Sylvamo Corporation 2026 Q2 Earnings Call

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 two and three 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 U.S. GAAP financial measures are available in the appendix. Our website also contains copies of the earnings release, as well as today's presentation. 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, 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 freesheet 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 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 Mogi Guaçu and Três Lagoas mills 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 size sheet plant in Sumter, South Carolina, and across corporate functions.

Lastly, we continue to make very good progress on our strategic investments at our Eastover 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 as we work through the termination of Riverdale supply agreement and the extended outage at Eastover. Adjusted EBITDA more than doubled sequentially to $60 million with a margin of 7%. Adjusted operating earnings were $0.03 per share. Free Cash Flow was negative $23 million, a $36 million improvement sequentially. 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 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. Planned 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 non-repeat of a one-time charge of $10 million from International Paper's Riverdale mill due to high natural gas costs in the first quarter. Let's move to slide seven to walk through the industry conditions. European industry supply and demand remains challenging. Pulp prices improved throughout the first half and now seem stable. We continue realizing paper price increases. We communicated another paper price increase effective mid-June as costs continue to increase and margins are at unacceptable levels. We 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 freesheet industry supply was removed with International Paper's Riverdale mill paper machine conversion. In the second quarter, we saw imports into North America increasing compared to the previous quarter, a reaction to the 10% global tariff window. We also continue realizing paper price increases and expect to see additional realization through the third quarter. We expect the Middle East conflict to 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 Nymölla.

Planned maintenance outages will be unfavorable by $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 6 months of the year. 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 9.

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 wood yard 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 uncoated freesheet 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. Let's go to slide 10. Also within our Eastover strategic investments, the new sheeter project continues to make good progress.

The sheeter passed equipment acceptance testing in June, arrived in the U.S. 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 million-$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. A 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 shareholders in January, I described the areas that define our success: safety and wellbeing, 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 Sylvamo, 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.