Executive Summary / Key Takeaways

• Sylvamo is strategically transforming its business through disciplined capital allocation, focusing on high-return projects and cost reduction to enhance its competitive position in the uncoated freesheet market.
• Despite a challenging Q1 2025 marked by lower volume, unfavorable mix, and operational issues, the company anticipates sequential improvement, with a significantly better adjusted EBITDA performance expected in the second half of 2025 driven by lower maintenance costs and operational gains.
• Key investments at flagship mills like Eastover and Luiz Antonio, targeting operational efficiency, cost reduction, and capacity/mix enhancement, underpin future earnings and cash flow growth with attractive projected IRRs.
• A strong balance sheet, achieved through significant debt reduction since the spin-off, provides financial flexibility to weather market uncertainties, fund strategic initiatives, and continue returning cash to shareholders.
• While facing risks from global economic slowdown, tariffs, inflation, and ongoing tax disputes in Brazil, Sylvamo believes its regional footprint, local sourcing, and cost management initiatives position it to manage these challenges.

The World's Paper Company: Forging a Path in a Mature Market

Sylvamo Corporation, established in 2021 as a spin-off from International Paper (IP), set out with a clear mandate: to be the world's paper company, focused squarely on the uncoated freesheet (UFS) market across Europe, Latin America, and North America. This strategic focus in a mature, cyclical industry necessitated a foundational approach centered on financial discipline, operational excellence, and targeted investment to carve out and defend a competitive position. The company's history since independence has been defined by a rapid deleveraging effort, a commitment to returning value to shareholders, and a strategic pivot towards reinvesting in its core assets to become a lower-cost, more agile producer.

The competitive landscape for UFS is populated by larger, more diversified players like International Paper (IP), Packaging Corporation of America (PKG), and WestRock Company (WRK), alongside regional specialists. While companies like IP and PKG often benefit from greater scale and broader portfolios spanning packaging and other paper grades, Sylvamo's strategy is to leverage its focused expertise and regional mill footprint to achieve cost leadership and operational efficiency within its chosen niche. This involves optimizing existing capacity, enhancing mill capabilities, and streamlining its cost structure, rather than pursuing broad market expansion or diversification. The industry has seen significant capacity reductions in recent years, notably in North America and Europe, which management views as a positive development for supply/demand balance, potentially reducing economic downtime across the system.

A critical element of Sylvamo's strategy and competitive differentiation lies in its operational technology and targeted investments. Rather than relying on revolutionary new paper-making processes, the company focuses on enhancing the efficiency, reliability, and capability of its existing, well-located assets. Projects like the planned $100 million investment to optimize a paper machine at the Eastover mill aim to modernize the equipment from headbox to winder, reducing costs and improving product mix. This enhancement is projected to yield an internal rate of return (IRR) greater than 30% and potentially add up to 60,000 incremental tons of capacity. Similarly, replacing an aging sheeter at Eastover with a state-of-the-art unit ($45 million investment, also targeting Q4 2026 start-up) is designed to lower sheeting costs by up to 15%, reduce waste, and increase cutsize volume capability, contributing to the overall high IRR of the combined Eastover projects. In Latin America, investments at the Luiz Antonio mill, such as upgrading a turbine generator and installing a new reel transition system, demonstrate a focus on increasing self-generated power, reducing maintenance, and cutting production waste, with projected IRRs of 24% and 40% respectively. These initiatives, part of a broader pipeline of high-return projects, represent Sylvamo's technological approach: incremental, high-impact improvements to existing, proven processes to drive quantifiable benefits in cost, efficiency, and yield, thereby strengthening its competitive moat against rivals who may not invest as aggressively in their UFS assets. The partnership with The Price Companies for woodyard modernization at Eastover, avoiding approximately $75 million in capital spending over five years while improving efficiency and reliability, further underscores this pragmatic, return-focused approach to operational technology.

Performance Under Pressure: Navigating Near-Term Headwinds

Sylvamo's first quarter 2025 results reflected the impact of anticipated market dynamics and operational challenges. Net sales declined to $821 million from $905 million in Q1 2024, contributing to a decrease in net income from $43 million to $27 million. Adjusted EBITDA fell to $90 million (11% margin) compared to $118 million (13% margin) in the prior year period.

The decline in Q1 2025 performance was primarily driven by lower volume, particularly in North America due to the exit of volume from the International Paper Georgetown mill supply agreement and separate operational challenges at North American mills, including receiving less volume than planned from IP's Riverdale mill. Unfavorable price and mix in Europe and export regions also weighed on results, although partially offset by price increase realizations in North America and Brazil. Higher planned maintenance outage costs, as the company entered a heavy outage period, and less favorable input and transportation costs, influenced by seasonally higher energy and cold weather in the U.S., further impacted profitability. These headwinds were partially mitigated by more favorable operations and costs elsewhere.

Segment performance highlighted these dynamics. Europe's operating profit saw a significant year-over-year decrease, primarily due to lower pricing, higher outage costs (compared to no major outages in Q1 2024), and elevated wood costs. Latin America, despite lower sales, saw a substantial increase in operating profit, benefiting from lower operating and outage costs and favorable price/mix. North America's operating profit decreased, mainly due to lower volumes and higher operating/input costs, partially offset by reduced economic downtime.

Financially, Sylvamo maintains a strong position. Cash provided by operating activities in Q1 2025 was $23 million, down from $27 million in Q1 2024, influenced by lower net income and working capital timing.

The company's balance sheet remains robust, with net debt reduced significantly since the spin-off, standing at a net debt-to-adjusted EBITDA ratio of 1.1x as of March 31, 2025.

This strong financial footing, coupled with $400 million of available capacity on its revolving credit facility and no major debt maturities until 2027, provides ample liquidity and flexibility. Capital allocation in Q1 2025 included $48 million in capital spending ($37 million maintenance/regulatory/reforestation, $11 million high-return), $18 million in dividends, and $20 million in share repurchases, demonstrating a continued commitment to its stated capital allocation framework.

Strategic Momentum and Outlook

Looking ahead, Sylvamo is focused on executing its strategic initiatives to drive improved performance. Project Horizon, the cost reduction program, has already surpassed its initial $110 million run rate savings target (before inflation) by $34 million, achieving efficiencies across manufacturing, supply chain, and overhead, including the elimination of approximately 150 salaried positions globally. These savings are expected to provide ongoing benefits.

The company's outlook for the second quarter of 2025 anticipates adjusted EBITDA between $75 million and $95 million. This sequential change is projected to be influenced by favorable price and mix ($5 million to $10 million positive impact) driven by better mix in Latin America and North America, stable volume, favorable operations and other costs ($10 million to $15 million positive impact) due to better mill performance and seasonally lower costs, and improved input/transportation costs ($5 million to $10 million positive impact) primarily from energy. These positive factors are expected to be more than offset by a significant increase in planned maintenance outage costs ($36 million higher), as Q2 marks the heaviest outage quarter of the year across all regions.

While not providing full-year guidance due to market uncertainties, management expects a "significantly better adjusted EBITDA performance in the second half" of 2025. This anticipated improvement is attributed to lower planned maintenance outage expenses (over 80% of the annual total is expected in the first half), improved commercial results, and better operations. Directionally, the combined Latin America and North America segments are expected to deliver slightly better full-year 2025 adjusted EBITDA compared to 2024, tariff uncertainty aside. However, Europe's 2025 performance is projected to be significantly worse than 2024, primarily due to the higher planned maintenance outage costs this year and challenging market conditions, including signs of a weakening pulp market.

The high-return capital project pipeline remains a key driver for future growth. Beyond the Eastover projects, Sylvamo has identified another $200 million in potential high-return investments, with a weighted average IRR estimated to be greater than 35%. The company plans to invest $50 million to $70 million in high-return projects in 2025, alongside $175 million to $190 million annually for maintenance, regulatory, and reforestation capital expenditures. These investments, particularly in enhancing mill efficiency and capabilities, are central to strengthening Sylvamo's low-cost position and driving earnings and cash flow growth in the coming years.

Risks on the Horizon

Despite strategic progress and a solid financial foundation, Sylvamo faces notable risks. A global economic slowdown, potentially exacerbated by tariff disputes, could dampen demand for uncoated freesheet. Shifts in trade flows are already being observed, and while Sylvamo's regional focus and local sourcing (over 90% of raw materials sourced locally) offer some insulation, significant market disruption could impact volume and pricing. Inflationary pressures on raw materials, transportation, and capital expenditures remain a concern, although currently deemed manageable through mitigation strategies.

Legal and tax contingencies, particularly in Brazil, pose potential financial risks. The Brazil Tax Dispute related to goodwill amortization, with significant disputed amounts ($103 million tax, $260 million interest/penalties as of March 31, 2025), remains ongoing and could take years to resolve, despite a favorable ruling on a portion of the amount being appealed by tax authorities. While International Paper (IP) bears the majority of the risk above a certain threshold ($300 million), Sylvamo is responsible for 40% of assessments up to that amount. Other open tax matters and environmental proceedings, such as the situation at the Mogi Guaçu mill, carry potential, albeit currently unquantifiable, liabilities that could become material in the future depending on regulatory requirements and legal outcomes.

Competitive pressures persist, with larger players leveraging scale and diversified portfolios. While Sylvamo's targeted investments aim to enhance its cost position and operational efficiency, maintaining a competitive edge in a mature market requires continuous improvement and strategic agility. The reliance on supply agreements for some volume (like the remaining Riverdale volume from IP) also introduces a degree of dependency.

Conclusion

Sylvamo's story since its spin-off is one of focused transformation. By prioritizing a strong balance sheet, implementing aggressive cost reduction through initiatives like Project Horizon, and committing to high-return capital investments in its core mill assets, the company is strategically positioning itself as a resilient, low-cost producer in the uncoated freesheet market. While the first quarter of 2025 highlighted the cyclicality of the industry and the impact of operational challenges and heavy maintenance periods, the outlook points towards sequential improvement and a significantly stronger second half, driven by the timing of outages and anticipated operational and commercial gains. The pipeline of identified high-return projects, particularly the significant investments planned at Eastover, underscores a clear path for future earnings and cash flow growth, leveraging operational technology to enhance efficiency and competitive advantage. Despite facing macroeconomic uncertainties, tariff risks, and specific legal challenges, Sylvamo's disciplined capital allocation, regional strength, and ongoing efforts to optimize its cost structure provide a foundation for navigating the current environment and creating shareholder value through consistent cash generation and returns. The upcoming leadership transition is poised to continue this strategic trajectory, focusing on operational excellence and disciplined growth within its core markets.