Earnings Call Transcript - SLVM Q4 2022

Operator, Operator

Good morning. Thank you for standing by. Welcome to Sylvamo's Fourth Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, you will have the opportunity to ask questions. 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.

Hans Bjorkman, Vice President, Investor Relations

Thanks, Amy. Good morning, and thank you for joining our call today. Our speakers this morning are Jean-Michel Ribieras, Chairman and Chief Executive Officer; and John Sims, Senior Vice President and Chief Financial Officer. Slides 2 and 3 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 fourth quarter 2022 earnings press release as well as today's presentation. With that, let's hear from Jean-Michel.

Jean-Michel Ribieras, Chairman and CEO

Thanks, Hans. Good morning, and thank you for joining our call. I'll begin my comments on Slide 4. In 2022, we delivered significant accomplishments as we executed our three-pronged strategy of commercial excellence, operational excellence, and financial discipline. We worked hard to be the uncoated freesheet supplier of choice, which resulted in our outperforming industry shipments in all three regions. We improved our safety performance and defined our ideal culture, which would help us become the company in which employees care, trust, grow, and succeed together. We delivered strong earnings and free cash flow despite global supply chain challenges and unprecedented input cost inflation. We reduced our geopolitical risk and uncertainty by divesting our Russian business and agreeing to acquire the Nymolla mill in Sweden. We achieved a 30% return on invested capital, strengthened our balance sheet by repaying more than $370 million in debt and returned $90 million in cash to shareholders. I'm proud of our team and their accomplishments over the last year. Slide 5 highlights our 2022 full key performance metrics. We increased net sales by 28% to $3.6 billion. We achieved an adjusted EBITDA of $721 million, a 62% increase over 2021, and our adjusted EBITDA margin was 20%. We generated $269 million in free cash flow, which was more than $6.00 per share. I would like to point out that our 2021 free cash flow only included one quarter worth of cash taxes and interest. Our adjusted operating earnings increased by 72% to $7.84 per share. As we enter 2023, we are confident in our ability to continue to create value for our customers and shareholders. Slide 6 highlights our key performance metrics for the fourth quarter. Net sales were $927 million, a 19% increase versus the fourth quarter of 2021. Adjusted EBITDA was $170 million, up 38% versus 2021, with a margin of 18%. We generated $84 million in free cash flow, and adjusted operating earnings of $1.97 per share, which was more than double the adjusted EPS in the fourth quarter of 2021. These strong performances demonstrate our ability to continue to deliver on our investment thesis. Now, John will discuss our fourth quarter performance in more detail. John?

John Sims, Senior Vice President and CFO

Thank you, Jean-Michel. Good morning, everyone. Let's turn to Slide 7. Let's review our fourth quarter adjusted EBITDA versus the third quarter. In the fourth quarter, price and mix improved by $31 million as we realized higher price increases in all regions. This improvement was in line with our outlook. Volume decreased by $20 million. In addition to the usual seasonal slowdowns in Europe and North America, volume in North America was also impacted by channel destocking in the commercial printing segment, which I will discuss in more detail later. Operations and costs increased by $42 million, which was near the high end of our outlook. Twenty-five percent of this was in operations, largely due to seasonally higher costs in Europe and North America. The remaining seventy-five percent was in other costs. These include incremental incentive compensation accruals, unfavorable Brazilian foreign exchange, and unfavorable year-end LIFO. As expected, we spent $21 million more on planned maintenance outages, as this was our highest outage quarter in 2022. Input and transportation costs improved by $6 million with favorable energy and distribution costs, even after the unfavorable impact of $5 million due to the winter storms in the Southeast U.S. in December. Let's look at the 2022 uncoated freesheet industry fundamentals on Slide 8. Demand in Latin America and North America continued to rebound from pandemic levels, while demand in Western Europe declined slightly. In the first half of 2022, customers in Europe and North America could not get enough paper from domestic suppliers, so they turned to importers, primarily Indonesian mills. The deliveries of these imports began to show up in the third quarter and during the fourth quarter. They caused channel inventories to build especially in the North America commercial printing segment. At this point, commercial printers began to reduce their paper orders to rebalance inventories. It is important to note that the underlying demand for commercial printing in North America has declined slightly but in line with the slowdown of the economic activity. With the reopening of the Chinese economy, we expect increasing paper demand in China, which should absorb some of the Indonesian mills' production that has been imported into our regions. Importantly, uncoated freesheet industry capacity in our region is down 10% to 20% relative to pre-pandemic levels, which will continue to help the supply and demand balance. In sum, the demand is up in our largest regions, capacity is down in all regions, and we are confident in our positions with key customers. I'll turn it back to Jean-Michel to talk more about our newly acquired Nymolla mill.

Jean-Michel Ribieras, Chairman and CEO

Thanks, John. I'm on Slide 9. At the beginning of January, we welcomed our Nymolla colleagues to Sylvamo. These photos are from our day 1 celebration. The Nymolla mill sits well with our three-pronged strategy of commercial and operational excellence and financial discipline. It is one of Europe's largest integrated uncoated freesheet facilities and generates 85% of its energy from carbon neutral renewable biomass residuals. The majority of its purchased energy is produced without fossil fuels. The mill has a strong customer-focused culture and shares many of our values. The Nymolla team maintains strategic channel partnerships in a complementary geographic mix. It also has an excellent environmental position and is aligned with our environmental stewardship and social responsibility strategies. On Slide 10, you can see Nymolla's new oxygen delignification plant, which was part of the $40 million pulp mill modernization project that was completed and started up prior to our acquisition. The project included a new softwood digester, increasing softwood pulp capacity by 15%, which will allow us to reduce the use of more expensive hardwood. The mill is on its way to realizing the expected annual earnings benefit of $8 million. We are thrilled to have the Nymolla mill and their talented team as part of Sylvamo and have integrated Nymolla into our commercial and operational processes. Okay, let's turn to Slide 11, and hear from John on our first quarter outlook.

John Sims, Senior Vice President and CFO

Okay. Thank you, Jean-Michel. In the first quarter, we expect to deliver adjusted EBITDA of $200 million to $215 million. This table shows the quarter-over-quarter changes without the impact of Nymolla. We provide a $15 million to $20 million outlook for the Nymolla mill contribution. Price and mix are projected to decrease by $15 million to $20 million, primarily reflecting a seasonal mix shift in Latin America. We expect volume to decrease slightly by $5 million to $10 million, reflecting seasonally weaker volume in Latin America and continued inventory corrections in Europe and North America. Operations and costs are projected to improve by $10 million to $15 million as the unfavorable fourth quarter items will not repeat. We also expect input and transportation costs to improve by $5 million to $10 million, largely due to unfavorable trends and costs for natural gas and transportation. Maintenance outage expenses are projected to decrease by $29 million, as we will not conduct any maintenance outages in the first quarter. This will be a good time to point out that while Jean-Michel will provide a full year outlook for free cash flow, we expect the 2023 free cash flow to be weighted more heavily to the second and third quarters of the year. But we are confident in our full year free cash flow forecast. Please turn to Slide 12. Here you will see the three prongs of our capital allocation framework. This depicts how we think about allocating cash to drive shareholder value. At the time of the spin-off, we prioritized using cash to reduce debt. We also began to return non-discretionary capital spending to the appropriate level to maintain our low-cost assets. Now that we have achieved a much stronger financial position with less than $1 billion of gross debt, we are putting greater emphasis on returning cash to shareholders and reinvesting in our business to grow our earnings and generate cash. We remain a cash flow story. We will leverage our strength to drive high returns on invested capital and generate free cash flow. And we will use that cash to increase shareholder value by maintaining a strong financial position, returning more cash to shareholders, and reinvesting in our business. Let's move to Slide 13 to review our fortified financial position. Since the spin-off, we have reduced our debt by more than $500 million. At the end of January, our gross debt to adjusted EBITDA ratio was 1.4x, and our net debt to adjusted EBITDA ratio was 1.2x. Pension funds remain well funded at or above 95%. We do not have any significant debt payments due until 2027. Let's move to Slide 14. We will continue to reinvest in our business and maintain our low-cost assets and will fund high return projects to increase our earnings and cash flow. Our 2023 capital spending outlook includes $175 million to $190 million for non-discretionary spending and $35 million to $45 million for high return projects and to integrate Nymolla and achieve the synergies there. Our maintenance and regulatory spending plan includes $80 million for our Nymolla mill, as well as a spending plan for 2022 that was delayed due to supply chain challenges. Our maintenance and regulatory plan also includes an incremental $10 million due to inflation. We will also invest $30 million to $35 million in Brazil forestry, about a 10% year-over-year increase, to ensure long-term availability of sufficient volumes of low-cost wood, which are a critical component of our competitive advantage in Latin America. I'm now on Slide 15. We have created substantial shareholder value in the 16 months since the spin-off. We fortified our financial position, reduced debt by more than 35% and achieved a $1 billion gross debt target. Returning cash to shareholders is a core component of our investment thesis. We have returned $111 million in cash to shareholders, with $21 million in dividends and $90 million of share repurchases. Since the spin-off, we have repurchased 1.8 million shares. Also, we more than doubled our quarterly dividend to $0.25 per share, effective this quarter. We'll continue to reinvest in our business to remain the supplier of choice, to maintain our assets and competitive cost position, and to increase cash flow. I'll turn it back to you, Jean-Michel.

Jean-Michel Ribieras, Chairman and CEO

Thanks, John. Let's turn to Slide 16 to review our 2023 full-year outlook. In 2023, we expect to generate $760 million to $840 million in adjusted EBITDA, and $300 million to $330 million in free cash flow. Our adjusted EBITDA outlook assumes slightly favorable price and mix against input costs, and relatively stable volume, since we expect channel inventory correction to be resolved in the first half of this year. Our planned maintenance outage expense would be about $20 million higher this year than last, with outages in Saillat and Nymolla. We're expecting favorable trends in energy, input, and transportation costs. Our free cash flow outlook reflects an increase in earnings, reduced interest expenses, and the elimination of foreign tax credits on our Latin American earnings. It also reflects the increase in capital spending that John reviewed. Let's wrap up our comments on Slide 17. We remain committed to our investment thesis. We strive to remain the employer, supplier, investment of choice. We are grateful for our talented and engaged colleagues and their dedication to working safely, delivering on customer commitments, and creating value for our shareholders. We're also grateful for our customers. Without their continued support and partnership, we could not succeed. Executing our three-pronged strategy of commercial excellence, operational excellence, and financial discipline will enable us to continue to create long-term value for our shareholders. We will continue to leverage our strength to drive high returns on invested capital and generate cash. And we will allocate capital to maximize shareholder value. Increasing cash returns to shareholders is one of our key objectives. With that in mind, we are considering alternatives regarding the current limits on restricted payments. We remain committed to creating value for all of our stakeholders as we build our desired culture, one in which we care, we trust, we grow, and succeed together. With that, I'll turn the call back over to Hans.

Hans Bjorkman, Vice President, Investor Relations

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

Operator, Operator

Thank you. Our first question comes from George Staphos with BoA Securities. You may begin.

George Staphos, Analyst

Thank you. Hi, everyone. Good morning. Can you hear me okay?

John Sims, Senior Vice President and CFO

Yes, George. Hi. How are you doing?

George Staphos, Analyst

Doing well. Thanks for all the details, and congratulations on the progress in the year. My first two questions will be around volume. And so, Jean-Michel, I think you said in your prepared remarks at the end that you expect stable volumes. And I'm just trying to determine whether that's underlying demand that you're referring to or your own shipments when considering the fact that I think you said channel destocking is still going to be occurring through the first half. Relatedly, and my second question, so you talked about the impact of imports and what triggered that, and that was very helpful. Recognizing there is a lag on this data, the imports continue to rise at least in North America. What do you attribute that to the extent that you can comment? And what is embedded in your forecast for '23 about the impact of imports in North America, but certainly anywhere else you care to discuss? Thank you.

Jean-Michel Ribieras, Chairman and CEO

Thanks, George. Two separate questions. I'll start with the volume. I'm talking about our volume. I think, when we look at the full year and what we are winning with customers, I feel comfortable we would have a great year. Even if you take the inventory correction, we're full in Latin America. It's a little less in North America and in Europe, but it really depends on segments already. If you take the commercial printing segment, it is weak, and that's probably where the inventory is the highest. If you take the cut size segment, it's quite good. Concerning demand, we're still seeing strong demand growth in Brazil. Brazilian cut size is back to above pre-COVID. The demand in North America is difficult to forecast. But I would say, maybe not as strong as last year where imports impacted, but still good. Europe, we have the trending slight decrease, which is normal. Your question on inventory, here is my understanding on inventory, and it comes mostly from the imports. The question on imports comes from a lot of discussion recently, actually we have had with customers. In the first half of last year, as you remember, there was a little bit of a panic, I would call it, in the markets. And this is true in North America and in Europe, where our customers had a lot of work. From a supply standpoint, we were still tight because of the demand and also, we were still getting out of COVID and probably not efficient like in a normal timing. So, this is when a lot of this import was ordered. And it didn't come in the first half of the year as it would have been expected by these customers. It mostly came in the third quarter and fourth quarter, which, by the way, if you look at the statistics in North America, you can see the increase in the import is mostly during third and fourth quarter. I think there was the pipeline defect because supply chain was very difficult in the first half. So, the cost of sending paper from Asia to North America or Europe was 10x what it is today, so it was extremely high. So that has created clearly an issue in the inventory that even our customers were not expecting to be so strong. I think that's one-time big impact. We will still have imports in Europe or in the U.S. I expect it to be like the trends we've had up to now between 10% to 15% maximum, but not between 15% and 20%, which we had in the fourth quarter. So, I think this is once the destocking will have happened, we will be back to more traditional long-term trends.

George Staphos, Analyst

Jean-Michel, I'll turn it over, but those ratios you mean as a percentage of consumption or year-on-year growth? Just one point of clarification there.

Jean-Michel Ribieras, Chairman and CEO

Percentage of demand, of consumption.

George Staphos, Analyst

Thank you.

Operator, Operator

Our next question comes from Paul Quinn with RBC Capital Markets.

Paul Quinn, Analyst

Yes, thank you. Good morning, everyone. I have a question regarding the increase in capital expenditure this year. It seems that you missed around $30 million in spending last year. Could you provide some examples of where the $30 million to $35 million will be allocated to high-return projects? Also, do you anticipate maintaining this elevated level of capital expenditure in 2024?

John Sims, Senior Vice President and CFO

Yes, Paul. It's John Sims. Our capital spending this year is higher than last year. Some of this increase is due to carryover from projects we had planned for 2022 that were delayed by the supply chain issues into 2023. Additionally, spending is impacted by the Nymolla mill, which we've mentioned. We initially expected to spend between $130 million and $150 million on maintenance, regulatory, and reforestation. However, the revised estimate is between $175 million and $190 million, which includes around $15 million to $20 million specifically for the Nymolla mill. We've also considered the effects of inflation, which has impacted input costs, labor, and capital expenses, and we anticipate that will continue. Regarding your second question about high-return cost reduction capital, we have a planning number at this stage. We are working on a pipeline of projects that will be approved, ensuring that we direct funds toward high-return projects in our most competitive mills to secure long-term benefits. We will share more details as those projects are approved in the future.

Paul Quinn, Analyst

Okay. And then, if I could just switch over to free cash flow, we have a strong guidance of $300 million to $330 million. Could you remind us about the restrictions on share buybacks and what you are doing to address some of the limitations on returning that cash?

John Sims, Senior Vice President and CFO

So, we, in the fourth quarter, were able to increase the restricted payment covenants that we had from $75 million to $90 million. And that's what, as you know, we fully utilized that and returned $90 million back to shareholders in either in the form of dividend or also in terms of share buybacks. What we did last year, $10 million in dividend and $80 million in share buybacks. We're still limited to the $90 million right now as we speak, and this is one of the things that Jean-Michel alluded to, it is a priority for us. As you rightly say, our free cash flow is projected to increase this year versus next year. And so, we're working on different options that we'll be reviewing with the Board and our intent is to get flexibility, to increase what we can return back to shareholders above the $90 million.

Jean-Michel Ribieras, Chairman and CEO

It's one of our priorities. We do want to return more cash to shareholders. This is a key objective.

Paul Quinn, Analyst

Well, that's great to hear. Best of luck. Thanks.

Jean-Michel Ribieras, Chairman and CEO

Thank you, Paul.

Operator, Operator

Thank you. Our next question is from Ed Brucker with Barclays. Please go ahead.

Ed Brucker, Analyst

Hey, thanks for taking my question, and congrats on the good quarter. My first one was just on some of your comments right at the start on what seems like some outperformance in shipments in the quarter versus peers. Just want to get your thoughts on, is that taking share within the market? Or, I guess, just more details on what you're doing to kind of be the go-to uncoated freesheet provider?

Jean-Michel Ribieras, Chairman and CEO

Hi Ed, thank you for joining the call. We have been a long-term partner in this business. Sylvamo, with its emphasis on uncoated freesheet, aligns very well with key winning customers around the globe. This holds true in North America, as well as in Europe and Latin America. Consequently, our volume has generally outpaced the market. This isn't something new; it has been occurring for several years. However, it is particularly noticeable now, as it is a strong fit with our customers, who are very aligned with us, and we are experiencing growth. We are expanding through long-term partnerships with brands, offering a complete range of products, working with the best partners in the channels, and that makes a significant difference. Therefore, we aim to continue succeeding in this market, believing we have the right key players in place.

Ed Brucker, Analyst

Got it. My next question, just on M&A. The Swedish mill sounds like a pretty good acquisition. It seems like just in the space, the consolidation could be a way to control what seems to be a declining uncoated freesheet market just in general and control capacity there. So, just want to get your thoughts on more M&A, if you're looking at other acquisitions in the size you'd be willing to do that, primarily in the context of your restrictions on share repurchases and the excess cash you'll likely have in 2023 with the $300 million free cash flow?

Jean-Michel Ribieras, Chairman and CEO

So, Ed, M&A is not our priority. We are satisfied with our core mills and what we have today. It will be purely opportunistic. But returning more cash is clearly our priority. So, this is more what we're going to spend our time on than looking at M&A. Nymolla was a unique, very opportunistic, great opportunity. We're going to continue allocating our capital more to a strong financial position. The return to cash to shareholders and great reinvestment in our business, that's going to be our priority.

John Sims, Senior Vice President and CFO

Yes. This is John. I want to emphasize that while the Nymolla was a significant opportunity for us, our primary strategy focuses on uncoated freesheet. This focus is one reason we tend to outperform the market, as our customers recognize our long-term commitment. We seek low-cost assets that offer a competitive advantage in the marketplace, allowing us to continue serving the uncoated freesheet sector and potentially generate strong cash flow over time. The Nymolla mill aligns perfectly with our objectives. Opportunities like this are rare, but when we refer to being opportunistic, we mean that acquisitions must fit our strategy of having strong, low-cost assets, which is exactly what the Nymolla mill represents.

Operator, Operator

We have another question from George Staphos with BofA Securities. Please begin.

George Staphos, Analyst

Thanks. Hi, everybody. I have a couple more questions regarding volume, but I also have other topics I'd like to address later. So I'll return to those. Jean-Michel and John, if we consider that imports are expected to decrease from 15% to 20% of consumption to 10% to 15%, and given that market consumption is likely to decline as per the usual trend, this suggests a significant reduction in imports for 2023 compared to 2022. Am I missing something in your assessment? Is there anything reassuring or positive feedback from DCs or your customers indicating that this is occurring? That’s my first question. For my second question on volume and trade flow, while China was locked down last year, this also impacted freight by limiting exports from China and Southeast Asia. With the reopening, we might now be seeing those imports arriving in North America and Europe, but could there be additional challenges from the reopening of supply chains? What are your customers saying about this, especially in relation to supply levels in markets that were quite tight last year in Europe and North America, which benefited your business?

John Sims, Senior Vice President and CFO

Yes, George, I'm going to start off, and then I know Jean-Michel probably want to weigh in. But when you look at the year for the full year for '22, imports into North America represented 13% of demand. Most of that was the increase as we talked about in the second half of that year. So, when we look at our projections, and there's a lot of moving parts on this. I mean, when we're talking about somewhere between the 10% to 15%, we're still seeing and projecting a potential increase of imports year-over-year into North America. Now be mindful that it is true that the cost of shipping from Asia into the U.S. has actually backed down to pre-pandemic levels. But there's still extensive duties that are applied to both the Indonesia and Chinese suppliers. As the Chinese market opens back up, when you look at it from a pricing perspective, net pricing perspective, it's still probably more advantageous for them to ship into China. The other thing we didn't talk about a little bit, but some of the imports also came in from Europe. The European freight costs continue to be extremely high. So, I think when we look at our outlook and how we're thinking about it, we do see and we're projecting that we're going to see some increase of imports into the U.S. But like, I think we're trying to allude to, it's not going to be out of the norm than what we've seen before, and it's manageable.

George Staphos, Analyst

Okay. If I could sneak one in, just in terms of your guidance. So, the first quarter is well over $200 million in terms of EBITDA. Look, recognizing there's lots of seasonality and certainly maintenance outages are lumpy, if I just annualize that, I would wind up with an EBITDA outlook that's probably above your full year range. So, are you just trying to create or give yourself some cushion against the unknowables that occur in any year? Were there some specific things that you want us to remember in terms of the cadence of your EBITDA for the rest of the year? Thank you, guys.

John Sims, Senior Vice President and CFO

I think there are two points to consider, George. First, there were no outages in the first quarter. In fact, our appendix shows that the two quarters with the highest outages are the second and fourth. That's an important factor to keep in mind. However, I want to emphasize that we are accounting for a lot of economic uncertainty in our outlook. That’s why we’ve provided a range; we're confident in it considering both positive and negative projections. For instance, we mentioned that imports in North America could have an impact, while the reopening of China could be beneficial for us. Another point we didn’t cover, but Jean-Michel touched on, is the robust demand we're seeing in Brazil. Brazil's uncoated freesheet demand has surpassed pandemic levels, with nearly a 19% year-over-year increase. Demand for cut size is also strong, coinciding with reports that in the U.S., office returns are now at 50% and expected to increase, which supports our outlook. Our projections incorporate both positive and challenging scenarios.

George Staphos, Analyst

Thank you, John.

Operator, Operator

Our next question comes from Paul Quinn with RBC Capital Markets. Please go ahead.

Paul Quinn, Analyst

Yes, thanks. I just wanted to follow up on this new priority of returning cash to shareholders that you've got and just talk about some of the alternative solutions you've got on trying to remove some of the restrictions from your payment basket to shareholders.

John Sims, Senior Vice President and CFO

I would like to share that with you, but some of these options may involve confidential information, so we can't discuss it right now. We also need to ensure that our Board has approved it. However, we are exploring all options, and we are confident that we will be able to address the increase to $90 million this year.

Paul Quinn, Analyst

All right. That's all I have.

John Sims, Senior Vice President and CFO

Thank you.

Operator, Operator

Our next question comes from Adam Ritzer, private investor. Please go ahead.

Unidentified Analyst, Private Investor

Hi, thanks for taking my call. Most of my questions have already been answered. Regarding your debt situation, you are currently about 1x levered. Is there any reason you would need or want to go below that in terms of cash deployment?

John Sims, Senior Vice President and CFO

No, I think the short answer to your question, Adam, is that we're really comfortable with where we are. I mean, we've set the target of $1 billion, and that's gross debt because we want to be able to have the financial flexibility through the cycle to invest in our business, either in high-return projects or whatnot. That's where we are. Now, could we reduce our debt? We may, but not because of the payment restrictions that we have, but that's not the plan right now.

Unidentified Analyst, Private Investor

Right. Until the payment restrictions are lifted, the cash will continue to accumulate, but ultimately, you don't want to maintain too little debt. Got it.

John Sims, Senior Vice President and CFO

Yes.

Unidentified Analyst, Private Investor

The other question I had relates to Europe. I know in the past, you said about, I think it was 25% of Europe's capacity is not fully integrated. I'm not that close to the markets as you guys are, but are there any other mills in Europe or capacity reductions or potential consolidations that you guys have heard about or rumored to further consolidate the European markets?

Jean-Michel Ribieras, Chairman and CEO

I think we cannot really answer that question. We don't comment on rumors. But your numbers in terms of non-integrated capacity and which means less competitive for Europe of about 25% is correct.

Unidentified Analyst, Private Investor

Okay. Appreciate it. Thanks very much.

John Sims, Senior Vice President and CFO

Thank you, Adam.

Operator, Operator

Thank you. Our next question comes from George Staphos with BoA Securities. You may begin.

George Staphos, Analyst

Hi, I appreciate the opportunity to ask a question. This will be my last one, I promise. Regarding this year's CapEx, you've explained the reasons for the increase well. However, looking back, priorities and the market have shifted, and your positioning has likely improved significantly, but the rise in CapEx is still quite large. Could you clarify what you consider a more normalized level of CapEx for the company while factoring in return projects and ensuring optimal performance? Additionally, when you assess your expenditures, do you believe you are spending at least as much, if not more, than the industry average? From my perspective, it seems like your spending is quite healthy, and it appears to be yielding positive results. What do you view as normalized CapEx, and are you spending comparably or more per mill or per ton than the industry averages? Thanks, and best of luck this quarter.

John Sims, Senior Vice President and CFO

Yes. Thank you, George. Our focus is to generate cash. We want to be very judicious in the capital that we spend, but also the engine of our cash is our low-cost assets, as well as our customer relationships and our people, of course, but this is a key focus. If you look at the average of our capital when we do this, we'd really go back to pre-2016 because it was '16, after that '17, '18, '19, capital was pulled back. We would say that we were underinvested during that time period. If you look at the period prior to 2016, we're spending essentially pretty much on average what we've spent then on a per facility basis, with the exception of inflation. In 2016 dollars, you have to inflate it and there was quite a bit of inflation the last two years that we've seen in the maintenance spending. So, the short answer to your question is, yes, I think the range that we talked about earlier, $175 million to $190 million for maintenance, regulatory, and forestry is probably what we feel is the appropriate number going forward. We didn't mention this, but I'm going to take a little extra time. It is good to point out why we are increasing spending in forestry down in Brazil. We are increasing by 10% because of what I said earlier; back in 2019, '20, and '21, we underinvested in our forestry in Brazil. We typically have 80% of our wood consumed from our own forest, and 20% we have to go out to the outside market to get the wood. Not only that, but there were forest fires and insect damage. We are now approaching 70%, and that 10% is a big deal from a cost perspective for us. We're going to be investing more in the forestry to replant land that we have, that we own, or through our partnerships that we haven't been adequately sustaining, and so we're spending that to go forward. But again, because of the rotations of the wood, six to seven years, we really won't see the benefit of that until out in the future, but that's the other reason we're increasing our spending.

George Staphos, Analyst

Yes, that makes sense, and certainly is consistent with a lot of the things that the LatAm folks talk about. And it's a low-cost source of wood, so you are seeing investing in conversion of that fiber as well, so you've got to keep your base. Thank you, John.

John Sims, Senior Vice President and CFO

Thank you, George.

Operator, Operator

Thank you. I'll now turn the call back over to Hans Bjorkman for closing comments.

Hans Bjorkman, Vice President, Investor Relations

Thank you for joining us today. We appreciate your interest in Sylvamo. I'm going to ask Jean-Michel to give a quick summary of the call today.

Jean-Michel Ribieras, Chairman and CEO

Thank you all for joining us today. I want to emphasize our key message. In 2023, we anticipate growth in our earnings and free cash flow compared to 2022. Our goal is to return more cash to shareholders. Regarding capital allocation, we aim to maintain a strong financial position, return cash to shareholders, and reinvest in our business. While 2023 presents some uncertainties, we believe we have the right strategy and the right team to achieve our goals. We are confident in this outlook. Thank you.

Operator, Operator

Once again, we'd like to thank you for participating in Sylvamo's fourth quarter 2022 earnings call. You may now disconnect.