah daniel um we do um we haven't changed the revision on full year uh capital and whereas most of our outages in the first half of the year the you know the second half uh will be somewhat influenced by the large capital projects we have you know with associated with eastover both the speed up and the new sheeter so um the four-year guidance will still be you know 220 to 240. hi Daniel

i would just maybe add something in your question i think when you look at free cash flow and we've the I would call it the issue last year and the one before we are very strongly second half of the year cash flow or two last years was 90% of our cash flow the last two quarters of the year we expect about the same this year so I know sometimes in your modeling it's a little bit difficult to do but this is what we've seen historically speaking you've got it in our a panic slide, and we expect about the same thing this year, so a very significant increase in cash flow for the second half of the year.

Okay. Thank you guys so much.

Thank you.

The next question is a follow-up from George Staffos with Bank of America. Your line is open.

Thanks. John, Jean-Michel, Don, you mentioned on one of the slides that you think the North American demand is down 1%. But that is, I guess, if you will, higher than underlying demand because it reflects imports. So I guess two parts. Imports, you think, are going into inventory right now and pre-buying, putting that common together with another one you just made, that will be, I guess, something that has to be absorbed and be in overhang for a little while. And then I think you said overall you think demand is 3% to 4% on an underlying basis. Is that what your expectation will be for industry shipments over the rest of the year? And how would those figures map? When do you think they should ultimately align, demand versus shipments, 3Q, 4Q, and the like? I'll turn it over there.

Yeah, so the comment there was the apparent demand, and we call out the word apparent because of the calculated, you know, it looked at domestic shipments plus imports, you know, minus exports. And you know, that's being reported as down negative 1%, but we believe that underlying demand is really down 3% to 4%, to the point you just, you made, George, because the account and you count the imports as soon as it hits the port and typically you know that and there was a large surge of imports particularly in January in the first quarter and so we think that that has made demand look stronger than it actually is but yes it's an inventory and that will be probably consumed going forward if you look at the numbers and it's only I think it's reported But the February numbers, import numbers were a little bit more, I guess not full, but they were lower than January. So we think some of this is due to, you know, just the timing of the imports coming in makes the first quarter demand maybe look stronger than what we actually see.

And when do you think about- Go ahead, John.

No, that was Jean-Michel. Michelle, sorry. I just wanted to reintegrate when we look in terms of demand, especially for Sylvamo I'm talking, our order flow, not only because we've had some issues in the mills, but in general, the demand we're seeing with our customers is strong. Okay. We have food.

I think you were asking about domestic shipments, George. So my comment on this was that, you know, there were some capacity that's closed last So domestic, you know, just that in itself would lower domestic shipments. and then there was a mill that was recently announced that may be shutting down at the end of this year. But so, we would expect domestic shipments to be down just because of the capacity closures. But as Jean-Michel said, operating rates are in the mid, you know, low 90s domestically.

Very good. Another question I have, and I'll turn it over actually. So, So, the operational issues, thank you for going through those earlier, do they affect at all the progress on Eastover with your bigger projects? And if you can just give us a quick update on how that's going. No, they do not.

Just to be frank with you, they did not impact that. And actually, those projects are going well from a timing perspective.

So, we're still seeing, you know, start up next year on that. it's on time on schedule on time no impact there okay thank you john again ladies and gentlemen if you have a question it is star one on your telephone keypad i'll now turn the call back over to hans bjorkman for closing comments all right thank you everybody for joining our call today we appreciate your interest in silvamo and we look forward to continued conversations in the coming weeks.

Thank you very much. Thank you, everybody.

Once again, we would like to thank you for participating in Salvamo's first quarter 2025 earnings call. You may now disconnect.