Good day, ladies and gentlemen, and welcome to the Sappi Third Quarter 20 16 Results Conference. All participants are questions. Please also note that this call is being recorded. I would now like to turn the conference over to Mr. Tiffany.
Please go ahead, sir.
Thank you. Hi everyone. I'm joined on the call today with by a number of my colleagues. I'll call out the page number of investor presentation as I move through the deck. I'm going to start on Slide 4, which has some of the key highlights for the quarter.
EBITDA, excluding special items, of $160,000,000. That's compared to $109,000,000 last year. Showing nice growth and bottom line net profit, up from $4,000,000 to $32,000,000. Earnings per share, similarly up from $0.02 to $0.11 and pleasingly, our net debt continues to come down. We are $384,000,000 below last year.
And reached $1583,000,000 by the end of the quarter. And that's the lowest it's been for many, many years. Moving to Slide 5, some of the, key ratios for us. Our net debt to EBITDA has shown significant improvement. We're now at 2.2 compared to 3.1 last year and that's been very, very close to our target that we've set ourselves at 2 times.
Interest cover continues to improve and EBITDA margins percent last year to 13.1 percent this year. And our return on capital employed, we communicated our target to to you guys and that's 13%. And I'm pleased to say that we were above that at 14%. Then in terms of our EBITDA bridge, which is on slide 6, You can see the key factors contributing to the growth. And just to highlight a few, firstly, volumes are down relative to last year.
It's important to point out that we did sell Instrand Capecraft earlier in the financial year. So we don't have those volumes. Obviously, graphic paper in North America and Europe been under a little bit of pressure and that's resulted in some lower volumes. And there was some timing differences on the dissolving pulp volume. We saw favorable price and mix, higher selling prices, for our South African business and our dissolving pulp and also a mix improvement flowing through from, the higher contribution being made by specialities as that business continues to grow.
Throughout the financial year and into this quarter, we've been able to take out variable costs and you can see we achieved a significant benefit in this quarter contributing to the growth And then the other thing at play was, the exchange rates and clearly the weaker rent has helped boost our profitability. Moving to Slide 7, the contribution split between specialized silos and paper you can see that, from operating profit on the right hand side, specialized payloads is makes better margins and has a higher contribution of profit. But when it comes to EBITDA, it's roughly half half. So our paper business continues to be important and it continues to generate cash for us to invest in other areas of the business. Moving to Slide 8.
The evolution of our net debt to EBITDA. And this is a very, a very nice slide. It tells a good story you can see that we've been continuously coming down over the last few years and we would expect that trend to continue getting into, the next quarter and beyond. And then looked at in a slightly different way on Slide 9, you can see the cumulative cash flow impact we've We started it at October 2012, and we did that for a reason because we wanted to show the negative impact of the investments that we made at Invidwana and cloquet for dissolving pulp. But you can see that since then there's been a dramatic cash generation.
We've and from the trough, we're, up to where we are today. That's nearly a $1,000,000,000 of cash that we've generated over the last 3 years and really reinforces our ability to generate cash The Slide 10 has a maturity profile for our debt. And following all the good work that's been done, we've been able to push out a number of our maturities and 'twenty two, 'twenty three and obviously beyond. The next thing that we have to tackle is the 2017 bonds that mature, and the anticipation is that we will be able to repay those with the cash generation in the business in 2017. On Slide 11, the CapEx And again, you can see the investments that we made in dissolving pulp 2013.
Since then, we've tried to strive to keep our CapEx at $300,000,000 or below this year is the same. We expect the year to end about 2 40 which means that the last quarter, we got quite a bit of investment this quarter, but should be about $100,000,000 giving us the $2.40 for the full year. Then turning to the divisions and just to put the global markets in context possibly on global paper. It's fair to say that recent months in the U. S.
And in Europe have been tough for graphic paper. We have seen demand coming under pressure and we have seen pricing pressure as well. And then that's something that's probably going to continue for as we move forward. But Fortunately, we've been able to take our substantial costs out of our business to offset the impact of those and market forces. Yes, market conditions have helped us in terms of lower commodity prices, but we have been through a number of initiatives in the business being able to benefit the cost and through good work on the procurement side, reduce our variable costs.
Then if we turn to Slide 14, the, Europe first. And I'm pleased to say that, the margins continue to improve there. And we have seen despite all the difficult market conditions, we've been able to grow our profitability quite nicely year on year. The Specialty business had a very good quarter, up 15% and those are in markets that are growing between 1 5% in the various categories. So that's something that we, we will continue to do and try and end as we move forward.
And as I said earlier, all the good work done on cost is able to, has enabled us to offset the impact, the negative impact from market. Selling process. In North America, similarly, we have seen demand and prices coming under pressure. But again, we've been able to take costs out and And again, once again, grow the profits relative to last year dissolving pulp has been good and we'll talk about that a little bit more on the next slide. On the release paper side, it's doing okay, but the Chinese market continues to be tough there.
And then, the other positive aspect of our results is, again, on the specialty side, we started, expanding our C1S last year and which seems very nice year on year growth there. So that's we can give back an opportunity as we move forward. Then moving to Slide 16, the specialized areas market. Overall, it's been better than we had expected and certainly, better than when we last discussed the market 3 months ago, demand has been good. And pricing has has been a fatigue.
Not just for dissolving pulp, but a high correlation with the improvement that we've seen in cotton and VSF prices And clearly, in this period where the dollar has been relatively strong, any of the non U. S. Dollar producers has benefited. Our strategy here continues to be to maintain low cost position And then we do think that our growth opportunities as we move forward, this is a market that is increasing and and we want to preserve our position. So we continue to work with our customers to support common growth strategies.
Then in South Africa on Slide 17, the in addition to the dissolving part, our packaging business margins continue to get better. And, despite the timing of shuts, all that it was another good quarter for us. We were able to get better selling prices, which offset the, the impact of the weaker exchange rate on our raw material costs. So overall, we're doing well there once again. Turning to the strategy slide and I'll jump to Slide 19.
We have the 5 pillars which we've talked about in the past. And again, just to focus on the key drivers. Firstly, on cost advantages, It's something that we have worked on and I think we see evidence of all the good work that we've been doing and which we still think there are opportunities as we move forward. Some of the projects are listed. We've got new turbines going in at Saiccor and Seguela, which will improve our cost base We had the boiler upgrade area this year in Botswana.
Yesterday, we announced an investment and as Somerset Woodyard improvement and that will give us nice cost improvements as we move forward. We did talk last quarter about our global procurement initiatives, and we said that we wanted get at least $100,000,000. We, per annum savings and, we were on track to being able to achieve that over the next couple of years. So a lot of good work being done there. And then in terms of rationalizing our declining businesses.
This is really being realistic about our traditional graphic paper business. Strengthening where we have, good core assets in graphic paper where we do have cost advantages and we'll continue to invest at those mills and strengthen there. But at the same time, other assets, which are maybe less competitive, we need to look at opportunities to deploy those into other grades on the specialty front, which are growing and can generate higher returns for us as we move forward. In the short term and I'm on Slide 21, in the short term, we continue to focus on on cash, but at the same time, we have to grow the business and we've been making moderate investments. We do think there's further opportunities to grow packaging in South Africa, specifically in Botswana and together.
And we do have electricity opportunities down in South Africa. Seasonally, we on the dissolving pot side, both at Saiccor and in the Goodwana, we we think we can boost our production through some smaller projects. Those combined hopefully will give us another 100,000 tons, over the next year and a half. And then at the same time, globally, we are looking at opportunities to boost our specialty packaging. I mentioned that on the last slide.
And we have seen that we've been successful there and we will continue to grow further. Then on Slide 22, focusing on the balance sheet now, we obviously sold in store and Capecroft earlier this year generated cash for us. The next big milestone I talked about earlier is the 2017 bonds, which are $400,000,000, which we can call in April. And that will be the last of our what we would regard as our more expensive debt, it's about 7.75%. And compare that to the recent bond issues that we've done at about 4%.
So this will be the last of the more expensive ones. And certainly will put us in a much stronger position as we move forward once those are gone. And then on Slide 20, 3, we turn to the longer term and clearly as our balance sheet continues to improve and and we strengthen our position. We need to start thinking about the future opportunities. And I've talked about some of these, but we do think that the specialty packaging can go further it makes margins in the low teens and they are in growing segments and we think we have the skill set to be able to take advantage of that.
And then on the dissolving pulp side, the beyond the debottlenecking opportunities in Talaka we have in the short term that I talked about, we need to start thinking about longer term and future growth investments there. As that market continues to grow. And then at the same time, we've established this bio materials business and We think there are opportunities in litmus and sugars and we have some announcements in recent quarters about demo plants that we've established And we do believe that that will be a revenue source as we move forward. So turning to our outlook and to move to Slide 25. Overall, dissolving pulp remains positive.
As I said, it's in a better place. And then when we last spoke, So we're feeling pretty good about that. The drought conditions remain a risk factor for us. The good news is that We've had, excellent rainfall over the last couple of weeks and the river levels have risen and they're higher than they were a year ago. It always remains a risk, but hopefully this will see us through to the, until the summer rainfalls come.
Things are certainly a little bit better than they were a couple of weeks ago. The graphic paper markets, I've talked about a few times are weaker, but all the good work that we're putting in on the cost side is allowing us to maintain margins. Q4 is a better quarter for us traditionally and orders so far have been robust and looking good. The implications of Brexit are still being evaluated. Clearly, there will be lots of long term effects of what is unfolded in the short term, specifically to our UK sales if you convert those, those times sales back into euros, we estimate the impacts about 1,000,000 per annum.
Clearly, we're looking at ways to to compensate for that. And, and that may entail pushing up our prices, but that's something we're working on and, we will be taking actions very soon there. So based on our overall, so based on our current market congestions and assuming current exchange rates, we expect that EBITDA for Q4 will be in line of the same quarter last year. And I do point out that last year's Q4 was a very good quarter for us. The CapEx, as I said, $100,000,000, and again, focusing on maintenance and efficiency projects, And we expect to reduce debt further.
We'll certainly go below $1,500,000,000 by the end of the year. And hopefully, we'll be very close to that 2 times target by the end of the year. So yes, that's the slides in the invested debt. So operator, I'm going to put it back to you then for questions.
You. Our first question is from Nishar Amritonin of UBS. Please go ahead.
Hi, yes, good day everyone. Just two things from my side. The, I mean, paper market's clearly, clearly weak and probably weaker than you anticipated. Is that accelerating any plans you've got for your own mills, in terms of conversions and closures? And just the second thing is can you
just give us some color on dissolving pulp?
I mean, what's keeping the prices so strong, particularly considering the weak paper pulp prices?
Yes. Okay. On the first one in terms of the paper market Yes. I mean, we, as I said earlier, we continue to look at all our mills and all the machines and what's the best use of those assets. There are certainly a number of our machines and mills, which are very competitive and we will continue to invest in those mills However, there are other machines that maybe are less competitive.
And what we've been doing both in Europe and in the U. S. Is looking at these and seeing whether we can reallocate some of that production towards specialty grades We've been doing that already. We've been and I'll give you some examples. We've been doing it at Aimmune.
We've been in Maastricht in Europe. We've been doing it at Somerset in the U. S. So we'll continue to look for those opportunities, but it may entail in some time that we may do something similar to what we did at Alfeld PM2. 2 years ago.
So there may be investments going forward. And those would be investments that would give us very attractive paybacks and will allow us to strengthen our position in specialties. On the dissolving pulp, I will I'll let Gary expand further, but, there's a number of factors at play. The underlying demand for viscose has been good. There has been some inventory build up by the viscose producers as well.
So that's benefiting the benefit of those. Another factor that's contributed to the growth is that the competing products, cotton, polyester, the demand for all of those has been pretty good. Year to date dissolving pulp demand is up 8% this year. So it's performing better than we've got forecast of around 4% or 5% and pleasingly, it's up 8% this year. So it's certainly in a good position there.
Gary, is there any other items you want to add to that?
So I'll see how you on the key issues, as you say, the cotton market, it's about some dynamics in it, and it has created quite a good demand on BSN and fee for, the market is all in pulp. And also, I'm quite interested in the marketplace There's a plow cut to the lift. It's a bit under pressure. But as you said, the demand is still there, and you're getting full requests from all our customers.
Thanks, Gary. Okay, Michelle.
Yes, no. Thank you for that.
Thank you very much. Our next question is from David Wu of Merrill Lynch. Please go ahead.
Hi, good afternoon guys. Just three questions from my side. The first question is just on one of your main customers lending. Now they've been quite vocal on announcing some expansion plans for the sort of specialty fibers as well as on pulp I'd just like to get your sense of whether you see this as a risk or more of an opportunity. Then the second question is on group CapEx.
Just for the fourth quarter, that $100,000,000 in CapEx, if you can just perhaps give us a split of allocation by region, And then lastly, if you can just give us an update on your thoughts around a dividend and possibly reinstating it.
Okay. On the first question about lens and clearly, we can't speak specifically about a specific customer. More broadly, what I would say is that our customers are talking about growth potential and clearly, we have strong relationships with these guys and we believe that through those stronger relationships that we will be able to, boost our capacity as we move forward and take a, to benefit from the growth potential that there is we as I said earlier, we think the market is growing at around 4% 5%. We think we can through these debottlenecking opportunities in South Africa specifically, we'll add 100,000 in the next 18 months. And then beyond that, there will be a further dissolving pulp investment.
And we would not commit to such a large investment we weren't confident that we will, we'll be able to sell that product. So we do think overall it is favorable for us moving forward. The CapEx by region, I don't have that in front of us. I don't think as we go into that specific detail, just to summarize, it's obviously in the short term focused on, the efficiency projects and maintenance projects, we did announce yesterday the investment of the Somerset wood yard. And that's part of the investment in the last quarter.
And in South Africa, You know, we're starting work on the debottlenecking opportunities at Saiccor and Urvana. And we got the turbines at Nindudwana and sorry, together and Saiccor as well. So it's spread over, David, Then the dividend, we've been public before. We said we don't want to commit to a dividend until we get below the two times EBITDA and we've got to be confident that we can maintain it at those levels. So clearly, we're getting very close to those levels.
We need to take a look at the end of the financial year and make a decision based on that, but we wouldn't commit to a dividend until we're confident that we can keep it below 2 times EBITDA. But it is getting very close.
Our next question is from Sean Chungura of Arcum Capital. Please go ahead.
Good afternoon, Steve. Just two questions. In terms of the bonds in 2017, just to confirm what you were saying earlier, I'm not saying you're going to repay it from operating cash flow, so you're not going to raise any new debt. To sort of replace that by any means? And then just secondly, in terms of procurement benefits, obviously, we've seen quite a bit come through already, and so the Was it the line sort of blanked out earlier?
So I couldn't hear if that was related to the SEK 100,000,000. So I just wanted to get a bit of clarity as to how much more we can sort of see play out.
Yes, the answer to the first question is we would use our own cash flows to repay those bonds next year. There is no plans to issue a new bond. And then on the procurement, the savings that we've targeted, that $100,000,000 those are not in our numbers so far. Those would be additional benefits over 20172018.
Thank Our next question is from Brian Morgan of RMP Morgan Stanley. Please go ahead.
Hi guys apologies if you've spoken about this already, I missed the first part of the call, but in terms of the $100,000,000 that Sean spoke about. Have you achieved any of that yet? That's the first question.
No, that's what I was saying. The savings that we've achieved so far, are not included in the $100,000,000 target. These are further initiatives where we believe we can achieve some over Some of it will come in 2017 and the balance into 2018. So it'll be over the next 2 years, and it will add up to $100,000,000 per annum. At least.
But none of it's been achieved yet?
Correct.
Okay. And then the second question is, is just on the balance sheet. Cash generated in South Africa can be used to offset European and U. S. Debt.
Am I right?
Yes. 2,000,000,000 rand per annum is
Yes. That's right.
2,000,000,000 rand per annum, okay. Perfect. And then I'd just like to understand how Kieran presence, the threat is at cycle. Are you just giving us a broad risk here, or is it something that you're particularly concerned
Look, when we when we dropped in this thing 2 weeks ago before the rainfalls, we were concerned about and it's still a risk. However, the rainfalls we've had over the last 2 weeks has resulted in the river flows being much higher than they were a year ago. Clearly, those labels could go down but it's probably brought us time to get it's certainly to get us through the next month or 2. And so it still remains a risk factor and it's it's a dry conditions resume, ahead of the summer rains in that, that could put at risk, but as we stand today, we're fine.
Our next question is from James Hutchison of Barclays. Please go ahead.
Hi, good afternoon, gentlemen. Two questions from my side, please. Firstly, in terms of the contribution of specialty grades to European profitability, I know it's not something you've given historically, but Steve, you have highlighted a number of times in your discussion as being a highlight this quarter in particular and volumes up 15% or just really helpful for us to get a sense of what the base is and how material that is The second question is just coming back to dissolving pulp. You've spoken to the demand side of the equation, but do you have a sense of how much developing public capacities do you just come on the second half of this year and into next year? And then the final question just in terms of the typical working capital movements over the fourth quarter.
Can you just remind us typically what happens in terms of your working capital cut in wire flows over the fourth quarter in a given year? Thank you.
On the specialty side, it's not something we specifically disclose as of yet. And overall, in terms of our EBITDA contribution across the group, it's it's between 10% 15%. So that should give you a rough size. And that's something that we would want to go as we move forward. DWP expansions, I don't think there's any news to ones coming on board.
There have been ones, over the last few quarters. We've had Jari. We've had some paper coming to the market. Gary, do you know if any others are coming in the second half of the year?
No, I think 2017, you've covered most of them, Steve. Just 2018, there's some additional capacity that has been announced in the public domain, but I think you touched on it on next year.
Yes. If you look over the next 18 months, we are seeing demand growing at a faster place than supply. But there are some big projects being lifted for 2018.
Okay. Thank you.
And then Glenn, do you want to just chat about working capital in the last quarter In terms of working capital, our last quarter is the quarter that we have the lowest working capital over the year. And we usually see inflows between about $50,000,000 $50,000,000.
Great. Thanks again. Thank next question is from Ricardo Otabiani of Arias. Please go ahead.
Hi there. No, I just had a few questions. So you mentioned that your exposure to Brexit would result in roughly 1,000,000 per annum impact, was that on the EBITDA number?
Yes, that's right. And that's just a simple currency translation on our current billing sales.
Sure. And have another question.
Sorry, before we just leave that, but clearly, we need to figure out ways to compensate for that. And then that could involve price adjustment.
Understood. Yes. My other question was, so your stated leverage target is of 2 times. Do you also have a target in terms of becoming investment grade or that's not one of your targets?
Look, it's not specifically one of our targets to be at investment grade. Clearly, as our financial position continues to improve our our credit ratings should also improve. I think they should be better than where they are now, but that's margin. But it's not a target in itself, no.
Understood. So my final question is, I've correct in your presentation that you had a timing effect in relation to some maintenance shutdown in the U. S? And what is the EBITDA impact of this maintenance shutdown like this timing effect?
Yes, we actually I'll pass you to Mark, but we had the cloquet shut this quarter and including the line count mark. So maybe you just want to expand a little bit further there?
Yes. Sure, Steve. Thank you. Yes, we had, we do our annual pulp mill maintenance outage in this past quarter at cloquet every year, so that's the same as every year in the past. And then, on top of that, this year, we also had, lime kiln, a major project to rebuild and upgrade the lime kiln, the cloquet, that went on.
And then one other thing that was a little bit different this past quarter than prior years, we took a cold outage at our Westbrook Mill. So we had really 3 events, all maintenance related or maintenance slash upgrade in terms of the alarm kiln.
Understood. Is there an EBITDA number that you think do you have an estimate of what the impact was on EBITDA for this timing effect?
We typically see about a $7,000,000 to $8,000,000 expense on our annual outage at cloquet. Pretty typical. And then the line kiln and the Westbrook outage would add a little bit more cost to it this year versus prior year.
Understood. Thank you very much.
Thank you. Our next question is from Brian Nunez of Gramercy. Please go ahead. Hi. Good morning, Steve.
Could you just tell us when your next ratings reviews are with S And C And Moody's
Let's let me explain further. We were recently moved to a positive outlook by Moody's, won't we, Glenn? So you maybe just want to talk Well, we speak to our rating agencies on a quarterly basis. And, they indicate that into next year next calendar year, they'll be reviewing our status. And that's both for the month, yes, both standard and release.
Sorry, which time next year, this time next year or?
No, earlier, in first half of next year. Thank you.
And then one.
Operator, if that's everything, I'd like to thank everybody for joining us on the call this afternoon, and I look forward to discussing the business with you again at the end of the financial year. Thank you very much.
Thank you very much. Ladies and gentlemen, That concludes this conference. Thank you for joining us. You may now disconnect your lines.