Sylvamo Corporation (SLVM) Earnings Call Transcript

Thank you. Good morning. Thank you for standing by. Welcome to Sylvamo's second quarter 2026 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. If you would like to ask a question, press star 1 to raise your hand. To withdraw a question, press star 1 again. a reminder, your conference is being recorded. I'd now like to turn the call over to Hans Bjorkman, Vice President of Investor Relations. Sir, the floor is yours.

Thank you, Lucas. Good morning and thank you for joining our call. Our speakers this morning are John Sims, Chief Executive Officer, and Don Devlin, 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-US GAAP financial information. Reconciliations of those figures to US GAAP financial measures are available in the appendix. Our website also contains copies of the earnings release as well as today's presentation.

With that, I'd like to turn the call over to John. Thank you, Hans, and good morning, everyone. I'm glad that you're on the call and so you know, I'm on slide four, that's where I'm starting. Our second quarter highlights include continuing to implement the previously communicated uncoated free sheet price increases to our customers across all our regions. We also advanced our lean transformation journey to embed continuous improvement into how we run the business, so performance improvement employment becomes employee driven, systematic and self sustaining. We kicked off our lean efforts in our Latin America business and have value stream mapping underway at our Moji Gua Su and Trace Lagos mill to identify waste and unlock cost savings across end-to-end processes. In North America, we introduced lean at our Ticonderoga New York mill and our cut-sized seed plant in Sumter, South Carolina. and across corporate functions. Lastly, we continue to make very good progress on our strategic investments that are East Silver Mill, which we will discuss in more detail later on this call. Let's move to the next slide. Slide five shows our second quarter key financial metrics. 2026 is a transition year to work through the termination of Riverdale Supply Agreement in the extended outage at Eastover. Adjusted even more than doubled sequentially to 60 million with a margin of 7%. Adjusted operating earnings were $0.03 per share. Pre-cash flow was negative $23 million, a $36 million improvement sequentially. And as in prior years, the majority of our free cash flow will be generated in the second half of this year. Now I'll turn it over to Don to review our performance in more detail, Don.

Thank you, John, and good morning, everyone. Slide six contains our second quarter earnings bridge versus the first quarter. In the second quarter, we earned $60 million of adjusted EBITDA compared to $29 million in the prior quarter. Price and mix were favorable by 32 million, reflecting the implementation of paper price increases in all regions. Better mix in the Americas, as well as the implementation of price increases in Europe, pulp price increases in Europe. volume increased by 3 million driven by seasonally stronger demand in Latin America. Operations and costs were favorable by 22 million, largely driven by green energy credits in Europe and lower overhead. Plan maintenance outage costs were unfavorable by 24 million due to scheduled outages in all regions. INPUT AND TRANSPORTATION COSTS WERE UNFAVORABLE BY 2 MILLION AS ENERGY COSTS WERE STABLE WHILE PURCHASED WOOD IN LATIN AMERICA AND TRANSPORTATION COSTS IN NORTH AMERICA WERE HIGHER. THESE WERE PARTIALLY OFFSET BY THE NONREPEAT OF A ONE-TIME CHARGE OF 10 MILLION FROM INTERNATIONAL natural gas cost in the first quarter. Let's move to slide 7 to walk through the industry conditions. European industry supply and demand remains challenging. Pulse prices improved throughout the first half and now seem stable. We continue realizing paper price increases, and we communicated another paper price increase effective mid-June as costs continue to increase and margins are at unacceptable levels. expect the realization to occur through the third quarter. In Latin America, we expect seasonally higher demand through the second half. This should positively impact our volume and geographic mix. We continue realizing paper price increases to our export customers across other Latin American countries as well as the Middle East and Africa region. and should continue to see additional realization through the third quarter. In North America, industry supply and demand dynamics have improved as 7% of the annual uncoated free sheet industry supply was removed with International Papers Riverdale Mill paper machine conversion. In the second quarter, we saw imports into North America increasing compared to the previous quarter, reaction to the 10% global tariff window. We also continue realizing paper price increases and expect to see additional realization through the third quarter. respect the Middle East conflict continue pressuring energy, chemicals and transportation costs across our regions as we go through the year. Let's move to slide eight. As we move through the second half of the year, we expect better earnings across most of our key drivers. This slide provides some perspective to how we see the second half of the year as compared to the first half. Price and mix should have a significant improvement with the price realization we've seen across all our regions and will continue into the third and fourth quarters. In addition, our mix in both Latin America and North America should be significantly better in the second half. Overall, we expect to have 75 million to 85 million benefit from better price and mix compared to the first half. Volume should have positive momentum given stronger seasonality in Latin America. which will be partially offset by less volume in North America due to the loss of the Riverdale volume and the extended outage at Eastover in the fourth quarter. Operations and other costs are also expected to be much better in the second half. Operational issues we had in the first half are now behind us with the exception of the debarking drum at Newmala. Plan maintenance outages will be unfavorable by approximately $5 million as we execute our heaviest planned outage quarter and take the extended downtime at our Eastover mill to complete the paper machine investments. Input and transportation costs are expected to be favorable with lower fiber costs in Latin America and Europe. more than offsetting unfavorable energy, chemicals, and transportation due to the Middle East conflict across all regions. In total, we expect a much better earnings performance for the last six months of the I'll now turn it over back to John to talk about our strategic investments at Eastover and our long-term focus. John?.

Thank you, Don. I'll pick back up on slide nine. Our Eastover strategic investments, including our wood yard modernization and paper machine optimization and new sheeter continue to make good progress. Starting with the wood yard, the hardwood line has been performing extremely well since May, and we're seeing improved reliability and chip quality. The Woodyard Softwood line startup remains on schedule for the first quarter next year. The paper machine speed up project remains on schedule, on budget, and will be completed during our fourth quarter maintenance outage. This will result in 60,000 additional tons of uncured depreciate capacity annually which will start to ramp up early next year. The benefits including reducing costs, improving our mix and efficiency while enhancing service for our customers. So to slide 10. Also within our e-service strategic investment, the new Sheeter project continues to make good progress. The Sheeter passed equipment acceptance testing in June, arrived in the US a few weeks ago, and the teams are preparing for the installation. We expect $50 million of annual benefits from the paper machine speed up and a new sheeter. We estimate roughly $30 to $40 million of that in 2027. Lastly, we completed a sale leaseback transaction with a third party for existing sheet plant to expand the attached warehouse by 300,000 square feet. The third party is investing the capital to expand the facility and will lease it back to us. The project will reduce supply chain costs, improve service to our customers while providing additional flexibility. We expect this expansion to be completed in the first quarter of 2027 and contribute upwards of $5 million in savings per year. These four projects will generate 55 million of benefit per year. These strategic investments are high return projects which will generate incremental earnings and cash flow for the long run. Let's move to slide 11. In my letter to show owners in January, I described the areas that define our success. safety and well-being, employee engagement, customer centricity, operational excellence, cost leadership, and sustainability. Let's go to slide 12 to discuss these in more detail. As we aim to achieve world-class performance in the areas that matter to Savamo, we have set clear goals for each one. Today I want to share with you what we are working toward and how we will measure our progress to achieve these by 2030. Safety and wellbeing is our most important responsibility. Our goal is to have a resilient safety culture in which serious injuries are eliminated. eliminate serious injuries it will be because our employees truly care and are aligned on relentlessly pursuing excellence ON EMPLOYEE ENGAGEMENT, WE HAVE NEARLY ACHIEVED WORLD-CLASS ENGAGEMENT WITH AN EMPLOYEE NET PROMOTER SCORE OF 46. Our focus is to be greater than 50. While we strengthen the capability and readiness of our teams and tap into their talents to help us achieve world-class performance. OUR CUSTOMER CENTRICITY, ON CUSTOMER CENTRICITY, WE ARE SETTING A NEW STANDARD FOR CUSTOMER EXPERIENCE AND LOYALTY. We will measure it through our customer net promoter score and through our perfect order performance delivering complete on time and without the defects. targeting a 20-point improvement in net promoter score and higher than 90 on the perfect order On operational excellence, we are targeting improving overall machine efficiency by 400 This is a measure of how well our assets run. Across leadership, we challenge ourselves to set an aggressive goal in order to drive margin improvement despite the significant inflationary cost pressures. Our goal is to achieve three to five times our 2022 through 2025 average annual cash cost improvement rate. This will be enabled by our lean and digital transformation efforts. Lastly, on sustainability, we'll continue to operate responsibly to protect for uplifting communities and improve the planet every year. Underpinning all six are our talented team, lean management, and digital transformation. I'll conclude my remarks on slide 13. As you are aware, it has been a very dynamic year where we've been adopting and executing the initiatives that are under our control. We are focused on generating strong, sustainable results and long-term value by making discipline, data-driven decisions that strengthen Sabama for decades to come. We will do this by diligently executing our flagship growth strategy, adhering to our disciplined capital allocation. institutionalizing lean continuous improvement. As industry conditions turn, capital spending normalizes and the benefits for our investments begin to materialize. We have the potential to generate annually over 300 million of free cash flow and greater than 15% return on invested capital.

So with that, I'll turn the call back to you, Lon. Thanks, John, and thank you, Don. Okay, Lucas, we're ready to take the questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Daniel Herriman with SITODI.

Daniel, please go ahead. Hey, guys. Good morning. Thank you so much for taking my questions. I'll start with two. In North America, margin was up at 15% versus 10% in the first quarter. And I'm curious if you could add more color on what drove this improvement and how much was priced in mix versus maybe lower sourcing costs from bringing new products. in from Brazil rather than Europe. And then leverage finished the quarter at 2.2 times with most of the free cash flow for the year expected in the back half. Can you give us a better idea of how much of the first half working capital bill reverses and where you expect to end the year on leverage? Thanks.

Yes, Daniel, I'll take your second question first. This is Don and good morning. SO THE WORKING CAPITAL BUILD WILL UNWIND BY THE END OF THE YEAR MOSTLY. AND AS WE TALKED ABOUT IN AN EARLIER CALL, THAT'S DUE TO THE EAST OVER MACHINE SPEED UP PROJECT BUILDING INVENTORY THROUGH WHAT WAS FIRST QUARTER, SECOND QUARTER, AND WE'LL to draw down fourth quarter, it should be pulled out. And your your first question back to North America, the margin improvement from first to second quarter, It was largely price and mix. And yes, price and mix and lower operations costs and a bit of lower input costs. But the key driver is price and mix for North America going into Q2 from one.

Just give a little bit more color, Daniel, on the working capital. North America is where we built the biggest inventory. It's about 50,000 tons that we expect to draw down in the second half. We will draw down in the second half.

Your next question comes from the line of Matthew McKellar with RBC Capital Markets. Matthew, please go ahead.

Hi, good morning. Thanks for taking my questions. It sounds like you're expecting lower North American volumes in the second half of the year, if I've understood your comments on slide 8 correctly. Is that sales volumes or production? I ask what the bogey might be for North American volumes at this point? Thanks.

Yes, Matthew, thanks for the question. So on North American's volume, so it will be both because both production, lower production and lower sales and, you know, we have Riverdale's gone, that's not our production, but the, supply from riverdale is gone but that'll impact sales in the second half and of course we've got the eastover outage which uh is is now it's longer than we thought. We originally planned for 45 days. It'll be a bit longer than that. So that'll reduce production as well for North America. And a bit of that flows through sales and volumes.

will be lower for those two main reasons. And one other point it would be, Don, is that, during this various situation, it's gone. With IEPA going away, we were able to take advantage of that and move on some volume from our Brazilian operations. But now with the new tariffs that are in effect, we said, but it's not economical. So we're actually bringing in less volume from Europe and Brazil than we expected. And so there'll be a little bit less than that.

I think your second question relative to North American volume as well. If you think about the impact of Riverdale going away so that supply is gone and I think we go from. what was about a little less than 100,000 tons this year. So that goes away. It was 90, I think through April. and we won't have that in 27, but yet we'll have the speed up from Eastover. And the plan from the speed up was a total of 60. We won't get all of that next year. as we'll be ramping up once we come out of the project in the quarter. But eventually those two things will be a net four.

Okay, so if I think about the Q4 25 presentation where we talked about 1.17 million tons in North American sales, I think it was. The variance is primarily a longer outage at Eastover. and then less volumes coming in from Latin America and Europe than you'd anticipated.

That's right. Okay. We also got slightly less time. from Riverdale, which we already experienced. So that, but Riverdale, I think in that flood, we were assuming a hundred, tons before they converted and they delivered about 90,000. But that impact's already been felt.

Okay, got it. Thank you. Next, it sounds like you have pricing as a tailwind across each segment into Q3. Could you maybe spend a minute just running through what price is currently announced and pending in the markets? Maybe talk about how price should trend sequentially by region. either on average or as the execute three in comparison to where you were in Q2. Thank you.

I'LL START WITH HOW WE SEE THE PRICE IN THE SECOND HALF. PRICE IN THE SECOND HALF. SO WE SAID 75 TO 85 MILLION SO WE SAID 75 TO 85 MILLION INCREMENTAL WHICH IS BOTH MIX INCREMENTAL WHICH IS BOTH MIX AND PRICE. I'd say 70% of that is price. And the majority of that is North America and then North Europe as well, which will will see some flow through. And your second question, repeat your second question.

Yes, it was kind of tied together. It was, I mean, what is announced depending on the markets and then, you know, how pricing trends sequentially by region from Q2 into Q3.

whoever you'd like to express that. Thank you. Yes, so I think, Great, thank you. We have a third price increase that's going through in Europe. So that's being implemented right now. We're actually seeing that in the month of July. So we'll see that through. And LATAM, we're seeing in the OLA markets and NIA. And that's me and realized in the third quarter, we're seeing that now. And the same thing with the second price increase that we had in North America. that's being mostly implemented in the third quarter. So most of these price, you know, the 85, 75 to 85 debt, that Don talked about, a lot of that pricing is, we're seeing that flow through in the third quarter. Then that'll carry that, you know, we'd be relatively flat and carry into the fourth quarter.

Okay, perfect. Thanks for that. It lasts for me. On slide eight again here, under input and transportation costs, it sounds like lower fiber costs will only partially be offset by higher energy, chemicals, and transportation costs. It sounds like that benefit is specific to Europe and Latin America. Could you help us understand what's happening with fiber costs and how they're favorable in the back half? Thank you.

Yes, Matthew, and I'll start with Europe. So, you know, we've had a deliberate effort, especially at our new mill to reduce fiber costs there. And I think a lot of what we're seeing in the second half and into the fourth quarter is the benefits of that. Both market decreases and actions we've taken. So we'll see that benefit second half in Europe. And in Latin America, we had some higher costs in Q2 related to some of our outside wood purchases. They were, I would say, unusual, and we don't expect those to occur again in the second half. So we'll be normalized in Latin America. As you know, most of our Latin American fiber is his own make, own produce.

Just to be maybe a little bit more. We've seen a decrease of about 20% since its peak, in the fourth quarter last year, but it takes six months or so for it to start to impact our operations and that's why we're seeing it in the third quarter.

OK, thanks for the color. I'll turn it back.

Your next question comes from the line of Mark, Mike Ruxland with Truist Securities. Mike, please go ahead.

Yes, thanks, John, Don, and Hans for taking my questions, and congrats on all the progress. I think, you know, about 18 months ago, I guess you hired a new head of EU. And then you also, that was subsequently followed by a mention of a decision on the EU strategic review. So that really implies then a timeline that you'll have a decision made regarding the and what's happening with your European operations around end of year. So just, can you give us an update to where that process ends? What the different options are in terms of, do you think you're going to continue to put money into those two assets, or are you continuing to shutting them or selling them? Because from our understanding, the cash cost of actually closing the asset seems to be manageable and would roughly imply a two-year payback and probably would be the most accretive option for shareholders. So any call you have on European operations and your plan there? Yes.

Yes, Mike, I think you characterized it correct in that we said that we were not happy with the performance with our European operations, but this time last year we made a significant management change because we wanted to see a accelerated performance and I have to say that, you know, we made a great change. We're seeing accelerated performance. We're focusing on our strategy there, which is mixed improvements when enabled by the investments we made at our SIOP mill. We're actually ahead of plan there. We're also looking at implementing significant cost reductions that we're seeing Sayat and Numola increased productivity and also efficiency and then we just talked about it's a wood cost They online that with our strategy I It's being executed and being executed much better and well, you know, but you know, as we said, the conditions are difficult in Europe and we're looking looking at the long term is are we satisfied with where we think we can get and we'll probably would be looking at somewhere in 2027 if we're not satisfied with the outlook that we've got that we may pursue other options and those other options are just about essentially everything that you named. it's not like we're starting, I mean, we've, we've been looking at that and, but it's, it's.

probably in 2027 we'll make the call. Got it. Okay, so a little bit longer than the 18 months that you initially outlined. Do you think it's going to be early 2027 in terms of making a determination? And then just one quick thing, John, in terms of the cost redux that you've achieved there, what are you ultimately targeting? Like you've achieved a certain amount already.

your targets in terms of improving the overall cost structure of europe well i mean uh when we look at what we're targeting we probably need um you somewhere between 50 million dollars or so So we can be where we are and it's not just cost reduction, it's mixed improvement, it's other things that go into that. get us at significantly above cash positive on a mid-cycle basis. greater than cost of capital returns. You know, and yes, I don't want to, I don't want to, I'm going to lock myself down into a specific, because we're making and looking at the Our focus is on Europe. We understand that the issue So I don't want to lock down the timeline. Things could be sooner, things could be later. You know, it depends on, how things play out, but that's, that's, I don't really want to commit to a certain date, you know, not,.

I totally understand. Two quick questions and then I'll just turn it over. You guys mentioned 75 to 85 million from better price mix in second half over the first half. way to help quantify the benefit from better volumes, better opt-in costs, better input costs. Anyway, just quantify that in the second half versus the first half. And then the second question, the poison pill ends in November. What's your plan regarding the poison pill? I mean, and if you have a great, good relationship with your... a shareholder and they're interested in purchasing more shares why stop them thank you.

So, Mike, relative to the second half quantifying volume, so we wanted to give you, give, you know, analysts and investors a sense of the 75 to 85 on price and mix because one, it's big, two, we're confident prices are in place and we'll see that carry through. We're confident on the planned maintenance outages. That's something that we typically execute well. on the volume and ops and other costs inputs uh there's there's more uncertainty we we are leaning in we're confident in our forecast but we chose not to provide specific guidance there.

And to your other question about. Yes, the shield of rights plan. The plan remains in place. The board hasn't made it yet a decisional what we're going to do in terms of when it does expire at the end of November. That'll be something we'll address with the board when we meet in September.

Thank you. Your next question comes from the line of George L. Stavos with Bank of America Securities Incorporated.

George, please go ahead. Hey guys, how are you? Thanks for the details. I'll ask you questions and then I'll come back in queue. First of all, we appreciate you actually providing the pricing guidance that is helpful. John, Don, if I heard you correctly, MOSAT hits in 3Q in a month. It incorporates what you have in the market, and there's not so much of a tail into fourth quarter. Did I correctly summarize that, or what would you do to modify ad correct what I just relayed. And again, thanks for the pricing guide on that. We asked for that last question.