Sylvamo Corporation Q2 FY2025 earnings call

Key Highlights - Teams committed to customer success, operational performance improved in Q2, with largest planned maintenance outage in over 5 years completed, and nearly $40 million returned to shareowners via dividend and share repurchases. - Adjusted EBITDA was $82 million with a margin of 10%, in line with expectations, reflecting large planned maintenance outages. - Nearly 85% of planned maintenance outage for the year was behind us. - Generated adjusted operating earnings of $0.37 per share. Free cash flow was negative $2 million. - Industry conditions: Europe demand sluggish, Latin America demand down 2% (Brazil up 6%), North America apparent demand stable but real demand expected down 3%-4% with import increase. - Capital allocation: Strong balance sheet with net debt-to-adjusted EBITDA at 1.3x, $42 million available for share repurchases. Eastover mill has high-return projects including optimizing paper machine, replacing sheeter, modernizing woodyard, expected to create incremental adjusted EBITDA of over $50 million per year with IRR >30%.

In the second quarter, Sylvamo earned adjusted EBITDA of $82 million with a margin of 10%. Adjusted operating earnings were $0.37 per share. Free cash flow was negative $2 million. In Europe, demand remained sluggish, down 8% year-over-year, with industry capacity reduced by 7%. In Latin America, demand was down 2% year-over-year, but Brazil was up 6% due to strong publishing demand. In North America, reported apparent demand was stable year-over-year, driven by higher imports (up nearly 40%), but real demand was expected to be down 3% to 4% this year, and industry supply was reduced by 10% with mill closures.

Third Quarter Outlook - Expect adjusted EBITDA of $145 million to $165 million for third quarter. - Price and mix projected to be unfavorable by $15 million to $20 million, primarily due to paper and pulp prices in Europe. - Volume projected to be favorable by $15 million to $20 million, primarily due to stronger seasonality in Latin America and North America. - Operations and other costs projected to be favorable, up to $5 million due to improved operational performance. - Input and transportation costs expected to be stable. - Planned maintenance outages will improve by $66 million as no outages planned in the quarter, expecting significantly better adjusted EBITDA performance in the second half due to lower planned maintenance outage expenses, improving volumes and better operations.

• Tariff situation and potential challenges and opportunities. - Currency fluctuations with the U.S. dollar devaluation against many currencies. - Market demand changes in different regions. - Impact of imports on pricing and market share in various regions.

Q: Can you talk a little bit about what the outlook is for South America in the third quarter, to the extent that you can talk about EBITDA and how things are trending, that would be helpful. And the second question would be, I remember from last quarter, I seem to remember that you were expecting North and South America on a combined basis to be up in EBITDA versus '24. Is that still the outlook and what are the puts and takes there?

A: For South America's third quarter outlook, we're expecting continued improvement with seasonally increasing shipments and no outages. In the second quarter, shipments were slightly lower than expected due to outages but are now behind us. Regarding the combined EBITDA of North and South America, currently, we believe the combined earnings could be slightly less than last year, mostly due to weakness in other Latin American markets pricing driven by tariffs and increased imports.

Q: First, I just wanted to start with Europe. And in the last quarter, you spent quite a bit of time talking about the changes that were made there. Obviously, the region continues to suffer from soft demand and lower pulp prices. And I'm just wondering if you could update us on what needs to happen either commercially or operationally to kind of stabilize performance there heading into 2026?

A: Europe is a difficult market with conditions driven by tariff impact and weak demand. We need to improve our competitive cost position, such as improving mix in Saillat and reducing wood cost and improving operations in New Mouland.

Q: You mentioned shifting trade flows in uncoated freesheet through the first half of the year. Can you maybe just give us a sense of what the latest is that you're seeing on that front and how trends through the past couple of months into August have looked in particular. What are you seeing by market?

A: Relative to the first half of this year, there's been a significant increase in trade roles coming into North America, believed to be in advance of tariff uncertainties. In Europe, we've seen importers trying to get into the European market, with OLA (other Latin America) prices under pressure.

Q: What is your outlook for how uncoated freesheet demand in Latin America evolves over the next couple of years?

A: We think Latin America will continue to be flat or slightly down. Brazil is up 6% year-to-date, but other Latin American markets are down, mainly driven by Mexico's tariff uncertainty.

Q: I recognize that Eastover spending will be ramping into '26. But how do you think about the opportunity to lead into share repurchases with where the share price is at particularly with the balance sheet in good shape in the second half of '25 likely to be stronger from a free cash perspective.

A: We have a strong balance sheet with $42 million available on our current share repurchase authorization. We will opportunistically buy back shares when they are significantly undervalued.

Q: Could you talk about the green energy credits that you received in 2Q? What was the amount? Are they nonrecurring? And then to the extent that you can comment, the fact you're seeing so much in the way of imports into North America, is that affecting any of your tactics and for that matter, the behavior of producers in the region vis-a-vis their margin efforts? And then I guess relatedly, you're saying imports, I believe, into Europe as well from what I heard from Jean-Michel, I recognize it's slow, but is it changing behavior at all? And how are you contending with that?

A: The green energy credits received in 2Q were $8 million, and they are not entirely nonrecurring. The increase in imports into North America impacted pricing competitiveness, with a price increase announcement in the first part of the year realizing less than expected due to imports and the closure of the Chillicothe mill. In Europe, imports are affecting behavior, and we are focused on improving our competitive cost position and debottlenecking the Eastover mill to better contend with it.