Good day, ladies and gentlemen, and welcome to the SAP Q2 Results Conference. All participants are currently in listen only mode and there will be an opportunity for you to ask questions later you. I'm going to redo this introduction, if you don't mind, sir. Good day ladies and gentlemen, and welcome to the Safi Q2 Results Conference All participants will currently be in listen only mode and there will be an opportunity to keep you
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Please also note that this call is being recorded. I would now like to turn the conference over to Mr. Stephen. Please go ahead, sir.
Party conference alert has been reset. Thank you. Good afternoon, everyone, and good morning to those in the U. S. I will be going forward.
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Thank you for your patience, ladies and gentlemen. Please, you may sir, you may continue with your conference.
Thank you. As per previous investor calls, I will go through the investor presentation and I'll refer to page numbers as we go through. And I'd like to start on page 4 which is the highlights for the quarter. Our profit for the period was $100,000,000, which was more than almost double the $56,000,000 that we achieved last year. Earnings per share was $0.16 as compared to 11 dollars last year.
EBITDA was $195,000,000, that's up 15% on the $170,000,000 we achieved last year. Pleasingly, our debt continues to come down and we ended the quarter at $1652,000,000 That's a reduction of 264,000,000 from the prior year at the same time. On Slide 5, you can see the graphically, the evolution of our profits and they've been up considerably over the last couple of years. Both on an EBITDA and operating profit perspective. The net debt to EBITDA ratio has now come down to two point four times by the end of the quarter and our margins have improved considerably and we achieved a 15.1 percent EBITDA margin for the quarter.
Moving to Slide 6. You can see our earnings EBITDA bridge from 2015 to 2016. Unfortunately, I'd like to draw your attention to the price the favorable price and mix bar. We have higher selling prices in South Africa for both our dissolving pulp and our, packaging business. And at the same time, in Europe, our prices are still marginally above where they were a year ago.
On the fixed costs, you can see that there was a red block there. Primarily that relates to the fact that we had an extended shut at Ngodwana. Plus other shuts timing of other shuts as well. Exchange rate was negative. That exchange rate relates entirely to translation impacts from converting our European results and our South African rand results back into U.
S. Dollars. Moving to Slide 7, the, product contribution. Firstly, on the EBITDA side, you can see that paper it is a decreasing share, but paper still represents 54% of our overall EBITDA. So it's still an important contributor.
On the right hand side, you see the operating profit. And obviously on this side, the specialized sales represents a significant share at 3%. Moving to Slide 8, the net debt to EBITDA, I've talked about briefly, but this graphically just demonstrates how we have come down in the last few years. And we would expect that trend to continue in as we move forward and as we get closer to our 2 times net debt target. To net debt to EBITDA target.
On Page 9, we have the maturity profile of our debt The first one to call out here is the 2021 bonds. Those have been refinanced and pushed out to 23. The other major maturity we have in the short term or medium term is this 2017 bond. They mature next year. And we anticipate using our cash reserves and our cash generation to repay a substantial portion of that when they do mature.
Slide 10 just summarizes the key points from our recent refinancing, which we completed last month. The new bonds are at a rate of 4% as opposed to the 6.625 on the existing bonds. That's a savings of approximately $8,000,000 per annum. The costs incurred in that refinancing exercise were 1 off costs of $23,000,000. And just to call it out that those are or those will be in the Q3 numbers.
Slide 11 has the CapEx projections and it's consistent with what we've talked about in prior calls. We estimate that for the year, our CapEx will be approximately $250,000,000. Roughly half of that is maintenance the efficiency projects primarily relate to debottlenecking opportunities and the boiler upgrade at Ngodwana. Moving then to the divisions and talking about the product categories. Firstly, on page 13, we have a summary of some of the key paper market trends.
It's fair to say that the overall demand is still soft. In the European market, we saw things over the last 12 months or so holding up, although in recent weeks, we have seen a further slowing down in that market. The U S continues to be negative, but we've been able to manage within that environment and gain market share. Selling prices, on the coated woodfree side have been relatively stable. Coated mechanical has been under pressure from a demand perspective, albeit that prices have still remained reasonably stable.
We've been able to offset any market demand declines by taking costs out of the business. And we've also benefited from lower pulp prices and fuel and energy costs. Moving to Slide 14, the and taking each of our regions in turn. Firstly, Europe, another good performance from the European business. Volumes were up on a year ago.
And prices were still higher than last year. And that's on the back of the price increases we implemented last year, if you recall. Coated mechanical is still tough in a tough place and volume declines were greater on that side. We've been able to gain market share. On coated woodfree, we've been able to gain market share, which has helped offset the declines in coated paper.
Specialty Paper Packaging had a good quarter and volumes were up 19% on a year ago. And that's in a market or markets where our products are growing roughly between 1% 5%. Importantly, in that environment, across Europe, we've been able to bring down our variable and delivery costs 5%. North America has built on recent successes. As you know, at the start of last year, we had some tough quarters, but we've seen improvements come into the numbers.
Paper volumes were positive. And we were able to take significant costs out of the business. E heavyweight web demand was good. However, pricing for sheeted products and lightweight web was under pressure from mainly from imports. The dissolving pulp volumes were higher and benefited or because of the fact that we switched a little bit of extra production to help offset the impact from the drought at Saiccor earlier this year.
Moving then to specialized sailors on Slide 16. Overall, demand continues to be strong. Operating rates for VSF were pretty good. And we're of the belief that most of the swing capacity has already entered the market as hardwood paper prices have come down. Spot prices for dissolving pulp fell in the early part of the quarter, but we have seen some recovery in recent weeks.
Our position is obviously to maintain our low cost position and to work closely with our key customers as we move forward benefited for higher selling prices both on containerboard and dissolving pulp. It's important to call out that we did have the extended shut at Gudwana and the Saiccor shut also occurred during this quarter. Those occurred in Q2 sorry, Q3 of last year. There was a million negative impact related to that timing difference. We'll get the benefit in Q3.
Dissolving pulp volumes were better than the comparative periods and the selling prices for Q2 were marginally above Q1. On the packaging side, it's important to call out that there was a later onset of the citrus picking season and that did impact negatively on paper, paper packaging volumes during the quarter. However, now that the weather has changed and the season has picked up, we would expect some acceleration as we move forward. Slide 18 just demonstrates the 5 pillars of our strategy that we've talked about in prior quarters. I'll just talk about each of them briefly in turn.
Moving to Slide 19. We continue to focus on lowering our cost base. And I think we've done a lot of good work here across the group to take out costs and is one of the main contributors to our our successful results. More specifically, some of the projects that we're working on, we've got the big Well, we've talked about in Goodwana shut for the boiler upgrade. And that's putting it as a position for future debottlenecking opportunities.
At the mill. We also have a global procurement initiative underway and that's work in progress and we're targeting at least $100,000,000 savings per annum. Moving to Slide 30. Rationalizing declining businesses. A lot of good work has been done in the last couple of years.
We've simplified the South African business. We've got more recently got out of some niche grades and out of recycled paper. 2 of the most. And what's key here, particularly in the the graphic paper markets in U. S.
And Europe is we have to anticipate demand and manage our capacity accordingly. On Slide 21, in the short term, we continue to focus on debt reduction, but within that environment, we do see moderate growth opportunities and be moderate investments associated with that. More specifically in the in the short term, I've talked about it already, but there is an opportunity to debottleneck at in Guidwana and Saiccor, we estimate that will give us another 10% volumes in for dissolving pulp in from a South African base. And there are smaller energy opportunities in South Africa as well. Globally, we continue to look for opportunities to, reallocate some of our productions from graphic paper.
And grow our specialities business. We've been reasonably successful at that and we will continue to focus on that as we move forward. Then moving to Slide 22. As I said, our primary focus in the short term continues to be strengthening the balance sheet. We We saw the 2 mills being the sale of the 2 mills being completed earlier this year and the successful refinancing that I've talked about earlier.
Continues
to be
a strong focus on working capital as well. Then as we move forward on Slide 23, And as we get closer to our debt targets, we need to think about ways of growing our business. And we do think there are opportunities to expand dissolving pulp further specialty packaging and we've got some nice projects on the bioproducts side. One of which being the that the Necessarial is what we've done and we've got that pilot plant underway. Moving to our outlook And firstly, on Slide 25, specialized sailors continues to benefit from the rising average dollar prices and the weaker exchange rate, run dollar exchange rate.
Demand remains good. We're fully sold out and the outlook for this business is positive. In North America, variable costs are down significantly, whilst volumes are stable and we've been gaining market share. The European business continues to improve good operating rates for particularly for coated wood free and lower variable costs. And encouragingly the specialities is showing strong growth.
Based on market conditions and assuming current exchange rates, we expect the growth in second half EBITDA to be in line with the growth in the first half EBITDA. We expect a strong increase in our earnings, bottom line earnings based on this improved in profit sorry, based on this improved operating profit and the lower finance costs, those will be somewhat offset slightly by the higher taxes that we pay on the profits. Net debt will continue to come down further and we should get very close to our target of 2 times net debt either later this year or early in the new financial year. Operator, I'm going to put it back to you for questions. You.
You. Our first question is from Roger Spitz. Please go ahead.
Thank you and good afternoon. How much of the significant improvement in specialized cellulose EBITDA was driven by the weak rand versus the strong U. S. Dollar?
Look, if you're comparing it year on year, the round is obviously significantly weaker than it was a year ago. The dissolving Pulp dollar price, our average dissolving pulp price was marginally up on an average basis compared to Q1. And then obviously, from a cost perspective, we were able to control our costs. So yes, the weaker run did contribute significantly, but there were other factors at play as well.
I'm looking at Slide 16, the very last bullet point, investigative Jason, dissolving wood pulp grades. Can you elaborate on what you mean by that? For instance, is this referring to perhaps considering looking at the acetate and or ether grades of specialty dissolving wood pulp?
I'll let Gary expand further. But yes, we continue to be looked for up opportunities to make higher alpha products. The currently we're predominantly in techstars. But we continue to explore different avenues. Gary, do you want to expand further?
Thanks, Steve. I think as Roger has highlighted, it is work happening in ethers and acetate and also in the pharmaceutical grades plus improvement on our current grades. So that's where the focus is going forward.
And just a last one on, Alb, on that, how I know virtually all of it goes to viscous now, but how material are you in the ethers and or acetate grade right now in terms of volumes actually put into the market?
Roger, it's very small. It's almost predominantly, in the viscospace takes down.
Thank you. I'll turn it over.
Thank you very much. Our next question is from Nishal Ramlutani from UBS. Please go ahead.
Hi, guys. Good day, guys. Just a couple of things from my side. The first one is, you indicated North America prices were softer on the paper side. Can you maybe just give a number to that?
And then on Europe, do you think that paper prices will actually follow input costs down? And then just on specialty paper, maybe just some color in terms of how you received that could grow in specialty paper?
Okay. I'll give a brief answer and then I'll hand it over to each of the regional guys. Firstly, on the U. S, on an average basis, this is just our all in average price for all our product was down about 4% year on year. But if you recall, after the softness that we saw in the early part of last year, we did have to pull back prices a little bit.
Mark, do you just want to expand anything you want to add to that?
Yes. Thank you, Steve. Yes, It's predominantly in the, in the sheet area and the lightweight web, where we're seeing a little bit of market softness and also combined with a lot of imports coming in from, from, Asia and Europe, making that market a little bit more sensitive on price. And as you mentioned, we're down about 3% 3% to 4% dependent upon the grade in those segments.
Thanks, Mark. The second question initial, I think, was you asked about whether Europe could look at lower prices as we move forward. Up till now, we've been able to hold our prices in Europe. And in fact, they're up on a year ago. Clearly the market's a little bit soft now, but, we've been able to maintain our prices so far.
Bear in mind that we have been able to gain market share and at the same time, a lot of capacity did come out of the market over the last couple of years. I'll let Barry expand a little bit further.
Yes. On the price side, I think you've got more to said it all, Steve, there has been remarkable stability. I think possibly also due to the fact that the contracting season for mechanical papers is over. So you see a stability for 6 months. And the commercial print market has been relatively stable as well.
So there have been, from that point of view, quite a good period. As far as the specialty growth is concerned, result. We have seen 2 things that work there. The first is that we have been able to grow outside Europe. So we've got quite a bit of new business coming in from export market which we didn't have before because we just didn't have.
And the second reason is the fact that the qualification periods for a number of these customers is now over. So we are the products we're getting qualified, they have been qualified, and we're just taking up a greater space in that market area. Of course, the overall markets, particularly for release liner and for Flexback, are growing very nicely.
Okay. Thank you.
Our next question is from James Hutchison from Barclays. Please go ahead.
Hi, good afternoon gentlemen and congrats on another set of strong results. A couple of questions from my side, if I may. Firstly, just on, any color around how much dissolving pulp produced a clicker over the quarter, maybe just as a percentage of capacity and presumably that should normalize over the course of the third quarter. And maybe pushing it, but any indication of the EBITDA contribution to North America from dissolving pulp in the 2nd quarter? And then just in terms of your outlook for dissolving pulp prices, you mentioned in the presentation that discussed APO5 operating rates are currently higher.
Also most of the swing productions come back in dissolving wood pulp given the differential with the hard grade, hardwood pulp. And in addition to the swing production, how much new capacity is slated for 2016. I mean, we've seen estimates for around 440,000 tons per annum. And given that where is the price supports implied by your guidance for step pricing for the rest of the year? Thank you.
Okay. In terms of the dissolving pulp for cocaine, we don't give that specifically. However, overall, it's broadly it's broadly in line with where it was, a year ago. It's marginally up. And bear in mind, we did take it down a little bit and we brought it back up.
So there's not been a significant shift year on year. Jim, your second question, what was that again?
Just my outlook for dissolving pulp prices. I appreciate that to discuss Stable fiber operating rates have been relatively high in China. And you've mentioned that most of the swing production has now come back on. But have you got any sense of how much new capacity is slated for this year? Think RISI's got an estimate of around 440,000 tons for the full year of new capacity coming on.
And just given that, where is the price supports implied by your guidance for flat pricing coming from?
Yes. Look, we, you're right. That number is pretty close to the estimates that we have. And we, we do believe it will be about 400,000 or 500,000, but bear in mind that the demand side is also increasing. And for 400000 or 500000 is about 5% increased supply.
And we are seeing similar increases on the demand side as well. In terms of pricing going forward, bear in mind that when we set our prices for dissolving pulp, for our contractual prices, it's done, based on the price, in the last quarter. So we already know what the Q3 number should be. And we're now well into this quarter. So we're getting a feel for what the Q4 number should be as well.
Looking at the underlying fundamentals, you're starting to see a pickup in polyester prices. Cotton prices have risen recently as well. And as I said earlier, the viscose operating rates are pretty good. So the underlying fundamentals are probably better than they were a few months ago. Nevertheless, based on our outlook statement, we believe that the estimate of the price being roughly where it is at the moment is a fair assumption.
Gary, do you want to add?
Steve, no, I think you covered all the aspects.
Thank you.
Thank you very much. Our next question is from Bill Hoffman from RBC Capital Markets. Please go ahead.
Thanks. I've been having some technical difficulties. I apologize if this has been asked before, but just talk a little bit about in the dissolving markets? How much swing capacity you see coming in just because we obviously with additional growth in hardwood capacities, we would expect a further push for the swing producers. So I just want to get a sense of what the impact of that is having on the markets.
The estimate of swing capacity is about 2,000,000 tons. Look, that includes our own Clocaymo. And it does include some of the fluff pulp dissolving pulp swing producers. Based on our understanding of the market, we are of the belief that at least 1,000,000 of tons of debt has already swung back to dissolving pulp. And bear in mind that we're part of it.
And as I say, some of the other producers are making fluff pulp and they're not anticipated to switch back. So in summary, we believe that the vast majority of the production that can swing back has already swung back.
Okay. Thank you. And then with regards to the papers markets, the switch to the specialties, can you just give us some idea of how much specialties you have in both Europe and North America at this point and maybe what you can expect to get to?
Obviously, in Europe, firstly, we have the, we have our outbound model that we've already converted And then we we're looking for opportunities where we've done a little bit of work at, ing in and Maastricht to reallocate some of that production. And we'll continue to look for other opportunities. In the U S, it's relatively small. In the U. S, it's only about 10% of our production.
And in Europe, in Europe, it's about 15% to 20%.
And I guess just in the U. S. As you look for the difficult market conditions and the softness in demand, where do you think you can take that 10% over what kind of timeframe?
Yes. As I mentioned on the introduction, we continue to look for opportunities at our mills and that's an ongoing process on our part. So it is work in progress, but, certainly at our Somerset and Cloke mills, we continue to look for opportunities. Mark, is there anything more you want to say there?
No, Steve. I think, as you said, we, we have the ability to swing more more time and more tonnage over to the specialty markets and in the areas that we've already qualified grades, and we're looking to grow that over the next year.
Okay. Thank you very much. Thank
you. Our next question is from Victoria Lambert from Bank of America Merrill Lynch. Please go ahead.
Hi. Thank you for the call. I have two questions. Firstly, what opportunity is there to repay your high yield bond? And when is this callable, how should this benefit net finance costs?
And secondly, do you think that fine paper and chemical silulose prices will come under pressure given the deterioration of hardwood prices?
Okay. I'll take the second question first and then I'm going to hand over to Glenn to talk about the bonds. I think we've covered the dissolving pulp in quite a bit of detail already on the call, that we expect that we think it's going to be stable in the next few months. On the paper side, Mark alluded to the fact that in North America on the sheet side, prices have been under a little bit of pressure and that's the reason why you will see a little bit of decline year on year. On a in Europe paper prices, have been stable and we haven't seen declines as of yet.
And clearly, that's something that we would want to hold on to as long as possible. So so far, okay, in the European environment. In South Africa, on the packaging side, we've been able to put through reasonable price increases to offset the impact of the weaker rand. Now, Glenn, over to you on the first one on the bonds. All right.
Subsequent to the quarter end, we completed the refinancing of our 2021 bonds and replaced them with the 7 year 2023 bonds at a quick one of 4%. The 2021 bonds vehicle window became available in April of this year. We have 2017 bonds, that have a call window becoming available April next year. And as Steve mentioned in his introduction that, will be looking to refinance that predominantly with available cash reserves. Repay.
Repay. Sorry.
Thank Our next question is from Lars Kjellberg from Credit Suisse. Please go ahead.
Good afternoon. Just coming in back to your guidance, What I suppose is happening, you've got a sequentially somewhat stronger brand you will have, I guess, lower price realization in dissolving wood pulp and some pressure on prices. So how do you what factors are sort of offsetting those negatives? Because it sounds like you believe H2 is going to be relatively similar in absolute quantum to what you had in the first half of the year?
No, no, just to be clear, Lars, it's not an the quantum, it's in growth. Our guidance is I understand that. Yes. Okay. Dissolving pulp is obviously a big part of our business.
The prices are set a quarter in arrears. We already know the prices for a lot of our products. In Q3. Q4's prices will be set based on the average prices in Q3. We're already halfway through that.
So in summary, we probably know the selling prices for of our remaining years dissolving pulp for three quarters of our dissolving pulp. So that gives us a high degree of confidence on the dissolving pulp side. In South Africa, a lot of our prices are set annually. So we know the selling prices. And then in Europe, as I've indicated already, the prices are still holding up.
We've been able to deliver at current prices levels. We're already, through halfway through May And looking at the outlook for the volumes and the order book, we're still pretty confident that we can maintain those levels. In the U. S, yes, there will be slightly lower prices on the sheet side. But again, we have a reasonable window of looking at the markets over the next couple of months.
At the same time, a lot of our higher profit is coming from lower costs. So we know what our pulp prices are our purchased pulp prices are going to be over the next couple of months, and similarly energy prices. So we have a fairly high degree of confidence in the margins that are built into our estimates.
Understood. And just to be precise, what sort of run rate are you factory and you were about $15,800,000,000, I suppose in fiscal Q2. What are you what are you not using for that guidance? Just to be clear.
We are 1475.
Very good. When you look at the procurement savings that you're talking about, which are very significant come 2020, Is that something you can report today that you've seen on a benefit from or is that an entire value still to come?
That's entire value still to come. We'll start to see a little bit of coming into Q4, but mainly into the new financial year in 2017.
In terms of hardwood, pulp, you're talking about securing longer term, increased supply from hardwood in South Africa Is that what the ultimate target then to further expand the solvent wood pulp production? Yes. And when can we if that is indeed the case, when can we actually see that happening?
Yes. I'll let Alex expand a little bit further. In the short to medium term, we want to boost our dissolving pulp capacity in South Africa by 100,000 tons. And that's sprayed across Ngodwana and Saiccor. We are currently, or we have secured the wood supply to be able to do that.
And now we must do the debottlenecking projects. Longer term, we continue to look for opportunities and I'll pass you over to Alex.
Thanks, Steve. Just in terms of the short term 100,000 tons you spoke about, that will come in next year and in 2018. And then the opportunity we're looking at is anything between 200, up to 500,000 tons of expansion in South Africa and at this stage, we're evaluating different opportunities, at our various sites.
It's just it's important to point out that that's a 10 year 7 to 10 year, long term plan that we're looking So we haven't committed to anything there, but clearly, if the market continues to grow at 5% per annum and our customers continue to grow then we would want to match the growth. But there's nothing immediately planned for that.
Just one more question to Barry. When we talk about weaker paper markets in Europe, what is, in your view, causing that? Is that a function of the strong euroversus the dollar race as something more domestic that you're seeing in your business?
I think it's a number of things. First of all, you've got
a very strange May month this year because of late Easter. You get a bunch of holidays, public holidays, bunch together That always has an effect on the printing industry, but they tend to undertake time off and that has had the short term effect. In fact, if you look at the softness that there is, it tends to be in the export markets rather than in the European market at the some uncertainty in Europe, but I certainly don't see a large softening going on in Europe.
Thank Our next question is from Wade Napier of Avior Research. Please go ahead.
Hi guys. Thanks for the call today. Just a couple of questions from me. Can you give us more color on your short term tax guidance as well as your medium to long term tax guidance for by region? And then just more of maybe a strategy type question.
As you guys are transitioning toward from graphic paper, towards specialties I noticed, actually transitioning from your coated wood free moles in Europe. Why aren't you doing it from your coated mechanical moles given that that's a weaker market? Thanks very much.
All right. Just as far as the short term tax guidance is concerned, our rates for the 6 months where we have a average rate of 28 percent and we pay, tax according to that rate, so 28%. In North America, we've got an average rate of 38%. Because of certain nondeductible expenses, we're above that, slightly above the 40%. And in Europe, we've got significant assessed losses, which we're utilizing and that rate comes down quite substantially to, between 15% 18%.
So overall, going forward on a long term basis, we would anticipate that our rate overall rate would be around the 26% to 28%. Thanks, Glenn. And in terms of your second question, let me be clear that we are open minded in terms of how we think about our capacity in the European most. In recent years, obviously, we converted also we got rid of NY Meghan. And more recently, we had the Houston volumes coming back to us.
So that enabled us to fill the move, on the mechanical paper space. Clearly with that market in decline, we need to be open minded. So it's not just coated woodfree. We look at it. It's just been at that point in time that we we've had the opportunities.
Maybe I don't know if there's more you want to say on the mechanical side?
I've answered it, Steve. That's it.
Thanks a lot. Thank We will pause a moment to see if we have any further questions. We do have a follow-up question from James Hutchison.
Hi, James. Just two more questions from me, if you don't mind. Just firstly, just to go out to get priority on the maintenance outages at some good one. Just to confirm that was contained to the second quarter. So no spillover into the third And then can you just remind us what the maintenance program for the remainder of the year looks like?
And then the final part of that final final question is just on the refinancing of 1,000,000. Does it that gets stripped out of the adjusted EPS number or does it get included?
The second one is it does get backed out. We treated as a special item. On your first question, there is a little bit of the Ingridwana shot in the third quarter. But bear in mind, we had it in the third quarter last year. Other than that, and what we've called out, the million impact everything else is in line with last year.
Okay. Thank you.
Thank you very much. So we have no further questions in the queue. Do you have any closing comments?
No, operator. Thanks. I would like to thank everybody for joining us and we look forward to having another update call at the end of Q3. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of Zapier, this concludes today's conference. Thank you for joining us and you may now disconnect your lines.