Ladies and gentlemen, good day and welcome to the SAPI Limited 4th Quarter 20 16 Results Conference. All participants will be in a listen only Please note that this call is being recorded. At this time, I'd like to turn the conference over to the Chief Executive Officer, Mr. Steve Binnie. Please go ahead.
I'll go through the investor presentation. And what I'll do is call out the page numbers as I go through so that you can refer to it. Firstly, on Slide 4, highlights for the year. EBITDA was $739,000,000, up from 6 $125,000,000 $5,000,000 to $319,000,000. Pleased to say that the net debt came down further and we reached $1408,000,000 and that's down $363,000,000 from last year and further reinforces our ability to generate cash.
Very pleased to say that we declared our 1st dividend since 2008. The amount of the dividend was US0.11 dollars and it will be paid in January. For the quarter, EBITDA was 209,000,000 from 201. That was a strong number last year and again, this year. And bottom line profit up from 83,000,000 to 112,000,000.
Moving to Slide 5, just graphically, you can see our evolution of the EBITDA and profits. Just some of the key ratios, pleased to say that the net debt to EBITDA has now come down to 1.9 times. Over some period of time, we've been talking about our target being below 2 and very pleased that we got below that in this quarter. And clearly, that was one of the triggers for us declaring the dividend that we talked about. EBITDA percentage continues to improve and was up at 15.6%.
Again, nice improvement there. On Slide 6, the EBITDA bridge, from last quarter 4 last year to this year just highlighting some of the key items. Firstly, volumes were done. And we did talk about it in earlier quarters, but graphic paper, our traditional coated graphic paper continues to be under pressure and we have seen volumes come off there. However, we're able to offset the impact of that through good cost management and you can see positive bars there coming through on variable and delivery costs.
Exchange rate, we did also benefit from that the week around during the course of the year. On Slide 7, the contribution split between paper and specialized cellulose perhaps start on the right hand side, the operating profit, 61% coming from specialized cellulose and 39% from paper. But when you look at EBITDA, which is obviously a proxy for cash generation, you can see it's roughly roughly half half. So papers continues to play a role. Within the paper of 54%, clearly, there's our traditional coated graphic paper, but we've also got the specialities, which continues to grow nicely.
Moving to Slide 8, the net debt to EBITDA, and you can see there's been a tremendous improvement over the course of the last, this is 2 years. You can see coming down from 4.6 times to 1.9. And, on Slide 9, you can see what that means on a cash flow basis. And from the from the bottom of our cash generation at the end of well, that was July 13. That was just after we invested in the conversions at Clokey and Ngodwana, you can see that over the course of the last 3 years, we've generated over $1,000,000,000 of cash.
Moving to Slide 10, our maturity profile of our debt, all the bonds that we refinanced the last year or 2 are out in 2022 2023. In the near term, we have a $400,000,000 bond, which is maturing in 2017. That's the biggest part of the 513 that you see on the left hand side. And we anticipate using our cash reserves to pay off those bonds and the cash is the gray bar on the left. So we've been able to generate cash to be able to do that.
Moving to Slide 11, our CapEx 16 has been pretty consistent with recent years. You can see our maintenance CapEx has been around $150,000,000. As we look forward into 2017, we expect a similar number Our overall CapEx, we expect to be higher this year at $350,000,000. And the reason for that is we are investing in South Africa in our, a debottlenecking opportunities for dissolving pulp. And we've set aside some capital for specialties growth as well.
Turning to the divisions then, and firstly on paper on Slide 13. In terms of supply and demand, it's fair to say that the graphic coated paper markets have been tough during 2016, probably a little bit softer than we even had forecasted this time last year. And as a consequence of that, operating rates have declined, We continue to see closures to offset some of that, but the market has been under pressure. On the speciality side, on the other hand, we see those markets continuing to grow, in the sectors we're in between 1% 5%. As a result of the softer demand selling prices have been declining, but we've been able to offset the impact of those lower selling prices by a focus on costs, and clearly, the market for pulp and energy has been lower.
So that assisted us our strategy will be continued to anticipate demand as we move forward and take out capacity if it if it doesn't make sense and we look for opportunities to convert capacity towards specialities, which is growing and with a strong focus on costs. Within the geographies, firstly, on Europe, very good results for the year. We've seen nice growth despite the fact that demand has been soft. And all in all, we've seen flat pricing for the year. If you recall in the early part of the year prices rose and then they came back in the second half of the year.
Specialty volumes We're up for Fuseppe, up 15% and our margins continued to improve there. As I said earlier, we We were able to take costs out of it and ensure the profit growth came through for us. On Slide 15, North America, similar. The markets work, challenging and we have seen prices down 5% from a year ago. Offsetting that dissolving pulp at the Clokemo.
Obviously, it was a strong market there and we were able to boost profitability. And similar to Europe, we were able to do a lot of good work on costs and that ensured that the profits for North America were up significantly on the prior year. Slide 16, turning to dissolving pulp. It's been a very good year for dissolving pulp. The demand has been strong.
Prices have been rising and we've been able to sell all our capacity. One of the reasons for the good growth is that it's been a the cotton lintas pulp supply has been constrained and that tightened the market further. Selling prices have been rising alongside cotton and VSA. And obviously with our South African business, the weaker rand has, boosted our profitability from a cost base. Our strategy will be to maintain that low cost position.
We're optimistic about the growth in this market. We've talked about it many times, 4%, 5% per annum. And we, we believe that there'll be growth opportunities for us as we move forward. In the short term, we're looking to add another 100,000 tons in South Africa over the next year or 2. And then beyond that, we're looking at opportunities to grow further, whether it be in South Africa or outside.
On Slide 17 in South Africa, In addition to the dissolving pulp that we talked about, the container board has, has been strong obiate that it was impacted by the drought situation, but underlying demand, has been good and volumes were up on a year ago. We saw higher selling prices across the board, which boosted profitability. As I said, already dissolving pulp prices have been very good and the weaker exchange rate did put some pressure on input costs. We have to import some of those raw materials. Moving to Slide turning to then to our strategic focus, our 5 pillars of our strategy.
And I'll talk about each one of those in turn. And on Slide 19, On the cost side, we recognize that we are in commodity businesses. We continue to focus on cost efficiencies A number of smaller projects in South Africa was invested in some new turbines at a couple of the mills. In Europe, we think there are efficiency opportunities, at some of our mills like Lanaken and Cook Neeami Importantly on this side, we've got our group procurement initiatives underway. We talked about this already, but we want to realize at least GBP 100,000,000 of that GBP 113,000,000 was realized in the current year.
And that takes us to Slide 20 then which just reinforces the point that I just made. But, in addition to the $13,000,000 of the $100,000,000 that we've realized, we do have ongoing continuous improvement initiatives. And if you look at all the good work that we've done over the course of the last few years, you'll see that we continually improve our efficiencies and our cost base. Of the 100, we think we can get another 50 in 2017 and that will offset the lower graphic paper prices that we, that we talked about earlier. And our focus areas that look at across the board, it's all our raw materials and and on the freight side as well.
Then on Slide 21, rationalizing our declining businesses, I've said it many times, we're pragmatic about where our coated graphic paper is going and we try to anticipate demand we are we continue to look for opportunities to convert some of our capacity towards speciality grades like what we did at the Alfeld Mill a couple of years ago. And that's ongoing work, as we move through the year. On Slide 22, moderate investments, we think that there's opportunities in South Africa to boost our packaging businesses further in gooduana and together with some electricity opportunities. And I've already talked about the bottle making. And we continue to look for opportunities to expand on the specialty front.
Obviously, we're mindful of the 2 times net debt target that we've set ourselves. We'll always use that as a guiding principle and we will will not overstretch this balance sheet. Moving to Slide 23. The balance sheet done tremendous work at improving the balance sheet. Debt will come down further in the course of the new year.
And as I said earlier, we've got the bonds the 2017 bonds that are maturing and we'll repay that with cash. And then accelerating adjacent businesses from a strong base on Slide 24. In addition to the specialities that I talked about, we do think there opportunities with lignans and sugars, the Nana Salas pilot plant that we've got, we've got a sugars pilot plant at, in Goodwana. So we've set a little bit of capital aside to look at these opportunities. Then turning to our outlook, which is, on Slide 26, dissolving pulp markets are continued to be strong, albeit that they have come off a little bit in the last couple of weeks, but they are significantly higher than they were a few months ago.
Demand for graphic paper has been weak. And however, we've been able to offset that through good work done on costs and that's allowing us to maintain margins. So taking all of that into account, an exchange rate. It's clearly the rent is stronger now than it was a year ago at this time. So that will that does put a little negative pressure on our numbers.
But at these levels, we expect the 2017 EBITDA to be in line with the good performance that we achieved in 2016. CapEx is 350 that I talked about and I've already mentioned the the bonds. So operator, I'm going to turn it back to you then for questions. Session.
Our first question is from Roger Spitz of Bank of America Merrill Beach. Please go ahead.
Thank you. Good afternoon. Should we interpret the EBITDA guidance for 2017 as an improvement in dissolving with Pulp EBITDA being generally equally offset in a rough manner with the decline in the graphic paper EBITDA?
Yes, marginally, marginally so. With the costs that we're taking out of the business in, on the graphic paper side, we are able to offset the lower selling prices. So there's a marginal shift, but we've been pretty realistic about our expectations for the year from a capacity point of view, there's no additional capacity coming on board. So overall, it's only a marginal shift. What you're
saying is that actually the guidance for both DWP and graphic paper will each be like like they were, respectively in 'sixteen. It's not that there's a shift between the they're both going to be roughly in line with 2016 is what you're saying, I think.
Yes. Look, look, if you look at where markets are currently dissolving pulp prices are higher, but that's being offset by a weaker Sorry, a stronger rent, a stronger rent. With the rent, I think at the moment, what's at about 13 50, 13 60, We had a weaker run during the course of 2016.
Got it. And do you see within paper, graphic paper, any shift between the U. S. And Europe in terms of EBITDA there of 2017?
Not a significant shift. Clearly, imports do come in from Europe into the U. S. Market, but it's we're not anticipating a dramatic shift in terms of our our contributions. No.
Got it. And, you've been talking in the past about making a greater shift towards some of the specialty desoggin wood pulp grades. I know you're already in there to, to some extent, at least that's my understanding. It sounded like you were gonna do a bigger push. Would that come post this current debottlenecking, or would it come when you were talking about adding more significant capacity in the future.
What would might be the timing of that at, shift?
Yes, what we are doing at the moment is we're evaluating all the machines in the group that currently make coated paper. We're evaluating whether it would make sense for them to perhaps switch their capacity towards specialities. It's work in progress at the moment and we'll be able to give further updates as we move during the course of the year. In terms of timing, if it is something that we choose to pursue, it would occur late 2017 into 2018. Thank you very
much.
Thank you. Our next question is from Brian Morgan of R. B. Morgan Stanley. Please go ahead.
Hi guys. Thanks very much. Just you make the comments about capacity that needs to come out, particularly because of mechanical capacity that needs to come out in. In Europe. When would it be when do you think it'll become critical that, that type of capacity is removed And are we 6 months away from a point where the industry is forced to take best yet?
Look, based on our numbers, we look at ourselves. And based on where we're at at the moment, the mills are still cash positive. So it doesn't make sense for us to take capacity out. As I said in my answer to the last question, we're evaluating the machines and seeing whether there's an opportunity to convert one of them to specialities. That's likely to be the immediate answer.
We're not looking to close a mill or a machine at this stage.
Yes. So during the course of 2017, you'd look to do a conversion?
We would look to commence 1, perhaps.
Yeah. Yeah. Okay. Perfect. And in terms of, in terms of your net debt, Are you expecting to remain below two times, for every quarter, every reporting quarter?
That would be our target at this stage. Yes.
Okay.
Clearly, and Brian, just to be clear, going forward, that is our guiding principle. Obviously 3 or 4 years down the track, if we were to make an investment, a larger investment in dissolving pulp, you may temporarily go above that. But it wouldn't be by much. And that would be our guiding principle as we allocate our capital and control our CapEx.
Okay, perfect. Thank you very much.
Thank you. Our next question is from James Hutchison of Barclays. Please go ahead.
Good afternoon, gents. Congrats on another solid quarter and I think more importantly for getting yourselves in a position to be able to reinstate the dividend today. A couple of questions from my side, please. Just firstly on the dividend, how should we think about that going forward? I mean, have you decided on a policy in terms of payout ratio or cover corridor.
And then I've got a couple of other questions. So maybe just take them one at a time.
Our policy will be to go to three times. The dividend we declared today was 5 times covered. It will be three times. Obviously, at the end of this financial year, we'll make a call whether, when's the right time to get it to 3, but that a longer term goal is to get it to 3.
Great. Thanks Steve. And then just secondly on I'd like to get your views on dissolving pulp prices. Beyond the first quarter guidance you've given. I mean, clearly, part of the current strength is down to favorable supply and demand dynamics But then some of the other sports of pillars, as you mentioned, constraint, cotton and pop supply, associates costs, sports of that, And then high risk goes stable fiber prices seems fairly short term where this sort of short duration.
So how do you see logging pulp prices developing into the 2nd quarter and then into the back end of 2017?
Yes, yes. Look, As you know, the bulk of our business is on contractual basis and the prices are set with reference to the previous quarters average prices on CCF. So, you know, we're getting to the we're halfway through this quarter which will be the reference point for our pricing for Q2. So we're fairly confident of obviously Q1 and Q2 prices. As we get to the back half of the year, look, prices have spiked considerably in the last couple of months.
Sure they've come back in the last 2 or 3 weeks, but they're still significantly higher than they were a few months ago. So we're reasonably confident that the prices in the second half of the year can be relatively strong compared to what we've seen in 2016 2015.
Okay. Thanks. And then just the last question is just around your and dissolving wood pulp production at T. K. Just given that you're less concerned around the drought situation in CASI, and have you started scaling back production in dissolving wood pulp production in North America?
And roughly, we're 2 thirds, 1 third, clocate 2 thirds being dissolving pulp. Clearly, when we had the drought situation in the U. S sorry, at Saiccor, we made a little bit more at cloquet. Based on the current economics, it is favorable to make dissolving pulp at cloquet. So we are maintaining those volumes.
However, we have to evaluate the situation as we move through the rest of the financial year. So we're still making craft paper, but dissolving pulp volumes are a little higher.
Okay. Thank you very much. Thank
you. Our next question is from Lars Kahlberg of Credit Suisse. Please go ahead.
Yes, thank you. I just want to come back to Europe a bit. If you look on the specialty paper offering that seems to be doing very well, Can you give us any sense of how big a share of volume that is in Europe and more specifically what sort of activities you are engaged in, I. E. In which niches, if you like?
Okay. I'll start with the answer and then I'm going to hand over to you, Barry. In terms of volumes, in around about overall about 300,000 tons that we are in specialities. And that's something that clearly we want to grow as we move forward. As I said in the presentation, it was up 15% for the year.
It's primarily at the all felt mill But at some of the other mills, we're making a little bit of specialities. And to my point earlier, we are looking at all our machines as we move forward. Barry, do you want to expand a little bit further on the different grades?
Sure, Steve. It's there are 3 big businesses really that we are involved with. 1 of them is Flexpack. This is lightweight coated from one side packaging going into such areas as suit pouches and bander rolls and yogurt leading and these sorts of things. Then there is the release liner, which goes into such things as if you've got the decorations on police cars and things like that or on planes, then it tends to get applied through release paper technology.
And the 3rd big area is the, the board, so the SBBSBS board, which goes into cosmetics, very, very high quality packaging.
And on that in that particular market, there seems to be a bit of a squeeze coming in, not so much maybe on SBS side, but generally on high quality paperboard. Are you seeing any of that? And how would how competitive would you be in that business?
Well, in the quality area that we operate with, there are very, very few players and that market is growing, we find we're growing with it. We do not find that there is a particularly hostile competition at this time. You never know what the future brings, but it is quite different from the sort of the rather larger folding boxboard area, which I agree with is getting a bit crowded.
And just finally, how much money or interest cost savings would you save if you cash in the 400,000,000 bond, just to clarify?
The 400,000,000 bonds come at a coupon rate 7 of 7.725, and we'll be cashing that in. So you can work it out from there.
Very good. Thank you.
Our next question is from Slack Anipo and Wabe of Bank of America Merrill Lynch. Please go ahead.
Hi, guys. Can you hear me?
Yes.
Hi, this is actually David, his colleague, but anyway, Steve, perhaps you can just talk about your current supply agreements in DWP, in particular, one of your larger customers in Austria. Now it seems that there's an increase in us there on backward integration, which would make sense given where market prices are. And I mean, it doesn't necessarily sound like this would be limited to new capacity. So My question to you is, do you see any risks to your current contracts there? And say there was some risk there, would you be comfortable that you could place these volumes elsewhere in the global market?
And look, the contracts we've signed, are long term contracts that will see us through the next 4 to 5 years. So we've already locked that up. In terms of the customer that you're specifically referring to, yes, they do talk about backward integration, but they do have very, aggressive growth plans. So if you do the maths, the possibility of backward integration really applies to the incremental volumes. Having said that, it's not that they are looking they're necessarily looking to build their own pulp plants.
What they mean is that they're referring to strategic line sees as well. That's a possibility. So it's ongoing discussions that we have with them. In terms of the risk, All I can say is that we're fully sold out, and we continue to be fully sold out. And And in fact, we can't make enough of the products.
So we have other customers out there that are looking for additional volumes from CEPI And clearly, we've locked up in a significant proportion of our volumes on long term contracts. So we do think there are opportunities to place additional volumes with other customers.
Great. No, that answers my question. Just lastly, what is the actual CapEx number allocated to debottlenecking, DWP in the forthcoming year? And then lastly, can you perhaps tell us how much of EBITDA comes from Specialty Paper?
On the second one, it's not something we disclose yet, but it will it could be something that we'll disclose in the future as we expand the business. In terms of the CapEx for the debottlenecking, it's about $100,000,000.
Thank you. Our next question is from Ian Gazzard of Blue Mountain. Please go ahead.
Yes, thanks for taking my question. I just had a question on the Rand. We're seeing a little bit more, optimism in commodity markets, the rand has come up a little bit. How are you positioned if the rand strengthens a lot? And have you considered hedging?
The, look, the rand is volatile as you indicated. Long term, to try and hedge the round is extremely difficult. What we've got to focus on is the things that we can control. And it's to make sure that we are amongst the lowest cost producers. Typically, our big competitors are also in emerging market economies and and their currencies go with the rent.
So we can only focus on what we can control and that's to make sure that our costs are low and that we're efficient in the manufacturing of dissolving pulp.
Okay. Thank you. That makes sense. And just a follow-up is on input costs? Are you seeing any trends there as some of the players here in North America are talking about higher input costs?
What are you guys seeing?
I'll let Mark expand further, but clearly the pulp prices have been low over the course of the last few months. And then they're still relatively low. There's been a little bit of an upward tick which, pushes costs up, but they are, lower than they were this time last year. On the wood side, Mark, I'll let you expand further, but wood prices have been coming down further.
Yes, Steve. Thanks. Yes. In North America, our wood baskets, where we're located in Minnesota and Maine, we have seen over the last year, with the work that we've been doing and just the demand on those baskets and the good weather that's finally been in place for extended periods, the wood costs have come down fairly from what we were a year ago. And looking forward, the work we're doing, we think the wood costs will stay fairly flat.
Or possibly even go down further.
Thank you. Our next question is from Joern Sihim of Spread Research. Please go ahead.
You say that specialty penny per volumes were 50% whereas market average is 1% to 5%. Or do you explain these outperformance? And also will you be interested in M And A to penetrate the specialty market? I didn't hear you entirely, but I think what you were asking was that considering that volumes in the markets have been up 1% to 5% would we consider M and A? I think What's important is that we've reached our debt targets.
And yes, that does provide us with more flexibility as we move forward. I would refer you to the point that I raised earlier, and that's it. We would always use that net debt to EBITDA of two times as a guiding principle. So we would never overstretch this balance sheet. Yeah, there might be smaller opportunities out there, but As I said, we wouldn't overstretch the balance sheet.
Our next question is from Lars Kalberg of Credit Suisse. Please go ahead.
Yes, just a quick follow-up. Steve, you mentioned that the dissolving wood pulp prices had eased off a bit. Could you give us any sense by how much?
Not by much loss. It would be it's about $20 in the last couple of weeks, but I think there were as high as, and Gary correct me, I think they went as high as $9.80, 9.90. Gary?
Yes, Steve, that's correct, about $9.80. And as you say, it dropped off about $15.20 in the last couple of weeks.
So you can see Lars is significantly higher than what we saw during the course of 2016 financial year. For sure.
Absolutely. And can you share what you've sort of put into your number in your forecast in terms of trajectory and pulp prices in those prices going forward?
Yes, we had assumed, it was relatively flat during the course of the year relative to where we had come from. So it was in the it was about $8.50 to $8.60.
Okay. So for your assumption, your guidance, you're assuming a relatively flat average price for the Southern Wood Pulp through 2017?
Yes. Look, Lars, just to be more specific, clearly, we know we know what our Q1 prices are. And we've got a feel already for what Q2 may be. And then as I say for the rest of the year, we had assumed that to 850 beyond that.
Mr. Beney, there are no further questions. Would you like to make some closing comments?
Thanks, operator. I just want to thank everybody for joining us on the call and we look forward to updating you on our results at the end of Q1. Thank you very much.
Thank you. On behalf of SAP Limited, that concludes today's call. Thank you for joining us and now disconnect your lines.