Sylvamo Corp Q3 FY2024 earnings call

• Third quarter performance was strong with good commercial and operational results, mill system running well, and stable input costs.
• Progressed with Project Horizon cost reduction program, on track to exceed savings goal.
• Earned adjusted EBITDA of $193 million, free cash flow of $119 million, and adjusted operating earnings of $2.44 per share.
• Focused on building a resilient safety culture.
• Georgetown mill closure: will exit about 150,000 tons of the ~250,000 tons expected to be supplied this year, retained 100,000 tons of most profitable products which have been transitioned to existing footprint.
• North America uncoated freesheet capacity will be reduced by approximately 10% with the Georgetown closure.
• Uncoated freesheet industry conditions improving in Europe and North America; Latin America demand and supply stable in 2025.
• Brazil goodwill tax dispute: Brazilian Federal Regional Court ruled in favor on 2/3 of disputed amount, currently discussing with lenders to eliminate $60 million escrow requirement.

In the third quarter, Sylvamo earned adjusted EBITDA of $193 million with a margin of 20%. Free cash flow generation was $119 million, and adjusted operating earnings were $2.44 per share. The $193 million of adjusted EBITDA was better than the outlook of $170 million to $185 million and almost $30 million higher than the prior quarter. Price and mix was unfavorable by $4 million due to North America mix. Volume increased by $10 million due to North America. Operations and other costs were stable and better than projected. Planned maintenance outages costs decreased by $28 million. Input and transportation costs increased by $4 million. For the fourth quarter, Sylvamo expects adjusted EBITDA of $150 million to $165 million. Price and mix is projected to be unfavorable by $20 million to $25 million. Volume is expected to improve by $15 million to $20 million. Operations and other costs are projected to increase slightly due to an $8 million operating expense with a planned 10-year turbine generator maintenance event at the Eastover mill. Input and transportation costs are expected to increase by $5 million to $10 million. Planned maintenance outages are projected to increase by $17 million. Project Horizon, the cost reduction program, is on target to exceed the $110 million year-end run rate savings goal by up to $10 million.

• Expect fourth quarter adjusted EBITDA of $150 million to $165 million.
• Project Horizon on target to exceed $110 million year-end run rate savings goal by up to $10 million.
• European mills mostly on 24-month cycle, with $40 million maintenance outage costs expected in 2025 due to outages at Saillat and Nymolla in the first half of the year.
• Brazil goodwill tax dispute: Brazilian task authorities will appeal court ruling, could be several years for final resolution.

• Brazilian task authorities may appeal court ruling on goodwill tax dispute, potential for several years of uncertainty.
• European Union Deforestation Regulation implementation details unclear, could impact European uncoated freesheet markets and imports.
• Uncertainties in planned maintenance outages costs and input/transportation costs.

Q: With the upcoming closure of Georgetown and strategy changes at IP, how does the capacity reduction impact the Riverdale agreement?

A: Riverdale grades are produced in other mills, mix improvement will mitigate potential negative impact to earnings, and if Riverdale were to go down, it would probably be breakeven with benefits.

Q: Has the retained 100,000 tonnes of business been transitioned over to existing footprint?

A: Yes, it's all been transferred and is ready.

Q: Can you talk about offset from tightening footprint to offset the gross impact from Georgetown?

A: Reduction of simplification of the business and reduction of lack-of-order downtime is factored in.

Q: What about free cash flow for the fourth quarter?

A: Approximately $65 million to $75 million is in the program of possibility.

Q: Remind us of planned maintenance in Europe in 2025 and comparison to 2024?

A: European mills mostly on 24-month cycle, directionally $40 million impact next year with outages at Saillat and Nymolla in first half, different from 2024.

Q: View on implementation of European Union Deforestation Regulation and its effect on European markets?

A: Intention is good, EUDR needs clarification, potential positive impact for European producer if rules are clear.

Q: Capital allocation and share repurchases?

A: Maintain strong balance sheet, committed to 40% cash return to shareholders, will consider share repurchases if price is attractive.

Q: How to think about economic downtime in Europe moving forward?

A: Reduction in capacity in Europe with 2 mills shutting down, expect stronger capacity reduction versus demand decrease, less lack of order downtime in European system.

Q: Demand and shipments in 2025?

A: Expect shipments to be comparable with demand down in Europe and North America.