Good day, ladies and gentlemen, and welcome to the Sappi Limited First Quarter 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 Please also note that this call is being recorded. I would now like to turn the conference over to the Chief Executive Officer, Mr. Steve Beney. Please go ahead, sir.
Thank you. Good day, everybody. I'll refer to the page numbers as I move through the presentation. And starting on page 4, the highlights for the quarter. EBITDA excluding special items was 201,000,000 U.
S. Dollars up from $175,000,000 last year, profit for the period up from $75,000,000 last year to $90,000,000 this year. And following that earnings per share up from US0.13 dollars to US0.16 dollars. The same times the profit been going up. Net debt came down further, down another $400,000,000 to 13,38,000,000.
As at the end of the quarter. And that's nearly half where it was 4 years ago. Moving to Slide 5, some of the key ratios, it's pleasing to see that net debt to EBITDA is now down at 1.7 And just to remind you guys, over time, we always want to strive to maintain it below or at a maximum of two times. EBITDA percentage, 15.4 percent, up nicely. And Also pleasing to see our return on capital employed continues to improve.
Obviously, that's a key ratio as we evaluate new projects and new initiatives. And for the quarter, it was 19.5%. And turning to Slide 6, the EBITDA bridge from 16 to 17. Firstly, sales volumes up. A large part of that obviously was because of the fact that we had an extra trading week.
On price and mix, nice price improvements on, for us in dissolving pulp and in our South African business on the packaging side. We're also benefiting from a mix as we grow our specialities business across the regions and clearly that will continue to be the case as we grow that business.
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lot of good work being done on variable costs and you see that coming through as a big positive. Then turning to Slide 7, Just this product contribution split between paper and specialized sales, those numbers haven't changed that much since recent quarters. EBITDA close to fifty-fifty. And then operating profit 62% specialized failures. On the paper side, just obviously that includes graphic paper and specialities and our intention over time will be to split that out, between the the graphic paper and the specialties.
As we move through and into these new projects, Slide 8, the evolution of our net debt, and I've already called out the highlights, the fact that it's nearly half where it was 3 or 4 years ago, and you can see the nice trend. And we would expect that to continue to go down for the rest of the financial year. Slide 9 is the maturity profile of our debt. And it's it's looking good. Most of the debt is now long dated.
The one bond is maturing in 2017 and we put it in the outlook statement that we intend repaying those bonds in April using our cash resources. We do have sufficient resources on hand. Then on Slide 10, our CapEx, this year, we are projecting 350,000,000 And then in 2018 2019, we've included our estimates for those years. In our results announcement, we did talk about the 2 new conversion projects that we're undertaking and I will expand further. I'm looking at the cash flows associated with those and the debottlenecking of dissolving pulp opportunities in South Africa.
That's what gives us the numbers that you're seeing on that slide. Then turning to the product categories, on Slide 12, Firstly, talking about the paper, graphic paper. Obviously, the markets continue to be challenging and and obviously that's one of the reasons we are looking for opportunities to redirect capacity away from graphic paper towards specialties. We continue to see closures and obviously as a result of our conversions, we're going to take a little bit we're going to take some capacity out of the market. Specialities continues to grow in the segments that we're in.
And we're seeing rates of between 1% 5%. And that's why they are attractive to us and to make further investments. Selling prices for graphic paper have come down since a year ago. More recently, we're seeing a little bit of stability. We've we've just announced the price increase in Europe on for graphic paper.
And, I'm sure we'll get questions on that a little bit later. Costs have come down since a year ago and we've done a lot of good work there. But it is important to point out that pulp prices have started rising a little bit in recent weeks. Our strategy, clearly is to try to anticipate the demand for the paper and convert or reduce capacity, as that demand drops. And that's obviously what gave rise to the projects that we've announced today and continuing to make sure that we focus on costs and make sure we're amongst the lowest cost producers.
Turning to the regions, Europe good volumes, coming through across the board on graphic paper. Obviously, and we had the extra week, which helped us, on the volume side. But in addition to that, good work done on costs, specialities volumes up very nicely 26%. And clearly over the next couple of years, that will rise significantly. Then moving to Slide 14, North America.
Also, the market has been tough. We saw prices come off more recently that they've started to stabilize. As we've lowered our prices, we've been able to boost our volumes which has helped fill up the mills, the dissolving pulp has been good and helped the region. Cost management has been very good and we've been able to take costs at the business and we continue to look for efficiency initiatives and opportunities. Then turning to Slide 15 and the dissolving pulp markets, Those have been pretty good over the last couple of quarters.
We have We've seen demand being pretty good. And, some of the dissolving pulp capacity that was expected to come onto the market has been delayed a little bit, which has obviously helped us. Prices have been good and in recent weeks, in fact, have actually picked up a little bit as well. So that's encouraging. And going forward, we obviously want to continue to maintain our low cost position.
We have some short term opportunities to improve volumes in South Africa over the next couple of years and in addition to that, as we look beyond 2019, we or at 2019 and beyond, we look for opportunities to expand our capabilities further as that market grows. In South Africa, on slide 16, the business has done well. Obviously, dissolving pulp has been good, but underlying demand for our packaging offerings continues be positive. We did have a little bit of, production issues at Saiccor, some tub leaks and going to be addressing them due during the Saiccor shut in March. The RAN is now stronger than it was a year ago.
That does put a little bit of pressure, on the business. Clearly we benefit from a weaker rand relative to the dollar. Then moving to the strategy, on Slide 18, And the various pillars on our strategy. Firstly, on costs, it continues to be an area of focus. We have and good projects across the business on the procurement side.
We've achieved savings and we continue to look for further savings As we move forward, we've made some recent investments, in South Africa, some turbines at Saiccor and Tagala. We at Somerset, we I think it was last quarter we announced to the market that we're investing in the wood yard there and we'll start to see the benefit of that coming through in the 2018 financial year. So there's ongoing continuous improvement initiatives across the business to to make sure we stay competitive. Then on slide 19, the rationalizing of our declining businesses and And clearly, we have to be pragmatic about our declining graphic paper exposure. The projects that we announced today, which I will talk about in more detail, will help manage our exposure there.
Lanakin, as a result of the projects that we announced, we are going to see less exposure to mechanical paper, the lightweight coated. And then with the increase specialities investments at Maastricht And Aingham And Somerset, we are going to reduce our exposure to those at those mills for coated woodfree. Then moving to Slide 20, in terms of making moderate investments to grow our business. I've already talked about the fact that we have some short term debottlenecking opportunities at Saiccor and in Goodwana. The investments that we make at the various mills that we announced today.
And as I said, we've got a couple of slides now where we'll go into more detail. We look for opportunities to grow packaging at in Goodwana and together. And as I said earlier, the market demand there is continues to be good and we do think those opportunities to grow further. So turning to Slide 21, before going into the projects, we've just put the graph of our return on capital employed over the last few years and you can see it sounds a very good story. Obviously, we picked up from a relatively low base, but it's important to recognize that when we consider these projects, when we evaluate them, the return on the capital employed, the paybacks, the IRRs are all very important for us and you are seeing the benefits of that coming through.
And We think that the projects or we know that the projects that we've announced today meet those hurdles as we move forward. Slide 22, just talks about those investments. Firstly, in Europe, we're spending $140,000,000 across 4 mills, the bigger stories there are at Maastricht, expanding our rigid packaging offering. And at the same time, smaller increases at Ingen and alfeld You can see the product categories that we're getting into, solid beach board, folding box board, white top liner, expanding all of those And, we estimate that that will give us an additional specialities volumes of about 200,000 At the same time, Lanaken will reduce its exposure, to mechanical paper and that will pick up the volumes of coated woodfree coming from the other mills. And then at Somerset, we're investing in PM1 at Somerset, which will give us the flexibility to make packaging grades and graphic paper, it does increase our overall capacity at that mill.
And in the medium term, the 3 year medium term, we are targeting to ramp up our packaging grades by up to 350,000 tons. Slide 23, just graphically, just shows you the grades that we are in. On the containerboard side, in South Africa, we have the corrugated board offerings and that does very well for us and makes very good returns. The white top liner under containerboard is predominantly at our Aengen Mill. And then in a solid breach solid bleach board and folding box board, the investments that we're making at, Somerset and Maastricht will predominantly be in that space.
Slide 24 just breaks it by mill in the European. I'm not going to talk to that, but you can just see what we're doing at each of the mills. Then turning to Slide 25, the next pillar of our strategy is strengthening the balance sheet and We've done a lot of good work here and we'll continue to be very disciplined. As we think about our CapEx initiatives, In the short term, we've got the bonds that Tom mentioned now, which will obviously lower our interest bill. And then on Slide 26, the adjacent businesses, in addition to everything that we've talked about already.
We will continue to look for further opportunities to grow our specialities. Also, in addition to that, we were doing a lot of good work on the bio, bio materials, the lignins, and the sugars, and We've recently announced the pilot plants in the various categories and that's a longer term initiative for us to look for new avenues of growth. And then dissolving pulp, as I said earlier, we want to expand further and we do think there are opportunities. So finally coming to our outlook statement on Slide 28, just summarizing a lot of what we've talked about already, but dissolving pulp demand remains good. Pricing seems okay at the moment.
There has been a recovery in further recovery in Q2. So that's looking good. Graphic paper demand remains under pressure. Having said that prices have stabilized, Our CapEx, $350,000,000, we've talked about and So based on market conditions, we expect Q2's EBITDA to to be in line with that or our operating performance to be in line with that of Q2 of last year. I've got to call out the rent, obviously, the rent at the moment is about 13, 4th So that does put that does put a bit of risk into the numbers if the Rand were to continue to strengthen.
And then we will which is our net debt further before the end of the financial year. So that's me going through the presentation. Operator, I'm going to put it back to you for questions.
Thank you very
you.
Our first question is from Brian Morgan of RMB Morgan Stanley. Please go ahead.
Hi guys, thanks for the call. And so the first question from me here is, just in terms of just going back to your comments about capital allocation, Do you guys have a firm, or a group wide ROCE target? You know, is it 20% 25%. And then just coupled to that, perhaps if you could just comment, would you be looking at some point to put in a or to establish a firm divvy policy like a payout ratio of some sort?
Yes. Okay. On the first question, yes, we've got, return on capital employed targets. But interestingly, the projects that that we're looking at at the moment and we've announced and we continue to look at. They're well above our targets for return on capital employed.
So the two projects that we announced today You know, we're looking at paybacks there of about 4 years and IRRs above 20%. And then on your second question, the dividend payout, we have said over time, we would like to get it to 3 times.
Okay. So over time to be translated as over 2 years, over 3 years?
Yes. Yes, certainly within 2 years. At the end of this year, we'll make a call. As you know, last year, it was 5, wasn't it? And We'll make a call at the end of this year, whether what level it should be, but definitely within 2 years, it will be at 3.
Okay, cool. And then just last question, you've been gaining market share in Europe and in North America and numbers pretty impressive in terms of volumes. How does this play out? Do you see yourselves continuing to gain market share or at what point do you run out of runway here?
Okay. What I'll do, Brian, is just I'm going to pass you just now to both Barry and Mark and to talk irrespective markets. But clearly, the investments that we've made today, or we've announced today will reduce our exposure in those markets and will have an impact on market share, but I'll allow them to expand a little bit further, Barry.
And market share gains, in the recent past have been due to some extent because of other people getting out. So there's been some capacity reduction. And to another extent in the business model that we approach, particularly in coated woodfree, where market shares have grown In the future, we'd expect that those market shares would continue to grow somewhat, but only in line with the capacity reductions that we will have through the project. So it will not be a question of keeping the capacities at the current levels in order and then go for a market share gas dash. So there'll be a a cautious approach.
And Mark? Thank you, Steve. In North America, with our cloquet and Somerset mills, we focus on the quality and the service and, and, and with the aim to make sure the mills maintain a good backlog and stay full. And so our market share will increase if we run full and the market continues to decline. It's as simple as that.
Okay, cool. Thank you.
Thank
you very much. Our next question is from Sean Angoure of Arcam Capital.
Good afternoon, everyone. Thanks for the time. Just in terms of the cost saving initiatives in terms of procurement, So the sort of expected savings this year is about $50,000,000. Could you maybe just comment on the run rate that we saw in Q1? And then just on top of that, the outlook is, I mean, the sort of run rate, you should hit the $100,000,000 by the end of FY 2018.
And then in the results, you sort of comment that by 2020, it should be greater than $100,000,000. Could you maybe just comment a little bit about that for me, please?
Yes, the run rate in Q1 was about 18,000,000. Clearly, some of that benefit you don't see because of the fact that selling prices have come down. So it's kind of offset the impact of the selling prices. I think we see in the announcement that or in the presentation that it will be the run rate by the end of the year will be $63,000,000. And then ultimately, the $400,000,000 over the next 2 years.
Okay, great. But just in terms of the commentary, I mean, it does sort of allude to more than 100 and it seems you guys are getting there much quicker I mean, should there is there any sort of decent scope to go beyond that?
Yes, at least 100.
Okay, cool. And then just in terms of the disruption in cycle in the quarter, are you able to quantify the impact on DWP volumes
Okay. I will I'm going to hand you to Alex just to provide a little bit more clarity there. Thanks. Steve, If the impact was roughly 10,000 tons, some of it related to the tube leaks and then obviously just following on onto that, a couple of operational issues and water issues. We do we are quite confident that most of this is behind us.
And, with the shot in March, we will replace the economizer, which is, seems to have a design problem, and that should then sort this out completely.
Okay, great. Thanks. And then just last one, Steve, in terms of DWP expansion, so you sort of indicated post FY 2018, I'm assuming the market will get some sort of communication in terms of what is going to take place. So I mean, Is there anything barring the debottling over the 100,000 tons sitting in CapEx for CapEx guidance for the next 3 years? And then just on top of that, I mean, is there any sort of feeling at the moment whether you're going to do a JV, brownfield, greenfield, sort of expansion?
Thanks.
Yes, yes. And that's something we're going to be working on over the course of this year. And we will give an update. It's only going to be in the 2018 financial year that we'll probably hopefully this time next year we'll be able to give you an update on where we want to expand further. It's not in those CapEx numbers that I've given you.
In terms of greenfield, brownfields within South Africa outside of South Africa, it's too early to say we're considering all the options. And as I said, we will give you updates at a future date.
Okay, great. Thanks. Our
next question is from Lars Kahlberg of Credit Suisse. Please go ahead.
I just wanted to come back to the projects that you announced today. Steve, you're talking quite up in terms of 20% above IRRs. Could we sort of just step back a bit and look at Alpha that took quite some time to get qualified and get volumes through and profitability step up. How are these projects different And also with a backdrop of, seemingly a meaningful amount of consumer board in Europe, I appreciate, is it more sort of SB SBS or SBB as you call it, but there's some folding box ports. And there's a lot of volume in the market.
And also if you can share what you're doing at Somerset in terms of packaging grades at that mill?
All right. What I'm going to do, I'll initially handle it and then I'm going to again, I'm going to give us to Barry and Mark to give a little bit more clarity. Just in terms of our Phil, you are right that there was a bit of a slow ramp up. In fact, we were looking at the numbers today and going into more detail. And yes, year 1 after the conversion was slower than we initially projected, but if you look beyond that in years 2 3 beyond, we're now ahead of where we thought we would be at this point in time.
The overall returns on that project were 20% plus. So we're very happy with that conversion. And in terms of the specific categories, I did refer to them earlier, but I'll let Barry maybe just talk about them a little bit further.
In Europe because there's a lot of other investments in that area. So we really are concentrating on the really top end of the SBB quality. And that market is also growing quite sharply and the capacities there are well filled. There's not much investment into new capacity going on there. So we know from our customers that the demand is going to be there.
In terms of the speed of the ramp up, yes, we expect the same kind of period as we would normally expect that that differs from sector to sector, but can take anywhere between 6 months from a year. But the same ramp up in year 2 and year 3 will be the same. And the kind of targets we have are really for you for the year 2020, when we expect the full ramp up before.
Yes. Mark?
Thanks, Steve. On the Somerset PM1 rebuild. It's a fairly unique opportunity. And I'm not going to get into too many details, but the machine is uniquely situated in the way it was originally designed and the way it will be, rebuilt to service not only the coated graphics business that we currently service, but a wide range of C1S, C2S and specialty coatings that allow us to go through a variety of different packaging grades, including some very heavy weight grades that we'll be able to make out of there. Unique proprietary technology that we imply that will give us an advantage in many different aspects in the market, we believe.
And And we did build a 3 year ramp up on those grades into the plans.
And that was going to be some sort of SBS quality grade of how should we categorize that?
It will certainly be one of the grades that will be out of service. Yes.
Thank you.
Our next question is from Roger Spitz of Bank of America Merrill Lynch. Please go ahead.
Could you provide your view of calendar 2017 and maybe a midterm industry view of the global viscose, dissolving wood pulp volume growth outlook, please?
Yes. And I'm going to pass you to Gary again. It's always nice for him to expand a little bit further, but as things currently stand, demand is full. We're seeing good growth relative to prior years, pricing is good. So we over time, our projections are around 4% growth and We've been beating that for the last 15 months or so, but I'll allow Gary just to expand a bit further.
Thank you, Steve. Growth is still around the 3% to 4%. If you look at what's happening on the cotton side, there was a some restrictions on cotton going forward. As Steve has highlighted, we remain full out on production. We also close with our customers in terms of their growth plans and making sure we support the demands going forward.
So for the rest of 2017, I think it's very positive.
It sounds like perhaps imply that you may be gaining share. Do you feel like you're gaining share and do you expect to take more share going forward?
Yes. Look, in terms of our our capacity is obviously our capacity. And clearly, we've been boosting our a little bit at Inguwana and we have the swing capabilities at cloquet. So yeah, we've ramped up a little bit at cloquet and for by implication, that means we have gained a little bit market share, but it hasn't been a significant swing, Gary.
The market's growing and we've grown with it, I'd say.
Clearly with the favorable pricing, it makes the economics of the cloquet better for us and we'll we'll continue to monitor that and take advantage of markets as it suits us.
Thank you for that. In terms of release paper, I guess that's felt like a drag for a bit of time here. Is it can you tell us, is it a positive EBITDA contributor or positive EBITDA less CapEx contributor
Yes, it is positive. Although it may have underperformed, it still makes good margins. And it is positive for us. So yes, it's not a high growth area for us, but it makes a contribution. So we're reasonably happy.
Okay. And lastly, I'm looking at page 23, this is the paperboard market, the boxes on that page, is, on the right side, are some of these products you would make? You could make. I was a little unclear about that. And on the right side, it talks about North American CRB market.
Are you are you looking to enter the North American CRB market?
No, no, no, no, and perhaps we should have qualified that, that the green ones are the ones that we will be in across our mills. So we're not looking at the two blocks on the right. We just put it there just to put it in context.
Thank you. Our next question is from Klabe of Bank of America Merrill Lynch. Please go ahead.
Hi, thanks for taking my question. Just two questions quickly. Firstly, what's the downtime going to be on the upcoming projects in Europe and U. S? And what's the likely impact on EBITDA And then just secondly, how much I don't know if you're able to let it to disclose, how much the specialty pack packaging currently contributes EBITDA and what will it be what contribution will
it be after these projects?
Okay. I'll take your second question first. And then I'm going to hand to Mark and Barry just to talk about exactly how the downtime will work in the respective projects. Just on the contribution of the EBITDA for specialities. It's not a number we give currently, but it's in the teens.
Okay. Okay.
And as I said, our intention will be to break that into a separate segment, probably not this financial year, but next financial year. And then, Barry, do you want to talk about your
in terms of the downtimes to do the rebuild there in the order of 30 days in, in terms of the effect on EBITDA, because there is a carousel in and there is free capacity to do the carousel. We don't expect a significant effect on EBITDA because we will have we will be able to carousel orders
from one mill to another as the rebuilds take place. So I expect that to be Mark? Yes, thank you, Steve. On the Somerset number 1 rebuild, it's a very significant rebuild. We'll do a small shutdown in December of 2017.
And then in the month of March, pretty much, we'll be down 2018 for that rebuild. Yes.
Okay. And what's the likely EBITDA impact on that on the summer season?
It will be Obviously, that amount of downtime, there'll be some there, but we do have a lot of flexibility between where we make our grades, particularly at Somerset, but also with the Europe And so it's, it could be a 10% plus hit on our regional EBITDA during that that quarter, we're down.
Okay, okay. Okay. I'm sorry, just to go back to the to the first question or to the my second question. What targets, where do you target, specialty or what EBITDA, what parts, what percentage of EBITDA do you target the fish entity taking up?
Yes, if you look at these projects that we've announced, and let's summarize it all. In the U. S, you are if you look the existing business and the additional volumes that we're going to create, that business is going to be about 400,000 tons. In Europe, we're currently about 300,000 and with the extra 200,000 tons, and that will give us 500 overall. In terms of our 2020 vision, we are targeting specialties to be at least 25 percent of our EBITDA.
You.
Our next question is from Wade Napier of Avior Capital Markets.
Hi guys, thanks for the call. A couple of questions from my side. In your outlook when you're guiding for Q2 operating performance to be in line with last year, Q2, what sort of ramp are you assuming And then secondly, I just want to get some sort of clarity on the market size of sort of specialty grades in North America, because this 350,000 tons looks like a lot of sort of capacity in my mind, particularly if it's largely focused at SBB, given that I'm looking at Europe and it's sort of like a 500,000 tonne market. So now you're sort of talking about another 350,000 tons here. And then I assume with that 350,000 tons, you're obviously converting coated free sheet and you're trying to send some of those volumes.
Over to Lanaken as well. What do you think your net impact of sort of lost credit free sheet volumes in North America is going to be?
Thanks very much.
Yes. Sorry, just remind me your first question again.
What's your end assumption for saying that Q2 is going
to be
in line with Q2?
Yes. Well, look, we're already halfway through February. And we obviously know our January results. We know where the end has been and we've locked in ourselves for the next few weeks. So we kind of know where the end is and it's at current levels.
So based on the combination of what we've achieved and the rates we know we've achieved and where the end is today, that's what we're basing it on. So we're pretty confident about achieving that that Q2 number. On the specialties at some effect, Mark, the question about where is broadly where is the 350 going to come from?
Well, If we Somerset mill today is we'll use round numbers roughly a little more than 800,000 ton mill. After the rebuild and depending on the grade mix, it will move to slightly more than a 1,000,000 tons. We'll We have plans and we believe we can grow the, the specialty grades to roughly 400 of that 100 of that 1,000,000 tons. At least 600 that can be, which will be coated wood free, but we are not eliminating the ability to make either of those grades on number 1. So it will depend on the market as we move through those development years.
And then the other part of the question was, where will we get the 400 from broadly? Speaking? What categories? Yeah.
No, it will, it'll be in C1F through, label stock all the way up through to the SBS market.
Okay, cool. Then can I just get a follow-up on your sort of recent pricing announcements? You're looking for 8% across the board in Europe. And you sort of gave a comment that that was on the back of sort of input cost pressures. Are you expecting 8% RAS and variable costs?
Yeah, look, based on the on where pulp prices are going or expected to go over the next few months, yes, we feel that that it would be in that range. Obviously we've made the announcement effective in March. You know, it's just been done and clearly we wanted to hold. So yes, that would be our expectation.
Thank you very much. Our next question is from Hamed Khosand of PWS Financial. Please go ahead.
Thank you for taking my questions. First off, you're talking about North America as far as the investment process Could you detail as to if you're seeing any kind of market share gains because you're moving prices lower and what your plans are as far as building inventory ahead of the capital investments that you're making going into specialty more and more?
Yes. Look, obviously, we have reduced our prices in the U. S. And that has helped us gain market share. But obviously not just that.
I mean, it's our service levels and our relationships with our key customers. So, but it has been a factor at play. Clearly from a sappy perspective, it's important we keep our mills full and we maximize the efficiencies at the mill. So So that has been a contributor. The inventory levels, it's still early.
It's too early to say. We haven't started building the inventories, Mark. You want No,
because we will, we will manage our inventories to service our customer base. I would maybe reflect back a few years ago when we did a major rebuild on the wet end of number 3 at Somerset. And we were able to, on the front side of that rebuild and on the back side of that, meet demands of our customers without having to build a very much inventory. So we We will manage the inventories about where they are today. And, as we get closer to the outages, we'll be building some inventory during that time, obviously, to support that outage.
Thank you very much.
You.
Sorry about that. The gentleman, we have no further questions. Do you have any closing comments?
Operator, thank you very much. Just want to thank everybody for joining us on the call today and we look forward to updating you at the end of Q2. Thank you very much.
Thank you very much sir. Ladies and gentlemen, that concludes this conference and you may now disconnect your lines.