International Paper Company (IP) Earnings Call Transcript & Summary

Good morning, and thank you for standing by. Welcome to today's Sylvamo Corporation Investor Day 2021 Call. [Operator Instructions] I'd now like to turn the conference over to Tom Cleves, Senior Vice President, Corporate Affairs. Please go ahead, sir.

Thank you, Stephanie. Good morning, everyone, and good afternoon to our European colleagues. Thanks for joining us today for Sylvamo's first-ever Investor Day. Slides 2 and 3 in our deck 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, including the impact of COVID-19. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available in our appendix. Our website also contains copies of the slides that we'll discuss today. Slide 4 features today's discussion leaders. Upfront, we'll hear from Jean-Michel Ribiéras, our Chairman and Chief Executive Officer; and John Sims, our Senior Vice President and Chief Financial Officer. Jean-Michel's 35-year paper and packaging career spans 3 continents and multiple businesses. Jean-Michel has lived in and led all 3 Sylvamo regions. He has been an International Paper Officer since 2002. And in 2013, he was elected Senior Vice President and President of IP's Europe, Middle East and Africa. In 2016, Jean-Michel was named Senior Vice President of Global Cellulose Fibers, where he led the integration of Weyerhaeuser's Cellulose Fibers business. Most recently, he served as Senior Vice President of IP's Industrial Packaging business. John Sims joined International Paper in 1994 after serving as an officer in the United States Navy. He has been an International Paper officer since 2008. And in 2016, he was elected Senior Vice President and President, Europe, Middle East and Africa. John has served as Vice President of Strategic Planning, Vice President and General Manager of North American Papers and Vice President of Finance and Strategy for Industrial Packaging, where he helped to lead the acquisition of Temple-Inland. Most recently, he served as IP's Senior Vice President of Corporate Development. Later on, we'll introduce our regional leaders, Oliver, Rodrigo and Greg, our senior vice presidents and general managers. Slide 5 shows our agenda for today. Jean-Michel will provide a company overview followed by John Sims, who will present our investment thesis. Our general managers will provide overviews of each region and then John will come back for a financial review. Following that, we'll host a question-and-answer session. So before we begin, allow me to make a few points to help set the stage for our conversation. First, we ask that you do not view Sylvamo only through a North American lens, but rather through a global lens. We have a strong U.S. business, but many of our key assets and 70% of our earnings are in Europe and Latin America. Second, we believe in the promise of paper. We believe uncoated free sheet demand will continue to grow in Eastern Europe and Latin America. And in all regions of the world, uncoated free sheet is sustainable, affordable and functional. Third, we compete in mature demand segments. We remain confident in our ability to create long-term shareowner value. we will explain how our key competitive advantages position us for long-term success. And finally, above all else, Sylvamo is a cash flow story. Cash flow is the basis for creating shareowner value. We will demonstrate our ability to generate robust and resilient free cash flow. With those points in mind, please welcome our Chairman and Chief Executive Officer, Jean-Michel Ribiéras.

Thanks, Tom, and good morning, good afternoon, everyone. We appreciate you joining us this morning. I'm on Slide 7. In, We have Sylvamo, the world's paper company, a premier global uncoated free sheet producer with annual revenue exceeding $3 billion. Uncoated free sheet accounts for 89% of our total volume. Over the last 12 months, we generated $463 million in adjusted EBITDA and $363 million of free cash flow despite the significant economic impact of the global COVID pandemic. As Tom mentioned, we have a strong U.S. business, but we generate more than 70% of our profit in Europe and Latin America. We have outstanding assets, including low-cost mills and 3.5 million tons of capacity. We also have an offtake agreement with International Paper for 687 tons of paper produced by IP Georgetown and Riverdale mills. Slide 8 summarizes why we believe in Sylvamo is a compelling story. Commercially, we have a significant competitive advantage, most notably our iconic brands, strategic channel partnerships and best-in-class commercial teams. Operationally, we are building on IP's operational excellence. The foundation of our success is our low-cost mills in attractive locations, our captive Brazilian forestland, our best-in-class operators and our advanced safety, environmental, social and government practices. With respect to financial discipline, we expect continued robust and resilient free cash flow to create shareowner value. Our first priority is debt reduction. Then we will achieve our focus to returning cash to shareowners. Each of our senior leaders has been in the paper business for at least 25 years. We know this business well. We understand it at the detailed level in all 3 regions. Slide 9 shows our three-pronged strategy of commercial excellence, operational excellence and financial discipline. Our strategy starts with engaged employees, helping our customers succeed. We know this business, our customers and their end users, and we use that knowledge to remain the supplier of choice and to drive sales and earnings. Our mills operate safely, responsibly, sustainably and efficiently to produce low-cost, high-quality products. We will use the cash integrated by our commercial and operational results to maintain a strong balance sheet, invest in our strengths and return cash to shareowners. Our strategy focuses on leveraging our key competitive advantages. It does not focus on the need to convert our mills or acquire additional assets. Slide 10, please. We believe in uncoated papers. Uncoated free sheet is sustainable, affordable and functional. Paper will remain an effective vehicle for education, communication and entertainment. Cellulose fiber, our primary raw material comes from trees, which are renewable resource. We generate more than 75% of our mill energy for from carbon-neutral biomass residuals. And at the end of use, paper is one most recycled materials in the world. And uncoated paper plays a critical role in education. Studies continue to show that students of all ages absorb more when reading on paper versus reading on electronic screens. Slide 11, please. The use of uncoated paper is universal. Copy papers, forms, file folders, envelope, notebooks and many other products are used extensively in all industries, especially in health care, education, finance, insurance and all government services. And while data continued to move digitally paper-based record serve us backup security for online data and paper-based marketing remains effective. For example, in the United States, direct mail marketing experiencing a recovery. According to the U.S. Postal Service, in their fiscal third quarter of 2021, marketing mail revenue grew by $1 billion or nearly 40% versus the prior year. Direct mail marketing has historically been a resilient marketing channel and has reestablished its value with many U.S. businesses that use a combination of investments in data and technology and direct mail campaigns. Let's look at Slide 12 to understand why uncoated free sheet is the largest and most resilient of all graphic paper grade. What separates uncoated free sheet? It's quite simple, uncoated free sheet has the highest number of end-user application. This is why the total demand for uncoated paper exceeds the sum of all the other printing and writing grades combined. Slide 13 shows our pre-pandemic and pandemic earnings and free cash flow. Despite losing a significant amount of demand due to global COVID restrictions over the last 12 months, we generated an adjusted EBITDA of $463 million and $364 million in free cash flow. In the first half of this year, more evidence of the continuing recovery are apparent. As demand recovery continued and as [indiscernible] started to recover, we generated adjusted EBITDA of $247 million and $190 million of free cash flow. It is important to note that we expect the second half earnings to be better than the first half results, reflecting the flow-through of volume and price recovery and continued GDP recovery. Each month, our results show the benefits of back-to-school and more return to office demand. Slide 14 shows our profit mix by region. Over the last 6 months, we generated 29% of our operating profit in North America and 71% in Europe and Latin America. This regional diversification and our strong supply position in all of the 3 regions plus synergies across our regions are key to our success. One example of such synergy is our ability to export across the region. Others involve innovation and e-commerce positioning. That's why it's important to view Sylvamo as the [indiscernible] strong commercial and operational positions in 3 regions. We are much more than a strong North American company. Slide 15 provides a snapshot of our operations. We have 5 low-cost commodity mills and 2 low-cost premium mills. As I mentioned, we also have a 10-year agreement to sell the product produced at IP's Georgetown and Riverdale mills, plus an excluding agreement in Russia [indiscernible] to sell its uncoated free sheet production. Our Brazilian forest brand are a key component of our low-cost position in Brazil. Rodrigo will provide additional information on this later on. Let's turn to Slide 16. Our employees, customers and other key stakeholders know that Sylvamo is about more than just sales, earnings and shareowners returns. Our commitment to people and our planet is embedded throughout our culture and strategy. Our most important responsibility is to ensure that all employees and contractors return home safely at the end of each day. We improved people's life, the planet and our company's performance by transforming renewable resources into paper for education, communication and entertainment. We have assembled an outstanding governance team. 8 of our 9 directors are independent and have diverse and extensive experience in all disciplines across many industries. They also have extensive experience with international operations and spin-off. Slide 17 shows how an uncoated free sheet company can generate robust and resilient free cash flow. We compete in the most attractive regions with talented and experienced teams, and leverage our many competitive advantages. We are the largest producer in Brazil and Russia and a strong #2 in North America. We are a low-cost producer in all the regions and we have opportunities to further reduce our cost through high-return investment that offers internal rates of return greater than 25%. Next, John will review our investment thesis.

Thank you, Jean-Michel, and good morning, everyone. Thanks for joining our call. We do appreciate your interest in Sylvamo. I'm going to take the next few minutes to explain why we believe Sylvamo is a compelling investment. So let's turn to Slide 19 and look at our investment thesis. Our investment thesis is built on the knowledge that people around the world will continue to use our paper for education, communication and entertainment. The use of uncoated free sheet is universal. Businesses, schools and governments have used and will continue to use uncoated freesheet. As Jean-Michel explained, we will execute a three-pronged strategy to leverage our strength and build on our key competitive advantages. Our unique combination of strong supply position and low-cost mills in attractive regions will enable us to continue to generate substantial free cash flow. We will use that cash to strengthen our balance sheet, reinvest in our core capabilities and return cash to shareowners in order to grow the equity value of Sylvamo on a per share basis. Let me repeat this because I think it's important. We're going to leverage our strength to generate significant cash flow so we can create shareowner value by growing our equity on a per share basis. We're going to do this by reducing our debt to less than 2.5x, so we have the balance sheet and the flexibility to invest in high return, quick payback projects to grow our cash and be in a position, when our Board approves it, to return cash to our shareowners. I've talked about the promise of paper being core to our investment thesis. So let's discuss demand post-pandemic. As you know, the original COVID restrictions in the spring and summer of 2020 led to significant declines in paper demand. Copy paper demand in North America and Europe decreased significantly more than any other uncoated grades such as offset nimble papers. But big consumers of copy paper including schools and offices shut down around the world, this was unusual given that copy paper is typically the more resilient segment of uncoated paper even during economic downtimes. Importantly, as schools and offices began to reopen, we expected copy paper demand to return, and that's what we are experiencing starting in the spring of this year. As you know, many offices remain essentially closed, so there is more demand recovery to come. Having said that though, we do expect that more people will work from home after the pandemic, especially for large companies, and this will reduce copy paper demand in mature economies going forward. Print advertising was also significantly curtailed during the 2020 COVID restrictions. Now that businesses that reopen and travel was resuming, uncoated free sheet demand for print advertising is also recovering. [RISI] projects continued demand growth in Eastern Europe and Latin America because the key driver for uncoated paper demand in these regions is GDP. As GDP increases in these regions, white collar employment growth and people use more financial, professional and other services that drive uncoated paper demand. And so we operate in attractive region. Slide 21 shows why we consider our regions attractive. Although we are the third largest supplier in Europe, we have the largest supply position in Russia, given our agreement with Ilim. Russia is an attractive location from which to serve Eastern Europe and the commonwealth of independent states. We are also the largest producer in Latin America and have a strong #2 supply position in North America. Our low-cost mills and strong supply positions make these regions very attractive. At the bottom of the slide, you can see the projected demand by region, which reinforces the attractiveness of Eastern Europe and Latin America. Our regional leaders will provide more detail on their respective businesses and how we create value for customers and shareowners in these attractive region. So let's go to Slide 22, please. Brands are a differentiating advantage we have. We produce the iconic brands that consumers demand. These brands are the key reasons why we have outperformed the industry demand by an average of 120 basis points over the last 6 years. Chamex enjoys unparalleled brand recognition throughout Latin America. Our distributors are exclusive there. The only branded coffee paper they sell is Chamex. SvetoCopy was the first branded paper produced in Russia and has strong brand loyalty. Since 1992, SvetoCopy has become synonymous with copy paper in Russia. Hammermill has deep roots in North America that go back more than 120 years. The Hammermill brand enabled us to secure a leading position in copy paper on Amazon's business e-commerce site. In addition to our own brands, we have the exclusive rights to manufacture HP Papers which we sell in more than 75 countries. Our decade-long relationship with HP enables us to keep up with the latest printing technologies as they change and allows us to develop new products with HP. We believe that we can drive volume and profitability by further enhancing our brand position across the region. Moving to Slide 23, We have long-term committed channel partners and customer relationships, some of which began more than 100 years ago. We sell products to merchant office product, suppliers retailers, dealers, mass merchandisers and e-commerce channels. We also sell directly to converters who convert our products into envelopes, form, file folders, packaging products and many other end users. It is important to note that not only do we have significant supply positions in the regions we serve, we are aligned with the channel partners that have leading positions in their own portions of the value chain. This winning combination of premier producer and premier channel partner is another reason why we continue to outperform the industry demand. We believe that we can work with our strategic channel partners and loyal customers to tap into growing pockets of demand in the select regions we operate. Slide 24 shows the global cash cost curve for uncoated free sheet roles, nearly all of our capacity, as you can see, is in the first quartile, which on average, has a $400 per ton cost advantage versus the fourth quartile mills. It is one thing to be positioned in attractive markets. It's altogether another thing to have the advantages we have and be the low-cost producer in those markets, and that's what Sylvamo has. Our low-cost mills, which are the green bars generate strong local margins and can export profitably. Our low cost positions are particularly important given that we have exposure to regions with secular demand erosion. Historically, as demand declines, producers have shut down high-cost mills and converted other mills. Assuming these trends continue, operating rates will improve, and as a result, we expect to be able to improve margins and cash flows despite stable or eroding industry demand. [Três Lagoas] is depicted as a high-cost mill, but it's not. This mill is attached to another company's pulp mill, but this cost curve does not recognize the contractual rights we have for pulp, energy, steam and certain Brazilian tax benefits we get. When these favorable benefits are included Trê Lagoas' cash costs is similar to Mogi Guaçu's cost far on the left. Our Ticonderoga and Saillat mills are shown in the orange bars. These mills produce premium grades and our low-cost mills for the products they produce. We have a 10-year supply agreement with IP that allows us to buy and sell all the uncoated free sheet and specialty papers produced at their Georgetown and Riverdale mills. This agreement, which includes 680,000 tons of capacity is very attractive to Sylvamo as we'll only pay for the cash manufacturing cost for these products. Therefore, we will realize the full cash contribution margins of these volumes. And additionally, we'll not be responsible for any maintenance capital for these paper machines. Slide 25 shows our operating profit improvement by region. As you can see, our operating profits for the first 6 months of this year have increased $98 million versus the same period last year. Our 2020 demand was about 25% less than 2019. But our demand snapped back, and since the second quarter of this year, all our mills across all the regions are running at full capacity. Our Latin America operating profit has improved the most because we've achieved faster price recovery than in Europe and North America. Our North America earnings improvement was driven by volume recovery although North America and Europe still had some lack of order downtime in the first quarter of this year. Our operating profit recovery in Europe has lagged since we did not begin to realize the benefit of price increases until the second quarter, and we'll see that in the third and fourth quarter. In the second half of this year, we expect additional realization of prior price increases in Europe and North America, which after full realization will more than offset inflation of chemicals, energy and distribution costs. Let's move on to Slide 26 and take a look at our free cash flow. Our business has been pressure tested over the last 18 months of the COVID pandemic. Now the recovery is underway. As I mentioned, COVID restrictions reduced paper demand significantly in 2020, yet we still generated $284 million in free cash flow in the worst economic conditions since the Great Recession. Now we're running at full capacity and beginning to realize prior price increases. We are still in the process of realizing the benefit of those increases and our first half margins are already approaching 2019 levels. And in the first half of this year, while still in the middle of the pandemic, we generated $190 million in free cash flow. We expect to have approximately 44.2 million shares outstanding. Looking at the turn on this page, you can do the math and see the cash we would have generated on a per share basis. I'll wrap up my comments on Slide 27, which summarizes our key competitive advantages, which is why we believe Sylvamo is an attractive investment. We have low-cost mills in the most attractive highest-margin regions for uncoded papers. We produce iconic brands, which we sell through strategic channel partners. We take advantage of cross-regional synergies, which is something new other uncoated producer has the ability to do. Our best-in-class commercial and operational teams drive our success. These streams make us confident in our ability to generate robust free cash flow and to create long-term value for our customers and shareholders. Now it's time for regional overview. So I'll turn it over to Tom to introduce our regional general managers.

Thanks, John. Let's hear from each of our regional leaders who will provide more color on how Sylvamo's positioned in the most attractive regions for producing and selling uncoated free sheet papers. Oliver Taudien has been with IP for 26 years. He has held leadership roles across multiple geographic regions in finance, strategy, information technology and general management. Most recently, Oliver served as IP's Chief Financial Officer and Strategy Director for Europe, Middle East and Africa. In 1993, Rodrigo Davoli started his career with Champion International, which merged with IP in 2000. Rodrigo has held a variety of leadership positions in finance, strategic planning, marketing, sales and general management. Most recently he served as IP's Vice President, Latin American Printing Papers and President of International Paper Brazil. In 1982, Greg Gibson joined Champion International. During his career, Greg has held a variety of sales, marketing and general management roles. He served as Vice President and General Manager for multiple IP divisions including North American Papers, European Papers, European Packaging and Coated Paperboard. Most recently, Greg served as IP's Vice President and General Manager of North America first. Okay. Let's start with Europe. Oliver?

Thanks, Tom, and good morning, everybody. It's a pleasure to join you from the other side of the ocean to talk about our business in Europe, including Russia. I'm on Slide 29. As John noted, we are the third largest supplier in Europe, most importantly, the largest supplier in Russia. Our Svetogorsk Russian mill is a low-cost uncoated free sheet mill. We also have an exclusive joint marketing agreement with Ilim, the largest pulp and paper company in Russia, to sell their uncoated free sheet in Russia and to export markets. Our Saillat mill in France produces premium copy papers with a relatively low cost producer of these products in Europe. Moving to Slide 30. Let's review our key strategic advantages in Europe. First, we now have to operate in Russia. We have a strong 2-decade track record there with a strong local management team. We have navigated various economic and political conditions and have generated consistent cash flow. We have limited exposure to foreign exchange rate fluctuations. Second, our SvetoCopy brand has the strongest supply position and brand loyalty in Russia. Third, our Svetogorsk mill is the first quartile cost now that generates high margins and strong, consistent operating cash flow. Finally, our Saillat is the only integrated mill producing premium uncoated free sheet in Europe. Slide 31 shows the supply and demand history and projections for Eastern Europe and Western Europe over 3 time periods: pre-pandemic, pandemic and post-pandemic. RISI projects supply and demand balances in both regions to tighten over the next 3 years. Keep in mind that the demand figures do not include export demand. Let's start with Eastern Europe, which is about 2/3 of our European capacity. Eastern European demand as shown by the solid black line on the chart. The COVID impact on demand was relatively modest. As you can see, demand in Eastern Europe is projected to grow slightly driven by a strong rebound in GDP and RISI projects favorable supply and demand dynamics. Western Europe is a bit different. It's a mature demand economy. The data showed post-pandemic demand recovery followed by the return to [secular] demand erosion. GDP recovery mitigates the pressure on uncoated free sheet demand. For both Eastern and Western Europe, RISI forecast sizable capacity reduction which would lead to rather balanced operating rates, we have already experienced a step change in capacity reduction announcements in 2021, and high-cost mills have taken significant economic downtime. Moving to Slide 32 for a little more color on the impact of the pandemic across Europe. We are tracking 6 key indicators, GDP, white collar employment, back to school, work from home, electronic substitution and vaccination rates. In Eastern Europe, the COVID impact on copy paper demand was relatively small and short term. Current demand is recovering well, and we expect positive demand growth going forward. We expect GDP-driven demand growth to more than offset the impact of electronic substitution and work for home. The low vaccination rate in Russia is a watch-out, but we do not expect major restrictions. In Western Europe, the COVID impact on 2020 demand was more significant, and many countries lockdown their economies and sent people home. Demand continued to recover in 2021, driven by solid GDP recovery with the schools reopening and employees returning to offices. High vaccination rates should minimize future restrictions. In Europe, both mills have been running at full capacity since early this year. Slide 33 summarizes our commercial advantages in Europe. Our portfolio is powerful and includes brands requested by end users, consumers and distributors. We are aligned with the leading channel partners and winning customers. Here, you'll see a few examples of our partner. We continue to focus on further developing attractive segments including digital printing. And we're also pursuing new approaches in developing new channels such as retail for home and office workers. Finally, we are focusing even more on innovation and improving on our value proposition to create even more value for our channel partners and end-user customers. I'll wrap up my comments on Slide 34, which focuses on our mills. Svetogorsk is a global low-cost copy paper mill with favorable labor and fiber costs. It is near the Finnish border which enables low-cost exports. Svetogorsk is also the only Russian producer of coated paperboards, primarily for liquid packaging and also produces bleached chemical thermal mechanical pulp. We consumed some of this pulp and sell the excess in Russia, Europe and Asia. We plan to rebuild or replace 2 Svetogorsk recovery boilers that are reaching end of life. We estimate a new boiler would cost approximately $220 million. The new boiler which would be completed in 2025, would replaced the 2 existing boilers, reducing our operating costs and increasing pulp production. The project offers not only solid financial returns but would bring the mill into compliance with best available technology regulation and produce greenhouse gas emissions. We have not yet caught project approvals from our Board of Directors. Saillat is a relatively low-cost premium mill. It produces high quality laser and inkjet rate as well as colors. It also produces market pulp, which we sell in Western Europe. The French Ministry of Ecological Transition selected Saillat and the third-party energy provider to produce 25 megawatts per year of biomass energy for a 20-year period. Our energy provider is constructing the biomass boiler, which will reduce Saillat's energy cost and cost of fuel use. At this point, Rodrigo Davoli, will discuss Sylvamo in Latin America. Rodrigo?

Thanks, Oliver. It is a pleasure to join you from [indiscernible] Sao Paulo, Brazil and discuss our business in Latin America. Starting on Slide 35. For more than 60 years, we have enjoyed a strong supply position in Brazil and in Latin America. Our 1.3 million tons of production give us the ability to profitably supply our core segments in Latin America and to take advantage of our low-cost position to export around the world. Our eucalyptus trees are key to our high margins. They grow at a fast rate with a 6- to 7-year cycle compared to 25 years or more for hardwoods in the Northern Hemisphere. Sylvamo generates its highest margin in Brazil, 20% over the last 12 months, and we expect to continue these high margins. In the first half of this year, the margin increased to 24%. Let's now review Slide 36. We have a long track record of leveraging our strategic advantage to generate strong earnings and steady cash flow in Brazil. Let me start with Chamex, the #1 brand for copy paper in Brazil and many Latin American countries. Chamex was the first office paper brand in Brazil. Our service levels, superior quality and strong channel partners make Chamex the strongest brand in Latin America. Today, we export about 50% of our production with more than 70% of the volume sold in Brazil and throughout Latin America. 100% of our exports are sold in hard currencies, mainly U.S. dollars, providing a natural FX hedge. One key ingredient to our competitive position is access to low-cost fiber, which we get from our own forest land. We own and manage 100,000 hectares of eucalyptus plantations and natural reserves. I will share more about our forest in a few slides. Slide 37 shows RISI projections for uncoated free sheet supply and demand in Latin America. RISI projects demand to grow while capacity declines. As Oliver noted, the demand figures are in-region demand and do not include export demand. As the graphic shows, demand declined in 2014 through 2016 during the worst Brazilian recession in history. Brazilian GDP declined 3.5% for 2 consecutive years. Demand in our region remains highly correlated to GDP, and with the pandemic, we saw a sharp decline in demand when schools and businesses and offices were closed. With schools and businesses reopening and GDP recovering, we expect increased demand in the region, creating the demand that RISI is forecasting to increase at an average annual rate of 2.2% from 2021 to 2025. It's important to note that as a global low-cost producer, we have always run at full capacity. With the unique exception of the second quarter of 2020 when COVID lockdowns reduced demand quickly and sharply. Moving to Slide 38. I will provide a view on the COVID impact and outlook in Latin America. Paper demand is recovering in line with strong GDP recovery across the region. As of August 2021, schools are starting to reopen across Latin America, where education accounts for more than 30% of uncoated free sheet demand. We're very encouraged by back-to-school and return to offices. Increasing vaccination rates are improving business conditions. More than 90% of our employees have been vaccinated with at least 1 shot, demonstrating that vaccination programs were very well adopted by Latin Americans. We expect most countries to be highly vaccinated by the end of this year and also expect continued improvements to overall business conditions. Turning to our commercial excellence, Slide 39. We're proud of Chamex and Chamequinho, our strong office and school products. But I also want to highlight Chambril, which is our brand for printing paper rolls. Chambril products are widely known for quality by printers and converters, and they account for an important portion of our sales. One distribution system, including our partnerships with the leading distributors in Latin America is one of our key advantages. Our channel partners in Brazil and Latin America bring deep regional knowledge and provide fast delivery of a wide variety of our products. We have dedicated resources to work closely with our channel partners to learn about end user trends and to offer new products and services such as e-commerce capabilities to drive sales. Slide 40 highlights our mills, which produced 1.3 million tons of low-cost, high-quality products. Our global low-cost position reflects lean and low-cost teams, world-class paper machine efficiencies and global low fiber costs. Luis Antonio and Mogi Guaçu have the flexibility to produce copy paper, office papers and market pulp. These mills are located close to our eucalyptus plantations. In 2013, we installed a biomass boiler at our Mogi Guaçu mill. This renewable fuel boiler replaced 2 fossil fuel boilers, reduced purchased energy from 35% to 10% and reduced new energy costs by 50%. Tres Lagoas is our newest mill built in 2009, and it is attached to a large pulp mill, ensuring a consistent supply of low-cost fiber, energy [and steam]. Slide 41, please. Our eucalyptus plantations are key to our success. We own and operate 100,000 hectares. 75% of this is certified forestlands, which provides sustainable, low-cost, high-quality fiber to our integrated mills. Our eucalyptus trees grows to maturity in 6- to 7-year cycles, and they provide naturally high-bright fiber, which is easier to process into pulp. The pulping process for eucalyptus fiber requires less energy and chemicals than required to process Northern Hemisphere hardwoods. Our nurseries conduct ongoing research and development to improve growth rates and pulp production yields. Our harvesting model is an industry benchmark. We used 100% of each tree, using the 3 tops embark as we move fuel for our biomass boilers. Now let's hear from Greg Gibson about our North American business. Greg?

Thanks, Rodrigo, and good morning. Thanks for being with us. I'll provide some color commentary on our North American paper business. I'm on Slide 42. We have a strong #2 supply position in North America with the last 12 months revenue of just under $1.6 billion. North America is strategic region, and we remain committed to the uncoated free sheet business. We like our customers and our supply position in North America, and we're confident in our ability to create value and generate strong cash flow. Moving to Slide 43. Let's discuss our key strategic advantages. First, we have a strong supply position and meaningful presence in all major uncoated free sheet segments. We span multiple end users through many different channels. Second, we also have iconic brands, including the best-known copy paper brand, Hammermill and the exclusive right to produce and sell HP Papers. Third, we are well positioned in all channels and with winning customers. And finally, our low-cost everyday paper mills and premium grade mills are extremely well positioned to compete in their respective product categories. Slide 44 shows the demand history and projections for uncoated free sheet in North America. As the graph shows, supply and demand are currently well balanced. And of course, the demand figures do not reflect export demand. North American demand has eroded over time primarily due to electronic substitution, but as the data shows, supply has been reduced as well. 2 of our largest competitors have been converting uncoated free sheet capacity to containerboard production and plan to convert more. Since 2019, North American uncoated free sheet capacity has been reduced by 1.5 million tons. Uncoated free sheet demand rebounded from the initial and significant pandemic impact in 2020 and is projected to return to secular demand erosion and in the outer years. And with this loss in demand, RISI projects favorable supply-and-demand dynamics to continue. We are a low-cost producer, and we like our position in North America. Moving to Slide 45. Let's discuss the COVID impact and outlook. In 2020, COVID restrictions drove an 18% drop in uncoated free sheet demand. Through July 2021, demand has rebounded and is gaining momentum. As the economy strengthens and schools, offices reopen. July industry shipments were up significantly versus July 2020. Not all segments are recovering at the same rate. Uncoated free sheet used in advertising and direct mail has increased at higher rates, as you heard Jean-Michel talk about. Copy paper driven by schools and offices is improving but has not recovered as quickly as other segments, but we're encouraged to see the trends and believe that there's a lot more demand to come, as John referenced earlier. Currently, all of our mills are running at full capacity. In the second quarter, we had no lack of order downtime, which has been an important contributor to our volume growth. We anticipate the improving demand trend to continue as vaccination rates increase and the economy continues to improve. Slide 46, shows some of our commercial advantages, starting with the Hammermill and HP brands, which are requested by distributors, end users and consumers. We are aligned with leading channel partners and winning customers. We continue to focus on further developing attractive segments including books on demand, and digital printing. We are also working on new approaches such as paper as a service and deeper end-user selling. Finally, innovation will strengthen our value proposition and create even more value for our channel partners and end users going forward. Slide 47 allows me to highlight one of the key competitive advantages: our #1 supply position in e-commerce. Our online sales continue to accelerate and now account for about 10% of our total revenue. And as shown on this slide, our e-commerce sales are expected to grow between 2017 and 2023 at a 46% compounded annual growth rate. We estimate that the Hammermill and HP brands account for more than half of the total North American e-commerce paper sales. We have outstanding partnerships with the leading office products retailers, which complement our e-commerce strategy. I'll wrap up my comments on Slide 48, with a quick look at our mills. Eastover is the lowest-cost uncoated free sheet mill in North America, the lowest cost mill in North America. This is one of the newest and most modern paper mills in North America. Ticonderoga is a terrific low-cost producer of premium grades. These 2 mills produce 1.1 million tons of high-quality uncoated free sheet and market pulp. The commercial agreement that you heard John talk about for Georgetown and Riverdale allows us to take care of our customers, maintain our strong position and generate strong returns. That wraps up our regional discussions. So I will turn it back to John. John?

Thank you, Greg, and thank you, Rodrigo and Oliver for explaining and sharing with us our key competitive advantages in the attractive markets we operate and showing how we'll continue to generate strong sales and cash flow. So let's move to Slide 50 to look at some key financial highlights. As economic recovers throughout our regions, the recovery in our sales and earnings is accelerating. In the first half of this year, we generated $247 million in EBITDA. We expect second half 2021 earnings to improve versus the first half, reflecting the fact that we have been running full since the second quarter, and we expect to continue to do so. Also, we continue to view as prior price increase, which when implemented -- though implemented, will not show up in our numbers until the third and fourth quarters. So let's turn to Slide 51 for a more detailed discussion of our recovery. Our businesses were impacted significantly by the global pandemic, but our sales and earnings and cash generation continue to recover strongly. One way to measure that recovery is to compare our last 12-month operating profit to our full year 2020 results. Let me pause here because you don't typically see full year results bridge to a midyear trailing 12 months. We did this to show our last 12 months operating profit was $302 million or $98 million higher than 2020. Since the second half of 2020 is common to both the full year 2020 profit and the last 12-month profit, this bridge is really a comparison of the first half of 2020 to the first half of 2021. Keep in mind, in the first quarter of 2020, vaccines were just being rolled out in North America and Europe. And at that time, Brazil was in the middle of its worst COVID wave. Our selling prices in Europe and North America were lower in the first quarter of 2021 than in the first quarter of 2020. Therefore, most of the improvement we see in this bridge is in the second quarter of this year and is primarily a result of higher volumes in all 3 regions. Since the second quarter of this year, we have run full across our entire system. We had significantly less lack of order downtime, so most of this benefit is shown in the operations bar, reflecting a significant reduction in unabsorbed fixed costs that occurred in 2020 due to that significant lack of order downtime we took. In the first half of this year, we began to realize prior price increases. By the end of the first quarter, we had realized price increases in Russia and Brazil. We started to realize price increases in Europe and North America near the end of the second quarter, and we expect to see continued flow-through of these increases in the second half. Our last 12-month operating profit is up nearly 50% with our mills running full and most of the second half earnings improvement will reflect the realization of prior price increases as they continue to flow through each month's result. When our prior price increases fully realized later this year, our run full volume improvement and price realizations are expected to more than offset inflation in raw materials and distribution costs. Let's take a look at Slide 52 to discuss our initial debt structure. We raised $1.5 billion to fund our start as a stand-alone company. We established a $450 million credit revolver because these funds carry a lower cost of debt. We intend to draw $100 million of this revolver to be part of the special payment to IP. We also raised $520 billion of secured debt via Term Loan F at a very attractive rate and $450 million of secured debt via Term Loan B. We also issued $450 million in unsecured 8-year notes. As the table showed, in 2022, we expect a weighted average interest rate of 4.4%. Or 4.1% net of the expected 70 basis point Term Loan F rebate. Let's turn to the next slide. Looking to the fourth quarter, which will be our first quarter as a public company, this slide provides some selected key metrics for costs related to the spin-off. As row 2 shows, we expect to spend $23 million in onetime costs in the fourth quarter. Most of these costs are IT related. We also expect $8 million in transition services and $4 million in dissynergies in the quarter. Once we complete the transition service agreement, we expect the annual dissynergies of being a stand-alone company to be approximately $15 million. This is less than the TSA cost because we have found ways to reduce costs that were being allocated to Sylvamo by IP. Let's turn to Slide 54 for some additional guidance. This slide includes selected financial metrics in order to help model our earnings and cash flow for 2022. 2022 CapEx will be higher than 2020 and 2021 as we return our maintenance, regulatory and reforestation capital back to normal levels following the pandemic. We expect $160 million in 2020 CapEx. Now this does include $15 million for engineering the Svetogorsk boiler that Oliver talked about and $6 million related to our new corporate headquarters here in Memphis. The balance $139 million is for maintenance, regulatory and Brazilian reforestation. We expect the 2022 interest expense to be $63 million. We will spend $32 million in onetime costs in 2022 to establish the systems needed to exit the TSA with IP. And through the third quarter of 2022, the transition service agreement with IP will cost $25 million, spread evenly over 3 quarters. So we expect the combination of these nonrecurring costs $57 million to be gone in 2023. Slide 59 -- 55, please. I would like to provide some detail on the contingent liability that we included in our From 10. The Brazilian tax authorities have disputed deductibility of goodwill from IP's 2007 acquisition of our Luis Antonio mill. The case is in the first round of judicial court proceedings. We and our advisers believe IP has a strong position in this case and IP has not taken a reserve. Periodically, Brazil has offered tax amnesty programs to allow companies to resolve such dispute. The Brazilian Senate recently passed such a bill, but additional approvals are required before that bill becomes law. If the bill were to become a law before the spin-off and IP decides to participate, IP has agreed to pay the first $180 million of any negotiated settlement and Sylvamo would be required to pay up to $60 million after that and would be kept at $60 million. If a settlement or judgment to occur after the this bill, Sylvamo will be required pay 40% of the settlement or judgment up to a maximum of $120 million. Appendix 53 includes bank covenant restrictions on returning cash to shareowners and other investments, which will remain in place until the contingent tax liability is resolved. However, we will be able to pay down secured debt without restriction. I'll conclude my remarks on Slide 56. When we speak of financial discipline, we mean creating a strong cash culture at Sylvamo. We intend to maintain a strong balance sheet and adequate liquidity throughout the cycle. We intend to pay down debt and have set a target gross debt to adjusted EBITDA ratio of less than 2.5x, which we expect to get there by the end of 2022. Above all, we intend to execute our strategy and leverage our key competitive advantages to generate significant free cash flow in order to create value and return cash to shareowners. We expect to reduce debt and begin shareowner return discussions with our Board in the second half of 2022. Our target is to continue to outperform the industry volume by 100 to 200 basis points, and we plan to do so by performing at or above emerging economy demand and outperforming developed economy demand. We plan to leverage our low-cost mills, our iconic brands, our strong customer relationships and experienced leadership team to achieve 15% to 18% adjusted EBITDA margins and generate strong free cash flow. And for incremental investments, we will target returns well above our cost of capital. At this point, we are ready for your questions. So I'll turn the call back over to Tom. Tom?

Thank you, John, and thanks to all of our speakers. Stephanie, would you remind our callers how to get in the queue for questions, please?

[Operator Instructions] Your first question comes from the line of George Staphos with Bank of America.

Thanks for the presentation and the details, and good luck with the transaction. To be fair, I'll ask 2 questions then I'll turn it over. I guess the first question I had is really around the new boiler project that you talked about at Svetogorsk. How much, as you're doing this project, will this impact your ongoing EBITDA and operations? And there was at one point discussion about potentially doing a rebuild as opposed to a new boiler, where do you stand on that? Or is that now decided and you're going ahead with a new boiler? If you went with the rebuild, how much would that cost you from EBITDA over the course of the project? And then I had a question on growth.

George, this is John. And thank you. We're excited about Sylvamo. To your question around the recovery boiler, I think one of your first question was the impact would have on the operations. So what we were looking at -- we are looking at both options, both -- rebuilding both of those 2 recovery boilers or replacing those 2 with 1 recovery boiler. And the number that, Oliver shared with you, the $220 million, assumes the replacement of it. And we're heading in that direction right now, although it's not been approved by our board, and we're still in the engineering phases of that is the fact that, one, it doesn't impact our operations any. So you can build the new boiler, continue to operate your mills and then once you're ready, you just switch it over. On the rebuild option, it would impact the operations. The capital would be less. It would be less than the $220 million, but not significantly less. It could be only $40 million or $50 million less. However, the operational impact would be more. That would be spread over a longer period of time, but the initial estimates we have that could always be $100 million to $120 million of lost earnings. And so that's why we're right now, as I said, we're still in preliminary engineering phases. And to be clear with that, we'll have our final detailed engineering done by the end of this year, which is when we would plan to take it to the -- to our Board of Directors for approval. So we are leaning toward replacing it. One is also, we'll get some benefits from it. So as you can imagine, lower maintenance costs, more pulp production. So we'll have some benefits going that direction.

Okay. No, that's very complete, John. My other question for now is just on growth in really Latin America and how the relationship with Suzano and Tres Lagoas may or may not affect your ongoing business. So one, I guess, what gives you confidence that the business will show sustained growth over time as you're projecting here as RISI's projecting, partly because we've seen other countries, I mean, it's not that long ago that China was assuming a very,very large increase in newsprint consumption, built a lot of capacity then the market really declined precipitously. So what gives you confidence in the long-term growth projections in Latin America? And how -- if that materializes, would you be impacted, if at all, by the relationship with Suzano? And the last part of that there's been issues, obviously, in terms of water to your eucalyptus plantations in Brazil, how do you feel about your positioning there and having the required water to support that growth?

George, Jean-Michel. 3 great questions. Let me take them maybe a bit separately. When we look at Latin American demand, first of all, we see that the GDP is the main driver. You have a lot of end use in Latin America, especially in Brazil. And among those end use, one which impacts a lot of demand is education, which is quite different from other type of products. And also when the GDP grows, of course, you get more business, more services, more white workers, some of that makes us feel quite good about demand. Actually, when you look at the rebound of Latin America, despite the last COVID impact, which is thankfully clearly going down with the high level of vaccination, just the first 7 months of this year, Latin America grew back by 6.2%. So even the preliminary numbers before having a long period of COVID, pre- or post-pandemic are very good. So we're feeling quite good. The last point I would add on demand is we don't include export demand, but we have such a low cost position in our Brazilian assets, that we can be profitable, deliver anywhere in the world. So we really have such assets that they're great. Concerning our agreement with Suzano, it's a very long-term agreement and very solid agreement for the pulp side. So we are [indiscernible] worried on that side of the equation. This is a very good agreement. It's a win-win situation. I actually was part of the initial negotiation of that agreement. It's got a very long term into it. Suzano is happy with it. We're happy with it. There is no reason to worry at all on that type of thing. You had a third question?

Just water availability as well as the eucalyptus plantations.

Yes. We don't have an issue, but it's a good question. It's something we are monitoring. We -- maybe Rodrigo, maybe there's something you could say a little bit more about because this is something you're living every day.

Sure, Jean-Michel. So in fact, this year has been a very dry year for us. But so far, we haven't seen any impacts to our productivity or to our eucalyptus growth, So we continue to monitor that. Our teams are looking at opportunities to apply extra fertilizers, and we're monitoring that. So we don't think there's a risk to our plantations at this point.

Another point on that, George. Water consumption is something we follow closely. And there's been a lot of studies around eucalyptus. Being more and more efficient in the use of water is part of what we do and part of our energy plan. So this is something we look closely. So it's a [indiscernible] question. It's something we're taking seriously, and we're looking at even if right now we have no issue.

Our next question comes from the line of Mark Connelly with Stephens.

So given your low-cost positions, do you expect to run your mills at or close to capacity? Or are you going to continue to throttle capacity to keep markets balanced following the traditional IP approach?

Jean-Michel speaking. I think you have to distinguish North America from the other regions. In Latin America and in Eastern Europe as we've mentioned, we don't take [LLO] because we got the opportunity being so low cost to serve anywhere in the world. We've taken on since 69 years [LLO], in Latin America, which was Q1 last year because of the full impact of pandemic. So for 70% of our earnings, my question is we have good demand regionally, we've got a great position in export, and we don't expect to take any [LLO]. In North America, which is maybe the reference you were using, and we talked more about, we have the lowest cost position also. And we've got the best position in the market. So right now, the market is very tight. The supply and demand seems good. We have a good -- lot of confidence from our customers, by the way, about Sylvamo. We are getting a very good encouraging reception because they are very happy to have a focused and dedicated supplier to [indiscernible]. So I can't speak about what IP was used to do, but I think we have the capacity to a long run and to run full with our demand. So we will continue to run to orders. So whatever our customers want, which today they want a lot, and that's good for us, that's what we will do.

Okay. And just one quick follow-up. Did I understand you to say that you'll be buying IPs, Georgetown and Riverdale output at IP's cash cost of production?

That's correct.

That's correct.

Our next question comes from Gabe Hajde with wells Fargo.

One quick question and somewhat piggybacking also the question that Mark just asked. So in terms of that supply agreement, and I appreciate it might be tough to answer this on open mic. But would it be fair to say that it would be in your best interest to be running your mills full out should demand decline quicker than what you think or something like that, and sort of the offtake agreement would be somewhat of the variable in the fulcrum, if you will?

No, we don't look at it this way, Georgetown and Riverdale are important for us. We manage our system as one. So we don't have 1 customer to 1 mill. We manage it from multiple mill optimizing the mix, optimizing the truck, the distance. So we don't look at 1 asset differently or less than the other. We look at all the assets the same way.

Our next question is from George Staphos with Bank of America.

Can you talk about the cost-reduction programs that you have across the regions? I would imagine, obviously, North America might get more of the focus there. I think you had cited something around a 20% or 25% return on these projects. And then also, can you help us -- you spent -- John, I appreciated a lot of time talking about the bridge, the waterfall to LTM June. Can you talk about for the pricing that has been reflected recognized in the market, how much that would add additionally, to your earnings bridge for the second half of '21?

So I'll take the first question. I move the bridge question to John after that. In terms of projects, first of all, those projects are across the globe. There are a lot of very interesting projects in Latin America and Russia because even if we are first quartile, we still have opportunity to improve our cost. And I know, in total, and I'm not saying we will do that in 1 year, that's not the intention. But in total, we have, right now, assessed about $100 million in total of projects, which have returned above 25%. So there would be accretive cash and accretive EBITDA for the company if we, and when we decide to do that. So our first priority is, as you know, we want to reinforce our balance sheet, reduce debt, go below 2.5, then when we look at opportunities to grow -- how we return to shareowners. But we will not forget this opportunity also to get our bottom line better with this project. But it's not mostly focused on North America. In fact, we are very global and I would say, proportionate to our earnings roughly in terms of repetition.

John?

Yes, George, I answer to your second question about the bridge. I'm glad you asked that we go to Form-10, we didn't provide any guidance in terms of the second half. But as we said, we expect the second half of the year to be much stronger than the first half. One, because we're running full; and two, because of these price increases that we announced to our customers in the first half, and then we're going to be realizing some of those benefits in the third and fourth quarter. And as I shared with you, we were able to implement -- and you can see that in the operating improvement in Brazil. So we realized some of the Brazilian price increases in the first and also in Russia. But I will point you to 2 things that can help you maybe get a sense for what to expect in the second half from a pricing perspective. The first one is, if you looked at International Paper's third quarter -- I mean second quarter earnings presentation, they have a bridge that had second quarter versus first quarter. And that showed $29 million improvement for papers, second quarter versus first quarter. And then they did provide guidance for the third quarter, and they mentioned that the papers business would improve by almost $30 million due to price/mix and volume. $25 million of that being price/mix and then $5 million of it due to volume. Now just one thing to caution you on all those numbers, the International Paper already did have [Kwidzyn] in that. Of course, [Kwidzyn] is not part of Sylvamo that would have to be factored out. But hopefully, that gives you a sense for the momentum we have in pricing in the second half of the year.

John, just a definitional one, given the normal lag, would you more or less have everything in by the third quarter? Thank you for reminding us on the IP presentation. I appreciate that or there be based on normal order of nature, et cetera, that you get some pickup in fourth quarter versus third quarter run rates?

Yes, so we have a different dynamic in all our markets. And so in Europe, we'll see it spread out also not only in the fourth quarter, but we have to see some benefit of that in the first quarter.

But to come back to your question, we have a big impact in third quarter, which will fill in [third quarter], which will be fully in the fourth quarter. So the majority of what we've announced and negotiated with customers will be an impact of third latest fourth quarter.

Our next question is from Mark Weintraub.

I just wanted to make sure I understood in terms of your capital needs, which you laid out somewhat on that Slide 54, and you talked about '21 and '22. And obviously, it's a pretty big step-up in maintenance, regulatory and reforestation. And I think you mentioned that was getting back more to normal levels, but it was also higher than we saw in '19 as well as '20 and '21, what should we view as your ongoing maintenance, regulatory and reforestation needs as we go to '23 and '24 and then presumably at least at this juncture, we would just add Svetogorsk on top of that? Or is there anything else that we should be conscious of?

Yes. So Mark, this is John. We provided guidance in the Form-10 that I think a typical which you should expect in terms of maintenance, regulatory and reforestation, capitalize the reforestation of the Brazil in plantations, to be between $130 million to $150 million. And this actually is pretty typical of what you saw prior to 2019. We're very forward to the International Paper maintained our facilities well. 2019 is a little bit of an anomaly. It looks like the capital was -- and it is, the capital was decreased. There was a reason for that. Mostly all that decrease was actually in Brazil. And one of it was we extended the cycles and the plantations from 6 years to 7 years. That means we planned it less in '17 -- or '19. So we had less capital for '19 for the plantation. And then there was some timing issues of regulatory maintenance. But in general, when you look at our capital, that $130 million to $150 million, it's pretty consistent with what was done actually prior to '19 for our facilities going forward.

Your second question on if we have forcing another big investment like Svetogorsk, we don't. I mean this recovery boiler end of cycle, when we look at our mills and look at the different ages and the different investments we've done through the edge, we don't foresee in the coming year, any other major investments like Svetogorsk recovery boiler.

Okay. Great. And then I guess we've got the onetime spin-off expenses that will presumably not run through the P&L are roughly $50 million. And then I guess we got to figure out what's going to happen with the Brazilian tax situation. I recognize this is probably something difficult for you to assess. But do you know when we should have visibility on that?

Let me say, first of all, I just want to reiterate again that IP didn't take a reserve for this because we are sitting on a really strong case back in 2007. Brazilian tax laws allows you to depreciate the goodwill. There was an asset transfer we did when we did the Sylvamo acquisition and allowed us to depreciate the difference in the book value over a 10-year period. So we feel like we're in good standing. Our tax authorities feel like we're in good standing. So again, I think it's a very low probability as we have an adverse judgment. But to your point and timing of it, it is hard to say because these amnesty programs that do come out routinely, like we said, there's 1 right now, and there may be some in the near future that International Paper -- I want to remind you that International Paper is deciding party since they have 60% of the liabilities. So they'll decide whether we do an amnesty program or not. It's their call. And then there's the judicial process review. That could take years because of the appeal process. But I also want to share with you that we don't see this as a big issue even -- because we know that our drive is to reduce our debt leverage. That will give us -- there are some covenants. But at that point, when we reduce our debt to 2.5 multiple. And even further, we'll get the flexibility to return cash to our shareowners. So we don't see this as an issue.

Okay. Great. And one last one for me. As we think about that conversion of EBITDA to cash flow, is there anything else in terms of cash taxes versus book taxes or maybe working capital issues or things like that? Anything else that we should be conscious of that wouldn't be in the normally to be expected realm of analysis?

Yes. I think there is one thing that you should be aware of. We mentioned it in the Form 10, but of course, it buried in the details. And it relates to the Riverdale and Georgetown take agreements. And what -- as part of that agreement, as of October 1, there will be inventory that's in their facilities and also in our warehouses that was related to Georgetown and Riverdale production. And we'll have to pay International Paper for that inventory. The agreement is that we will pay for the -- we'll begin paying for the, I believe, is the Georgetown inventory starting in January through April. And then starting in April, we'll pay for the Riverdale. All in all, that will, we expect that to be about a $30 million working -- abnormal working capital charge, if you will, that's kind of buried into the note. Other than that, I think you've got it. We've got the TSA. We've got the onetime cost, which is $55 million in total, but we're going to have $23 million of that in the fourth quarter.

[Operator Instructions] Your next question is a follow-up from George Staphos with Bank of America.

Last one for me. So Rodrigo, can you talk about your wood costs with the additional fertilizing that you need to do? I've heard from some of the other producers down there is that they either to go farther into the forest over time, which has raised wood costs? Or Should we something to our forecast if we get to that point for lower margin and higher costs in Latin America? And then, John, can you just remind us what debt -- what freedom do you have to pay down debt? What debt will you not be able to pay down if you have the cash to do it in the first place? Obviously, you can generate a lot of cash, but what debt wouldn't you be able to pay down?

Thank you. Maybe I will add and Rodrigo can answer, but I can answer also that question on the wood side. We've got projects where we constantly improve our cost also in wood, So we're not seeing a major inflation in wood cost due to fertilizer or to change on climate or things like that. So you should not expect a change in our EBITDA margin because of major wood cost change. We will keep to be very profitable. Your second question was on the debt, and maybe John take that one.

Yes, I'll take that. So we can pay down all the secured debt. And so we can do that immediately. We are restricted in paying down the nonsecured bond until the tax issue resolved. But so the majority of the debt, we can pay down is certainly that revolver, we can pay down [ immediately ].

That was our last question. Tom, I'll turn it back to you.

Stephanie, thank you so much. Thanks to all our speakers to our callers. One thing before I turn it over to Jean-Michel for a wrap-up. Hans Bjorkman is a 25-year fellow IP employee. He's been running the Printing Papers business in Europe. He's going to serve as our Vice President of Investor Relations. He's a bit under the weather today, so he that's why he's not on the call. Normally, you would follow up with him. But I'll give you my phone number and e-mail. If anybody wants to follow up [indiscernible] you get a hold to me at 901-834-9976 or at [email protected], if you want to follow up and Hans will be back with us shortly. And with that, I'll turn it over to Jean-Michel to wrap this up.

Thank you, and we appreciate everybody joining today's call. We started our discussion asking why is Sylvamo compelling. And I want to leave you with this summary thoughts. We are focused on creating shareowner value. First, we expect to increase free cash flow generation; second, reduce that free cash flow to reduce debt; third, after reaching our initial target of 2.5 leverage ratio, we will reduce our free cash flow to return cash to shareowners through dividends and/or share repurchases. And finally, we expect to invest in high return and short payback project. We are well positioned to accomplish our plan given our commercial strength, our low-cost mills in attractive region, favorable supply-demand balance sheet and our ability to create cross-region synergy. So thanks for joining us today, and we are very excited with Sylvamo [indiscernible].

Thank you for participating in today's Sylvamo Corporation Investor Day 2021 Call. You may now disconnect.