Good morning, and thank you for standing by. Welcome to today's Savalmo Corporation Investor Day 2021 Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Please go ahead, sir.
Thank you, Stephanie. Good morning, everyone, Upfront, we'll hear from Jean Michel Rivierez, our Chairman and Chief Executive Officer and John's 35 year paper and packaging career spans 3 continents and multiple businesses. Jean Michel has lived in and led all 3 SovAMO regions. He has been the international team. He was elected Senior Vice President and President of IPs 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. He was 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 is 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.
Just 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 now 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, first, we ask that you do not view Solveamo only through a North American lens, But rather through a global lens, we have a strong U. S. Business, but many of our ton of our earnings are in Europe and Latin America. 2nd, we believe in the promise of paper. We believe uncoated freesheet demand will continue to grow in Eastern Europe and Latin America.
In all regions of the world, uncoated freesheet is sustainable, affordable and functional. 3rd, we compete in mature demand segments, yet 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, Savamo 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 Rivierez.
Thanks, Tom, and good morning, good afternoon, everyone. We appreciate you joining us this morning. I'm on Slide 7. We are Silvamu, the world's paper company, Zucer, with annual revenue exceeding $2,000,000,000 Uncoated freesheet accounts for 89% of our total volume. Over the last 12 months, we generated 463,000,000 in adjusted EBITDA and $363,000,000 of free cash flow despite the significant economic impact of the global COVID 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 3,500,000 tons of capacity. We also have an offtake agreement with International Paper for 6.87 tons of paper produced by IP Georgetown and Riverdale Mills. Slide summarize why we believe in Silvalmo 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 IT's operational excellence. The foundation of our success is our low cost mills in attractive locations, Our captive Brazilian forest land, our best in class operators and our advanced safety, environmental, social and governance 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 shift our focus to returning cash to shareholders.
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 a detailed level in all three regions. Slide 9 shows our 3 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 generated by our commercial and operational results to maintain a strong balance sheet, invest in our strength and return cash to share Our strategy focuses on leveraging our key competitive advantages. It does not focus Slide 10, please. We believe in uncoated papers.
Uncoated freesheet is sustainable, Affordable and functional. Paper will remain an effective vehicle for education, communication and entertainment. Cellulose fiber of primary raw materials comes from trees, which are a renewable resource. We generate more than 75% of our mill energy from carbon neutral biomass residuals. And at the end of use, Paper is one of the most recycled materials in the world and acrylic paper plays a critical role in education.
Studies continue to show that students of all ages have saw more when reading on paper versus reading on electronic screens. Slide 11 please. The use of uncoated papers is universal. Copy papers, forms, file folders, envelopes, notebooks And many other products are used extensively in all industry, especially in health care, education, finance, Insurance and all government services. And while data continue to move digitally, paper based records 7, 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 Q3 of 2021, marketing mail revenue grew by $1,000,000,000 or nearly 14% versus the prior Direct marketing has historically been a resilient marketing channel and has reestablished its value with many U. S.
Businesses That is a combination of investments in data and technology and their direct mail campaigns. Let's look at Slide 12 to understand why uncoated freesheet is the largest and most resilient of all graphic paper grades. What separates uncoated freesheet? It's quite simple. Uncoated freesheet has the highest number of end use application.
This is why the total demand for encodate papers exceed 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 restriction over the last twelve We generated an adjusted EBITDA of $463,000,000 $364,000,000 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 pricing started to recover, we generated adjusted EBITDA of $247,000,000 100 $90,000,000 of free cash flow.
It is important to note that we expect the 2nd 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 the three regions Plus synergies across our regions are key to our success, digital export across the region.
Other involve innovation and That's why it's important to use Citvammo as the same strong conversion. We are much more than a strong North American company. Slide 15 provides a snapshot of our operations. We have 52 low cost premium mills. As I mentioned, we also have a 10 year agreement to sell the product at IP's Georgetown and Riverdale Mills, plus an exclusive agreement to sell its uncoated free sheet production.
Our Brazilian fresh spend 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 SilvaMo is about more than just sales, earning and shareholders' returns. Our commitment to people and our planet is embedded throughout our culture and strategy.
Our most important responsibility is and our company's performance by transforming renewable resources into papers 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 freesheet 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 number 2 in North America. We are a low cost producer in all the region, And we have opportunities to further reduce our costs 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 Savamo. I'm going to take the next few minutes to explain why we believe Valmo 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 freesheet is universal. Businesses, schools and governments Have used and will continue to use uncoated freesheet. As Jean Michel explained, we will execute a 3 pronged strategy to leverage our strength and build on our key competitive advantages. Our unique combination of strong supply positions 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 share owners In order to grow the equity value of Savalmo 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 2.5 times, 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 I've talked about the promise of paper being core For investment thesis, so let's discuss demand post pandemic. As you know, the original COVID restrictions in the spring summer Of 2020 led to significant declines in paper demand.
Copy paper demand in North America and Europe decreased significantly Including schools and offices shut down around the world, this was unusual given that Kabi paper is typically the more resilient segment of uncutted papers, even during economic downturns. 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 Now that businesses have reopened and travel is resuming, uncoated freesheet 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 grows And people use more financial, professional and other services that drive uncoated paper demand. I I said we operate in attractive regions. Slide 21 shows why we consider our regions attractive. Although we are the 3rd 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 number 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 Our regional leaders will provide more detail on their respective businesses and how we create value for customers and shareholders in these attractive regions. 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. Shamex enjoys unparalleled brand recognition throughout Latin America. Our distributors are exclusive there.
The only branded copy paper they sell is Shamex. Their copy was the 1st branded paper produced in Russia And has strong brand loyalty. Since 1992, Svelteokoffee 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 a leading position in copy paper on Amazon Business E Commerce site.
In addition to our own brands, we have the exclusive right The manufacturer HP Papers, which we sell in more than 75 countries, our decade long relationship with HP, allows us to develop new products 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 our products through merchants, office product suppliers, Retailers, dealers, mass merchandisers and e commerce channels. We also sell directly to converters who convert our products It is important to note That not only do we have significant supply positions in the regions we serve, we are aligned with a channel partner that have leading This is in their own portions of the value chain.
This winning combination of premier producer and Slide 24 shows the global cash cost curve for uncoated freesheet rolls. Nearly all of our capacity, as you can see, is in the 1st quartile, which on average has a $400 per ton cost advantage versus the 4th 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 a low cost producer In those markets and that's what Svalmo has. Our low cost mills, which are the green bars, 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 flow despite stable or eroding industry demand. Trish Logos is depicted as a high cost mill, but it is not. This mill is attached to another company's pulp mill, But this call 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, Tracelico's cash costs are similar to Moju Washoe's cost, far on the left. Our Toyota Underoga and Syat 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 freesheet and specialty papers produced at their Georgetown and Riverdale Mills. This agreement, which includes 680,000 tons of capacity, is very attractive to Sivalma.
As we'll only pay for the cash manufacturing costs for these products, therefore, we will realize the full cash contribution margins of these 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 1st 6 months of this year have increased $98,000,000 versus the same period last year. Our 2020 demand was about 25% less than 2019, but our demand has snapped back. And since the Q2 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 Q1 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 3rd Q4. In the second half of this year, we expect additional utilization 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 2 $84,000,000 in free cash flow and 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 yet 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 $190,000,000 in free cash flow. We expect to have approximately 40 Looking at the chart 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 Sivamo is an attractive investment. We have low cost mills in the most attractive highest margin regions for uncoated papers. We produce iconic brands, which we sell through strategic channel partners.
We take advantage of cross regional synergies, which is A new other uncutted producer has the ability to do. Our best in class commercial and operational teams drive our success. These strengths 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 our regional overview. So I'll turn it over to Tom to introduce our regional General Manager?
Thanks, John. Let's hear from each of
our regional leaders who will provide more color on how Savamo is positioned in the most attractive regions for producing and selling uncoated freesheet papers. Howard Taldean has been with IP for 26 He has held leadership roles across multiple geographic regions in finance, strategy, information technology and general management. Most recently, Oliver served as ID's Chief Financial Officer and Strategy Director for Europe, Middle East and Africa. In 1993, Rodrigo DiBoli started his career with Champion International, which merged with IP in 2000. Arico 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 IT 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 American Papers.
Okay, let's start with Europe.
Most importantly, the largest supplier in Russia. Our Sverdodorsk Russia mill is a low cost uncoated pre ship mill. We also have an exclusive joint marketing agreement with Ilim, the largest pulp and paper company in Russia, to sell Varon coated free sheets in Russia and to export markets. Our Saya mill in France produces premium copy papers With a relatively low cost producer of new products in Europe. The K's track record there was 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. 2nd, our Svetlokapi brand has the strongest supply position And brand loyalty in Russia. 3rd, our Sverdrup mill is a 1st quartile cost mill Generate high margins and strong consistent operating cash flow. Finally, our Siam Mill It's the only integrated mill producing premium uncoated freesheet in Europe.
Slide 31 shows the supply and demand history and projections for Eastern Europe and Western Europe over three time period. Pre pandemic, pandemic and post pandemic, RISI projects supply and demand balance both regions to tighten over the next few years. Keep in mind that the demand figures do not include export demand. Let's start with Eastern Europe, which is about 2 thirds of our European capacity. Eastern European demand is shown by the solid black line on the chart.
The COVID impact on As you can see, demand in Eastern Europe is projected to grow slightly, driven by a strong rebound in GDP And we see projects favorable supply and demand. Western Europe is a bit different. It's a mature demand economy. The data show post pandemic demand recovery followed by the return to secular demand erosion. GDP recovery mitigates the pressure on uncoated freesheet demand.
For both Eastern and Western Europe, We should 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 code nodes 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 coffee paper We expect GDP driven demand growth to more than offset the impact of Electronic substitution and work from home. The low vaccination rates in Russia is a watch out, But we do not expect major restrictions.
In Western Europe, the COVID impact on 2020 demand With more significance that many countries locked down their economies and sent people home. Demand continues 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 nodes have been running Slide 33 summarizes our commercial advantages in Europe. Our portfolio is powerful and includes brands We are aligned with the leading channel partners and winning customers.
Here you see a few examples of our partners. We continue to focus on further developing attractive segments, including digital printing. We're also pursuing new approaches and developing new channels such as retail for home 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 MBS customers. I'll wrap up my comments on Slide 34 which focuses on our mills.
Sertigores is a global low cost Sverdorsk is also the only Russian producer of coated paperboards, primarily for liquid packaging And also produces bleach chemical thermal mechanical pulp. We consume some of this pulp And sell the excess in Russia, Europe and Asia. We plan to rebuild or replace 2 Sverdodors recovery boilers that are reaching end of life. We estimate a new boiler would cost approximately $220,000,000 The new boiler, which will be completed in 2025, which replaced the 2 existing borrowers, reducing our operating costs And increasing pulp production. The project offers not only solid financial return, That would bring the mill into compliance with best available technology regulations and reduce greenhouse gas emissions.
We have not yet caught project approval from our Board of Directors. Saya is a relatively low cost premium mode. It produces high quality laser and inject grades as well as colors. It also produces market pulp, which was held in Western Europe. The French Ministry of Ecological Transition selected Saia and a 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 Saia's energy costs and cost of CLU.
At this point, Rodrigo De Valle will discuss with Amo Latin America. Rodrigo?
Thanks, Oliver. It is a pleasure to join you from Mogibo Su 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 1,300,000 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 3 are key to our high margins. They grow at a fast rate with a 6 to 7 year cycle compared to a 25 years or more For hardwoods in the Northern Hemisphere. Silvalmo generates its highest margins 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 number one brand for copy paper in Brazil in many Latin American countries. Shamex was the 1st office paper brand in Brazil. Our service levels, superior quality and strong channel partners Make Shamex 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 currency, 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 lands. We own and manage 100,000 hectares of Eucalyptus Plantation and Natural Reserves.
I will share more about our forest Slide 37 show HESI projections for Encoated Free Sheet Supply and demand in Latin America. HESE 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 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 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 GIZ is forecasting to increase at an average It is important to note that as a global low cost producer, we have always run at full capacity. With the unique exception of the Q2 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 Latin America, where education accounts for more than 30% of uncoated prestige demand.
We're very encouraged by back to school and return to office. Increasing vaccination rates are improving business conditions. More than 90% of our employees have been vaccinated with at least one shot, demonstrating that vaccination programs We're 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 Shamex and Shamexina, our strong office and school products. But I also want to highlight Chambril, which is our brand for printing paper rolls. Chambreo products are widely known for quality by printers and converters and they account for an important portion of our sales. 1 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 produce 1,300,000 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 Cost. Luis Antonio and Mojigos too have the flexibility to produce coffee paper, Office papers and market pulp. These mills are located close to our Eucalyptus Plantations.
In 2013, we installed a biomass boiler at our Mujigosso Mill. This renewable fuel boiler replaced 2 fossil fuel We reduced purchase energy from 35% to 10% and reduced new energy costs by 50%. Freslagoz is our newest mill built in 2009. 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 35 forest lands, which provides sustainable, low cost, High quality fiber to our integrated mills, which is easier to process into pulp. The pulping process for Eucalyptus fiber requires less energy and chemicals than required to process Northern Hemisphere. Our Research and development to improve growth rates and pulp production yields. Our harvesting model is an industry benchmark.
We use using the 3 tops and bark as renewable 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 number 2 supply position in North America with the last 12 months revenue of just under $1,600,000,000 North America is a strategic region and we remain committed to the uncoated freesheet business.
Okay. And we're confident And our ability to create value and generate strong cash flow. Moving to Slide 43. Let's discuss our results. 1st, we have a strong supply position and meaningful presence in all major uncoated freesignments.
We span multiple end uses through many different channels. 2nd, we also have iconic brands, including the best known copy paper brand Hammermill and the exclusive Wright HP Papers. 3rd, 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. And history and projections for uncoated freesheet in North America.
As 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 Supply has been reduced as well. 2 of our largest competitors have been converting uncoated freesheet capacity to containerboard production and plan to convert more. Since 2019, North American uncoated freesheet capacity has been reduced by 1,500,000 tons.
Uncoated freesheet demand rebounded from the initial and significant pandemic impact in the outer years. Even with this loss of demand, RISI projects favorable supply and demand dynamics to continue. Let's discuss the COVID impact and outlook. In 2020, COVID restrictions dry 2021, demand has rebounded and 1st July 2020. Not all segments are recovering at the same rate.
Uncoated freesheet 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 it's 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 of order downtime, which has been an important contributor to our volume growth. We anticipate the improving demand trend to continue As vaccination 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 Tractive 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 number one 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 the slide, our e commerce sales are expected to grow between 2017 In 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 freesheet 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 Premium grades.
These two mills produce 1.1. 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 And the attractive markets we operate and showing how we'll continue to generate strong Slide 50 to look at some key financial highlights. As economic recovery recovers throughout our regions, recovery in our sales and earnings is Accelerating. In the first half of this year, we generated $247,000,000 in EBITDA. We expect second half twenty twenty one 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 us prior price increases, which When implemented though implemented will not show up in our numbers until the 3rd 4th quarters.
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, dollars 302,000,000 or $98,000,000 higher than 2020. Since the second half of twenty twenty is common to both profit, this bridge It's really a comparison of the first half of twenty twenty to the first half of twenty twenty one.
Keep in mind, in the Q1 of 2020, backings 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 Q1 of 2021 then in the Q1 of 2020. The R and D in this bridge It's in the Q2 of this year and is primarily a result of higher volumes in all three regions. Since the Q2 this year, we've seen 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.
This year, we began to realize prior price increases. By the end of the Q1, we had realized price increases in Russia and Brazil. We started to realize price continued to flow through these increases in the second half. Our last 12 month operating profit is up nearly 50%, but our mills running full and most of the second half earnings improvement Our full realized later this year, our run for volume improvement and price realizations are expected to more than offset inflation And raw materials and your structure. We raised $1,500,000,000 to fund our start as a standalone company.
We established a $450,000,000 credit revolver. We also raised 520,000,000 Secured debt via term loan F at a very attractive rate and $450,000,000 of secured debt via year notes. As the table shows, in 2022, we expect a weighted average interest rate of 4.4% or 4.1 percent net of the year. Let's turn to the next slide. Looking to the Q4, which will be our Q1 as a public company, this slide provides some selected key metrics in $23,000,000 in one time costs in the 4th quarter.
Most of these costs are IT related. We also expect $8,000,000 in transition services. Once we complete the transition service agreement, We expect the annual dis synergies of being a standalone company to be approximately $15,000,000 This is less than being allocated 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 2021 as we return our maintenance, regulatory and reforestation capital back to normal levels following the pandemic.
We expect $160,000,000 in 2020 CapEx. Now this Those include $15,000,000 for engineering, the Silveco's boiler that Oliver talked about and $6,000,000 related to our new corporate headquarters here in Memphis. The balance $139,000,000 is for maintenance, regulatory and Brazilian reforestation. We expect the 2022 interest expense to be $63,000,000 We will spend $32,000,000 in one time cost in 2022 to establish the systems needed to exit the TSA with IP. And during the Q3 of 2022, the transition service agreement with IP will cost 25,000,000 Spread evenly over 3 quarters.
So we expect a combination of these non reoccurring costs of 57,000,000 to be gone in 2020, please. Slide 59, please. 55, I would like to provide some detail on the contingent liabilities that we included in our Form 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 advisors believe IP is 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 disputes. The Civilian 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 $180,000,000 of any negotiated settlement and If a settlement or judgment to occur after the spin off, Svalmo will be required to pay 40% of the settlement or judgment Up to a maximum of $120,000,000,000 PENEX 63 includes bank covenant restrictions on Turning cash to shareholders and other investments, which will remain in place until this continued 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 in Savalmo. 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 growth debt to adjusted EBITDA ratio of less than 2.5 times, 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 to begin With our Board in the second half of twenty twenty two.
Our target is to continue to outperform the industry volume by 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 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. I'll turn the call back over to Tom.
Tom?
Thank you, John. Thanks to all of our speakers. Stephanie, would you remind our callers
as to not cause feedback when your line is unmuted. Thank you. We will pause a moment to compile the Q and A roster. Your first question comes from the line of George Staphos with Bank of America.
Thank you. Hi, everyone. Good morning for the transaction. To be fair, I'll ask 2 questions and 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 Sotogorsk, 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
Thank you. We're excited about Svalmo. To your question around the recovery boiler, I think one of your first questions was the impact it would have on the operations. So what we are looking at, we are looking at both Both of these building, both of those 2 recovery boilers or replacing those 2 with 1 recovery boiler. And then the number that Oliver shared with you, the $220,000,000 assumes the replacement of it.
And we think we're heading that direction right now, although it's not been approved by our Board and we're still in the engineering phases of that It's the fact that, one, it doesn't impact our operations any. So you can build the new boil and then once you're ready, you just On the rebuild option, it would impact the operations. The capital would be less, It'd be less than the $220,000,000 but not significantly less. It could be only $40,000,000 or $50,000,000 left. However, the operational impact would be more.
Now it would be spread over a longer period of time, but the initial estimates were $100,000,000 To $120,000,000 of lost earnings. And so that's why we're right now, as I said, we're still in Remember, replacing it, one is also we'll get some benefits from it. So as you can imagine, lower maintenance costs, More pulp productions that we'll have
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 would grow. Thank you.
Hi, George. It's Michel here. 3 great questions. Let me take them maybe you did separately. When we look at Latin American demand Different from other type of product.
And also when the GDP grows, of course, you get more business, Yes, the COVID-three or post pandemic are very good. So we're feeling quite that we have such a low cost position In our Brazilian assets that we can be profitable, delivered anywhere in the world. So we really have such assets They're great. Very long term agreement and very solid agreement for the pulp side. So we have zero worry on That side of the equation.
This is a very good agreement. It's a win. We maybe Rodrigo, this is something you could say a little bit more about Because this is something you're living every day.
Sure, Jean Michel. 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. Something we follow closely,
and there's been a lot of studies around the cadetive. Being more and more efficient in the use of water is part of what we do and part of our energy plan. Thank you, Jean Michel.
Thank you.
Our next question comes from the line of Mark Connelly with Stephens.
Thank you. At or close to capacity, are you going to continue to throttle capacity to keep markets It's balanced following the traditional IP approach.
Hi, Marc. Jean Michel speaking. I think Eastern Europe, as we've mentioned, we don't take LO because we've got the opportunity being so large, low cost To serve anywhere in the world, we've taken one sincerest Q1 last year because of the Full impact of pandemic. So for 70% of our earnings, my question is, we have good demand regionally And we talk 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 The supply in Zimbabwe about SIBARAMO, we are getting a very good encouraging reception because they are very happy to have a focus And dedicated supplier to uncoated free sheet to do, but I think we have the capacity to long run and To run full with our demand.
So we will continue to run to others. So
Did I understand you to say that you'll be buying IP's Georgetown and Riverdale output at IP's cash cost of production?
That's correct. That's correct.
Perfect. Thank you very much.
Thank you.
Our next question comes from Gabe Hajde with Wells Fargo.
Good morning, guys. Thanks for all the detail. Would it be fair to say that it's 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. George, Stone and Riverdale are We manage our system as 1. So we don't have 1 customer to 1 mill. We manage it from multiple mills optimizing the mix, optimizing the mix. So we don't look at one asset differently or less than the other.
We look at all the assets the same way. Okay. Thank you.
Our next question is from George Staphos with Bank of America.
Well, I didn't think I'd get back in queue so quick. Hi, guys. 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 said it's something around the 20% or 25%. You spent, John, appreciate it.
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 twenty twenty one? Thank you.
So I'll take the first question. I will move the bridge question to John after that. In terms of projects, first of all, These 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. As of now, in total and I'm not saying we'll do that in 1 year, that's not the intention.
But in total, we have right now assessed about $100,000,000 in total of projects, We have returned above 25%. So there will be accretive cash and accretive EBITDA for the company If we and when we decide to do that. So our first priority is just debt, go below 2.5, Then we will look at opportunities to go how we return to shareholders. 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.
It's actually very global and I would say Proportionate to our earnings roughly in terms of repartition. John? Thank you.
Yes, George. I answered to your second question about the Rich, I'm glad you asked that. Because of the 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, but one, because we're running full and 2, 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 3rd Q4. And as I shared with you, we're able to implement and you can see that in the operating improvement in Brazil.
We realized some of the Brazilian price increases in the first half 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 3rd quarter I mean, Q2 earnings presentation, they have a bridge that had 2nd quarter versus 1st quarter and $29,000,000 improvement for papers 2nd quarter versus 1st quarter. And then they did provide guidance for the Q3 and they mentioned that the papers business Would improve by almost $30,000,000 due to price volume. Now just one thing to caution you on all those numbers, The international paper we did have Quizin in that.
Of course, Quizin is not part of the Quizin. So the momentum we have in pricing In the second half of the year.
John, just a definition one, given the normal lag, would you more or less have Everything in by the Q3. Thank you for reminding us on the IP presentation. I appreciate that. Or would there be Based on normal order of nature, etcetera, is that you get some pickup order run rates? Thank you.
Yes, George. We have a little bit different dynamic in all our markets. And so in Europe, we'll see it Spread out also not only in the Q4, but we have to see some benefit of that in the Q1. But to
come back to your question, we have a Big impact in Q3, which will fill in Q3, which will be fully in Q4. So the majority of what we've announced and negotiated with customers Will be an impact of 3rd, latest 4th quarter.
Understood. Thank you.
Stepping.
Our next
question is from Mark Weintraub.
Thank you. Good morning. I just wanted to To make sure I understood, in terms of your capital needs, which you laid out somewhat on that Slide 54, And you talked about 'twenty one and 'twenty two. 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 2019 as well as 2020 2021.
What should we view as your ongoing maintenance, regulatory and reforestation needs as we go to 'twenty three and 'twenty four? And then presumably, At least at this juncture, we would just add Fedegorsk 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 is typical, which you should Expect in terms of maintenance, inventory and reforestation, we capitalize the reforestation in Brazil and Plantations To be between $130,000,000 to $150,000,000 And this actually is pretty typical of what you saw Prior to 2019, we're very fortunate that International Paper maintained our facilities well. 2019 is a little bit of anomaly. It looks like the capital was and it is, the capital was decreased.
There was a reason for that. Mostly all that decrease It was actually in Brazil. And one of it was we extended the cycles in the plantations from 6 years to 7 years. That means we planned it less in 'seventeen or 'nineteen. So we had less capital for 'nineteen for the Plantage.
And then there was some timing issues of regulatory maintenance. But in general, when you look at our capital, that $130,000,000 to $150,000,000 it's Pretty consistent with what was done actually prior to 2019 for our facilities going forward.
Your second question on if we have forcing another big investment like Zetogorff, we don't. I mean, this recovery boiler are end of cycle. When we look at our mills and look at the different hedges and the different investments we've done through the hedge, We don't foresee in the coming years any other major investments like St. Augustine Recovery Valor.
Okay, great.
Cost expenses that will presumably not run through the P and L are roughly 50,000,000 And then I guess we got to figure out what's going to happen with the Brazilian tax. I recognize this is probably something difficult for you to assess, Do you know when we should have visibility on that?
Yes, Mark. 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. The Brazilian tax laws allowed you to get the Sivamo acquisition And that allowed us to depreciate the difference in the book value over a 10 year period. So we feel like we're in good standing. So again, I think it's a very low probability that we would have an adverse judgment.
But to your point and timing of it, it's hard to say because These amnesty programs that do come out routinely, like we said, there's one right now, and there may be some In the near future, the International Paper, I want to remind you that International Paper is deciding Parties, since they have 60% of the liabilities, so they'll decide whether we do an MC program or not. It's call. And then there's the judicial process review. That could take years because 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 in
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 make up 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. As part of that agreement, as of October There will be inventory that's in our facility in their facilities and also in our warehouses. And so 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 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 $30,000,000 of working abnormal work at onetime cost, Which is $55,000,000 total, but we're going to have $23,000,000 of that in the 4th quarter.
Okay. Thanks so much.
Your next question is a follow-up from George Staphos with Bank of America.
Hi, guys. Last one for me. So, Rodrigo, can you talk about your wood costs, fertilizing and you need to do I've heard from some of the other producers Down there is that they've needed to go farther into the forest over time, which has raised wood costs or should we build in 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 do you pay down if you have the cash to do it in the
1st place? Obviously, you can generate a lot of
cash, but what debt would you be able to pay down? Thank you,
Thank you. Maybe I'll get a project 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, maybe John take that one.
Yes, I'll take that. So we can pay down all the And so we can do that immediately. We are restricted in Paying down the non secured bond until the tax issue is solved. But so the majority of the debt We can pay down certainly that we're borrowers. We can pay down the U.
S.
Thank you very much.
That was our last question. Tom, I turn it back to you.
Stephanie, thank you so much for 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 A 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 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 email. If anybody To follow-up while Hans is out, you can get a hold of me at 901-834-9976 Or at tom. Cleavessilvamo.com, 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 us up.
So 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 these summary thoughts. We are focused on creating shareholder value. 2nd, we use our free cash flow to reduce debt. 3rd, after reaching our initial target of 2.5 leverage ratio, we will use our free cash flow We are well positioned to accomplish our plan given our commercial strength, our low cost mills in attractive region,
Thank you for participating in today's Savalmo Corporation Investor Day 2021 Call. You may now disconnect. Speakers, please hold the line.