Sylvamo Corp (SLVM) 2021 Q4 法說會逐字稿

Good morning, and thank you for standing by. Welcome to today's Sylvamo's Fourth Quarter 2021 Investor Earnings Day Conference Call. (Operator Instructions)

I'd now like to turn today's conference over to Hans Bjorkman, Vice President, Investor Relations. Please go ahead, sir.

Thanks, Angie. Good morning, and thank you for joining our 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 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 2021 earnings press release as well as today's presentation.

With that I will now turn the call over to Jean-Michel.

Thanks, Hans. Good morning, and thank you for joining our call. I'm on Slide 4, which demonstrates significant improvement in our full year sales and earnings. 2021 net sales increased 16% to $3.5 billion, and adjusted EBITDA improved by nearly 60% to $594 million. This represents a margin of 17% or 460 basis points higher than our 2020 adjusted EBITDA margin. Our adjusted earnings per share has improved by over 70% to $6.94. We remain committed to generating cash and have positive momentum heading into 2022.

Let's turn to Slide 5 to review our fourth quarter performance. We are exiting our three-pronged strategy of commercial excellence, operational excellence and financial discipline, which resulted in a 17.5% adjusted EBITDA margin in the fourth quarter. Global demand for uncoated freesheet continues to strengthen as school and offices gradually reopen. Our volumes remain strong, and we run at full capacity in all 3 regions.

We also continue to realize the benefit of prior price increases, allowing price and mix to outpace increased input costs. I'm extremely proud of how our teams navigated through input costs and transportation challenges and work to take care of our customers.

We operated well in a challenging supply chain environment and executed 2 large and comprehensive maintenance outages at our Saillat and Eastover mills, safely and efficiently. Implementing this strategy generated free cash flow of $162 million, enabling us to pay down $124 million in debt and to increase our cash position by $48 million to $180 million. All in all, a strong performance by our team.

Slide 6 highlights our performance in the fourth quarter, our first stand-alone quarter. Fourth quarter net sales increased 7% sequentially to $972 million.

We generated an adjusted EBITDA of $170 million and a 17.5% margin during the easiest (technical difficulty) outage quarter of the year. However, if we had normalized maintenance outage expenses, our adjusted EBITDA margin would have been 19.2% for the quarter. We also generated adjusted operating earnings of $1.71 per share.

Let's turn to Slide 7 to discuss our commercial excellence efforts. Our commercial excellence strategy is designed to help our customers succeed. We want to be recognized by our customers as the suppliers they value the most.

Here are a few examples where we are winning incremental businesses, which is improving our mix and profitability. In Latin America, we are leveraging innovation to increase our position in other end-use segments such as thermal paper used for receipt.

This is a profitable and strategic segment with growth potential. In North America, we are creating value for our customers with Sylvamo shop, which allows 24/7 access to critical information to help them run their business better and allows them to interface via computers, tablets and mobile phones.

In Europe, we are leveraging our global footprint to expand sales of premium product in strategic channels, which provides better product mix for our customers while optimizing our global trade flows. Global uncoated freesheet demand continues to recover from the initial impact of COVID pandemic, allowing us to employ mix as our commercial teams maximize opportunities across geographies, segments and channels.

Let's turn to Slide 8 to look at the 2021 growth by region. Year-over-year, global uncoated freesheet industry demand increased by (technical difficulty) in 2021. And especially in our region, it was up nearly 6% in Europe, more than 13% in Latin America and 4% in North America.

We still see the incremental copy paper demand recovery which was only up 1.3% globally since many office workers in North America and Europe are still not returned to their offices. And in Latin America, we understand that students would be going back to school this year.

In 2021, we outperformed industry growth rate in our regions by 530 basis points. Our 2021 uncoated freesheet shipments were up 12% versus 2020.

I'll now turn the call over to John, who will discuss our fourth quarter performance in more detail.

Thank you, Jean-Michel. I'm on Slide 9. We generated $170 million in adjusted EBITDA in the fourth quarter, well ahead of our outlook of $140 million to $150 million. We improved price and mix by $41 million, which was greater than our outlook because prices rose faster and at a greater rate in North America than what we had projected. Volume improved by $14 million due to strong seasonal demand in Latin America. In all regions, we had more orders than we could ship. Operations and costs were solid and improved by $2 million. This does include a favorable $10 million LIFO adjustment in North America as well as a favorable $7 million in overhead benefits and environmental credits in Europe, which we had not included in our outlook.

As Jean-Michel mentioned, we successfully conducted 2 significant planned maintenance outages in Europe and in North America and spent $24 million more on outages than we did in the third quarter. Input and transportation costs increased by $39 million with rising costs for fiber, energy, chemicals and transportation across all regions.

Our strong performance in this quarter is a reflection of our talented and engaged regional teams. We worked hard to meet customer needs and manage through significant global supply chain and pandemic challenges.

Let's take a look at our regional results on Slide 10. Each of our regions performed well in the quarter, demonstrating the strength of our low-cost positions in our iconic brands. Nearly 2/3 of our earnings were outside of North America. Europe earned $27 million with a 9% EBITDA margin. Latin America earned $81 million with a 35% margin, and North America earned $62 million with a 13% margin.

We conducted an extensive 10-year maintenance outage at our Saillat mill and a cold mill outage in Eastover, which is reflected in our European and North America EBITDA margins. If we had normalized the maintenance outages expenses over a year, Europe EBITDA margins would have been 12% and North America would have been 15%.

Our strong earnings and margins reflect the utilization of price increases. Volume improved in Europe and Latin America and remained strong in North America. Our commercial team is focused on strengthening our customer value proposition and our successful efforts are reflected in these results.

The appendix contains additional details on our regional performance. So let's turn to Slide 11 to discuss uncoated freesheet industry conditions around the world.

Global uncoated freesheet industry conditions continued to improve in the fourth quarter as they did throughout 2021, and remain quite favorable as we enter 2022. Uncoated freesheet demand continues to improve in all 3 regions, while industry supply is shrinking in Europe and North America as competitors have shut down machines and converted capacity.

Input and transportation costs remain elevated, and we expect costs for fiber, chemicals and transportation to continue to increase. However, our selling prices increased in the fourth quarter and will continue to increase in the first quarter as realized power price increases throughout the quarter.

Let's move to Slide 12 and review our first quarter outlook. In the first quarter, we expect to deliver an adjusted EBITDA of $180 million to $190 million and adjusted operating earnings per share of $1.70 to $1.90.

We project price and mix improve by $35 million to $40 million as we continue to realize price increases already communicated to our customers in all regions. We expect volumes to decrease by $13 million to $18 million, reflecting seasonally weaker volume in Latin America and Eastern Europe.

Typically, the fourth quarter is our seasonally strongest quarter (technical difficulty) is our seasonally weakest for shipments. We expect operations and cost to improve by $18 million to $20 million. Fourth quarter results included favorable adjustments in Europe and a $10 million favorable LIFO adjustment in North America that won't repeat in the first quarter. We expect input and transportation costs to increase by $18 million to $23 million, which is about half the improvement in price and mix.

These increases will be driven by higher cost for fiber, chemicals and transportation. And we project maintenance outage expense to decrease by $31 million as we conduct fewer outages in the quarter.

Let's turn to Slide 13 for some additional 2022 guidance. So we have revised some of our 2022 selected financial guidance. We increased the outlook for capital spending by $18 million to fund high return and short payback cost reduction projects. For example, we'll fund the woodyard productivity project in Brazil that will cost less than $3 million, but provide an expected internal rate of return of nearly 50%. We'll also fund a project at our Eastover mill to upgrade the stock pump that will cost a little more than $1 million and offer an expected IRR of nearly 40%.

We have many other high-return projects to further improve our low-cost assets, and we look to fund these in the future. We have also our guidance on a projected income tax rate. U.S. tax regulations have changed in January, and we may no longer be able to claim the foreign tax credits for Brazilian earnings.

We expect this change to increase our 2022 tax rate to 32% to 34%. I would also like to update you on the Svetogorsk project. In December our Board of Directors approved $15 million in capital spending for engineering work for the proposed new recovery boiler, which will replace the 2 recovery boilers that are approaching end of life at our Svetogorsk mill.

We expect that this new recovery boiler to reduce costs and improve reliability and increase production at this very low cost Russian mill.

Let's turn to Slide 14 to discuss free cash flow. We remain focused on generating cash. We've generated strong free cash flow in the fourth quarter, $162 million, and we expect to drive strong cash flow in 2022. We intend to use cash generated from earnings, including some of the $180 million cash on hand at the beginning of the year to fund $178 million of capital spending. The $77 million onetime Georgetown and Riverdale inventory payments to Internet paper and $72 million of one-time and transition costs.

We also intend to continue debt reduction. We're doing all this to position the company to begin returning cash to shareowners later this year.

I will conclude my comments on Slide 15 with a review of our current debt structure. We launched Sylvamo with just over $1.5 billion in gross debt. We ended the third quarter at 2.8x gross debt to adjusted EBITDA, and we ended the fourth quarter at 2.4x gross debt to adjusted EBITDA. As we mentioned earlier, we paid down debt by $124 million in the quarter -- in the fourth quarter, and we increased our cash position by $48 million. We also swapped $400 million of the floating rate debt for fixed rate. As you can see from the table, we don't have any significant debt maturities until 2027.

So with that, I'll turn it back over to you, Jean-Michel.

Thanks, John. I'm on Slide 16. We are pleased with our performance in our first quarter as a stand-alone company. We are taking advantage of opportunities to enhance value for our employees, customers and shareowners. Our major opportunity is capital allocation. We are now able to use the cash we generate to reinvest in our assets and return cash to shareowners.

Focus is another opportunity. We are now able to serve the best interest of our customers globally and concentrate on being the supplier that customers value the most. We are also working to simplify our strategy. We will create long-term value through our talented teams, the world's most economic paper brands and low cost mills in attractive locations.

Most importantly, we are building the Sylvamo culture, one that is more agile, faster to act and with a more entrepreneurial spirit across our teams. As we have just become an independent company, our strategy will continue to further evolve with a commitment to increase value for all of our stakeholders.

I'll wrap up our prepared remarks on Slide 17. We are well prepared for continued success. Our commercial and operational excellence strategy and tactics will enable us to generate strong earnings and significant free cash flow. We will execute our plans and will increase capital spending to strengthen our low-cost positions. We'll continue to strengthen our balance sheet and prepare to begin returning cash to shareowners. In the near future, we plan to initiate discussions with our Board of Directors.

I could now be prouder of our employees performed throughout 2021. We appreciate their commitment to working safely and taking care of customers. We are passionate of our employees, our customers and our shareowners. Sylvamo is off to a great start. We are committed to uncoated freesheet and are confident in our ability to drive strong results in 2022. With that, I will turn the call back to Hans.

Thanks, Jean-Michel, and thank you, John. Okay, Angie, with that, we're ready to take the questions.

(Operator Instructions) Your first question comes from the line of George Staphos with Bank of America.

Congratulations on finishing the year. Guys, I'll start with 3 quick questions, and I'll turn it over. First of all, relative to where you were and what you were thinking about in terms of your markets and end markets at the Analyst Day, what is the outlook for '22? And I guess, more importantly, the post-COVID world, whatever that's going to look like, how does that compare more positively or more negatively in terms of consumption end markets and the like?

Related question, Jean-Michel, I thought you said something about in Europe, you're finding opportunities to leverage the supply chain or your access to the global supply chain. Can you comment a bit more, if I heard that correctly and what you meant?

And then lastly, on guidance, can you remind us what is embedded in your guidance as far as price increases? And are there any price increases that you've announced that would not be in guidance as of yet?

George, and thank you for joining. I will start with the 2 first questions, and John will take the third one. In terms of demand, both things -- you've seen that 2021 was better than our forecast initially. I mean I remind the number, Eastern Europe was 6.8% growth. North America was 4.2% growth. Western Europe was 5.5% and Europe was 5.9% in total.

So clearly, we had even more momentum in 2021 than we expected. This despite the fact that there was not in '21 return to school or return to the office. It was very slow, which explains why the cut size global demand was only 1.3%.

So I'll say I'm quite bullish for 2022. And if you're asking me compared to our original forecast, we clearly see some upside. I think the market is going to continue to grow both in the graphics sector where, worldwide, the demand is very strong. And on the cut size rebound, which we're starting to see the effect despite the pandemic.

So I'm quite positive and you were asking me if it was more than original, yes, it's more than original, both in '21 as we already have the number, and for sure in '22.

Yes, Jean-Michel, I don't want to be a hog here in terms of Q&A, but just the statistics just we've seen them, I guess the question is really why -- what do you think -- if you're more positive and we're seeing more positive statistic, why is that happening? And then what are you doing in your delivery supply chain and the pricing question in terms of guidance?

So the why is, I think we have more and more demand in uncoated freesheet. One of the things which have surprised us is, for example, the direct marketing, the whole commercial aspect, which impact offset this demand, you -- I don't have the latest number, but I remember Q3 number on direct mailing.

Direct mailing from the USPS numbers, for example, in North America, was up more than 40%. So you have an activity on the economy even with the pandemic or post-pandemic, which is very favorable to the use of our product. And then I think the back to school, back to the office is another one, which is going to be very positive for us.

So there are also some specific things like shifting to uncoated freesheet. We've seen that in quite a few of our customers. So I think the fact uncoated freesheet is sustainable, it's affordable, functional. It creates a long-term demand and short term, we're seeing it. The coated freesheet is not negligible.

A lot of work, which used to be on coated freesheet has switched to uncoated freesheet and has created incremental demand, we have not planned. So that's a few examples, but I think there are multiple examples.

On the global Europe supply chain, there are different options, which we have. First of all, if you look today all regions combined, Sylvamo exports to what I will call nonstrategic regions about 8% to 10% of what we produce. We've got an opportunity (technical difficulty) Europe from Russia, for example, to make sure we are aligned with the strategic long-term customers. And thanks to the demand, thanks to the partnership and work of our commercial team, we are now concentrating our commercial efforts towards having those global customers served from multiple regions and optimize both for them and for us, what we do as export.

So the supply chain, for example, Russia to Europe or Latin America to Europe is just example is quite optimized and helping our global customers to be better served. Those are opportunities. From one region mix to another regional mix, we sometimes have $50 to $80 difference [significantly]. So this 10% optimization, we can see bottom line, it's clearly very important. So maybe the answer your second question.

I will turn it to John for the guidance on your question on pricing and what is included or not in 2022.

Yes. Thanks, Jean-Michel. So George, to answer your question, if you recall in the third quarter review, we said that there were price increases that we announced to our customers in the fourth quarter that we're going to be realized in the middle of the fourth quarter and then carry over to first quarter.

So these are certainly into our outlook. But we've also announced price increases to our customers in all our regions, Europe, Latin America and in North America in the first quarter. And some of that realization will occur in the first quarter, but most of it will start to really start to realize in the second quarter. But there is a little bit of that is in the outlook for this quarter.

(Operator Instructions)

George, this is Hans. If you've got any further follow-up questions, feel free to go ahead and ask.

Okay. I guess my other 2 questions, and again, I don't want to be a hog here. What effect related to your earlier comments, Jean-Michel, on supply chain in Europe, are the finished strikes having on you, both your customers and your opportunities in the market?

And in the quarter, Europe trailed sequentially on input costs relative to pricing that was put to place, do you expect that will be the case in the first quarter?

So I'll start with the finish. The finished track has a major impact, especially on pulp. It's not a big impact on uncoated freesheet, it's very light. So it's not really impacting our demand as of now. We can say we've got incremental demand because of it. It's very small. It's mostly a big pulp impact.

In terms of your second question, which was mostly -- I'm sorry, I lost...

So inflation in Europe, the hedge pricing sequentially, will that be the case into 1Q?

So we -- in 1Q, we have -- the biggest issue we have is energy cost in Europe, especially gas cost price in France. And there was a peak in December. So the peak, usually you see it in our cost one month after, so that impact January. But then we have more, I would say, back to average high in February and March.

And we have some significant price increase which have been announced to our customers. So we expect Q1 price and mix to other -- to be better than our input costs, even if the input costs are high, we have good momentum on our price increase from which we've already announced. So the net would be positive for us.

Jean-Michel, one last one on the finished strikes and I'll let you go. So certainly, that's constraining pulp supply, it's constraining raising, I guess, relative to what would happen, all else equal, pulp pricing. I recognize you don't sell a lot of market pulp, but potentially some of your competitors are not as integrated as you. So can you talk, if at all, about how that could affect you and your competitive positioning on freesheet in Europe? And I'll turn it over.

Yes. I think specific to Europe, there are 2 factors which are very important in our competitiveness. There is a very high cost of gas. We use gas but we're 80% self-sufficient in terms of energy in our mills. So we don't use only gas, we are -- a lot of biomass. That gives us a big advantage versus a lot of European competitors.

And pulp price, as you mentioned, we sell some pulp price, but I think the fact that we integrated is a major advantage. So if you look at our cost curve, which is usually good and where we are first second quartile, we are definitely even more advantaged right now with high gas price and high pulp price. So it's helping us with leverage our low-cost mills.

And George, this is John. Just the other thing to consider too, 2/3 of our capacity is in Russia where the gas price isn't really impacted -- impacting us.

Angie, do we have any more questions in the queue?

Your next question comes from the line of [Jonathan Luft] with Eagle Capital.

It's [Jonathan Luft]. Great quarter. I would love to just hear a little bit more perhaps about what you're seeing on the competitive environment. I know, obviously, in Canada, there was one plant that was shut down.

But if you could just expand regionally what you're seeing in Europe, what you're seeing in Latin America and also in North America competitive? That would be great.

Let me take it region by region. In Europe, as you know, there's been some both integrated and nonintegrated capacity, which have shut down in '21, which will see the full effect in '22. So we're seeing less supply in uncoated freesheet on a significant basis.

I would say, in Latin America, it's mostly stable based on one announcement of a small machine going down. So it might impact a little bit of supply, but not huge. And North America, net-net with one, as you know, restart from one of our competitors, it's still down in terms of capacity.

So -- when we look at the supply demand right now and it's favorable. And when we look at the demand specifically that Sylvamo get from our customers, it's very strong right now. Plus you have the import side, which, as you know, is very low right now because the freight cost is making it almost privative from Asia, for example, to go either to Latin America to North America. So we're in a very favorable position all around the world right now.

That's terrific. And so given the favorable environment, are you able to perhaps sign a longer-term contract or sign more strategic deals? How do you see that playing out for Sylvamo?

So we've always been on long-term contracts with our customers. Sometimes, they're not formal contracts, but they work like formal contracts. Most of our customers have 10 years-plus experience with us. We have the opportunity to reinforce our position to the strategic customers which are aligned with our long-term strategic view. So it is very positive for Sylvamo.

I feel very good about it. We are up to a great start. And I think another thing is our customers recognize -- we here for the long term. We're going to be their strategic partner and that we are committed to uncoated freesheet. And I think that's creating a very positive dynamic also.

Your next question comes from the line of Paul Quinn with RBC Capital Markets.

A strong quarter, even including the one-offs, but sorry to get on the line late, but -- busy morning here for me. But -- just if you could give me a summary of where we're sitting on price increases in '22 by region, that would be most helpful.

So Paul, I'll take that. Where we are right now, as I mentioned earlier on the call is that we have price increases that we announced to our customers in the fourth quarter and that was in North America, Russia, and also prices that we had announced even back in the third and second quarter in Russia that we were realizing and starting to fully realize in the fourth quarter, but we're really going to see that in the first quarter.

And that's really what's really driving our outlook in terms of the sequential quarter improvement. But we've also announced additional price increases to our customers, and we're in the process of implementing those. And that's in all regions. So Europe, Russia, Brazil, or Latin America whether and also North America.

Okay. And those recent price increase announcements were all in '22, this year?

Yes.

And a typical lag between price increase and implementation, is that like a 6-month lag?

Well, it varies. Not -- we could see 6 months in Europe, for example, on some of the contracts and stuff like that. We actually will see -- it will be anywhere from 30 to 90 days generally depending upon the region.

Right. Is there -- and just lastly, is there any material change in the supply-demand relationship in any of the -- your key markets?

I would say no material. It's some of the closure of 2021, we will see the biggest impact in 2022. So that's maybe the change that you will see. There's been some discussions from some of our competitors on potential closing or incremental or potential change in -- from uncoated freesheet to other grades, but nothing very recent announcement.

Well, there was the restart of the one machine in North America, which was -- we're well aware of it, but also there was a shutdown -- announced shutdown in North America that almost balances each other out.

Right. Okay. And maybe a bonus question just because I got you. I guess -- and debt paydown is kind of the key -- the key for you this year, where do you expect to get on that by the end of the year?

Well, as we -- our outlook is to generate significant cash flow. So we will certainly be continuing to pay down debt. But outlook, as we mentioned, we think we're going to be well positioned to begin talking to the Board about returning cash to shareowners this year.

Your next question comes from the line of Douglas Dethy with DC Capital.

Terrific results and a nice presentation. Could you provide some context in having a major facility in Russia these days from a commercial standpoint? And there's been certainly a lot of talks about stringent sanctions if things change at the Ukrainian border. And how you think about that with major customer base in Europe?

Douglas. Thanks for joining today. Yes, of course, let me -- our Russian asset is very important. And to be clear, we've been there a very long time. We've been more than 20 years. And we've gone through different crises with different sanctions. And so we have a very strong contingency plan in place where we're looking at all the cases and including the worst-case scenario.

I want to first start by saying we hope diplomacy will win. We care about our people in Russia a lot as well we care about our sales office and our Ukrainian friends. So we are prepared with a very strong contingency plan, which we update almost on a daily basis right now. It's difficult to know what could happen.

As you know, the -- we are on the side of low risk of a major invasion then -- we don't know we're not expert on that. But we've been able to manage in the past those challenging sometimes countries' relations. And we feel it would be manageable for us, we've got good contingency plans in place.

We do have a follow-up question from the line of George Staphos with Bank of America.

I know it's late, I'll try to be quick. So first of all, if costs were up $193 million in '21, John, if you did kind of the pencil on paper, what is the current annualized run rate on inflation for '22 coming out of 4Q or whatever run rate you want to use in terms of input cost inflation for each of your key products or key inputs, I should say?

Secondly, a ticky-tack question, we can take this off-line. EBITDA declined sequentially about $7 million from 3Q, if I did my math right, but the operating profit was more $14 million. What caused that difference?

And then recognizing you're going to talk to the Board about this, so a lot of water flow in the bridge, can you give us a bit of an understanding in terms of what type of value return either size it or application types you're thinking about at this juncture?

George, thank you. And the -- to your first question is about what we're seeing in terms of input costs, certainly, we're still starting to continue to see some increases in costs and particularly in chemicals. We also have some wood cost and wood, but it is slowing. We're seeing a rate of increases starting to slow in this quarter.

So as you mentioned, we had $193 million increased cost in last year. And year-over-year average, we're going to still be higher than last year, but the weight that you're going to see in terms of the increase is going to be, I would say, significantly less than the $193 million that we saw last year.

On your question on the earnings per share drop that was really -- you got to remember that third quarter was based on the carve-out financials of IP. We're still with IP. So the big difference in that really is taxes and interest that we incurred. And I don't remember the third question. What was the third question?

Yes. Actually, I was looking at EBITDA versus EBIT. But if you don't have the answer on that one, we can take it offline. And the other question was just at this juncture, recognizing it's really, really early, what are you thinking about in terms of either dimensionalizing the value return or how you would deliver it to shareholders? And that was it.

Yes. We are looking at different options of returning cash to our shareholders. Of course, we're going to continue, as we mentioned, to reduce debt. And we're going to talk to our Board, and we're going to recommend with them the different options we have, being a dividend or share buyback, this would probably be the 2 major tools we would look like in terms of returning cash to shareholders.

And George, we'll follow up with you on the EBIT, EBITDA question you had.

At this time, there are no further questions. I would now like to turn the conference back to Hans Bjorkman for any additional or closing remarks.

We just want to thank everyone for joining us today, and we truly appreciate your interest in Sylvamo, and we look forward to our continued conversations. Have a great day and a great rest of your weekend. Bye-bye.

Thank you for participating in today's Sylvamo's Fourth Quarter 2021 Earnings Investor Conference Call. You may now disconnect your lines at this time.