Good day, ladies and gentlemen, and welcome to the Sappi Limited Q1 2022 results. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. If you should need assistance during the call, please signal for an operator by pressing star then zero. Please note that this call is being recorded. I'd now like to turn the conference over to Steve Binnie. Please go ahead, sir.
Thank you and good day to everybody. Thanks for joining us on the call today. As always, I'll move through the investor presentation, calling out the page numbers as I go along. I'm gonna start on page 3, which is our highlights for the quarter. We're very pleased to say that this was an excellent quarter for Sappi. The performance exceeded even our own expectations. Markets were strong across all our segments, and we achieved success in all our operating regions. Very pleased with those results. The EBITDA was $240 million, which was well up even from the prior quarter. We did have an additional trading week, which contributed $25 million, but we did have an extended cold mill outage at Somerset which offset that impact. It was a real number.
Up significantly from the prior quarter when we had the logistical challenges and that backlog was created. In the current quarter, we were able to transport the production that we made. The problems on the logistics side didn't get worse, but we were not able to reduce the backlog. Packaging continued to be strong, and we saw a big rebound in demand for graphic papers. That enabled us to ensure that all our assets ran at full operating capacity, which is the first time in some time. Our debt continued to improve. Our leverage ratio in terms of our debt was down to 2.9 times.
Mr. Binnie, this is the operator. Steve? Hi, this is the operator. I'm sorry to disturb, but may I just ask if you could please speak up a bit more, sir, and closer to the mic.
I'm sorry?
As close as possible. If you could please just speak closer to the mic and a bit more louder, please. Thank you, sir.
Apologies, everybody. We're just having some technical challenges. I'll move on. I'm now on slide four, which is the earnings growth, the prior year and the current year. Firstly, sales volume, I talked about on the prior slide, well up, on a year ago, and you can see across each of the segments. The selling price is up significantly. Pulp, a big contributor. Obviously, we benefited from the lag impact in our contractual pricing. On top of that, we were able to implement selling price increases across both packaging and graphics, which enabled us to offset higher costs, which are reflected in the big red bar.
The higher costs were really across the board from pulp, which would have been at elevated levels for the months, and then all the other raw materials, energy, wood, chemicals, and the higher delivery costs as a consequence of this, the ongoing supply chain challenges, the global ones. That was offset by the higher selling prices, enabling us to get to the $240 for the year. Slide 5 has our contribution growth across the product segment. Obviously, during COVID, that was that deviated from normal because of the different impacts of COVID on the segment. What we are seeing in the current quarter, obviously, and in the last 6 months or so, a big rebound once again from graphics, pulp picking up once again.
Pleased to say that packaging continues to grow and be a major contributor. On the right-hand side, about half in graphics, obviously boosted by the rebound in demand that we have experienced recently, and then pulp and packaging roughly a quarter each. Slide 6 has the segmental volumes and EBITDA margins. Obviously a very positive story. Volumes picking up in our paper segment. Margins picking up as we implemented the selling price increases. And then pulp, good to see volumes back up and the logistical challenges resolving somewhat. Although we still have that 100,000 tons, which we can sell or deliver later in the year. Margins improving across all the segments. Slide 7 has the net debt and leverage ratios.
The 2.8 you see on the far right there is slightly different to the 2.9 on the opening page because this is purely a balancing calculation. It's not in terms of the covenant itself. Nevertheless, moving in the same direction, debt coming down fast and the leverage coming down fast. With the strong cash generation that we anticipate over the course of the rest of this financial year, we're gonna see this come down sharply. Slide 8 is the maturity profile for our debt. You've seen before a lot of great work being done on the last 18 months or so. Refinanced all our near-term debt, and there's nothing immediate that needs to be refinanced.
The next one is at this mark, the next material one is in 2024, but that's a three-year facility which we roll over each time. It's looking good and a clear pathway. Slide nine is our CapEx. It's unchanged from the prior quarter results that we reported. Under $400 million, which contains the balance of the expense on the Saiccor expansion. Some cost optimization projects of $80 million and the sustainability projects that we talked about last quarter. Unchanged. Slide 10, we included some slides just to some of the challenges we face with the headwinds. This first one is on ocean freight. On the left-hand side, just the schedule reliability.
It's still challenging in global markets, and it does look like it's gonna carry on for some time to come. The reliability level, in fact, got worse for the last quarter. On the right-hand side is the cost of containers. This only goes back to February 2021. You can see it's doubled in that time and remains at those elevated levels. If you went back further, these World Container Indexes have gone up close to four times. Slide 11 has the pulp prices in Europe and China. You can see that European has remained at only two in the last. Obviously, we buy a lot of pulp in Europe.
In China, which tends to be a lead indicator from much of the global pulp markets, we did see declines in paper pulp prices. More recently, those prices have actually started picking up once again, which actually could be good for DP pricing. Slide 12. As I explained to you in the last quarter, our European business is a big user of natural gas in Europe and impacts on our available cost base. You can see that natural gas prices, albeit they've come off the highs, they remain extremely volatile and they're well up on a year ago. Across the board, across a number of our raw material categories, timber in South Africa, chemicals and the like, we are seeing higher costs.
Because our market is strong and all the great work that we've been able to do in our business, we've been able to mitigate that impact. Turning to slide 14, moving into our product segments. Firstly, on pulp. DP prices did come down to $905 during the quarter. It's still at pretty good levels, actually. But they did stabilize towards the end of the quarter. They followed viscose prices as well. More recently, on the end of the quarter, viscose prices actually started rising again. In fact, coming out of the current prices gone up quite nicely. The DP prices have actually gone up today $910. So it's moving in the right direction. We are positive about the short-term outlook for DP looking good.
Volume included the BCTMP out of our Matane mill. BCTMP prices also came off on the back of all the other declines in pulp prices in the Far East. We've also seen some nice improvement in BCTMP prices in recent weeks as well. That's looking good. On the 100,000 tons, which we mentioned last quarter, still there. As I said, not getting any worse, but we have been able to secure some additional capacity, break bulk specifically. We are optimistic that we can start to reduce that backlog in the current quarter and in the rest of the financial year. Slide 15, just a couple of graphs on the dissolving pulp market. On the left is just apparel.
We could put many different graphs or any indicators there for you. This just shows the rebound in textile and apparel sales. U.S. strong, China starting to recover and the underlying demand for textiles and viscose and ultimately dissolving pulp is good. On the right you see the DP price versus the viscose prices. After the drop that viscose experienced earlier in the quarter, you can see it's started rising once again. In fact, this graph's a couple of weeks old. It's actually moved, the green line has moved up further since it was put together. On packaging, slide 16. Strong, another strong quarter, record profits. Markets are robust across all our regions.
We've been able to successfully implement selling price increases, focus on product mix optimization, something we promised to, and that's led to additional benefits. EBITDA up more than double a year ago. South Africa containerboard, very strong. North America, equally very strong markets for us. In Europe, specifically in the categories that we list there, particularly strong. Across the board we're looking at very strong markets at the moment. Then on graphics, the rebound in demand, I'm on slide 17. Graphic demand has bounced back. Bounced back and demand is strong. With all the additional capacity that has come out of the marketplace, it's meant that operating rates are full and we are able to operate all our assets at full operating capacity.
Volumes are basically back at the pre-COVID levels. With that as a backdrop, we've been able to implement selling price increases in Europe and North America to improve our margin and offset costs. Turning to the regions, firstly, Europe. We had a strong recovery. We're very pleased. You know, from the difficult quarters that we experienced last financial year, a nice rebound. We've seen strong demand. We've been able to implement selling price increases to offset those higher costs. You see a significant growth in volumes across all the paper businesses. But we obviously do have the headwinds of the higher variable costs, but we've been able to mitigate that impact.
Just the one comment I'd like to make is that on the packaging and specialty margin side, there is contract business there and so there's a little bit of a lag impact as we recover margins in the packaging side as well. We continue to increase selling prices. In North America, another great quarter, a record quarter, more than triple the prior year in terms of profit. We did have the cold mill outage at Somerset. It was very successful for us, obviously offset by the additional trading week. All the segments doing very well, and we've been able to mitigate and stay ahead of the curve with regards to cost increases. In South Africa, a good quarter. We saw higher pricing in all segments.
Despite the higher costs, demand for DP continues to be strong, very strong demand for our containerboard. You know, that's expected to continue as we move forward. However, we do see variable costs coming through. We've got higher the external timber that we buy, and like everywhere else, higher chemical prices and delivery costs. It does mean that there could be some pressure on the South African pulp business because you don't pass on those same surcharges that you would see in the paper businesses. Slide 21 has our strategy in, and I know there's a lot on this slide, so I won't spend long on it other than to just reemphasize the four segments. Our ongoing focus on operational excellence, which includes safety, which comes before all else.
Looking for opportunities to reduce our costs to offset these higher raw material prices that we're experiencing. Enhancing trust, that's why we're in business. Some great work done on the certification, and we have a look, a slide a little bit later, which we'll talk about that. One of our strategic advantages is our forestry certification of our wood out of South Africa. As we talked about last quarter, there are some topics as we reduce our environmental footprint. We look for opportunities to grow and redirect capacity to our growing segments, and we've been very successful at that and we'll continue to look for those opportunities. Then ultimately, sustaining our financial health.
The debt situation has improved tremendously and will continue to come down on the back of the strong cash generation and higher profits. Slide 22 is one that you've seen before, and it's just to reemphasize that our focus on the short term is on the balance sheet, strengthening the balance sheet. Ultimately, we do think that there are opportunities to grow, you know, beyond this period, but we haven't made any big investments at this stage or material investments. Slide 24 has the sustainability. It's an important part of the way we do business. It's built into our values and our culture. These are some of the certifications, and a number of them you'll have seen before, but I'm pleased to say we're reconfirmed over the last few months.
Obviously, as I've mentioned before, we have committed to science-based targets out to 2030. Also very pleased to reconfirm that we are a level one BEE contributor, and that's all been certified. Turning to slide 26, the outlook, I'm pleased to say that we are optimistic about the prospects for the forthcoming quarter and for the rest of the financial year. All our markets are strong. Demand is good. We're able to put through higher selling prices. It looks like DP prices are picking up as well. I do think that margins in Europe's packaging and specialties business can continue to improve as well. Feeling good and things look strong across the board.
On slide 27, obviously, we have costs and logistics challenges, but you can see from our experience over the last year that despite these headwinds, we're able to combat them, we're able to mitigate those and deliver higher profits. With that in mind, looking at all the factors that are out there, we anticipate another improvement off of the $240 that we've just achieved. Obviously that contained an extra week. Even despite the fact that it had an extra week, we will beat that absolute number in the Q2 . We're feeling very optimistic. Operator, I'm gonna hand it back to you for questions.
Thank you very much, sir. Ladies and gentlemen, if you would like to ask a question, please press star then one on your touchtone phone or on the keypad on your screen. If you decide to withdraw the question, please press star then two to remove yourself from the list. Again, if you would like to ask a question, please press star then one. The first question comes from Wade Napier from Avior Capital Markets. Please go ahead, Wade.
Hi, guys. Congratulations on the great set of results. They are commendable. Thanks for the opportunity. A couple questions on my side. Can you maybe just give us a sense of historic sort of imports of coated free sheet into the U.S.? You sort of continue to sort of benefit from, I guess, a lack of imports into the U.S. Maybe you can just give us a sense of what they have been historically relative to what they are now and what the sort of potential risk is going forward if those return. Second question is on graphic papers price increases. We're obviously starting to see those price increases come through and they're becoming quite material. What are your sort of thoughts on the risk of price increases causing sort of an acceleration in demand erosion?
This sort of looks familiar to what we sort of saw in 2018, circa 2019. Just some thoughts on that would be great. Just a question on taxes. What is your expected tax rate over the sort of, financial year? I think the tax looked a little bit low this quarter. Maybe you can just give us, some guidance there, please.
Okay. Wade, I'm gonna just repeat the question. I mean, firstly on historical imports into the U.S., I've got Mike here with me. Obviously, you know, the logistical challenges that are out there have been a benefit to our U.S. business. However, we have seen a rebound in imports in recent times, particularly out of Korea. What I'm gonna do, I'm gonna hand you to Mike, and he will just talk broadly about the imports into the U.S. market.
In the U.S., historically, we've had 25%-30% of the coated free sheet market as imports. Currently, it's running just about 30%, overall down slightly over pre-COVID levels for the overall volume. We've seen in the last few quarters some of the demand returning and some imports covering that. You know, just from North America, our assets are full on coated free sheet, and there's no additional volume for us to supply.
Wade, your second question was about selling price increases in graphic paper, and could those lead to demand erosion like we experienced back in 2017, 2018? I think the big difference between now and then. I mean, clearly it's a risk, and there's a shortage of graphic paper in Europe and the U.S., in fact, globally. So there is a risk that that could impact downstream demand. However, at the moment, there is a significant shortage, and that's not what we experienced back in 2017- 2018. That's why we are much more confident about our ability to execute on these increases. Literally our customers are looking for more volume across the board and they're on allocation, and that's why we're very bullish about the short-term outlook.
I do think there will be an impact. However, markets are still very, very tight, and they look like they're gonna be that way for some time to come. In the longer term, clearly, if we look out two years and beyond, yes, graphic paper will continue to decline. In the intervening period, with markets as tight, none of us have seen markets this tight before. It's gonna create opportunities for us. Your last question was on taxes and the tax rate. I'm gonna give you to Glen.
Hi, Wade. Just as far as the taxes are concerned, for two main reasons that are so low. The first one is the investment allowances that we get as a result of the Saiccor expansion. Then the second one is the utilization of our assessed losses coming through in North America. It will continue. We anticipate the rate will stay at that level for the remainder of this year.
All righty. Perfect.
Thanks, Wade. That's all. Thanks. Thanks, Wade.
Yeah. That's great.
Wade, do you have any further questions?
Operator? No, no, you can hand it over.
Okay. Thank you very much. The next question comes from James Twyman from Prescient Securities. Please go ahead, James.
Yes. Thank you very much. Yeah. Excellent quarter. Congratulations, guys. I've got two questions. The first one is, in terms of energy costs, would you say that they peaked and that this quarter at the moment looks like energy is gonna be at a similar level to last quarter, or is it slightly higher, and maybe the same for chemicals? The Maastricht mill, you've said that you're looking to potentially sell that. Very keen if you could talk through the reasons of that and whether you're making any progress on that. That's it for me. Thank you.
Sorry, James, you just broke up slightly there, on your second question. Was it on Maastricht?
Yes. Just what the reasons are for it and whether you're making any progress on that?
Yes. Okay. On the energy costs, we are anticipating a further increase in Q2, which, you know, we're probably looking at another, and I'm giving you a rough number here, of about another 25% on the energy costs. In absolute terms, across the group, that's about $50 million. But we have been able to put through selling price increases to offset that impact. That's already taken into account in the outlook statement that we provided you. You can see that on that graph we showed earlier, the gas prices have come off a little bit, but they're still relatively high, and volatile. Yeah. Who knows where prices are gonna go?
One thing we do know is that typically when the Europeans come out of their winter season and into spring, energy prices, the pressure on the energy prices should come off somewhat. To the absolute impact of that, we have been able to mitigate. In terms of the Maastricht question, I'll briefly answer and then I'm gonna hand you to Marco. Yeah, we've talked about before about one of our strategies has been to reduce graphic papers, and we are exploring opportunities to see whether it would make sense for us to consider selling that asset. It's an exploratory stage and in terms of the legislation in the Netherlands, we have to make certain disclosures. It's exploring. We're...
I'm not gonna make any promises, but it's something that we're exploring. Marco, I'll allow you to speak some more. Yes. Thanks, Steve. It is, as you say, it's the exploration has started. It has been part of the strategy review that we have undergone last year, which has led to certain conclusions based on the market segments we would like to play and we think we can win. Part of that is the consideration of looking for a buyer for the Maastricht asset. Again, this is in an exploratory phase.
The reason that we went out public is that we had to comply with legal requirements, particularly in light of the information to the Works Council in Maastricht. That's why we have gone out and made it public. Again, we're in a very early phase to see where this ultimately will lead to.
Thank you. James, may I just confirm that you have no further questions?
Nope. I may come back later if there's time, but thank you.
Noted. Thank you. The next question comes from Brian Morgan from RMB Morgan Stanley. Please go ahead, Brian.
Hi. Good afternoon, guys. Two questions from me, if I may. Both on specialties. If I just simply take revenue divided by volume to get price realization, it looks as though prices are up or realized prices are up about 30%, quarter-on-quarter. And obviously you did highlight mix changes and product optimization and all that sort of stuff. Can you just give us a bit more color on what's going on there and, you know, specifically where you're seeing that geographically?
Look, it's a combination of mix and price realization. It's predominantly price. We have seen those kind of levels of price increases in Europe and in the U.S. South Africa, a little bit lower. You know, because you're aware of this, Brian, we have annual contracts on the packaging side in South Africa. Strong increases in prices in both Europe and North America.
Okay. In terms of margins, obviously a 15% EBITDA margin for specialties across the board. Specifically between Europe and North America, becoming quite material there now, is there a big margin differential between the two regions?
Yeah, I think we indicated earlier, I mean, we don't provide that granularity, but what we have indicated earlier is that the European margins are lagging a little bit, because we do have some contractual business, six months and annual business. So those selling price increases that we've been putting through and we continue to put through, as those terms mature, that business will start to benefit. So we do think there is further scope for margin improvement in the European business.
Okay. Perfect. That covers it. Thanks very much.
Thank you. Ladies and gentlemen, just another reminder, if you would like to ask a question, please press star then one. The next question comes from Mikhail Dupel from UBS. Please go ahead, Mikhail.
Yes, thank you. Good afternoon, everybody. Can I just ask, firstly, on the DWP backlog that you mentioned, how should we think about the pricing of that backlog? You might have said this previously, but maybe you could remind us of that. So you have 100,000 tons basically in the backlog, which you expect to deliver. The question is about price. I mean, compared to where the current spot market is. That would be my first question. The second question would be if you could talk a bit about the overall market dynamics now in DWP, in terms of swing mills behavior, in terms of inventories in the value chain, in terms of what you expect up or down in the short term.
Thirdly, just coming back to graphic papers, you mentioned you're basically sold out. Does that translate into a continued year-over-year volumes growth for you, in the current quarter? Those would be my questions. Thanks.
Yeah. Thank you. I'll talk about the DWP backlog price, and I'll talk briefly about the DP market dynamics, then I'm gonna hand you to Mohamed, who will expand further. Then on the graphics volumes, I will talk about those and then, perhaps Marco will elaborate a little bit further as well. Yeah, on the backlog, as we told you at the end of the last quarter, because of the lag impact of our pricing, we do get the benefit of the earlier quarter. The 100,000 tons backlog that's there today is not the same 100,000 tons backlog three months ago. That's why the price realization in this quarter relative to where market prices were at that point in time was higher. That's why DP prices were relatively higher.
Similarly, the 100,000 tons, as it's delivered in the current quarter, effectively is benefiting from the price two quarters ago, if that makes sense. Whereas the rest of the volumes would be at last quarter's price. We do have a benefit there. The DP market dynamics, as I said, I will talk briefly and then hand to Mohammed. Broadly, viscose prices came under a little bit of pressure. DP followed it downwards, but then it started to stabilize. More recently, viscose prices have picked up. We've seen cotton prices at 10-year+ high. The differential between cotton and viscose prices at a recent many-year high. Those are very, very favorable. As I said, viscose price is picking up more recently and DP went up today.
Only $5, but it's a sign that it's moving in the right direction. I'll hand you to Mohamed.
Thank you, Steve. Just if I can start, in terms of the industry specific characteristics, what we are seeing is the VSF operating rates inside of China has lifted quite nicely, and we're now seeing it sit over the 80%. The VSF inventory level sitting with the VSF producers, certainly going into the Chinese New Year has dropped to a very low level below the 17 days, and that's below actually the long-term average, which is closer to, say, 20 days. What we did see was that there was a big transfer of VSF inventory moving from the VSF producers to the yarn producers.
That's typically what you see leading into Chinese New Year. But when you look at the yarn producers stock of VSF yarn, that's sitting at levels which are below the five-year industry level. And that should, I think, support more spinning of viscose staple fiber. The inventory levels in the value chain are looking, I would say pretty good at the moment and supportive of higher pricing going forward. The one other thing I would say that has changed, you know, cotton has been at a very high level. That difference to viscose is at least at a ten-year high, and that should, I think, support increased usage of, you know, VSF fiber at the margin.
We're seeing more recently higher oil prices starting to have an impact on the polyester staple prices, which again, should be supportive of VSF demand in the near term.
On your last question.
Follow up on that one.
Oh, yeah. Okay. Sorry. Go ahead. No, go ahead. No. I'll take it afterwards.
Follow up. Ask your follow-up question.
No. I just wanted to ask on the cotton. I mean, I've seen the spike myself as well, and it's pretty extraordinary. I mean, can we expect that to last really? Or I mean, should it start to correct down at some point?
Hey, that's a hard question.
You know, obviously a number of global commodities are up significantly, and it's creating an opportunity, you know, for us, we believe. On the viscose side, it's very difficult to predict how long cotton prices can remain at these levels, but it's very promising for DP pricing ultimately. It's very difficult for us to predict how long that can carry on for.
Right. No, that's understandable. Thanks.
In terms of your last question, which was about graphic volumes. I guess the big story, our North American business has been full now for the last year. So the additional volumes you're gonna see coming through in the current year relate to our European business. As you know, last year, I think we took about 280,000.
280,000 tons of curtailment last year across the four quarters. It progressively got better. The opportunity there is if we keep our machines full, we can sell all those volumes.
Michael, do you have any further questions?
No, I'm good. Oh, actually one follow-up. Just on, actually not related to these questions, just a separate question on cost, the cost side of things. Just two questions there. You mentioned the energy being a bit of a headwind into this quarter, but you're covering that with pricing. Just wondering if there are any other costs, key cost items that you see moving up on a sequential basis. And then on these energy surcharges you have mentioned, just wondering, you know, to what extent have you implemented those across which products really is the question. And then on that topic, is there a mechanism of how you're gonna unwind those when the energy costs come down eventually? Or how does that work?
It was across the board that we implemented those, and it was clearly unprecedented. Energy prices costs have remained high. We continue to have that surcharge. You know, it's not mechanically tied to a specific metric, if that's what you're asking. We have to monitor the situation and determine how long it's appropriate for. It's across the board, we've been able to be successful. In terms of the other costs, you know, pulp has been high for some time. As we talked about in the presentation, delivery and shipping costs are high and chemical costs.
Overall, as a group, we are looking at probably a 10% quarter-on-quarter rise in variable costs, but we are able to offset that.
Right. Okay. No, that's very clear. Thank you very much.
Sorry, just one other thing I wanted to point out just, and I know you talked about it in your report today, but the 53rd week, we did point out at the end of the last quarter, we did say it was coming. And the impact of the Somerset shut perfectly offset the 53rd week. So it is a real number that you're seeing in our EBITDA.
Yep. I got it. Great. Thanks a lot.
Thank you. Ladies and gentlemen, I'd like to just give you one final opportunity to ask questions before we conclude. If you would like to ask a question, please press star then one. We will pause to see if there are any further questions.
Operator, if there's no more questions, I like to take this opportunity to thank everybody for joining us today, and we look forward to discussing good results at the end of the next quarter. Thank you.
Thank you very much, sir. Yes, there are no further questions. Ladies and gentlemen, that does conclude today's conference. Thank you for joining us. You may now disconnect your lines.