Sylvamo Corp (SLVM) Q3 2026 Earnings Report, Transcript and Summary

Good morning. Thank you for standing by. Welcome to Sylvamo's Third Quarter 26 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, you will have an opportunity to ask questions. If you would like to ask a question, press 1 to raise your hand. To withdraw a question, press 1 again. As a reminder, your conference is being recorded. I would now like to turn the call over to Hans Bjorkman, vice president, relations. Sir, the floor is yours.

Thanks, Rebecca. Good morning, and thank you for joining our third quarter 26 earnings call. Our speakers this morning are John Van Sims, Chief Executive Officer and Donald Paul 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-U.S. 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. Before I turn the call over to John, an important note on how we are presenting our results on slide 4. Following the announcement we made earlier this morning, our Europe business is now reported as discontinued operations. Unless otherwise noted, all figures in this presentation, for current and prior periods are for continuing operations and exclude Europe. Prior period results for our Latin America and North America segments have been recast to include certain corporate costs previously allocated to Europe. Approximately 6.5 million per quarter split roughly 60% North America and 40% Latin America. Recast historical information is also available in the appendix. With that, I would like to turn the call over to John.

Thank you, Hans, and good morning, everyone. I am glad that you are joining our call. I am on slide 5. This morning, we announced that we entered into a put option agreement with Midas Atlantic Partners in partnership with the Najafi companies for a binding offer to acquire our European business. We believe this potential transaction represents an important strategic step for our Europe business and Sylvamo. In Europe, it would create the opportunity to move forward with an owner experience in corporate carve outs and positioning businesses for long term success. After the proposed transaction, Sylvamo will be more focused company with greater ability to invest in our business strengthen our performance, and pursue world class excellence. We believe that focus will make us a stronger company and better position us to create sustainable value for our employees, customers, and investors. Our long-term strategy and investment thesis is unchanged. We are focusing on uncoated free sheet in attractive markets, which we believe North America and Brazil both represent. We are investing in low risk, high return projects that strengthen our competitive advantage which is what we are doing at our Eastover Mill. And we are leveraging our strength to generate high returns on invested capital. Slide 6 is a summary of the proposed transaction. We need to complete the required consultation processes with the work council and employee representatives in accordance with local laws before signing a share purchase agreement. We expect the consultation period to be completed and a transaction to close by the end of the first quarter of 2027. Subject to closing conditions including regulatory approvals. At closing, we will transfer our Europe business which includes our mills in Saillat France, and Nymölla, Sweden, along with supporting forestry and business operations with working capital of approximately €50 million and net cash of approximately €35 million. In exchange, for the Europe business, Sylvamo will receive a right to 20% of any future distributions. Throughout this process, we will remain focused on operating safely and reliably serving our European customers. Let's move to slide 7 and discuss our third quarter results. Our third quarter reflects solid execution on what we said we would do. First, we continued to implement the uncoated free sheet price increases we had previously communicated to our customers across all regions. Second, operational performance improved across all our mills, Sound execution of our planned maintenance outage work and our lean transformation helped drive the operational improvement in the quarter. Third, like much of the economy, we faced higher input and transportation cost. Donald is going to go into more detail on this later on the call. Let's move to the next slide. This shows our third quarter key financial metrics. Adjusted EBITDA nearly doubled from the second quarter to $128 million, a 20% margin. Adjusted operating earnings were $1.33 per share. Free cash flow was $16 million, a $32 million improvement from the second quarter. With that, I will turn it over to you, Donald.

Thank you, John, and good morning, everyone. Slide 9 contains our third quarter earnings bridge versus the second quarter. In the third quarter, we earned $128 million of adjusted EBITDA. Compared to $66 million in the prior quarter. Price and mix were favorable by $25 million reflecting the implementation of paper price increases and better mix in both regions. Volume was roughly flat seasonally stronger demand in Latin America was offset by lower volume in North America. Due to loss of supply from International Paper's Riverdale Mill. Operations and other costs were favorable by $6 million. Driven by improved operational performance. Planned maintenance outage costs were favorable by $38 million as we had no scheduled outages in the quarter. Input and transportation costs were unfavorable by $6 million as transportation costs were higher in both regions. Let's move to slide 10 to walk through the industry conditions. In Latin America, demand is seasonally stronger in the second half, which supports our volume and geographic mix. During the quarter, we implemented most of the price increases we had previously communicated, to our export customers in other Latin American countries and in The Middle East and Africa. In September, Colombia canceled its antidumping duties on uncoated free sheet imports from Brazil, which restores access to a market we previously served. In North America, industry supply and demand remain healthy. The Riverdale paper machine conversion removed about 7% of annual industry supply in our extended Eastover outage of about 50 days is currently underway. We realize most of our price increases previously communicated to our customers during the quarter. Lastly, imports continued to increase year over year in both regions. The chart on slide 11 shows the New York Fed's global supply chain pressure index. This index measures how far global supply chain conditions are from normal. It moved from about normal a year ago to well above its long term average. Day. We are seeing this directly in our cost in both regions in 3 main areas. Ocean freight, with tighter vessel availability and higher fuel prices, and inland transportation costs, higher diesel prices, fewer available truck drivers in the U.S. Inputs, chemicals, energy, and fiber, all affected by persistently higher oil prices. In the third quarter, our input and transportation costs were $6 million unfavorable compared with the second quarter. And we expect a similar unfavorable amount when comparing the fourth to the third quarter. These pressures are industry wide, not specific to Sylvamo. We are pulling many levers to mitigate these costs, such as our lean program, our supply chain initiatives, and fuel surcharges in North America. Let's move to slide 12. We are making good progress on our strategic investments at Eastover. Our flagship mill in North America. We are about 60% through the paper machine optimization, and it remains on schedule and on budget. Once complete, it will add 60 thousand tons of uncoated free sheet capacity per year, with the ramp-up starting early next year. Let's go to slide 13. After a strategic review, we changed the investment plans for our converting facility in Sumter, South Carolina which serves our Eastover mill. We decided to expand our converting capacity enabling us to internalize most of the currently outsourced converting and replaced cut size imports from our Brazil operations. Which are no longer economically viable due to tariff changes. Our Sumter converting plant currently has 3 sheeters. The previous plan included replacing 1 existing sheeter with a new state of the art sheeter. We now plan to keep 2 existing sheeters operational and add the new sheeter to the facility. When completed, Sumter will have 4 sheeters with a total of 500 thousand tons of annual cut size converting capacity which is an increase of 200 thousand tons from its current capacity. This capability will lower our converting and transportation cost and enhance our mix while improving service to customers. The new sheeter is planned to start up early in the third quarter next year. This change will require us to invest about $25 million more to upgrade the facility's infrastructure in 2027. However, it will also result in a higher projected annual earnings benefit. The overall investments for the paper machine optimization and new sheeter are still expected to generate higher than a 30% IRR. I will now turn it back over to John to conclude prepared remarks.

Thank you, Donald. In my letter to shareholders, in January, I committed that we would allocate capital wisely focus on long term value creation, and communicate transparently. We evaluate our position in Europe and have decided to focus our resources and capital. Latin America and North America, where we believe we have the best opportunity to earn returns above cost of capital and generate strong cash flow. We will be focusing on setting a new standard for customer experience and loyalty executing our strategic investments at Eastover, embedding lean continuous improvement across our operations and business, achieving best in class levels of efficiency, reliability, and performance in our mills and supply chain, adhering to our disciplined capital allocation principles, improving our social and environmental impacts every year. Our flagship growth strategy has not changed. We will continue to invest in low risk, high return projects as strengthen our uncoated free sheet capabilities and grow earnings and cash flow over time. I would like to close by recognizing that today we announced a big change for Savamo. And I want to thank all our employees for their hard work and commitment, especially our teams in Europe. With that, I am going to turn it over to. Back to Hans.

Thanks, John, and thank you, John, as well. Okay, Rebecca. We are ready to take questions.

We will now begin the question and answer session. Please limit yourself to 1 question and 1 follow-up. Should you have further questions, you are welcome to reenter the queue. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. We ask that you pick up your handset when asking 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 and a roster. Your first question comes from Mike with Truist Securities. Please go ahead.

Thank you, John, Donald, and Hans for taking my questions, and congrats on the announcement. John, just wanted to follow-up with you. You mentioned the letter your closing remarks here that you had earlier this year. I mentioned $300 million of free cash flow. on a normalized basis, or at least $300 million Once the sale of Europe is done, how do you think about that target? And I realize the target is a floor You did not provide a range. So, obviously, there is upside for starters. But could free cash flow be at $400 million, $450 million, particularly once you get rid of Europe? that is the first part. And the second part piece is now that you are approaching your target of $300 million-plus, what do you intend to do with your free cash flow? Is it all gonna head towards repurchasing stock? Thanks, Mike.

The proposed sale of our European business is going to make Sylvamo a much more focused company, concentrated in the attractive North America and Latin America regions. But we see the greatest opportunity to grow earnings and cash flow Our Eastover investments are progressing. Our lean transformation is improving performance across our mills. And our flagship growth strategy and disciplined capital allocations are unchanged. So we are confident that we can continue to develop strong cash flow and grow that as we complete the transaction of our footprint. Range. But I am going to tell you that we are going to share more about the long term potential of our stronger Sylvamo at the appropriate time once we complete the proposed sale of the European business. To your second question, you know, our focus on our cap. Our capital allocation strategy is unchanged. You know, first and foremost, we are gonna maintain a strong balance sheet so that we can invest and continue to invest through the cycle. We will invest and continue to operate or invest we think there is opportunities to generate well above cost of capital returns and grow our cash flow. And then we are gonna return the rest and the balance to shareholders. We will do that. We do believe that a dividend is important, to have that as a foundation. But we also believe that where there is opportunities, we will be buying back our shares. And we will prioritize that.

Gotcha. And just 1 quick follow-up. When you think about. can you help us frame actually an early bridge to maybe 2027 EBITDA, some of the larger bookends, given some of the moving pieces this year? The way I think about it, it looks like you would be at around $340 million of EBITDA roughly, give or take, for 2026. You have the. Once Europe is out you know, it is an add back of roughly 75 to $90 million. Eastover, $35 million benefit. You have fewer imports from Europe and Brazil, a $65 million benefit, and then you have some of these 1 offs that you incurred this year. So from weather debarking at Nymölla and reliability. So when you think about the progression from EBITDA this year to 2070, are you looking a starting point of around $525 million to $550 million or Well, you know, we to answer your question, we do not you know, we do not wanna project out, of course, there is a lot of unknowns between now and the beginning of 2028.

In terms of the global economy's cost and inputs and things like that. Now we think directionally, the way you have outlined it, Those all make sense with what is unknown is what is what is gonna be. what is going to occur in 2027 even from a geopolitical perspective. Understood. Thank you.

1 thing. 1 thing I will add, Mike, is relative to Eastover, you know, as you were going through those numbers, the 75, 35, and 65, I think, you referenced, I think, the 65, which we have talked about in the past as a non repeat. And the way the way we are thinking about that you know, we had a couple of components of that. We originally said 85, was a nonrepeat. You remember back in our 1 of our previous earnings calls, that has several components. Europe was a component, for example. Their volume was a component. The Eastover outage shutdown itself, extended outage was a component. And then we had another component for purchasing, you know, outside converting services. So the way we think about next year given what we are doing with the fourth sheeter, Volume, first of all, will be relatively flat for North America next year. So we do not see that $20 million component not repeating. And then we had, our Eastover outage Extended outage was $25 million of that. That would be something that we would expect as a onetime that will not repeat next year. But we think our converting cost as we know, work to the third quarter to start up this fourth sheeter, we will still incur some higher than normal converting cost well into 2027. So, in summary, I would say we expect about $25 million of that 80. Originally, 85. I think you are about 65. So $25 million of the $65 million to not repeat next year. Very clear, Donald. Thank you.

Your next question comes from George Staphos with Bank of America. Please go ahead.

Hi, everyone. Good morning. Thanks for the details. Question, and congratulations on the news. Good luck with the process. So the sheeter expansion in Sumter, can you talk to what the incremental cost will be? I think you just mentioned, directionally, it is gonna be an incremental negative. Can you talk about what that cost will be in 2027? And as I understood it correctly, this is all part of question 1. You, at 1 point in time, thought you would be bringing in tons from Brazil. You cannot do that now because of policy. What are you gonna be doing with those Brazilian tons that have been displaced by the incremental converting that you will be able to do at Sumter. And I had a follow on.

Yes. So, George, just to be clear, the $25 million is additional CapEx that will because we are not gonna originally, we had planned to shut down and replace a sheeter. Now we are adding a fourth sheeter to just Sumter facility. So we have gotta add infrastructure. You think about in terms of fire protection, dust systems, air, electrical, those. that is what the $25 million is. And we expect that then to delay the start up of that new state of the art sheeter until midyear next year. And what we are referring to is that we will have to continue to outsource converting We have those customers now because, we are providing those customers today, but we are providing a cut size using outsourced converting, which is expensive. that is where the additional benefit comes from. Once that sheeter is up and running, we will avoid those outside converting costs. We will be much more efficient internally to do that. For the Brazilian question you asked, we are doing that today. We stopped. You know, we were just able to briefly bring in cut size from Brazil that supports this transition with Riverdale going down. But then when the additional tariffs were applied, that shut that off. And so that volume that we were importing in from Brazil is now going into other markets. Other LatAm markets, And, you we are exporting that, and we are seeing that today. And in our Brazilian business. Did that answer the question, George?

It did. I guess just point of clarification before I get to the other question. So I understand the $25 million is capital. Capital. Would it be fair to say initially, with. As you are you know, building out what you need for the new sheeter in the capacity there and the incremental cost you are gonna have there, that is initially a negative. And at some point, obviously, you are doing this because you are going to become more. Efficient on converting. Is there a way to size the negative is, initially, from a P and L standpoint and what the positive is on the flip side. Once you are. Once it is up and running, And then my second question is, aside from the ongoing 20% of that will go to you on any cash outflows from the European operations. Is there anything else in terms of economic interest you gain or any other things we need to be mindful of that you. Could be a negative for you, in terms of the deal on Europe? So aside from the 20%, what else do we need to be mindful of on the economics there? Thank you.

Yeah. George, it is Donald. Good morning. So to your first question around yeah, so to your first question around the additional cost, I will go back to what I was describing to Mike earlier, the so in 2020, we estimated our incremental converting cost converting cost, due to the Eastover change to be about $20 million. that is about the same that will occur in 2027. So that is why it. That what we originally thought was a onetime would not go away. So incremental converting in 2027 approximately $20 million. To continue, and then the rest is capital that John described.

But to be clear with that, George, that it will go away when the new sheeter is up and running. that is the size of the price for installing the new sheeter. Exiting. Yeah. And we see that this project collectively everything we will spend on it, even including the incremental 25, we will have above a 30% return. And then to your second question around the 20% economic interest. So just to be clear, we have no equity ownership. We have no you know, voting position. So the equity. The 20% interest on any cash distributions, but it also would be you know, if the company does any type of joint venture or something, then we will get an appropriate position, you know, economic interest in the joint venture. Also, any future sales we would get 20% of the proceeds from that. So that is that is what the 20% means. It is also indefinite. So that is part of the deal. But you do not have a cash call as well. So if they need capital for whatever reason, do not come knocking on Sylvamo's door and say, hey. We need 20% of it or something like that. Would that be fair? that is correct. Okay. Thank you. cannot be. And, also, it cannot be diluted as well. The 20% position. Thank you, John.

Your next question comes from Matthew McKellar with RBC Capital Markets. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Just wanted to follow-up on that last 1. And I guess, confirm my understanding as well. Around what I heard. Are there any meaningful constraints placed on the buyer and how they run the asset as part of the transaction Maybe specifically, do they have the option to close those? Thank you.

there is no restrictions from our--you know, from our. From Sylvamo's perspective. No. They will be fully in control of the operations of the business once the it does get approved and we do close on it. And I guess the short answer is no. No restrictions.

Okay. And then as a follow-up, are you reasonably confident that the buyer and his partner are well positioned to fund any mill site liabilities may have to be resolved in the future. And that you are liabilities around those mills would be completely severed by the transaction?

Yes. We are really confident. The well, we ran a competitive process with actually a lot of interest know, these assets that we have, the teams that are there, the brands that we have, are very good. And I think that this. We have made a selection with Midas because of their track record. Because of their financial backing, But we also had other also very attractive potential buyers as well. To make a choice with. That was a difficult choice because they all had their strength, and we believe that Midas does have the financial backing and also the know how and the wherewithal to be able to be very successful. Long term with our European business.

Okay. Thank you. And if I could just sneak 1 more in. Regarding section 38 tariffs, the recent scope revisions Could you maybe just confirm the approximate share of volumes you would expect to be affected by tariffs at this point as it relates to the industry? North America. And if you speak to any opportunities for Sylvamo that you might be seeing following that announcement? Thank you.

Yeah. So they The U.S. did impose another ATS code on 38, which impacted about 82 thousand tons of cut size that was being. That was imported in 2025 from Canada. So we are thinking that is about the same volume. You know? If you look at that volume, it is like, let's say, somewhat immaterial to the overall you know, volume. So we do not see a lot of impact, and it is also. it is not clear as to what options the supplier of those tons may have in terms of converting those into rolls or to other biz. You know, offset business and supplying that cut-size domestically. So we do not see much of impact from the recent addition of this HTS code to the 38 tariff. Thanks very much. I will turn it back.

Please limit yourself to 1 question and 1 follow-up. Should you have further questions, you are welcome to reenter the queue. You would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. Your next question comes from Daniel Harriman with Sidoti and Co. Please go ahead.

Hey, guys. Good morning. Thanks so much for taking my questions. Just 2 quick ones for me today. The first is on working capital. Our expectation from August was that the build would most unwind by year end 2026. The 50 thousand tons in North America coming down in the second half. It looks like in the third quarter, it consumed about $42 million in working capital. So I am curious how much now comes out in the fourth quarter versus next year. And then just regarding the $6 million to $7 million a quarter in costs that were previously allocated to Europe, do you think any of that is addressable once the transaction closes? And if so, over what time frame? Thanks a lot.

Hi. Good morning, Daniel. it is Donald. So on your first question on working capital, we will. I expect it will be close to our plan in the fourth quarter. Most of that working capital was inventory build in North America, which was related to getting us through the Eastover outage. And with the sales plan we have, we will be close to that target, by the end of December. And then for the $6 million to $7 million quarterly, you know, cost that was previously allocated to the Europe business. Know, I. If you step back, when you know, over time, we have gone through changes with Sylvamo. We have looked at what our appropriate cost structure is from an overhead standpoint. We will do the same thing here. We will look at what is the right blend of resources that we need to execute our strategy. And so I think you can expect cost will come down over time as we allocate. We have got the right resources aligned at our, you know, new America's business, if you call it that.

that is helpful. that is helpful. Thank you. Daniel, from the timing expectation, I mean, that will start, you know, probably as soon as we are able to complete the deal. We get through that process.

Your next question comes from George Staphos with Bank of America. Please go ahead.

Hi, everyone. 2 questions. First, can you talk to what you think shipments and consumption might look like in North America in 2027 based on views, what your customers are saying, market forecast, whatever you want to throw into the pot And then secondly, on the. I think you said $6 million of unfavorable costs with inputs and transportation. If you can affirm or correct that, how do you ultimately whatever the number is, expect to offset that over time? Is that gonna be purely on surcharges and the like Or do you have other mechanisms?

Yeah. George, to your first question on shipments, we expect North America, our North America business, to be relatively flat from volume this year to next year. I think the industry in which. I think the industry this year is closer to minus. 2% And then on your second question, this the input cost, we expect the fourth quarter to see also from the third to the fourth about the same. I think, $6 million of negative. And a lot of that is fuel related, oil related, diesel related, and it impacts things like chemicals, distribution cost, I referenced earlier. So what do we do about it? that is--there is no 1 answer. And, really, the teams are looking at, you know, every lever we have. So think about starting from revenue. What are we doing? Surcharges is an element. it is difficult to do. You cannot do it in all regions. But that is a lever that will. That we have pulled and we are we are moving. Teams are also looking at you know, the mix, geographic mix, and customer mix. How do we improve that? And then further price, as we can push it later, into earlier into next year. And then in the cost side, it is a lot of things as well. there is teams looking at distribution cost and how do we get the best mode and reduce our exposure to the higher freight cost. The spot freight, if you will. Fiber, energy, chemicals, same thing. How do we reduce those things? And reduce consumption or even how we buy? And then on the productivity side, we. Our lead initiative is gaining momentum. it is a long process to get to build those capabilities, but we are seeing some early indications of success of identified approximately $15 million of benefit. Annualized benefit in some specific projects We have got a lot of people engaged in it. And so I think the answer is it is not 1 lever. it is many levers. And it is across the spectrum of revenue distribution. Manufacturing costs, and productivity. Okay. Thanks. I will turn it over.

Your next question comes from Mike Rocks with Truist Securities. Please go ahead.

Thanks. Just 1 quick follow-up. I am just wondering if you guys have any update on the poison pill which I believe expires sometime next week.

Yes. We do have an update on that. Right now, the as you said, the shareholder rights plan that they board adopted last November does expire this Monday, November 9, and our board has decided to let this plan expire. So it will not be renewed.

Thank you.

Your next question comes from George Staphos with Bank of America. Please go ahead.

Thank you. Hey, Just following up on the earlier question I had on input costs and the like. You said $6 million was the increase, and then there was another $6 million fourth quarter versus third quarter. So is that a consistent year-on-year $6 million you have got to manage against? Or what you are saying is costs have now moved up $12 million because it is 6+6. How would you have us think about that? And I had a quick follow on.

Yeah, George. So first, I would say you are right. It is incrementally 6 more in the fourth quarter. And we are expecting that we carry that cost into. That annualized cost into 2027. At this point in time, you know, Of course, we will have things that we will do to mitigate it. As much as we can. Okay. Annually, George, just go ahead. Sorry for perspective on. Nope. In 20, 2026. Versus 2027, costs are up approximately $50 million. And that is distribution is most of that. And the other things, chemicals, energy, things like that over 2025. Okay. Thank you for that.

Other question, I know you have got a lot going on right now. it is not gonna happen next month. But there had been some thought I think, maybe I was mistaken, that know, when you had the right window, you would have an opportunity to do a. An investor session kind of a, you know, capital markets day, something like that, Do you have any thought in terms of when that might occur? If that is a correct assessment?

that is right, George. You know, that is actually in my letter. I said we would have 1, but then I mean, when we started thinking about Europe and what we are gonna do with Europe, And then we got into the process. We pushed that off because, you know, it just did not wanna be going in front of investors saying 1 thing and actually work on something else. So we have pushed that off, and we will probably be looking at that probably now sometime next year. Sure.

If you like to think maybe second quarter? Would that be fair? Or too hard to call at this juncture?

Too hard to call at this juncture. It certainly will not be in the first quarter. Yeah, it could be sometime second, third quarter. Yeah. We understand. Alright. Thank you very much. Good luck in the quarter. Thank you.

We have reached the end of the Q and A session. I will now turn the call back to Hans Bjorkman for closing remarks.

Thanks, Rebecca. I am just going to let John give a couple closing thoughts to wrap up, and then we will let you guys go into the rest of your day.

So I just wanna reiterate the proposed sale of our European business will make Sylvamo a more focused company. Concentrated in North America and Latin America. Where we see the greatest opportunities to create value Our flagship growth strategy and disciplined capital allocation principles are unchanged. We are currently executing our most significant investment at our Eastover Mill that will drive a lot of value in the years to come, and that is progressing well. We are very pleased with what we are seeing so far. We will continue to invest in low risk, high return projects and uncoated free sheet to maintain a strong balance sheet and return cash to shareholders. We are focused on long term value creation and our confident ability to generate strong EBITDA and free cash flow through the cycle. And as we complete this transaction of our footprint, transition of our footprint, we are going to share more about the long term potential of the stronger Sylvamo. The appropriate time. Thank you for joining this call.

Thank you for participating in Sylvamo's second quarter 26 earnings call. You may now disconnect.