Good afternoon ladies and gentlemen, and welcome to SACI Limited's 1st Quarter 2019 Results Conference Call. All participants will be Please note that this conference is being recorded. I'd now like to hand the conference over to Mr. Steve Vinay. Please go ahead, sir.
Thank you. Good day, everybody. I will go through the investor presentation, and I'll call out the page numbers as I go through as always. I'm going to start on Slide 3, which, has some of the highlights for Q1. EBITDA up 15 percent and bottom line net profit up 29 and, earnings per share up 14%.
Moving across the page, our margins did improve from last year, which was 12.9 up to 13.9. And our return on capital employed from 14.1 up to 14.7. Just in terms of the climate that we were operating in, it was a quarter where some of the markets our major markets that we were in did deteriorate significantly, particularly from December onwards for graphic paper. We did see a ramp up of on the packaging front, as following the comparisons that we did. Last year.
Moving to Slide 4, the EBITDA bridge, and the big story that that this tells you is that, we continue to have significant pressure from raw material costs, and that's predominantly pulp prices. They are significantly higher than they were a year ago. We were able to put through higher selling process to offset that. Volumes is showing slightly trying, but obviously we have Calm, the acquisition of Calm in the numbers, which were not there in the prior year. So it tells you that our volumes elsewhere were down.
And that's predominantly, in the, printing and writing papers and on the back of the soft market. Moving to Slide 5, the product contribution split. And I'll focus on EBITDA there. You can see visualized cereals, dissolving pulp 41%, printing papers 41 and packaging continues to ramp up at 18%. Slide 6, maturity profile for our debt, the, you could see that there are no major, debt maturities in the next couple of years.
Obviously, the 20 twos and 20 threes, are getting closer too, too maturity, and we do get closer to, the non call windows, and it's something that we monitor as we move forward. Slide 7 is our CapEx and, we estimate the CapEx for this year will be 590,000,000, with the maintenance portion of that somewhere around the 150 mark. Turning our attention then to the product divisions segments. And firstly on Slide 9, the printing and writing graphic paper markets, It's fair to say that this was a, there's been a significant, reduction in demand. We saw that particularly from from December onwards.
It's, and it did put pressure on us. And, you know, obviously we'll talk about the outlook statement a little bit later, but, you know, we do expect that to continue into Q2 as well. The, looking forward, for the rest of the year and obviously beyond that, we do expect capacity reductions to come, in Europe and the U. S. To, offset that.
The forecast from the industry experts of the operating rates will remain pretty, pretty good as that capacity comes down. On cost prices, We talked about it in previous quarters, but pulp prices did run hard last year and during this quarter, we did saw it come off a little bit, from those historical highs. Predominantly on weak Chinese demand. We have seen some declines now in, North America and Europe as well. On the paper price, selling price side, prices were stable.
Obviously, when markets do get soft, like they are at the moment, you have an increased focus on costs and, we continue to look for opportunities to streamline and cost side of the business. And perhaps, you know, the one opportunity as we look forward is pulp integration, you know, we are short pulp and we look for opportunities there to improve our, integration rate. At the same time, we will get benefits as we take our own capacity out of this segment when we as we ramp up further on the packaging grades following the conversions that, Somerset and Maastricht. And that brings me then to Slide 10, which is the packaging segment. And, we have seen more capacity coming into the space In terms of macro trends, there's a strong push from downstream brand owners for packaging based solutions, which we, obviously want to take advantage of those opportunities that will bring us.
The paperboard categories have been good, particularly in South Africa, but even, in the European environment. However, there was some short term pressure on some of the consumer packaging categories. And we believe that's linked to the economic slowdown that has that has been occurring in Europe, mainly. The selling prices, did rise, obviously As we tried to counter the impact of the higher raw material costs, and as I said already, the Pulp prices have seen a little bit of a decline in recent weeks months. Our big focus here is to maximize this opportunity and clearly ramp up the volumes following the conversions that we've done.
On Slide 11, the gold in pulp demand for the product continues to be good. The market, we believe will continue to be strong. On the supply side, yes, there has been more supply coming to the market, but as you look forward, the increased volume demand we think will better for that, that increased capacity that comes through. Our estimates are that the majority or the vast majority of The swing capacity has already moved to dissolving pulp, and we believe that because of the, that the paper pulp demand in China has has dried up in recent months. Selling prices, for dissolving pulp, are down a little bit on and we believe that's on the back obviously of lower VSF prices.
However, we do expect them to stabilize and rebound, for the reasons that I've outlined in terms of the market balance. We have the extra volumes that will come through from the debottlenecking projects. And obviously, we've got the big a bigger project at Saiccor to boost production, and that will come through in 2020. Turning then to the regions and, unfortunately, Europe, we saw overall tons down 1.6%, but obviously we had come for the first time. So if you back that out, you see that our printing and writing volumes were down 7.
So it was tough. It was a tough market. The overall market was down by more than that, so we did we did gain some market share there. Specialaxies and packaging volumes were up 50, obviously, including comp. If you back that out 4% like for like growth in that, Obviously, that's the start of the ramp up coming through.
Offset a little bit by the soft, the softer demand that we saw in those consumer product categories that I mentioned. Earlier. Top line sales up 9 on the back of the higher selling prices. There's a bit of a mix issue there because of Calm on a lake for lake basis, packaging and specialities prices up 10%. EBITDA down slightly at 2% And it's predominantly, on the back of, the higher variable costs, and you can see up 17%.
And a big reason for that is the higher pulp costs. In North America, comes down 6 percent, sales up 3% and nice growth in EBITDA, up 61% relative to last year. A lot of the pressure points, the same soft coated paper market. Obviously, we're getting the ramp up of the on the specialty side. We have improved selling prices to offset costs, which helped us, and as, as Somerset ramps up further, we should progressively see further improvement.
So overall, a reasonable year, a quarter. In South Africa, strong improvement, both off the back of higher volumes and selling prices The market for packaging in South Africa has been strong. And we continue to grow there. And then on the cost side, fixed costs were in line with inflation, but obviously with higher volumes, the cost per ton, it has been coming down. So that's there's good work there.
However, we do have the impact of raw material cost rises impacting a little bit, but it was a good quarter for South Africa. And in fact, a record quarter for South Africa. The strategy pillars, and I'll start on Slide 16, Firstly, costs I've mentioned already that cost is always important, but fairly in times when markets do get weaker, it gets increased focus. We do believe that there's a further 16,000,000 opportunities on efficiencies and procurement. And in terms of our ongoing improvement initiatives across the mills, we will look for further improvement and pulp integration, is receiving increased focus for us as a business.
We do believe there are pockets of opportunities within our existing mills there to improve. And in that Saiccor expansion obviously coming later, we'll also contribute to lower variable costs for one of our biggest mills. And the Gratkorn upgrade, which we talked about on the results calls last year, I'm pleased to say that's been completed ahead of time on budget and we're confident that that can give us savings that we built into the project. Moving to Slide 17 and coming back to graphic paper. This is about obviously capacity and managing the capacity.
I've already said that we do expect significant amounts of capacity, external to Sappi to come out. Obviously, Internally, we, we will continue to ramp up at Somerset and Maastricht and and that will reduce our exposure here. And at the same time, specifically to mechanical paper, we've got the project Lanagan to convert that machine and that will be completed in April of this year. The balance sheet on page 18, we had a commitment with you guys about the 2 times EBITDA and we and we maintain that and we have what's used that as a guiding principle. The RCF as we negotiated last quarter.
I've already said that we'll monitor the bond market for opportunities to refinance. And I guess we've got some good news a couple of weeks back there that Moody's, upgraded our credit rating. And I think that's a testament to the good work that we've done. Slide 19, we will continue to look for opportunities to grow into higher margin areas. The debottlenecking of Saiccor in Goodwana were completed last year.
Pleased to say that production is going well there at the moment and, which we should be able to deliver on the promises that we made there. The Cloquet 1 will be complete in April. That will give us another 30,000 tons. And that appears to be on track. And, you know, we're confident that that will deliver again on the the benefits that we anticipated.
Longer term, we continue to look for opportunities to improve packaging or increase packaging in South Africa. We've got a a great business there. And, we can continue to grow further, we believe. On the bio side, as you know, we've got a number of initiatives underway and lots of discussions with potential commercial partners moving forward and the demo plants are progressing, nicely. We have the expansion at Saiccor 110,000 tons And obviously, the ramp up of the board grades at Maastricht and Somerset following those conversions.
In terms of the outlook, We expect, and I'm on Slide 20. We expect dissolving pulp sales volumes to increase this year. Following the projects that I mentioned earlier. Variable market conditions for specialities on the board side Pretty good. Unfortunately, pressure points coming from the consumer, products in Europe with the economic slowdown that we're witnessing there.
Graphic paper markets have been particularly weak from from December. So that is going to put some short term profitability under pressure. At the same time, CapEx for 2019 is expected to be 5.90 the majority of the projects that are listed there, the side core, the Lanaken conversion and the Gratkorn project that we've now completed. So given those weak graphic paper markets and the ongoing elevated pulp prices, we do expect Q2 to be down slightly this year relative to last year. However, for the full year, we do expect some profits to be higher.
So operator, that's my presentation. I'm going to put it back to you now for questions.
Thank you very
you.
The first question comes from James Triman of Precient Securities.
Yes, hi there. Thank you.
I've just got two questions. The first one is, the U. S. Markets obviously weakened a bit recently. I'm just wondering how confident you are of being able to maintain prices this year in that environment.
I'm wondering whether the george specific closure might help there and whether there's any information you've got on how that might help? And secondly, your comment on PULP integrations interesting. Is this what you're looking at in terms of CapEx for 2020 2021 for sort of increasing domestic production of pulp. And what sort of what we're looking at in terms of
Is it new recovery boilers? What are you looking at there?
Okay, let's take each question and turn on the U. S. Market, I'll let Martin expand a little bit further, but the one thing I would say is that operating rates, are expected to remain pretty good. There are capacity reductions coming. And obviously, we're part of that process.
We believe that, it makes sense to maintain our prices. And because of the higher costs that have come through, Mark, you want to add in there? I mean, we don't really comment on specific competitors.
Right. The market has been very tight through the course of this past year. It did slow down in December, and this is typically the seasonally slow period of the year. We're, we've got a lot of activities underway, and we're kind of leaning towards the same as the, forecasts are predicting. We see lots of reasons why the year coming up can, can, have still strong operating rates.
And I guess I'd leave it at that at this point.
James, on the second question pulp integration, yes, I mean, obviously our big project at the moment is, is Saipcor and that takes up the capital for 2019 and it goes into 2020. Yes, I suppose we are looking at beyond that. We're looking around the mills in our group and we do think there are debottlenecking opportunities and, opportunities to boost our pulp capacity. I'm mainly talking in Europe. Europe is about a 50% pulp integrated and we're looking at the mills.
How can we boost that? Because clearly with higher pulp prices that does make you vulnerable through the cycle. So yes, it's something that we're working on at the moment and we'll get you in the future.
Thank you.
Hi guys, thanks very much for the call. Just a question on your ability to accelerate the ramp up of your specialty conversions ahead of the timelines that you've guided to, especially given the weakness on the demand side seen in the magazine paper?
Yes. Yes. Look, it's obviously getting a lot of focus. These things do take time. We saw it in the past when we converted it also.
If I look at Somerset and I look at Maastricht in terms of the product that we have, we're very happy with the product. And we're getting positive feedback from our customers. We are, we are ramping up a little bit slower than we initially anticipated, but it is ramping up and it will continue to do that. So in terms of your specific question, can we go faster? Yes, with the weakness in the graphic paper side of it, we're going to do what we can to accelerate that.
But it does take time to get accreditation from customers. I think you covered it. Yes, I think you covered it.
Okay, that makes sense guys. And then given that you're adding specialty packaging conversion, specialty packaging paper here, I mean, you talk about demand weakness in Europe, but just a question, could we not be transferring pain from coated properties specialties at this point?
Yes, look, there has been, other players that have converted However, in terms of our relationship with our customers, as we talk to them about opportunities. We do think there is we do think those opportunities are out there to ramp up according to our original, business cases that we built around the conversions I don't think there's anything dramatically changed in terms of how we think about those markets.
Okay. Cool, guys. And then the 3rd question final one is, just maybe a bit of color on DWP maybe on a 3 to 6 month view are you expecting a bit of a rebound in pricing first during the new year maybe or how are you thinking about how might evolve in the next couple of months?
Yes. Mohammed, I'll give some brief comments and then I'll pass it to you. Yeah, this is is the Chinese New Year. And obviously, if you look back, it is a time when you do have soft demand and prices do come under a little bit of pressure. If you look at all the variables that are out there in terms of the balance in the market, the strong demand, the fact that paper pulp prices continue to be good, we still, we're still optimistic about the outlook for pricing on dissolving pulp.
Steve, I think you've covered it. It's largely a seasonal issue at the moment. And, post Chinese New Year, historically, we have seen an improvement important demand pickup as well as pricing.
Thank you. The next question comes from Sean Yangura of Borkum Capital.
Good afternoon guys. A couple of questions. I think starting on DWP, obviously in your slide pack, we still make reference to external opportunities. Think sort of unlocked, I know pulp prices haven't come down massively, but they have seen a bit of deterioration. Have you anything sort of picked up on that matter?
Sean, yes, look, it's not a secret that we have looked And these assets in this cycle have become very expensive. We haven't seen an opportunity yet that satisfies our valuations and other returns that we require. So, we'll continue to monitor the market but there's nothing as of yet.
Okay, cool. And then just in terms of European graphic capacity, so obviously there's quite a bit coming out could you just confirm that Savi is pretty comfortable with their positioning without the need to sort of take out more?
I'll let Barry expand, but yes, there are significant capacity expected to come out of the market externally to us. Based on the demand forecast that we have at the moment, we don't believe we need to take further capacity out other than obviously all the things that we're working on with the conversions and so on.
Well, just to add to that, we are of course taking out capacity through the rebuilds. And the conversion, that's about 200,000 tons of graphic capacity that will come out. So we're playing our bit in that game as well.
Okay, great. And then just last one on the guidance. For EBITDA to be higher year on year. Any chance you could elaborate on that?
Yes. Well, I mean, obviously, Q1 was comfortably higher than last year. But Q2 because of the short term pressure will be done. I mean, we can't give a specific number, but we as we sit here today, we do feel that the back half of the year should be better than what we've provided is the outlook guidance for Q2.
Okay, great. Thanks guys.
Thank you. The next question comes from Ross Pryker of JP Morgan.
Just two questions from me, both on volumes. Firstly, on specialties, if I take the absolute growth in volumes and try and strip out Cam, it looks like around 20,000 tons of volumes came in from the conversions. Is that accurate? And then leading on from that, just does that mean we should expect another 180,000 tons over the remaining course of the year? And then just on graphic volumes, your commentary seems to suggest that that demand account will accelerate in Q2.
Is that accurate? Thanks.
Sorry, I missed the second question. Apologies.
No worries. So just on graphic, graphic paper volumes, It sounds like you expect demand declines to accelerate. So to decline more than what you saw in Q1 Is that accurate?
Yes. Okay. All right. Let me take the two questions. In terms of specialty volumes, your numbers is close to the mark.
We do expect that to accelerate as we move through the year. In our original, plans, yes, 180 is about the right number. So I would expect each quarter to get larger than the loss. So 20, ramping up, and as I look at the full year, we're still pretty close to the kind of 180 level. The graphic paper volume, I mean, obviously, it was particularly weak in December the market and there were double digit declines in both markets.
We did gain some market share. At the moment, things are weak. But in terms of our bigger picture and as we look forward for for the rest of 2019, and we wouldn't expect it to be at the double digit level. In the high single digits is kind of the latest forecast. And that's consistent with what you're seeing from RISI, I think, RISI's got sort of 7% and 8% declines, Barry?
Yes, that's correct, Steve. I would say that it's not getting worse. December was the trough of the business, slightly better than that, certainly significantly the best on that, but it remains below last year.
Yes, yes. And to that earlier question, if it is down 7% this year, as we plan forward in terms of our volume, we think we can withstand that. And obviously there is anticipated capacity reductions, big ones coming in 2020. So that should see us through. Mark, anything you want to add?
Maybe just a little more in terms of, the North American market. We are, we would be right in the 6%, 7% down is what we see. But a lot of that is happening in the magazines and the catalogs and we've been working for quite a while to reposition our, our graphics focus. And, and in fact, commercial print is probably flat to even slightly up year over year when you look at just, the commercial printing that's going on.
Great. Thanks a lot guys.
Yes. The final question comes from Gabilo Moshe of Renaissance Capital.
Morning. So sorry, evening, I just have two questions. The first one is on in the last call, you mentioned that some of your paper volumes are fixed on contractual terms, and I had around 50% of TWP were fixed at a specific rate. Is this still the case? And what rate are you all those volumes fixed that for this quarter?
And then, the second question would be on in terms of your coated paper volumes as well, those also had what was mentioned was in periods of when the pulp prices were rising, you weren't able to at sort of at the same rate offset the higher pulp prices with higher coated paper prices. Is that still the case and would it be the case should in this type of environment where we've seen pulp prices falling? You would actually be able to hold on to the prices higher, and benefit from the lower pulp prices?
Okay. On the dissolving pulp, we a large proportion of our selling prices is indexed off the CCF dissolving pulp in China. And typically, they run or the price quarterly is in arrears. So they do move as prices move, but as I say, a quarter in arrears. On the coated paper, that comment was specifically related to Europe.
And predominantly on the real side and specialities. Very odd, do you want to
Very quickly, very quickly, Steve. On the real side, there are tend to be 6 month contracts on the whole. They do have a a form of linkage to, pulp prices. There's no formal index, but they do reflect the movement of pulp prices on specialities These tend to be much more annual contracts for about half the business. And it is true that they do not move in line particularly with with pulp prices.
So that does mean that when the pulp prices go down, these prices are more stable. So you should get a should see a higher margin when those prices go down.
Sure. Thank you very much.
Thank you. The final question comes from Steven Kieran of Mizuho.
Hi, good afternoon. On the graphic paper, the 7% to 8% decline you expect for 2019, Is that both for U. S. And Europe?
Yes. Yes. And that's what our estimates are giving us. And it's it's we've seen independent industry experts come out with similar numbers.
How does that compare to full year 17, 2018, what was that number for the year that just passed?
Yes, what you see, if you go back 2 years, it it reduced dramatically the rate of drop. And in fact, it leveled off. And then, in the early part of 2018, it was it was, lower single digits, but as I say, it accelerated towards the end and December was particularly tough because that was, the double digit decrease that we saw.
Okay. In terms of the pop integration, you talked about it sounded as if it will be merely debottlenecking at the existing sites rather than any acquisitions. Is that fair to say?
Look, we look at all our opportunities. Our focus at the moment is obviously internally. The same point I made on dissolving pulp, earlier that the pulp cycles against you at the moment, and these assets are very expensive. So with that as a background, our predominant focus would be internal.
And does that tie in your view with that for paper pulp? The prices, although they have come down, slightly in the recent weeks, that it still will be at the high levels we have seen over the past couple of years going forward?
Look, based on the industry experts and the market commentators that we see out there, the expectation is that prices for paper pulp will continue to be high. Obviously, ultimately determined by market forces. But, at the moment, there's been a little bit of a decline. But we don't anticipate a significant reduction. And with that is
It's a bit of decline. Can you give it in percentage terms, how much is that decline?
Well, look, some of us public. But you know, you've seen declines on the hardwood front in the magnitude over the last couple of months of or depending on whether you're in China or elsewhere, but between well, $50 in the U. S. And China. Sorry, U.
S. And Europe and a little bit more in China.
Okay. Okay. You already said you were 50 per and integrated in Europe. And in, I think at some point, you were actually as a company, as a group, you were neutral, but I guess with the latest conversions for the group as well. You are short.
Which regions if you can give us the breakdown of which region is integrated by how much in paper pulp?
Yes. Yes. I mean, obviously, overall, we're long dissolving pulp, and then we're short, paper pulp, So if you look at overall economically and you believe that in the long term paper pulp prices, and dissolving pulp prices are correlated, you do have a natural hedge there. Turning to paper pulp specifically, Europe, you're right, is about 50%. In the U S, obviously, as we ramp up there, our pulp integration percentage has declined about what now Mark said about 70%.
So Yeah. So those are the numbers. So we need to look at opportunities to close the gap there.
Okay. I understand. And lastly, you already mentioned that for your bonds, which the short one is callable and the 2023 becomes callable in April this year. You will be opportunistic. Is it just a, mathematical exercise where you can exercise where you can be issued at and the cost to do that or you are also considering extending the maturities, at the same time, so it's not pure mathematical exercise?
Well, you obviously do the maths, but at the same time, you look at market conditions. And if it makes sense to extend the maturity, then you would look to take advantage of that opportunity.
Okay. And so if the markets make sense, April onwards, it's possible that
you would look to come to the markets?
Yes.
Okay. Thank you very much.
That was the final question. Do you have any closing comments?
No, thank you. I want to thank everybody for joining us on the call. Forward to discussing the results at the end of Q2.
You for joining us. You may now disconnect your lines.