Sylvamo Corporation (NYSE:SLVM) Q4 2023 Earnings Call Transcript

Sylvamo Corporation (NYSE:SLVM) Q4 2023 Earnings Call Transcript February 15, 2024

Sylvamo Corporation beats earnings expectations. Reported EPS is $1.16, expectations were $0.82. SLVM isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and thank you for standing by. Welcome to Sylvamo’s Fourth Quarter 2023 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. [Operator Instructions] 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: Thanks, Greg. Good morning. And thank you for joining our fourth quarter and full year 2023 call today. Our speakers this morning are Jean-Michel Ribiéras, Chairman and Chief Executive Officer; and John Sims, Senior Vice President and Chief Financial Officer. Slides two and three contain important information, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non-U.S. GAAP financial information. Reconciliations of those 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 will turn the call over to Jean-Michel.

Jean-Michel Ribiéras: Thanks, Hans. Good morning and thank you for joining our call. Let’s turn to slide four, please. In 2023, we created value for share owners. By managing what we could control, as we executed our three-pronged strategy of commercial excellence, operational excellence and financial discipline, to strengthen our competitive advantages in our core uncritical market. First, we allocated cash to improve our financial position by repaying $76 million in debt, achieving a net debt that just did a big job 1.2 times. Second, we continue to deliver on our investment thesis. We earned $607 million adjusted a bit debt, generated $294 million in free cash flow and returned $127 million in cash to share owners. Third, we invested to strengthen our low-cost assets.

We invested $210 million and continue to accelerate investments in high-return capital projects. We also acquired the 500,000 ton Nymolla mill in Sweden for $167 million. This is a great asset. With a talented team, the mill is performing well and we are benefiting from the $40 million pulp mill modernization project that was completed just before the acquisition. In a tough market, the mill generated about $50 million in cash before any allocated overhead. Slide five highlights our 2023 full year key financial metrics. Our adjusted EBITDA was $607 million, which was a 16% margin. Our $294 million of free cash flow was more than $7 per share. In 2023, our free cash flow was heavily weighted to the second half of the year. We generated almost 90% of free cash in the second half.

You may recall that in 2022, we generated about 75% of our free cash in the second half of the year. Our adjusted operating earnings were $6.51 per share. Regarding our 2023 financial result, a solid considering uncritically [ph] industry conditions that were more unfavorable than expected. As we enter 2024, we are confident in our ability to continue to create value for our customers and shareholders. Slide six shows our fourth quarter key financial metrics. Adjusted EBITDA was $117 million, with a margin of 12%. We generated $104 million in free cash flow as we continue to optimize our working capital. Our adjusted operating earnings were $1.16 per share. These strong performances during challenging industry conditions demonstrate our agility and ability to adapt.

I am proud of how our teams collaborated to meet our customer needs and maximize cash. Now, John will review our fourth quarter performance in more detail. John?

John Sims: Thank you, Jean-Michel. Good morning, everyone. Thanks for joining our call. Slide seven shows our fourth quarter earnings bridge [ph]. Our $117 million of adjusted EBITDA was higher than our outlook of $90 million to $110 million. Let’s discuss the changes versus the third quarter. Price and mix decreased by $25 million, largely due to earlier paper price decreases in all regions, as well as unfavorable mix in Latin America and North America. Paper prices were stable in the fourth quarter in all regions. Volume improved by $20 million due to seasonally stronger volume in Latin America and positive trends in both Europe and North America. Operations and other costs increased by $12 million, primarily due to higher seasonal operating costs in Europe and North America, as well as unexpected reliability issue with a third party energy provider at our Saillat mill, which had a $5 million impact.

This issue has been resolved and we are working to recover the full amount. These negative impacts were partially offset by lower economic downtime costs versus the third quarter. Plant maintenance outage costs increased by $25 million, with planned outages in all three regions. Input and transportation costs improved by $1 million, driven primarily by favorable chemical costs more than offsetting seasonally high energy costs. Let’s move to slide eight. Current industry conditions are showing signs of improvement. In Europe and North America, we continue to see improving order books, as well as lower import levels. In Latin America, we expect seasonally weaker demand in the first quarter. Keep in mind, in Latin America, historically, demand is sequentially stronger in each calendar quarter.

A landscape of a large paper mill at sunrise, a sign of the size and importance of the industry.

We also expect improving demand for Brazilian exports to other Latin America and offshore markets. Let’s go to slide nine. We expect to deliver first quarter adjusted EBITDA of $105 million to $125 million. We project price and mix to decrease slightly, about $5 million to $10 million. In the fourth quarter, we communicated pulp and paper price increases to our European and Latin America customers effective in January. We do, however, expect some price and mix erosion in North America, and as usual in the first quarter, we expect an unfavorable seasonal mix impact in Latin America. We expect volume to decrease by $10 million to $15 million, reflecting seasonally weaker industry demand quarter in Latin America. Operations and other costs are projected to improve by $20 million to $25 million, primarily reflecting lower economic downtime.

We expect input and transportation costs to increase by $5 million to $10 million due to increased transportation costs, mostly in North America, and higher fiber costs in Latin America. Planned maintenance outages are projected to decrease by $3 million. Moving forward, we will continue to provide quarterly earnings guidance on selected annual financial metrics as shown on slide 17 in the appendix. On the advice of our high conviction, long-term share owners, we will no longer provide full year guidance for earnings or free cash flow. They have encouraged us to discontinue annual guidance and to continue our focus on growing long-term shareholder value. Let’s go to slide 10. We continue to reinvest, strengthen our low cost assets and we will fund high return projects to increase our earnings and cash flow.

Our 2024 capital spending outlook includes $125 million to $130 million in maintenance and regulatory spending, as well as $30 million to $35 million for high return projects. Our Brazilian forestlands are a significant competitive advantage. These eucalyptus plantations provide a material cost advantage relative to most other global competitors. In 2023, we invested $34 million, and this year we will invest $35 million on our forestlands to increase our self-sufficiency and reduce our wood cost. We are also investing $20 million this year, $12 million in 2025 for a three-year third-party wood supply agreement to ensure adequate wood supply in 2024 through 2026. Let’s look at slide 11 for additional detail on our Brazilian forestlands. We source a majority of our wood in Brazil from our own and managed wood and supplement that with open market purchases.

Most of our wood needs comes from our forestland, from strategic long-term partnerships. Our owned and managed wood has the capacity to produce or provide rather 80% to 90% of our total wood needs from forestlands close to our mill. However, several years of reduced planning, combined with natural causes, largely droughts and fires, forced us to harvest trees early. These factors increase the amount of market wood required to meet our needs. We are currently purchasing about 25% of our wood from the open market and this wood costs 2 time to 3 times our owned wood. The increase in reforestation capital and a three-year wood supply agreement will enable us to return to about 85% owned and managed wood by 2027. Let’s move to slide 12. In addition to providing global competitive advantages, our Brazilian forestlands have significantly increased in value.

In the fourth quarter, we commissioned a third-party to appraise our forestland. In December, they valued it at about $1 billion at the current exchange rate. The updated valuation reflects an increase of about $600 million from our 2021 appraisal done by the same firm. Increasing demand for land and wood in Brazil has driven this increase in valuation. Our forestlands are not only a source of global competitive advantage, but also an enduring repository of shareholder value. Jean-Michel, I will now turn it back over to you.

Jean-Michel Ribiéras: Thanks, John. I am on slide 13. We are a cash flow story. We have generated substantial cash over the past two years, and importantly, we returned $90 million in cash to shareholders in 2022 and $127 million in 2023. Last year, we also deposited $60 million in escrow, which allowed us to return more than the $90 million limit in our credit agreement. Returning cash to shareholders remains a key component of our capital allocation strategy. In 2024, we expect to return at least 40% of free cash flow to shareholders. Slide 14, please. We are confident in our ability to continue to create long-term shareholder value by executing our strategy and delivering on our investment thesis. We believe in the promise of paper for education, communication and entertainment, and we intend to increase our competitive advantages in the markets we share -- serve.

We are a low cost global producer with strong supply position, iconic brands and talented teams. We leverage our strengths to drive high returns on invested capital and generate free cash flow. We use that cash to increase shareholder value by maintaining a strong financial position, returning cash to shareholders and reinvesting in our business. We are confident in our future and motivated by the opportunities that lie ahead. With that, I will turn the call back to Hans.

Hans Bjorkman: Thanks, Jean-Michel, and thank you, John. Okay, Greg, we are ready to take questions.

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