Prepared remarks
Thank you. Good morning. Thank you for standing by. Welcome to Sylvamo's Second Quarter 2026 Earnings Call. As a reminder, your conference is being recorded. I'd now like to turn the call over to Hans Bjorkman, Vice President of Investor Relations. Sir, the floor is yours.
Thank you, Lucas. Good morning and thank you for joining our call. Our speakers this morning are John Sims, Chief Executive Officer, and Donald 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 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. With that, I'd like to turn the call over to John.
Thank you, Hans, and good morning, everyone. I'm glad you're on the call. I'm on Slide 4, 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 5 shows our second quarter key financial metrics. 2026 is a transition year to work through the termination of the 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.
Thank you, John, and good morning, everyone. Slide 6 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 7 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, and 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 8. 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 a $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 approximately $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 six months of the year. I'll now turn it back to John to talk about our strategic investments at Eastover and our long-term focus.
Thank you, Don. I'll pick back up on Slide 9. Our Eastover strategic investments, including our woodyard modernization and paper machine optimization and new sheeter, continue to make good progress. Starting with the woodyard, the hardwood line has been performing extremely well since May, and we're seeing improved reliability and chip quality. The woodyard 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 include reducing costs, improving our mix and efficiency, while enhancing service for our customers. So to Slide 10. Also within our Eastover strategic investment, 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 the new sheeter. We estimate roughly $30 million to $40 million of that in 2027. Lastly, we completed a sale-leaseback transaction with a third party for our existing sheet plant to expand the attached warehouse by 300,000 square feet. The 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 well-being, 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 well-being is our most important responsibility. Our goal is to have a resilient safety culture in which serious injuries are eliminated. To eliminate serious injuries, it will be because our employees truly care and are aligned on relentlessly pursuing excellence. On employee engagement, we have nearly achieved world-class engagement with an employee Net Promoter Score of 46. Our focus is to be greater than 50, while we strengthen the capability and readiness of our teams and tap into their talents to help us achieve world-class performance. On customer centricity, we are setting a new standard for customer experience and loyalty. We will measure it through our customer net promoter score and through our perfect order performance, delivering complete, on time, and without defects. We are targeting a 20-point improvement in Net Promoter Score and higher than 90% on the perfect order. On operational excellence, we are targeting improving overall machine efficiency by 400 basis points. This is a measure of how well our assets run. On cost leadership, we challenge ourselves to set an aggressive goal in order to drive margin improvement despite the significant inflationary cost pressures. Our goal is to achieve 3x to 5x our 2022 through 2025 average annual cash cost improvement rate. This will be enabled by our lean and digital transformation efforts. Lastly, on sustainability, we'll continue to operate responsibly to protect our uplifting communities and improve the planet every year. Underpinning all six are our talented team, lean management, and digital transformation. I'll conclude my remarks on Slide 13. As you are aware, it has been a very dynamic year where we've been adapting and executing the initiatives that are under our control. We are focused on generating strong, sustainable results and long-term value by making disciplined, data-driven decisions that strengthen Sylvamo for decades to come. We will do this by diligently executing our flagship growth strategy, adhering to our disciplined capital allocation, institutionalizing lean continuous improvement. As industry conditions turn, capital spending normalizes, and the benefits from our investments begin to materialize, we have the potential to generate annually over $300 million of free cash flow and greater than 15% return on invested capital. So with that, I'll turn the call back to you, Hans.
Thanks, John, and thank you, Don. Okay, Lucas, we're ready to take the questions.
Questions and answers
We will now begin the question and answer session. Your first question comes from the line of Daniel Harriman with Sidoti.
In North America, margin was up at 15% versus 10% in the first quarter. I'm curious if you could add more color on what drove this improvement and how much was price and mix versus maybe lower sourcing costs from bringing new products in from Brazil rather than Europe. And then leverage finished the quarter at 2.2x with most of the free cash flow for the year expected in the back half. Can you give us a better idea of how much of the first half working capital build reverses and where you expect to end the year on leverage?
Yes, Daniel, I'll take your second question first. This is Don, and good morning. The working capital build will unwind by the end of the year mostly. As we discussed on an earlier call, that's due to the Eastover machine speed-up project building inventory through the first and second quarters, and we'll start to draw it down in the fourth quarter. Regarding your first question about North America, the margin improvement from first to second quarter was largely price and mix. There were also lower operations costs and a bit of lower input costs, but the key driver was price and mix going into Q2 from Q1.
Just to give a little more color, Daniel, on the working capital. North America is where we built the biggest inventory. It's about 50,000 tons that we expect to draw down in the second half. We will draw that down in the second half.
Your next question comes from the line of Matthew McKellar with RBC Capital Markets. Matthew, please go ahead.
It sounds like you're expecting lower North American volumes in the second half of the year, if I've understood your comments on Slide 8 correctly. Is that sales volumes or production? I ask what the bogey might be for North American volumes at this point?
Yes, Matthew, thanks for the question. On North America's volume, it will be both lower production and lower sales. International Paper's Riverdale supply is gone, which impacts sales in the second half. We also have the Eastover outage, which is longer than we originally planned; we had planned 45 days, but it will be somewhat longer and will reduce production. Both of those are the main reasons volumes will be lower.
One other point to add, Matthew: during the situation when the tariff relief went away, we were able to take advantage and move on some volume from our Brazilian operations. But now with the new tariffs that are in effect, it's not economical. So we're actually bringing in less volume from Europe and Brazil than we expected. There'll be a little less than that.
If you think about the impact of Riverdale going away, that supply is gone. We were at a little less than 100,000 tons this year from that source; it delivered about 90,000 through April and we won't have that in 2027. We will have the Eastover speed-up, planned to add 60,000 tons, but we won't get all of that next year since we'll be ramping up after the project completes in the fourth quarter. Eventually those two things net about 40,000 tons down.
Okay, so if I think about the Q4 '25 presentation where we talked about 1.17 million tons in North American sales, the variance is primarily a longer outage at Eastover and then less volumes coming in from Latin America and Europe than you'd anticipated?
That's right. We also got slightly fewer tons from Riverdale, which we already experienced. We were assuming about 100,000 tons before they converted, and they delivered about 90,000. That impact has already been felt.
Next, it sounds like you have pricing as a tailwind across each segment into Q3. Could you spend a minute running through what price is currently announced and pending in the markets? Maybe talk about how price should trend sequentially by region, either on average or as we exit Q3 in comparison to where you were in Q2?
Matthew, I'll start with how we see price in the second half. We said $75 million to $85 million incremental, which is both mix and price. I'd say about 70% of that is price, and the majority of that is North America and Northern Europe, which we will see some flow through. The way it flows through the quarter varies by region.
I think we have a third price increase that's being implemented in Europe now. We're seeing that in July, and we'll see it flow through. In LATAM, we're seeing realization in the OLA markets and MEA now, and that is being realized in the third quarter. The second price increase in North America is mostly implemented in the third quarter. Much of the $75 to $85 million that Don mentioned is flowing through in the third quarter, and then it will carry into the fourth quarter.
Okay, perfect. Last for me. On Slide 8 again, under input and transportation costs, it sounds like lower fiber costs will only partially be offset by higher energy, chemicals, and transportation costs. It sounds like that benefit is specific to Europe and Latin America. Could you help us understand what's happening with fiber costs and how they're favorable in the back half?
In Europe, we've had a deliberate effort, especially at our Nymölla mill, to reduce fiber costs. Much of what we're seeing in the second half and into the fourth quarter is the benefit of those actions and market decreases. In Latin America, we had some higher costs in Q2 related to outside wood purchases that were unusual, and we don't expect those to recur in the second half. Most of our Latin American fiber is our own production.
To be a bit more specific, we've seen about a 20% decrease from the peak in the fourth quarter last year, but it takes about six months for that to impact our operations, which is why we're seeing it in the third quarter.
Your next question comes from the line of Mike Roxland with Truist Securities. Mike, please go ahead.
About 18 months ago, you hired a new head of EU, and that was followed by a mention of a decision on the EU strategic review. Can you give us an update on where that process stands? What the different options are in terms of continuing to invest in those assets versus shutting or selling them? From our understanding, the cash cost of closing an asset seems manageable and could imply a two-year payback and be accretive for shareholders. Any color on European operations and your plan there?
Michael, you characterized it correctly. We said we were not happy with performance in Europe, and we made a significant management change to accelerate performance. That change has produced accelerated performance. We're focusing on strategy there—mix improvements enabled by investments at Saillat. We're ahead of plan at Saillat. We're implementing significant cost reductions at Saillat and Nymölla, increasing productivity and efficiency, and addressing wood cost. It's being executed better. Conditions in Europe are difficult, and we're looking at whether we're satisfied with the long-term outlook. We expect to make a decision potentially in 2027 if we're not satisfied. The other options include everything you mentioned—continuing to invest, selling, or other moves. We've been evaluating those, and we may make a decision in 2027.
Do you think it will be early 2027 to make a determination? And related, what are you ultimately targeting in terms of cost reductions you've already achieved and what remains to improve the overall cost structure in Europe?
When we look at targets, we probably need somewhere around $50 million or so of improvement to be comfortable. It's not just cost reductions; it's mix improvement and other factors to get us to being cash positive on a mid-cycle basis with returns above cost of capital. I don't want to lock into a firm timeline; it could be sooner or later depending on how things play out, but our focus is on Europe and we're addressing it.
You mentioned $75 million to $85 million from better price and mix in the second half versus the first half. Any way to quantify the benefit from better volumes, better operating costs, and input costs in the second half versus the first half? And the poison pill ends in November. What's your plan regarding the poison pill? If you have a good relationship with your largest shareholder and they're interested in purchasing more shares, why stop them?
Mike, relative to the second half quantifying volume, we wanted to give a sense of the $75 million to $85 million on price and mix because it's significant and we're confident those prices are in place. We're confident on planned maintenance outages. On volume and operating and input costs, there's more uncertainty. We're confident in our forecast, but we chose not to provide specific guidance on those items.
Regarding the shareholder rights plan, the plan remains in place. The board hasn't made a decision yet about what we'll do when it expires at the end of November. We'll address that with the board when we meet in September.
Your next question comes from the line of George Staphos with Bank of America Securities Inc., George, please go ahead.
First, thanks for providing the pricing guidance, that's helpful. If I heard you correctly, most of that hits in 3Q, it incorporates what's in the market, and there's not so much of a tail into fourth quarter. Did I summarize that correctly? Second, the tax rate moved up a little bit. Can you help us understand why the effective tax rate moved up a couple of points?
George, the price flow will be a little more even across quarters, but depending on the timing for each region, it could be slightly more in Q4 than Q3. Regarding the tax rate, it moved up mainly due to a Brazil valuation allowance we took on a deferred tax asset in our Brazil export entity. VAT rules are changing and we merged two entities to take advantage of approximately $30 million of VAT tax credits in that entity, which resulted in an expense of approximately $9 million related to the valuation allowance.
We would have stranded that $30 million of tax credits had we not made that move this year before the law changes.
That's correct, George; it implies no change to mix or ongoing profitability relative to last quarter.
Your next question comes from the line of Matthew McKellar with RBC Capital Markets. Matthew, please go ahead.
Just one more for me. I thought Slide 12 was interesting. For the operational focus items—operational excellence, cost leadership, and customer centricity—how much of that do you need to get right to reach your $300 million free cash target?
It's a good question. To achieve the $300 million target, the most important areas are cost leadership and customer centricity. We need to accelerate the rate and level of cost reductions given inflationary pressures, enabled by lean and digital transformation. We also need strong customer loyalty, because as markets decline, serving customers better than competitors is critical for our strategy and running assets at full capability.
Your next question comes from the line of George Staphos with Bank of America Securities. George, please go ahead.
One follow-up: last quarter you mentioned an earnings impact from footprint alignment related to Eastover, a $20 million add-back on the view you'd bring in some tons, mostly from Brazil, to help volume and be economical. With tariffs changing, maybe that situation has changed. Can you update us on where that stands? Also, you mentioned Eastover's softwood line—how are you using softwood in the mix there?
George, based on the tariff changes, we will not be able to bring in as much product from Brazil as we anticipated last quarter. It looks like we'll be back near the $85 million estimate we provided back in February. The $20 million benefit from Brazil is essentially gone from our current view.
We use both hardwood and softwood in our fiber mix. Generally, we put about 30% to 40% softwood into products that need strength, such as converting grades and envelope grades. That's how we use softwood in the mix.
To add, Luiz Antonio is actually our lowest cost mill, even compared to Três Lagoas. While Três Lagoas benefits from being adjacent to a pulp mill, Luiz Antonio, which is integrated, achieves very low cost, and that's important when comparing margins and cash generation.
On the Canadian tariff question you referenced earlier, that tariff applies to a very narrow product line of uncoated freesheet and the import volume into the U.S. is small. The impact on the North American market is minimal from that tariff perspective.
Your next question comes from the line of George Staphos with Bank of America Securities Incorporated. George, please go ahead.
Two quick ones. First, on Europe: have you quantified benefits from improved fiber at Nymölla on an annualized basis in the near term? Also, what are you seeing in the European pulp markets right now and what is that doing to the cost curve, especially for non-integrated players? Second, in terms of moving from 2Q to 3Q: you reported $60 million in 2Q. If you get half of the $75 to $85 million, call it $40 million, and maintenance comes down $40 million from 2Q to 3Q, that's $80 million. Should we assume Brazilian tons not coming in offset volume benefits, and what other positives might add to that total?
On Europe and fiber: pulp prices have increased but appear to be stabilizing. Historically, when pulp rose, paper prices followed, but we don't see that relationship as strongly now. Operating rates remain low. Pulp has moved, but paper price traction is different. Regarding non-integrated players, there are fewer today than in prior years. On the bridge to third quarter, there are many components—price and mix is a large part of the improvement and we're confident in that. Inputs and operations have more variability, and there's uncertainty related to the Middle East conflict affecting energy, chemicals, and transport.
We have seen approximately a 20% decrease in wood costs since the peak in the fourth quarter last year, but it takes several months for that to flow through our operations, which is why we are starting to see the impact in the third quarter and into the rest of the year.
Related to the bridge: you reported $60 million in 2Q. If you get $40 million of that $75 to $85 million and maintenance comes down $40 million, that's $80 million. You mentioned Brazilian tons that are not coming in—does that negative $20 million offset other volume and ops benefits? Anything else that could add to that total?
We chose to emphasize the $75 million to $85 million on price and mix because it's large and we are confident about the realization. We are confident on planned maintenance outages. For volume and input cost specifics, there is more uncertainty, so we did not give detailed guidance. On the Brazil volume you referenced, some of the volume shipped during the tariff window was produced earlier and will be sold in the second half, which will show up in mix. That benefit is roughly $9 million to $10 million, which will be recognized across the third and fourth quarters, not all in the third quarter.
To summarize, directionally you're in the ballpark on the bridge. There's some uncertainty around inputs due to the conflict in the Middle East, but price realization and drawing down inventory will be the primary drivers of improvement.
Thank you very much. We have reached the end of the Q&A session. I will now turn the call back over to John Sims for closing remarks. John, please go ahead.
Again, thank you for being on the call and thank you for the questions. We said that 2025 and 2026 would be low points in our free cash flow generation, and the first and second quarters were probably the nadir of that. This is a transition year, 2026, and it will be a tale of two halves, as we've discussed. This year we're executing our most significant investments at our Eastover mill, and those will drive a lot of value in the years to come. We've launched our lean transformation, focused on exceeding our customers' expectations and driving improvement across all our operations. We are focused on long-term value creation and will generate strong, sustainable results by diligently executing our flagship growth strategy, adhering to disciplined capital allocation principles, becoming more customer-centric, and institutionalizing lean management principles. We are confident that as industry conditions improve, capital spending normalizes, and the benefits from our investments begin to materialize, we have the potential to generate annually greater than $300 million in cash flow and returns on invested capital above 15%. Thank you for being on the call.
Thanks, everybody. Have a great day and a great weekend. Bye-bye.
Once again, we would like to thank you for participating in Sylvamo's Second Quarter 2026 Earnings Call. You may now disconnect.