Good day, ladies and gentlemen, and welcome to the Sappi Full Year to September 2017 Results Conference. All participants are currently in listen only mode and there will be an opportunity for you to ask questions later during the conference. If you need assistance during the call, please signal and operator by pressing star and the 0. Please also note that this call is being recorded. I would now like to turn the conference over to Mr.
Steve Beney. Please go ahead, sir.
Thank you. Good day, everybody. I'll I'll call out the page numbers as as I move through the presentation. And I'm going to start on page 4 and the highlights for the year. Firstly, EBITDA, excluding special items, was $785,000,000, which is up 6% on the prior year's $739,000,000.
And then bottom line profit for the period similarly up 6% from $319,000,000 to $338,000,000. Earnings per share, up nicely from 57% to 64 And our debt continues to come down, by another $86,000,000 to 1322,000,000. Our dividend declared, was 15 US cents, which was some 36% higher than last year's $0.11. Specifically in the quarter, EBITDA was $2.21, up 6% again, from 209. And then profit for the period was 102 versus 112.
The reason for the drop there was that we had a a big, positive forestry plantation reevaluation in the prior year. And then earnings per share was $0.19 compared to 2018 last year. Moving to Slide 5, some of our key metrics. And, you can see that we're making nice progress on net debt. Leverage ratio, came down further to 1.7 times.
EBITDA margin up to 15.7 percent. And then importantly, with Tono and capital employed, we maintain that above the 20% level. Moving to Slide 6, the EBITDA bridge from last year, q 4 to this year's q 4. Firstly, on volumes, a very nice quarter on volumes across the board. On dissolving pulp, demand continued to be strong and we pushed higher volumes.
And then in graphic paper, we the market was was relatively better, and we were able to, keep our our coated wood free machine is full and and benefited from the stronger volumes, then, specialities continue to to grow. And then in South Africa, We continue to make progress on the packaging side. Price and mix slightly done. We have in the early part of the year, we saw prices come off on for graphic paper, but, subsequently, we have seen some price increases go through and and and we've been able to successfully implement there. I think the big story here as well is is great savings on on the cost side of the business.
We've talked in the past about setting ourselves targets, and you can see the benefits of of the cost saving initiatives come through. So overall, giving us the 221 that we see there. Moving to slide 7, EBITDA split, similar to what we've shown in recent quarters with specialized sailors and paper roughly half off. Within the, paper side, the 51%, specialities in packaging represents 15 of the 51. And our intention would be from Q1 next year to have a similar level of disclosure to dissolving pulp that we have in our current accounts for specialties.
Moving to slide 8 the maturity profile for a lot of for our debt, and you can see that a nice picture, no near term debt maturities, the next major one is our securitization in 2020, and and we don't anticipate any issues there. Slide 9 is our CapEx. And in the announcement, we talked about the fact that next year, we are gonna be spending a little bit more, up to the 450 level. And that's on the back of the announcements we had with last year Firstly, the debottlenecking projects for dissolving pulp in South Africa and then the conversions of at Somerset in the U. S.
And, Maastricht and Lanaken in, in Europe. So we anticipate that the CapEx levels will be around the 450 mark. That will be funded through the strong cash generations that we continue to make. Moving to Slide 11 and just some of the global market trends that we are seeing. Firstly, on supply and demand, we, as I said earlier, we've seen a little bit better markets for coated wood free.
Particularly, export markets have been good for the European producers, and we also benefited from that. And then more recently, in the U S, we've seen some major capacity coming out of that marketplace, and it's certainly more favorable for us as we move forward, and the market is more imbalanced now. And on the back of that, we, with a higher costs that have been coming through, we've been able to put through price increases. Specialty packaging and the sectors that we're in, the demand continues to be good, up between 1 5% and we've been able to, grow our volumes. On on the back of that.
In terms of selling prices, in the early part of the year, I talked about it already. We we did see prices coming off, but, there's been a series of price increases, over the course of the year. And and a lot of that is is obviously related to the higher variable costs, predominantly, paper pulp for our European business, and and and another chemicals, latex, caustic, and so on. So that that that has forced us to be to push up the prices or selling prices. There's a little bit of a lag between the higher raw material costs and as we push up selling prices.
So the benefit of some of the recent announcements that you'll have seen obviously will only be felt, as we move forward into Q2 and so on. Our strategy continues to be to look for opportunities to switch some of the packaging, coating capacity into packaging. And and and I've already talked about some of those initiatives. And then ongoing costs and efficiency programs, and we've been extremely successful there. Over the last few years.
Turning to the regions. Firstly, Europe on Slide 12, As I said, coated woodfree demand has been reasonably better, and we we've had very good export volumes and our all our paper machines are are full at the moment. So that that is encouraging news. We've been able to put through a series of price increases, but please bear in mind that for the exports, because of the stronger euro, when you convert that back into dollars. There is a there is a negative impact.
So that's why you see the selling prices, flat. Variable costs, as I say, were higher predominantly because of pulp. In North America, And despite the fact that it is a strong, a difficult marketplace, the for the quarter, we were better than the same time last year. Driven by growth on packaging and specialities. We have seen price increases through for the for the quarter, it it it it rose relative to last quarter, but it, it was still lower than a year ago.
However, there has been subsequent announcements, which should push us even higher. Very good work done on costs to to put us in a position to grow profits. Then turning to global dissolving pulp markets, throughout 2017, we've seen strong demand, double digit growth, and it's been encouraging. And we've seen a period where whereby demand growth continues to outpace supply. And we expect that to continue in the next couple of years.
There is some capacity announcements, some competitors that are expected come online in 2019, but we think the demand in the marketplace will be more than sufficient to cope with that. Selling prices, in the early part of the quarter went down a little bit, but we've subsequently seen a rebound in in in kind of September and and into October as well. Obviously, as paper pulp prices have risen at a faster pace, it has made it more attractive for some of the swing mills to to look at moving back, into paper pulp. Our focus is to continue to focus being a low cost player. And, you know, I talked earlier or in previous quarter about spending some money at the Woodyard in its Farcore, that, that, that, that is with that in mind to maintain that position.
We we have the debottlenecking projects in South Africa those will add 60,000 tons. That will be complete by the end of the new financial year. And also at cloquet, we're adding, we've got a debottlenecking project to add about 30,000 tons. And we continue to look for long term growth opportunities beyond that. And I've said it previously, but we are targeting to add 500,000 tonnes within the next 5 years.
Then turning to South Africa and on page 15, the packaging and the paper side of the business in South Africa, had a very encouraging and strong into the year. And, we're in a good position as we move into the new financial year, dissolving pulp prices recovering, as I said, towards the end. But the relatively stronger rent that we saw during the quarter did offset some of those benefits. Clearly, post the year end, the rand, as we can substantially, but during this quarter, the rand was strong. Good price increases coming through on the paper side and good cost management.
Page 16 just shows the various pillars of our strategy and taking each one of them in turn. On Page 17, firstly, on cost, it's been a major success of our strategy has been our cost management, and we continue to look for opportunities. We on the procurement side, we set ourselves a target of achieving $100,000,000 We actually achieved that in in in 2017. So we're pleased with that progress, and we are targeting another $60,000,000 in, 2018. We announced, 2 wood yard upgrade or new wood yards, one at Somerset, which, is in the process of being completed at the moment, and we'll start to benefit from that as we move forward.
And then the cycle 1, which will be completed, towards the end of this financial year. And then we we we have another project underway, or or we're about to commence another project at Gratkorn to upgrade our our our our PM 9. That's an exciting project for us, and and it will we believe will deliver as a a payback of less than 3 years. So So again entrenching our position as a low cost producer. Then on to slide 18, the rationalizing of declining businesses, most of this we've talked about previously, when we made the announcements of the big conversions.
But just to remind you that Lanaken's going to move out of lightweight coated. We're going to reduce coated wood free exposure mainly at Maastricht, but a little bit at Ingen. And then, obviously, the the big conversion of Somerset PM 1 as well. So those are on on track and, will be completed towards, in in quarter 2 3 of this year. Slide 19, as you know, we we repaid the bonds during the year, the 2017 bonds that was pay done with cash that we had available.
A strong cash generation allowed us to do that, and we expect our net our interest bill going forward to be somewhere around $60,000,000 to $70,000,000. And then moving on to slide 20, We continue to look for opportunities in higher margin products. We've got the short term debottlenecking at Saiccor in Goodwana and located as well, which I talked about already. And we are looking for other volumes that I talked earlier about the 500 within 5 years, and we are we continue to evaluate, potential opportunities there. In South Africa, we've got a very strong, paper business, and we we continue to evaluate opportunities to expand at Ingridwana and Together.
And at the same time, we recognize that our timber asset in South Africa is extremely important to us in And if we can, secure more, then then we certainly would pursue that. And then a lot of good work being done on the on on the bio material side of the business, the ligninants, and sugars. And we would look to accelerate that going forward. So that moves us to the outlook for, Q1, and then that's reflected on page 22. The, as I said earlier, the dissolving pulp demand continues to be good.
There's a there's a pricing recovery underway at the moment. Prices are higher. And we we we will benefit for that in Q2 forward. Q1 is obviously, a lot of our contracted pricing is is linked to, last quarter's prices. In Europe, paper utilization rates remain good, albeit it's important to point out that the the the the selling price increases do lag the costs as we implement those.
North American market is in a much better place now following the capacity closures. And we're encouraged about the prospects as we move forward. I've already mentioned that the Maastricht and some of some of said comparisons are on track and will be completed in 23. We are projecting 450,000,000 of CapEx on the projects that I mentioned earlier. For Q1 specifically, we remind you that last year, there was an extra trading week.
That accounted for about $20,000,000 of EBITDA So, obviously, you gotta take that off. We have the higher paper pulp costs that I've referred to a few times. Yes. We've been in through selling price increases, but there's a little bit of a lag. Dissolving pulp contract prices are lower than they were a year ago.
And we had a little bit of an impact from the the severe weather that we saw down in Cuozuna and Natau last month. Some damaged inventory and there was a, an adverse impact on production and getting, exports out of the port. That we estimated, I think, about $44,000,000 impact. So if we take all of that into account, we believe that the, profits will be lower than a year ago. So that's the presentation operator.
So I'm going to hand it back to you for questions.
Thank you very
you.
Our first question is from Brian Morgan of RMB Morgan Stanley. Please go ahead.
Could you just give us an update on on your thinking around, additional 300,000 tons of dissolving pulp that you've spoken about before? Just in terms of, have you have you filed have you filed something that that will that will work and and can just give us an idea of of the timelines that you're looking at there And then do you have any of that in your 2019 CapEx guidance?
Yes. Look, we're not in a position yet to give you final details. We are currently evaluating opportunity. I know I mentioned that last call, and I did say that we would hope to be in a position at our February results call to give you a more full update. We we and I'll just repeat what I said last time that we are evaluating internal opportunities and potential external opportunities.
In terms of 2019, as things currently stand, we expect the CapEx to be at a similar level to 'eighteen.
So so just to clarify, 19 current guidance doesn't include anything for this project or potential projects?
I I confirmed that. Yes.
Okay. And then if if I can ask, you you did some pepper top hedging last quarter. Did you do any in this quarter in in and what's what's the situation there?
No. It wasn't there was nothing material.
Nothing material. And and then if I may just ask third question, I think you in the past, you've mentioned, EBITDA margins, from specialities what were they due in the quarter?
They are in the, the mid teens.
In the mid teens? Yep. Got it. That's great. Thank you.
Thank you very much. Please go ahead.
Hi, guys. Thanks for the call.
Just a quick one on the specialty packaging and paper volumes. See in Q4 that actually went down quarter on quarter relative to Q3, is there any sort of seasonality that we should be aware of with regards to specialty packaging in Europe? And then secondly, on your dissolving wood pulp production outlook for 2018. Obviously, we've got the debottlenecking projects coming through, but that seems to be a year end story. So we've only really got cloquet swings swing capacity to add additional volumes.
How does North American profitability get affected if cloquet were to swing to more DWP production given the hard and hardwood pulp prices right now.
I'll take the second question first. Just just bear in mind that both a a raw paper pulp prices are rising, so dissolving pulp prices. So so on a relative basis either would would be better than last year.
Okay.
And do you want to talk about the seasonality on the specialty side?
Yes, certainly, Steve. There is a small summer holiday periods of a lull in the specialities business. It was less than normal years. In fact, it was fairly full. We were down by a couple of 1000 tons and it hit 1 month early.
By September, we were again growing well above the previous year. And we hit capacity restraints. We were sold out.
Okay. Thank you. And then can I just
add a third question?
You've now got it for an additional 60,000,000 in cost savings and from your sort of procurement opportunities, how should we think about where those cost savings are coming from between the different geographies?
Approximately 58% in Europe, 25% in the other 2.
Okay, great. Thanks, guys.
Thank you. The next question is from David Ruh of Bank of America Merrill Lynch. Please go ahead.
Good afternoon, guys. Just two questions from my side. On the South African containerboard business, volumes still seem to be positive there in a pretty muted end market. Is the growth coming from market share gains or are you getting some sort of export benefits. And then just my last question is, can you perhaps give us an update on the prospects for nano- nano-70 loss and, where are you in terms of that pilot project?
Thank you. On on South Africa, exports had a had a role, but I'm gonna give you over to Alex just to elaborate further.
In customers there are really the agricultural markets. So the export business, exporting citrus and ever And that's actually a market that's growing very strongly, roughly 3 to 4% a year. And, we're selling most of the production off our machines locally into that market.
Thanks, Alex. And then on the Nano, as you know, we've we completed the pilot plant, and we are doing significant work with potential customers and partners. At this stage, it's not a revenue generator. Clearly, we want to establish, from relationships with those customers. And then we would look to to build a commercial plant.
We're not at that stage yet, and that's probably still a couple of years away from that.
Okay. Thanks. And just to confirm, within the agri end markets, are you gaining market share there?
We effectively sold out on the machine, and we have plans to increase capacity, as Steve mentioned. So when you bring that capacity online, we're quite confident that we will grow them in a market share.
Great. Thank you guys. That's all.
Thank you.
The next question is from Sean Anngura of Parkland Capital. Please go ahead.
Afternoon guys. Just a couple of questions. I can start with the expansion options and how you're thinking about capital allocation, but between DWP and specialty paper packaging?
We've set ourselves target to grow on both sides. Clearly, we've already announced the conversions at Maastricht and Somerset. Our number one focus is is is is is clearly on dissolving pulp. We we we've targeted an extra $500,000 that I talked about. And that, as we evaluate opportunities and capital, That will be our number one priority.
Having said that, we do think there could be scope for further opportunities for conversions in the future, and we would we may allocate capital in that direction as well.
Okay. Great. And then just in terms of specialty packaging and the ramp up, I mean, given where paper margins are in both Europe and North America at the moment, given us strong the export market tire, is that impeding or slowing your expected ramp up of SPP volumes or your outlook for that business?
Look, bear in mind that the the the nice thing is that these mills will have swing capability. So if if the market for on the graphic paper side, it made science to, to, to, to, to, the reallocation of capacity, then that we would do that. But longer term, we still think that it makes sense to be in, in specialities, grades because those are markets that are growing and they deliver higher margins.
Okay, great. And then just sort of adding on to the question on hedging, especially you've given where, poll prices look like they're moving at the moment. I mean, what is your sort of options available for the rest of the year? I mean, are you guys really thinking about that?
No, not at these levels. As I said, there's been very little hedging, very, very little.
They're just going back to DWP, just to make sure I understand the sort of outlook for volumes now. So I think 10 odd kilotons were added at North Padwana and FY17. Now does that, is that 10 sitting in part of that 60 or maybe just give me a split of the 60,000 tons, because I thought it was going to be 10 cycle or 50 North Padana.
I'm just
trying to make sure there's no double accounting there on that.
Yes, that's not part of the 60. So the split of the 60 is is as as you indicated, a further 50 at Ngodwana and 10 at, cycle. And then we think there's an or there's an opportunity to boost it cloquet by another 30,000 tons. In addition to the flexibility we have on the swingy.
Okay. Cool. And I mean, just on so just to confirm, so ten is in the base for North Padana and FY 17. So you're actually able to squeeze another 10 in terms of debottlenecking there.
Yeah. A and good one is another 50 on top of the 10 that you referred to, and cycle is another 10.
Okay. Awesome. And then just maybe linking it to DWP markets. I mean, obviously, Lending came after their numbers this week and their sort of, outlook for VSF pricing in 2018 is not quite enthusiastic. What is the sort of read through for DWP pricing on that basis?
Look, VSF prices have run much harder than dissolving pulp over the last 6 months or so. And so, yeah, they may be coming back a little bit, but in terms of, the margins for VSS producers, they're still extremely good.
Okay. Cool.
And then, Steve, just in terms of, SBB and FBB, I mean, there was, there was a commentary around Europe and North America pricing coming under pressure, both regions. Maybe you could just give us a very quick update on how those markets or sort of playing after given your sort of expansion plans?
I'll let Barry and Mark elaborate that further, but, we were obviously in close conversations with potential customers, as we get closer and closer to the conversions being complete. So we're still confident about being able to place those tons in the market. I'll start with you, Barry, and then over to Mark.
Yes, Steve. Well, we're not in the FBB market and the conversion of mass 6, will allow a very small volume to be in the FBB market. So it hasn't been significant there. The FBB market, there's much more of a quality, sort of split between the better qualities, which the area we're in. And they kind of not quite so good qualities, but we'll do the job where there has been more pressure on the prices.
But the, the sort of top of the market where we exist is pretty stable.
And, Mark?
Yeah. Thanks, Steve. Yeah. In terms of, number one's rebuild, it's is coming along. It's on track, and we've been working with the customers, potential future customers and current customers because the machine will have the capability to manufacture, as we've already mentioned, graphic papers, but all the way through to, heavyweight coated coated board grades, SBS.
And, we've stepped a quite a, strong list of customers future customers that we're working with, and it's fairly comfortable and confident as we ramp up the machine starting, in the month of April, but, we'll be able to place the volume coming off that into the different grades at the time.
Okay, cool.
And then just last question, just in terms of the export markets out of Europe and the role China has played in that in the last sort of couple of months. Could you maybe just give us your view on how you see that playing out in 2018?
Yes. Again, I'm going to let you very expand further, but Yeah. We've been the the selling prices have been increasing globally, and there's there's been some capacity coming out of China. And that's created opportunities for us. And as I said, we've had a strong period.
Barry, do you want to comment further on that?
Very briefly. The Chinese, of course, mainly depends on imported pulp. So their pulp prices have also gone up tremendously and still are. And that has put, a lot of pressure on their paper prices to go up, and they have, particularly in China, And then the reduction in capacity of the older polluting plants, which many of them were back integrated into in Alba Thompson has meant that there is a better demand for the newer mills in China and their sign that. So it's better to mean that they have been less active in the market type.
That's kind of Europe is exporting more.
Our next question is from James Twaman of President Securities. Please go ahead.
Yes. Thank you. If I just got a couple of questions, the first one is on dissolving pulp you had a very strong increase in production, this year. Are you close to capacity there now before these debottlenecking come in, in other words, will you be able to grow your volumes there this year or not? And then secondly, in the US, obviously, there's price increases that are going through.
Could you give us some indication about how the contract links work in terms of the sort of timing for when you would actually get those increases through to the bottom line? I know there's probably a broad range there.
Yeah. On the dissolving pulp, the South African mills are are basically at capacity, but we're gonna be adding the 60,000 pump that I referred to. Cloquet, we, we were still making roughly about a, paper pulp. And, we have the ability to increase that, further towards dissolving pulp and we have the 30,000 tons debottlenecking project underway as well. So there there there is opportunities in at cloquet.
On the on the US contracts, we we you'll appreciate we can't get too specific there. Broadly speaking, we've implemented a number of price increases, and they the ones that we've implemented will progressively benefit our our US business. Some of that comes through in Q1, but, more of it, it picks up more momentum as we get into Q2 and beyond. Mark, anything more you wanna say?
No, Steve. I think you you covered it well.
Does it conclude your question, James?
Yeah. Just just quickly back on the on the first question. So, you you think you will increase, volumes in the dissolving pulp business this year because my my impression was that the debottlenecking of the 3 mills won't happen, in this financial year, it sort of happens towards the end, but you think you will be able to increase production this year.
Yeah. We we think we can, have some more volumes at cloquet, as we swing more towards dissolving pulp.
Our next question is from Ross Quicher of JP Morgan. Please go ahead.
Hi guys. Just on gas paper in Europe. I'm just wondering, you talk about a lag in paper prices versus where pulp prices have been going. I'm just wondering, does that imply that you expect to recover most of these pulp price increases through your paper through your paper prices?
Again, I'm gonna look very elaborate further. But, yeah, I mean, clearly, the reason we're implementing, the the the series of price increases is because of the pressure on on on input costs. And we, you know, I I think we commenced the first one in April and and and every quarter there's been one subsequently. And, We've been successful at implementing those. Pulp prices continue to rise So it is going to put further pressure on us to make even more price increases.
Barry, do you want to say anything more?
Well, let me just say that there is momentum now in the in price increases in Europe because the reality has struck home and a number of competitors are not integrated at all. And so for them, there's an absolute necessity to get these prices up. We have been particularly strong in leaving the woodfree coated price increases. And we're finally both merchants and printers see the reality of it and they're going through. So I do expect to recover the margins.
Clearly, our own focus on costs will help.
Thank you We'll pause a moment to see if we have any further questions. We have a follow-up question from Wade Napier. Please go ahead.
Hi, guys. Just sort of elaborate on Sean's previous question regarding the sort of differences between the risk markets and dissolving wood pulp markets. So this course, there seems to be a lot of capacity coming online, and we are expecting pressure in those prices. For dissolving wood pulp, you seem to have support for from from more demand and higher hardwood pulp prices. Do you think that this growth in dissolving wood pulp prices are going to move in tandem together this year or not?
We believe that based on the supply and demand dynamics of the dissolving pulp market, that prices will be good throughout 2018. We, we're obviously prices are continuing to rise at the moment, which will benefit us in Q2. And We've got no reason to believe that in the course of the next 66 months that there'll be a a a major drop in pricing. So we are encouraged by the prospects for 2018.
General, we have no further questions in the queue. Do you have any closing comments?
Operator, thank you. I just wanna thank everybody for joining us on the call, and we look forward to our next discussion at the end of Q1.
Thank you very much, sir. Ladies and gentlemen, that concludes this conference call and you may now disconnect your lines.