Country, which accounts for 40% of results and has the company’s best margin, has consolidated as a gate to mature markets
11/23/2022
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Rodrigo Davoli — Foto: Silvia Zamboni/Valor
Sylvamo, an independent company since the spin-off of the printing and writing paper assets of International Paper (IP) worldwide, found a new strength in the Brazilian operation a year after listing it shares on the New York Stock Exchange (NYSE).
Brazil, which accounts for 40% of results and has the company’s best margin, has consolidated as a platform for mature markets with a developed paper industry, including the United States and Europe, thanks to the competitiveness of the papers produced in the local mills.
The competitive advantage starts with eucalyptus forests, which are more productive and have shorter cycle, and is sustained with the integrated production of pulp and paper, said Rodrigo Davoli, Sylvamo’s CEO in Brazil and vice-president for Latin America.
“Brazil has great relevance in the business and remains extremely strategic,” said the executive. In the third quarter, net sales in Latin America, served by the Mogi Guaçu (São Paulo), Luiz Antônio (São Paulo), and Três Lagoas (Mato Grosso do Sul) mills – the only one that does not have integrated pulp production – totaled $270 million, 35% higher than a year earlier. The adjusted EBITDA margin was 27%, compared with 18% in Europe and 20% in North America.
In 12 months through September, the Brazilian operation reported revenues of more than $1 billion and produced a little more than 1 million tonnes of paper. About half of this volume was absorbed by the domestic market, while the other half was exported mainly to Latin America, maintaining the mix seen a few years ago.
Under Sylvamo’s structure, looking at Brazil as a viable exporter could help make viable an old plan to build a second paper machine in Três Lagoas. Asked about the project, Mr. Davoli said the company is always studying opportunities. “Thinking of Brazil as an export platform, it may be that at some point [the company] has to talk about capacity expansion. Brazil is the place if it has to make an expansion decision.”
The Latin American market for printing and writing papers was one of the most affected by the pandemic and demand fell as much as 30% in the first year. There has already been a recovery and Brazil is close to returning to pre-Covid levels. From January to September, according to the Brazilian Industry of Trees (Ibá), the national production fell 4.1% year-over-year, to 1.65 million tonnes. Domestic sales were stable at 1 million tonnes and exports grew 6.1% to 683,000 tonnes.
Sylvamo grew above average in the Brazilian market, according to Mr. Davoli, as well as in the other regions where it is present. “The third quarter was quite similar to the second quarter. We had an important shutdown [for maintenance] in the Mogi Guaçu plant that impacted the results, but the paper business is extremely resilient,” he said.
At this moment, the Brazilian operation sees opportunities in cost reduction projects with high return, including marginal expansion of production capacity. There are also possibilities in automation and modernization, in line with the financial discipline strategy. Together, these projects total about $10 million in investments. The company is the market leader in cut-size paper, with a 53% share. It used to be 50%.
In general, faster inflation has been the main concern of the paper industry and one of the most relevant pressures came from logistics and freight prices, particularly for foreign trade, the executive said. “International logistics was a complex theme and weighed too much on margins. We see signs of improvement, but still not much for Latin America,” he said.
On the demand side, there is recovery in different areas, especially education, which accounts for 30% of the consumption of printing and writing paper in Latin America. There is also expansion in other applications, such as e-commerce labels or thermal papers, whose base is offset paper.
Looking ahead to 2023, the company adopts a cautious tone. Although the perception is of solid demand in Brazil, it is unclear how the dynamics outside the country will be. Proper cost management will remain a priority at Sylvamo, whose strategy has been to try to pass on as much costs as possible in this line.
Globally, Sylvamo reported net sales of $2.7 billion up to September. In October, it concluded the sale of a unit in Russia for $420 million – the decision to sell was made because of the invasion of Ukraine – and announced the purchase of an uncoated paper mill in Nymolla, Sweden, from Stora Enso, for $150 million.
*By Stella Fontes — São Paulo
Source: Valor International