Sylvamo Corporation (NYSE:SLVM) Q4 2022 Earnings Call Transcript

Sylvamo Corporation (NYSE:SLVM) Q4 2022 Earnings Call Transcript February 10, 2023

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: 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: Thanks, Hans. Good morning, and thank you for joining our call. I’ll begin my comments on Slide 4. In 2022, we delivered significant accomplishment 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 and 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 shareowners. I’m proud of our team and their accomplishment 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 shareowners.

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: 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 unusual seasonal — 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. 25% of this was in operations, and this was largely due to seasonally higher cost in Europe and North America.

The remaining 75% was in other costs. These include an 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 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: 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. And 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 partnership 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 new oxygen delinification 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: Okay. Thank you, John-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. And 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 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 shareowner 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 shareowners 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 shareowner value by maintaining a strong financial position, returning more cash to shareowners 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 (ph) for our Nymolla mill, as well as 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 shareowner value in the 16 months since the spin off. We fortified our financial position, reduced debt by more than 35% and achieved $1 billion gross debt target. Returning cash to shareowners is a core component of our investment thesis. We have returned $111 million in cash to shareowners, 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: 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 shareowners. 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 continue to create long-term value for our shareowners. 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 shareowners 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: Thanks, Jean-Michel, and thank you, John. Okay, Amy, we’re now ready to take questions.

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Q&A Session

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

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

John Sims: Yes, George. Hi. How are you doing?

George Staphos: 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: Thanks, John — 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. I — even if you take , despite the inventory correction, were 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, it’s difficult to forecast.

But I would say, maybe not as strong than 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 inputs — imports, sorry, well I’m — import, sorry about that. The question on imports and it comes from a lot of discussion recently actually we have — personally had with customers. In first half 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. And from a supply standpoint, we were still tight because of the demand. And also, we were still getting out of the 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 on the first half of the year, as it would have been expected by this customer. It mostly came in 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 that’s because supply chain was very difficult in first half. So — and 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. So, 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 on fourth quarter.