Sylvamo Corp: Form 10-Q for the period ended Sep 30, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included in “Financial Information” of this Quarterly Report on Form 10-Q (this “Form 10-Q”) and the Company’s Form 10-K for the three years ended December 31, 2023, 2022 and 2021. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties. Our actual results could differ materially from those stated and implied in any forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and elsewhere in this Form 10-Q and in our 2023 Form 10-K, particularly under the headings “Risk Factors” and “Forward-Looking Statements.”

EXECUTIVE SUMMARY

Third quarter 2024 net income was $95 million ($2.27 per diluted share) compared with $83 million ($1.98 per diluted share) for the second quarter of 2024. Net sales were $965 million in the current quarter compared with $933 million in the prior quarter. Cash from operations was $163 million compared to $115 million in the prior quarter. Adjusted EBITDA was $193 million and our adjusted EBITDA margin was 20% compared to $164 million and an adjusted EBITDA margin of 18%. Free cash flow was $119 million compared to $62 million in the second quarter.

Comparing our performance in the third quarter to the second quarter, price and mix was unfavorable, primarily driven by North American mix, while volume increased in North America. Operations and costs were stable reflecting solid operations across our mills in all three regions. Planned maintenance outage expenses decreased significantly as we had no major planned outages during the third quarter. Input and transportation costs increased slightly, as higher fiber costs in Latin America more than offset lower energy and transportation costs in North America.

Looking ahead to the fourth quarter of 2024, we expect price and mix to be unfavorable due to pulp and paper price decreases in Europe, higher export mix in Latin America and unfavorable customer mix in North America. Volume is expected to improve driven by Latin America. Operations and costs are expected to increase slightly due to expenses for a planned ten-year turbine generator maintenance event at our Eastover mill that will be partially offset by better fixed cost absorption from less economic downtime in North America. Additionally, we expect input and transportation costs to be higher mostly due to transportation and seasonally higher energy costs. Lastly, we expect planned maintenance outage costs to increase due to the planned outage at Eastover during the fourth quarter.

Georgetown Mill Supply Agreement

On October 30, 2024, the Company and International Paper entered into an agreement to terminate the Georgetown mill supply agreement effective December 31, 2024. International Paper also announced plans to discontinue operations at the Georgetown mill. We expect the Georgetown mill to supply us with approximately 250,000 tons of uncoated freesheet and bristols during 2024. We plan to transition production of approximately 100,000 tons annually, of the most profitable products, to our Ticonderoga and Eastover mills. We will exit approximately 150,000 tons annually.

BUSINESS SEGMENT RESULTS

Overview

Management provides business segment operating profit, a non-GAAP financial measure, to supplement our GAAP financial information, and it should be considered in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Management believes that business segment operating profit provides investors and analysts useful insights into our operating performance. Business segment operating profit is reconciled to Income before income taxes, the most directly comparable GAAP measure. Business segment operating profit may be determined or calculated differently by other companies and therefore may not be comparable among companies.

The following table presents a comparison of Income before taxes to business segment operating profit:

In millions

(a) We define business segment operating profit as our income before income taxes calculated in accordance with GAAP, excluding net interest expense (income) and net special items. We believe that business segment operating profit is an important indicator of operating performance as it is a measure reported to our management for purposes of making decisions about allocating resources to our business segments and assessing the performance of our business segments.

(b) Special items represent income or expenses that are incurred periodically, rather than on a regular basis. Net special items in the periods presented primarily include legal fees related to the Brazil Tax Dispute, a loss related to forest fires in Brazil, certain severance costs related to our salaried workforce, integration costs related to the Nymölla acquisition, professional and legal fees related to negotiations resulting in a shareholder cooperation agreement, the impact of the step-up of acquired Nymölla inventory sold during the first quarter of 2023 and other charges.

Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023

Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023

The following tables present net sales and operating profit, which is the Company’s measure of business segment profitability, for each of the Company’s segments. See Note 16 Financial Information by Business Segment and Geographic Area for more information on the Company’s segments.

Europe

In millions

Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023

Our Europe business segment net sales increased $10 million, compared to the same period in 2023, primarily due to higher sales price and mix ($4 million) and higher volumes ($10 million), partially offset by foreign exchange and other.

Europe operating profit was $17 million higher than the same period in 2023, driven primarily by higher sales price and product mix ($4 million), higher volumes ($2 million), lower unabsorbed costs due to economic downtime ($9 million), lower input costs ($1 million), primarily for purchased chemicals, and lower operating costs ($1 million).

Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023

Our Europe business segment net sales decreased $17 million, compared to the same period in 2023, primarily due to lower sales price and mix ($60 million) and foreign exchange and other which more than offset higher volumes ($56 million).

Europe operating profit was $9 million higher than the same period in 2023, primarily due to higher volumes ($12 million), lower input costs ($17 million), primarily for purchased chemicals, as well as lower distribution costs, lower outage costs ($20 million) and lower unabsorbed costs due to economic downtime ($22 million) which more than offset the impacts of lower sales prices and less favorable product mix ($60 million) and higher operating costs ($2 million).

Latin America

In millions

Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023

Our Latin America business segment net sales increased $1 million, compared to the same period in 2023, primarily driven by an increase in sales price and mix ($3 million) and higher volumes ($9 million), partially offset by foreign exchange and other.

Operating profit for Latin America was $6 million lower than the same period in 2023, as higher input costs ($13 million), primarily for purchased chemicals, more than offset higher sales prices and more favorable product mix ($3 million), lower operating costs ($2 million) and higher volumes ($2 million).

Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023

Our Latin America business segment net sales decreased $10 million, compared to the same period in 2023, primarily driven by a decrease in sales price and mix ($49 million) and foreign exchange and other which more than offset higher volumes ($50 million).

Operating profit for Latin America was $49 million lower than the same period in 2023, as lower sales prices and less favorable product mix ($49 million), along with higher operating costs ($18 million) and higher outage costs ($13 million) more than offset higher volumes ($13 million) and lower input costs ($18 million), primarily for purchased pulp and chemicals.

North America

In millions

Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023

Our North America business segment net sales increased $56 million, compared to the same period in 2023, as higher volumes ($69 million) more than offset decreased sales price and mix ($13 million).

Operating profit for North America was $23 million higher than the same period in 2023, primarily due to higher volumes ($19 million), lower unabsorbed costs due to economic downtime ($17 million), lower outage costs ($1 million) and lower input costs ($2 million), primarily for purchased chemicals, as well as lower distribution costs, which more than offset decreased sales prices and less favorable product mix ($13 million) and higher operating costs ($3 million).

Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023

Our North America business segment net sales increased $60 million, compared to the same period in 2023, as higher volumes ($119 million) more than offset decreased sales prices and less favorable product mix ($60 million).

Operating profit for North America was $20 million higher than the same period in 2023, primarily due to higher volumes ($35 million), lower unabsorbed costs due to economic downtime ($40 million) and lower input costs ($23 million) primarily for purchased wood and chemicals, as well as lower distribution costs which more than offset decreased sales prices and less favorable product mix ($60 million), higher operating costs ($16 million) and outage costs ($2 million).

Non-GAAP Financial Measures

Management provides Adjusted EBITDA, a non-GAAP financial measure, to supplement our GAAP financial information, and it should be considered in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Management uses this measure in managing the operating performance of our business and believes that Adjusted EBITDA provides investors and analysts meaningful insights into our operating performance and is a relevant metric for the third-party debt. Adjusted EBITDA is reconciled to Net income, the most directly comparable GAAP measure. Adjusted EBITDA may be determined or calculated differently by other companies and therefore may not be comparable among companies.

In millions

(a) Special items represent income or expenses that are incurred periodically, rather than on a regular basis. Net special items in the periods presented primarily include legal fees related to the Brazil Tax Dispute, certain severance costs related to our salaried workforce, integration costs related to the Nymölla acquisition, professional and legal fees related to negotiations resulting in a shareholder cooperation agreement, the impact of the step-up of acquired Nymölla inventory sold during the first quarter of 2023 and other charges.

(b) We define Adjusted EBITDA (non-GAAP) as net income (GAAP), net of taxes plus the sum of income taxes, net interest expense (income), depreciation, amortization and cost of timber harvested, stock-based compensation, and, when applicable for the periods reported, special items.

Free cash flow is a non-GAAP measure and the most directly comparable GAAP measure is cash provided by operating activities. Management believes that free cash flow is useful to investors as a liquidity measure because it measures the amount of cash generated that is available, after reinvesting in the business, to maintain a strong balance sheet and service debt, and return cash to shareowners. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. By adjusting for certain items that are not indicative of the Company’s ongoing performance, free cash flow also enables investors to perform meaningful comparisons between past and present periods.

The following is a reconciliation of Cash provided by operations to Free Cash Flow:

In millions

The non-GAAP financial measures presented in this Form 10-Q as referenced above have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results calculated in accordance with GAAP. In addition, because not all companies utilize identical calculations, the Company’s presentation of non-GAAP measures in this Form 10-Q may not be comparable to similarly titled measures disclosed by other companies, including companies in the same industry as the Company.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our ability to fund the Company’s cash needs depends on our ongoing ability to generate cash from operations and obtain financing on acceptable terms. Based upon our history of generating strong operating cash flow, we believe we will be able to meet our short-term liquidity needs. We believe we will meet known or reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances and available borrowings through the issuance of third-party debt, as needed.

A major factor in our liquidity and capital resource planning is our generation of operating cash flow, which is highly sensitive to changes in the pricing and demand for our products. While changes in key operating cash costs, such as raw materials, energy, mill outages and distribution expenses do have an effect on operating cash generation, we believe that our focus on commercial and operational excellence, as well as our ability to manage costs and working capital, will provide sufficient cash flow generation to meet our operational and capital spending needs.

The terms of the agreements governing our debt contain customary limitations for the financing as well as other provisions. These provisions may also restrict our business and, in the event we cannot meet the terms of those provisions, may adversely impact our financial condition, results of operations or cash flows.

Operating Activities

Cash provided by operating activities totaled $305 million for the nine months ended September 30, 2024, compared with cash provided by operating activities of $337 million for the nine months ended September 30, 2023. The decrease in cash provided by operating activities in 2024 relates primarily to timing of cash flows related to working capital.

Cash used for working capital components (accounts and notes receivable, inventories, accounts payable and accrued liabilities, and other) was $44 million for the nine months ended September 30, 2024, compared with cash provided by working capital components of $3 million for the nine months ended September 30, 2023. The nine months ended September 30, 2024 working capital components primarily reflect $28 million, $21 million and $11 million of cash used for our accounts and notes receivables, inventories and other operating activities, respectively, offset by $16 million of cash provided by our accounts payable and accrued liabilities balances. The nine months ended September 30, 2023 working capital components primarily reflect $99 million and $72 million of cash provided by our accounts and notes receivable and other operating activities, respectively, offset by $46 million and $122 million of cash used for our inventories and accounts payable and accrued liabilities balances, respectively.

Investment Activities

The total cash used for investing activities for the nine months ended September 30, 2024 decreased from the nine months ended September 30, 2023, primarily due to the purchase of the Nymölla mill which occurred in the prior year.

The following table shows capital spending by business segment:

In millions

Capital spending primarily consists of purchases of machinery and equipment related to our global mill operations and reforestation and timber purchase costs in Latin America.

Financing Activities

Cash used for financing activities for the nine months ended September 30, 2024 primarily reflects the payments of $117 million, $44 million, $23 million, and $10 million on our outstanding principal debt balances for Term Loan F, Term Loan A, the AR Securitization, and Revolving Credit Facility, respectively. Additionally, payments of $93 million were made to redeem, at a premium, the full value of our 7.00% Senior Notes and pay $5 million in debt issuance costs in connection with the debt refinancing in the third quarter. These amounts are primarily offset by the issuance of Term Loan F-2, draws on our Revolving Credit Facility, and AR Securitization of $235 million, $10 million, and $6 million, respectively. During the nine months ended September 30, 2024 the Company also paid $43 million in dividends and repurchased $30 million of our shares pursuant to our share repurchase program. Cash used for financing activities for the nine months ended September 30, 2023 primarily reflects the payments of $60 million, $34 million, $20 million, and $8 million on our outstanding principal debt balances for the Revolving Credit Facility, AR Securitization, Term Loan F, and Term Loan A, respectively. Additionally, $360 million was paid to bond holders as part of our tender offer. These amounts are primarily offset by the issuance of Term Loan A, draws on our Revolving Credit Facility, and AR Securitization of $300 million, $70 million, and $70 million, respectively. During the nine months ended September 30, 2023 the Company also paid $32 million in dividends and repurchased $53 million of our shares pursuant to our share repurchase program.

Contractual Obligations

Our 2023 Form 10-K included disclosures of our contractual obligations and commitments as of September 30, 2024. We continue to make the contractually required payments, and, therefore, the 2023 obligations and commitments described in our 2023 Form 10-K have been reduced by the required payments.

Capital Expenditures

For the nine months ended September 30, 2024, we have invested approximately $157 million, or 5.6% of net sales, in total capital expenditures. Over that period, we spent approximately $140 million, or 5.0% of net sales, in maintenance, regulatory and reforestation capital expenditures, and approximately $17 million, or 0.6% of net sales, in high-return capital projects. Our annual maintenance, regulatory and reforestation capital expenditures are expected to be in the range of approximately $175 to $190 million per year (before inflation) for the next several years, which we believe will be sufficient to maintain our operations and productivity. In addition, we expect to spend approximately $30 million to $35 million on high-return projects in 2024.

PILLAR TWO DIRECTIVE

The Organization for Economic Co-Operation and Development (“OECD”) has been working on a project to act to prevent what it refers to as base erosion and profit shifting (“BEPS”). Most recently, the OECD, through an association of almost 140 countries known as the “inclusive framework,” has announced a consensus to address, among other things, perceived challenges presented by global digital commerce (“Pillar 1”) and the perceived need for a minimum global effective tax rate of 15% (“Pillar 2”). On December 15, 2022, the European Union formally adopted the Pillar Two Directive, and a majority of EU member states have enacted the directive into domestic law as of December 31, 2023. Other countries are taking similar actions. The Pillar Two Directive has not had a material impact on our condensed consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with U.S. GAAP requires the Company to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require subjective judgments about matters that are inherently uncertain.

Accounting policies whose application may have a significant effect on the reported results of operations and financial position of the Company, and that can require judgments by management that affect their application, include the accounting for impairment or disposal of long-lived assets and goodwill, business combinations and income taxes.

The Company has included in the 2023 Form 10-K a discussion of these critical accounting policies, which are important to the portrayal of the Company’s financial condition and results of operations and require management’s judgments. The Company has not made any changes in these critical accounting policies during the first nine months of 2024.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains information that includes or is based upon forward-looking statements. Forward-looking statements forecast or state expectations concerning future events. These statements often can be identified by the fact that they do not relate strictly to historical or current facts. They typically use words such as “anticipate,” “assume,” “could,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should,” “will” and other words and terms of similar meaning, or they are tied to future periods in connection with discussions of the Company’s performance. Some examples of forward-looking statements include those relating to our business and operating outlook, future obligations and anticipated expenditures.

Forward-looking statements are not guarantees of future performance. Any or all forward-looking statements may turn out to be incorrect, and actual results could differ materially from those expressed or implied in forward-looking statements. Forward-looking statements are based on current expectations and the current economic environment. They can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors that are difficult to predict.

Although it is not possible to identify all of these risks, uncertainties and other factors, the impact of the following factors, among others, on us or on our suppliers or customers, could cause our actual results to differ from those in the forward-looking statements: deterioration of global and regional economic and political conditions, including the impact of wars and other conflicts in Ukraine and the Middle East; physical, financial and reputational risks associated with climate change; adverse environmental events, including forest fires on our lands in Brazil; public health crises that could have impacts similar to those experienced as a result of the COVID-19 pandemic; increased costs or reduced availability of the raw materials, energy, transportation (truck, rail and ocean) and labor needed to manufacture and deliver our products; reduced demand for our products due to industry-wide declines in demand for paper, the cyclical nature of the paper industry or competition from other businesses; a material disruption at any of our manufacturing facilities; information technology risks including potential cybersecurity breaches affecting us or third parties with which we do business; extensive environmental laws and regulations, as well as tax and other laws, in the United States, Brazil and other jurisdictions to which we are subject, including our compliance costs and risk of violations and liability; our reliance on a small number of customers; a failure by us to attract and retain senior management and other key and skilled employees; loss of our commercial agreements with International Paper; our indebtedness having a material adverse effect on our financial condition, or our inability to generate sufficient cash to service our indebtedness; and the factors disclosed in Item 1A. Risk Factors, as such disclosures may be amended, supplemented or superseded from time to time by other reports we file with the U.S. Securities and Exchange Commission (the “SEC”), including subsequent annual reports on Form 10-K and quarterly reports on Form 10-Q.

We assume no obligation to update any forward-looking statements made in this quarterly report to reflect subsequent events or circumstances or actual outcomes.

Information relating to quantitative and qualitative disclosures about market risk is shown on page 44 of the Company’s 2023 Form 10-K, which information is incorporated herein by reference. There have been no material changes in the Company’s exposure to market risk since December 31, 2023.

Management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2024. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date and designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is: recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting:

In the third quarter of 2024, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

The risk factors that affect our business and financial results are set forth under Part I, Item 1A, “Risk Factors,” in our 2023 Form 10-K. There have been no material changes to the risk factors described in the 2023 Form 10-K. The risk factors in “Item 1A. Risk Factors,” in the 2023 Form 10-K and the risks described in this Form 10-Q or our other SEC filings could cause our actual results to differ materially from those stated in any forward-looking statements.