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PART I.
ITEM 1. BUSINESS
OUR COMPANY
Sylvamo Corporation (the “Company” or “Sylvamo”, which may also be referred to as “we” or “us”) is a global uncoated papers company with a broad portfolio of top-tier brands and low-cost, large-scale paper mills located in and serving the most attractive geographies, including Europe, Latin America and North America. We produce uncoated freesheet (“UFS”) for paper products such as cutsize and offset paper, as well as market pulp, aseptic and liquid packaging board (“LPB”) and coated unbleached kraft (“CUK”) papers. With roots going back to 1898, we have a long history of offering premium quality papers to meet the needs of our customers and end-users. Our mills predominantly rank in the lowest quartile on global and regional UFS cost curves, and we believe our low-cost operations enable us to serve our customers with the highest quality products at attractive margins. Our industry-leading brands, known for their long-standing reputation in their respective markets for product quality and performance, allow us to maintain our long-term relationships with top-tier customers throughout economic cycles. Our international reach and strong positioning across retail, merchant and e-commerce channels optimally positions us to meet the paper needs of our end-users around the world. This also provides geographical diversification of our revenue and profits. From 2019 to 2021, on average, we generated 51% of our revenues and 68% of our Business Segment Operating Profit in Europe and Latin America, which exhibit different supply and demand characteristics than North America, and all three regions have strong profitability for the uncoated paper industry relative to other geographies. See for a definition of Business Segment Operating Profit.
Throughout this Annual Report on Form 10-K, we “incorporate by reference” certain information in parts of other documents filed with the U.S. Securities and Exchange Commission ("SEC"). The SEC permits us to disclose important information by referring to it in that manner. Please refer to such information.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, along with all other reports and any amendments thereto filed with or furnished to the SEC, are publicly available free of charge on the Investors section of our website at www.sylvamo.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information contained on or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we filed with or furnished to the SEC.
2021 Revenues by Product Type
UFS, our primary product, has diverse end-use applications, including printing, copy and writing papers, and advertising and promotional materials such as brochures, pamphlets, greeting cards, books, annual reports and direct mail. Additionally, we produce a wide variety of uncoated paper grades that our customers convert into envelopes, writing tablets, business forms, packaging and file folders. As a vertically integrated operator, we produce hardwood pulp (including bleached hardwood kraft
(“BHK”) and bleached eucalyptus kraft (“BEK”), and we produce bleached softwood kraft (“BSK”). We also produce bleached chemi-thermomechanical pulp (“BCTMP”) at our Svetogorsk, Russia mill, which we sell globally. Further, our Svetogorsk mill produces LPB and CUK papers that are sold across Russia and Eastern European countries.
Many of our UFS products, particularly cutsize, are branded with strong consumer recognition and top brand positioning in their respective markets. We believe our portfolio of trusted brands across our regions provides us with a meaningful competitive advantage. We own some of the industry’s most recognizable brands, including Chamex (Brazil), REY (France), SvetoCopy (Russia) and Hammermill (United States). Cutsize represents approximately 60% of our UFS tons sold, and our owned and licensed brands represent 58% of those cutsize sales. Further, we have a license from HP Inc. (“HP”) for the rights to produce and sell HP branded printer and copier paper in almost all geographies globally. HP Papers is a premium line of uncoated cutsize products that work seamlessly across all models of printer and copier equipment. The remaining 42% of cutsize tons sold are private label brands we produce for our major customers, including Staples.
We sell and market our products globally to over 700 customers. By leveraging our strong brand portfolio and our customized service, we have built deep relationships with top customers in each of the channels we serve. We distribute our products through a variety of channels, including merchants and distributors, office product suppliers, retailers and dealers. We also sell directly to converters that produce envelopes, forms and other similar products. With a long history of more than 120 years, we have forged long-term relationships with our top customers and their loyalty results in very little turnover. Accordingly, our top ten customers, representing approximately one-third of our net sales, have been buying our products for more than 50 years on average. Our sales, marketing, supply chain and production staff work collaboratively to provide tailored client support, addressing the distinct needs of customers across geographies and channels. We provide marketing support to our customers to help them develop their go-to-market strategies by leveraging our extensive end-user sales and preference data.
Our mills have an annual UFS paper production capacity of 2.8 million short tons, market pulp production capacity of 580,000 short tons, and total LPB and CUK capacity of 130,000 short tons. In addition, Sylvamo expects to distribute annually an incremental 495,000 short tons of UFS and 160,000 short tons of uncoated bristols through its offtake agreements with International Paper in North America. Sylvamo is a party to the Joint Marketing Agreement with JSC Ilim Group in Russia, which allows us to retain the exclusive rights to market and sell all of the JSC Ilim Group’s UFS production, which totals 230,000 short tons annually. Our mill portfolio includes seven low-cost mills, six of which are fully vertically integrated. Vertical integration reduces costs associated with key inputs for paper production, such as pulp and energy, and decreases our exposure to commodity price fluctuations. Our only non-vertically integrated mill is co-located with Suzano’s market pulp mill and has a market supply agreement with Suzano, ensuring a consistent supply of fiber, steam and energy contractually guaranteed on a long-term basis. This effectively replicates most of the key economic benefits of vertical integration without the associated capital costs. We have high quality, well-invested facilities with low operating costs. As of September 30, 2021, more than 70% of our capacity is in the lowest quartile of global and regional cost curves. We believe the competitive advantages of our mills, such as their location in sustainable low-cost fiber baskets, and significant scale and distribution efficiencies, afford us sustainable strategic benefits.
The demand for our paper products is positively correlated with global commercial printing and print advertising activity, white-collar employment levels and government spending, including education spending, and negatively affected by the adoption of electronic billing and statements. We believe our low-cost position allows us to thrive in all demand environments, including in countries facing secular demand decline, and we have demonstrated this historically by strengthening Sylvamo’s supply position even in light of the rise of electronic media substitution. From 2015 through 2021, we outperformed the UFS industry demand by 1.8% on average in the regions we serve, and, in the future, we intend to target outperforming the UFS industry demand by 1% to 2% on average in such regions. We expect global demand for UFS to be flat from 2022 to 2026, based on RISI forecasts from September 2021. Approximately two-thirds of Business Segment Operating Profit on average from 2019 to 2021 comes from outside North America, and some of our key geographies, such as Latin America, have an increasing population of white-collar professionals, which supports the demand for our products.