Good day, ladies and gentlemen, and welcome to the Sappi Limited First Quarter 20 15 Results Conference. All participants are now in a listen only mode and there will be an opportunity for you to ask questions after today's presentation. Please also note that this conference is being recorded. I would now like to turn the conference over to Mr. Steve Beney.
Please go ahead, sir.
Thank you. Good morning and good afternoon. I'm going to go straight to Slide 4 of our presentation pack that was loaded on our website. And the first item is the highlights for the quarter. Our profit for the period was $24,000,000 compared with $18,000,000 for the same quarter last year.
Similarly, excluding special items, was up from $0.02 last year. EBITDA, which is an important measure that we measure ourselves against. And we generated $140,000,000 and that's broadly in line with the $147,000,000 that we achieved last year. Net debt was 2040,000,000, and that's a significant reduction of 1,000,000 from a year ago. Moving to the next slide.
You can see our trends with regards to EBITDA and operating profit And you can see that typically Q1 is a relatively smaller quarter. A big our most important quarter is Q4. And Q2 as well. Overall, the trains are in line with last year, and we would expect that momentum to continue through our the rest of the EBITDA in 2014 with our EBITDA in 2015. Firstly, you can see a negative in there coming through on sales volumes.
And that's all associated with our CapEx projects that we had underway and that impacted volumes in each of the regions. We had some favorable price movements and mix improvements which boosted our profitability. Then on on the cost front, payable and delivery costs were up slightly and that's why it's a red bar. And that's associated with the higher pulp costs, 1,000,000 Europe and also higher wood costs in the U. S.
Thank costs came down and we continue to do good work on that front. And then we had an overall net impact related to exchange rates negative of $11,000,000. The next slide shows the product contribution split. The paper and specialized sailors and the trends are broadly in line with what we've seen in recent times. EBITDA roughly half half between the 2, and obviously that's reflective of the cash generation of the respective businesses.
Operating profit get or slanted towards specialized sales at 76% with paper 24%. On the next slide, we have our net debt to EBITDA development. And you can see that net debt to EBITDA rose slightly during the quarter to just above three times. That's that's to be expected. We always have a seasonal flow of or a seasonal outflow of cash related to working capital.
In Q1, you'll see that trend in prior years as well. Over the course of the rest of the year, we would expect that trend line to start coming downwards and we'll end the year below where we were last year. Our maturity profile for our debt is reflected on the next page. And you can see that there's no significant debt maturing in 2015. 2016, we've got our securitization structure, our international securitization structure.
We don't anticipate any problems that and we should be able to roll that. And then we start to look beyond 'seventeen onwards related to our international bonds. Some of those, have call window coming up soon. And, we'll talk about that a little bit more later. Our CapEx development is shown on the next slide.
And we estimate this year that our CapEx numbers will be just below $300,000,000 split roughly half off between maintenance CapEx and expansionary CapEx. But I guess the that term expansionary quite loosely. It's mainly linked to efficiency improvement projects, some of which you saw coming through in the first quarter. Turning our attention then to the divisions. And on Slide 12, we have Europe.
On the left hand side, you can see the margin development. And if you look across the last 6 or 7 quarters, we've seen significant recovery from the lows of mid-twenty thirteen. Obviously a lot of that's down to the good work done on the cost front in the business. Q1, you would expect to be lower than Q4, for the reasons that I described earlier that it is a typically a lower volume quarter. So we would expect that trend line to continue in the same direction.
On the top right hand side of the page, you can see the demand development, for our key product categories, the blue bars coated wood free radars coated mechanical. And you can see that in 'fourteen, we did see a slowdown in demand declines. And that's helped us from a pricing perspective, particularly with regards to coated woodfree. Going forward, we have the RECE forecast they're about 4% negative. We our belief is that coated weekly would be a little bit better than that.
We estimate about minus 2, but on the mechanical side, it's probably certainly in the short term like it should be worse than that. In terms of the performance, we saw better sales prices coming through on coated wood free and the good work done on fixed controls has helped to improve performance. The weaker euro has negatively impacted or affected U. S. Dollar denominated variable costs, and that's mainly pulp for us, which is still very high.
However, we did see benefits coming through from improved export margins because of the weaker euro. Good news is on the specialty business at our alfelfelt mill. We've seen improved mix there. And we've been able to achieve higher pricing and we're pleased with the progress that that business is making. Perhaps the biggest headache we've got in Europe at the moment relates to Crotty Mechanical.
The market is very tough and, that's not unique to Europe. It's globally. And as I said earlier, that's where we anticipate the most demand decline will come from. The numbers that we included include a 1 off charge related to the Gratkorn project underway at 1,000,000 1 off impact. Moving to North America.
On Slide 13, we have a similar graph or we have similar graph and as you can see, 2013, sorry, 2014 was a tough year for North America. We as the year progressed and and we moved into Q4, we saw a significant recovery. Q1, although it's down on Q4 of last year, bear in mind that it does include the 1,000,000 once off impact from the Somerset project. So the underlying trend for the US is also moving in, in the right direction as well. Demand development is on the top right hand side, and you can see from this that demand declines have been, in recent years, have been a little bit better than you saw on the last slide in Europe.
Down about 2%. Interestingly, in in recent times, more recent times over when we compare 15 to 14, we've actually seen a flattening of that. And that's enabled us to get some price increases, through in the US and, and, we've been able to successfully implement them. Going forward, as we project, we anticipate between 1% 2% the decline is as well. The improvement came through from improved sales prices, which I've talked about, and and and the mix, dissolving wood pulp sales volumes at cloquet were impacted by the fact that we did switch some of the production back to paper pulp for our own use and then that boosted profitability.
Good work done on fixed and variable costs and they're flat, to down on last year. And that's despite the extended shut at Somerset, which would have had an impact on costs. We have a headache at the moment, a short term headache, which related to our release business, and that's been impacted by weak demand in China. And, the currencies do have an impact because we convert our European sales back to dollars and that has a negative impact on profitability. Turning to South Africa.
On slide 14. On the left hand side at the top, you can see the very strong progress that we've made in this business a profitability perspective and, margins have been progressively increasing now for some time. The, dissolving pulp margins, as you know, have been relatively stable. And a lot of this improvement, I'm pleased to say is coming from our packaging business, which is only a couple of years ago was in, was actually making operating losses is now and move significantly upwards. The graph on the right hand side has the dissolving wood pulp demand.
And you can see, in recent times, demand has been rising at 7, 8% levels and and has been strong. And even if you look at the long term forecast going ahead, we would expect that to continue. So the long term fundamentals remain very strong, for the business. The profitability improvement came from a number of sources. Firstly, the exchange rate gains that we do get on our export sales locally in South Africa, we got improved pricing on our packaging grades and there was some savings on our variable costs.
The dissolving pulp volumes, and the round pricing for dissolving pulp improved year on year. Important to note that in Gudwana, we did have, some boiler tube leaks in December. That didn't have an impact on sales. But it did have a negative impact on production. So on Slide 15, if we had to summarize Firstly, on the global paper market trends, supply and demand, I think what we're seeing is that closures have broadly offset the demand declines.
I've talked to this that coated woodfree demand declines appear to be moderating still downwards, but they are moderating. The biggest concern at the moment is on the mechanical side. In terms of costs, and selling prices. Cotted wood fee selling prices have moved up both in the US and in Europe, and and and and certainly that's encouraging. However, on the cost side, we have seen a strengthening of U.
S. Dollar, and that has had an impact on on certain of our input costs. However, oil and and and chemical prices have have been coming down as well so that we we do get benefit there's a bit of a mix there, as you look at those issues. So our strategy is to implement price increases when the market allows we'll never lose sight of the fact that we have to be amongst the lowest cost producers and there will be a continued focus on both fixed and variable costs. And we'll continue to reduce capacity in line with those demand declines.
On Specialized Salos, terms of supply and demand, we have seen a significant slowdown in capacity additions. There's been no new announcements in recent months. And the demand growth is normalizing as we see competing fibers, pricing declining. However, as I said, the long term prospects are still very good and we've talked about the 6% type growth going forward. From a cost and selling price perspective, selling prices, have come down probably more than we would have expected.
However, input costs have declined, and that's particularly for producers with non US dollar cost basis. And, and, and, obviously, with our having a strong presence in South Africa, we've been able to benefit from the weaker rent. Our strategy is to manage capacity strong focus on production and to continue working very closely with those key customers. Moving to Slide 18. This is a slide you will have seen previously and just outlines our strategy as we move forward.
The 3 short term pillars achieving cost advantages, we're rationalizing declining businesses and going through moderate investments. I have slides later, which I'll talk to each Ultimately, we want to focus on those, but our ultimate goal is to strengthen our balance sheet reduce our net debt and that puts us in a much stronger position longer term to grow the business. Slide 19 and talking to each of those 3 pillars, firstly, achieving cost advantages, We will work to lower our fixed and bareboat costs, increase cost efficiencies and invest for cost advantages. And we've just listed a few of the projects And I've talked about them on the call. There's the Somerset line and boiler gas conversion project.
At Gratcon, the paper machine of pulp Mill upgrade, the Cutmini power plant investments, and a bunch of initiatives that we're doing with global procurement. In terms of optimizing and rationalizing declining businesses, we spend a lot of time thinking about our future outlook for demand, and we recognize that graphic paper will continue to decline, and we will manage our capacity around that anticipated demand and we will continue to focus, on strengthening our leadership position in those markets. There's some smaller examples there, but we have stopped, coated paper production in South Africa recently And in Europe, we continue to monitor that decreasing demand that I talked about. We The 3rd pillar is on page 20, which is growing through modern investments. We will make smaller investments in existing areas we think the strong potential growth and quick payback with a strong focus on, pulp, specialty grades, packaging papers and and and probably, within South Africa, the energy opportunities that are out there for us.
Some recent examples are the investment in lightweight recycled packaging paper at Entra, and then we made some small upgrades to our capabilities at Toguela and Gudwana on the pulp side. Ultimately, we want to strengthen our balance sheet. The next 2 years, we think it will come down significantly. The net debt We want to have a cleaner's balance sheet, which will allow us to grow in adjacent businesses. So again, we have examples.
We continue to work on that 12 of forestry deal, which we talked about last quarter, that's an ongoing process. And hopefully, we can secure that as we move through the rest of the year. And then there's a lot of opportunities on the debt side to repay some of the bonds and refinance some of the more expensive stuff with with significantly lower interest rates. Finally, on the outlook Moving to Slide 22. As I said, the graphic paper markets remain challenging but they are a little bit better than our expectations, last year when we built our budgets.
And that's particularly true in Europe, and in North America. Demand has declined at a lower rate and our pricing expectations have been met. The exchange rate volatility, may affect, in a positive manner, would affect selling prices, particularly in Europe, Dissolving Wood Pulp markets have been under further pressure and and, yeah, prices have probably gone in dollar terms have probably gone a little bit lower than we expected, but that's alongside, viscos, polyester, and cotton. However, I should point out that these lower prices are likely to be substantially offset by the weaker randdollar change rate. And as we've seen today, the rand has depreciated significantly further as well.
So that will help us a little bit. The currency movements that we've seen both with the rand and the euro, the euros depreciated some 20% over the last year or so. That will have a both will have both a transactional and translational impact on our numbers the weaker euro and Rand relative to the US dollar does support, local pricing selling prices, and that tends to offset input cost increases. As discussed last quarter, we are evaluating opportunity to utilize our cash resources to refinance a portion of our debt in order to lower our future interest costs And we expect to reduce net debt levels to, by the end of our 2015 financial year, to below that of 2014. We're still on track to doing that.
Nothing has changed there. The 2 15 performance an operational perspective will be largely in line with 2014. The improvement that we're seeing in the paper business is expected to be offset by the lower dollar dissolving pulp prices and those one soft impacts that I talked about earlier related to Grafcon and Somerset. The other thing to bear in mind is that at current exchange rates, we have to translate our European and South Africa and ran numbers back into dollars. And when you do that conversion, they naturally would be negatively impacted by the currency movements.
So
that
everything in the presentation. We want to hand it over
session. Our first question comes from Carolyn Learmont of Barclays.
Thanks very much. A couple of questions, please. In terms of cloquet, what proportion of dissolving pulp capacity has been switched into paper pulp. And what has been the incremental margin impact of that of that switch Secondly, you've explained EBITDA margins in in Europe, impacted by the Gratkorn outage. But even adding that back, EBITDA margin seems to have contracted.
So presumably, that's around the the currency impact. So maybe can you go in to a little bit more detail of how it works in terms of higher pulp prices versus, the paper exports impacts. And then, in terms of your stated aim to to redeem some of the debts or or pay down some of the debt. What level of of liquidity do you need ideally in the business in the longer term, in terms of, you know, potential debt levels, longer term. And then, just very quickly, would inventory levels in North America change since the end of the quarter?
The boiler leakage in Gervana, just to check, I think you said it didn't impact, sales. In the quarter, sorry, will it impact sales in the next quarter?
Yep. Okay. That's a few questions. Firstly, on the switch between dissolving pulp and paper pulp, we are approximately just above 200,000 tons of dissolving pulp and 150,000 tons of kraft pulp, in terms of the volume. In terms of impact on profitability, it's not a significant impact.
That's not a number that we've been disclosing to the market. The European margins, Caroline, what you're forgetting is it's Q1. So you can't really compare it to Q4. So you've got to compare it to similar quarters in last year. So the underlying trend in the business are better and continue to be so The next question relates to the redemption of the debt and how much cash we need to hold, and I'll let Glenn, our CFO, handle that one.
We finished off the quarter with cash reserves in excess of $300,000,000.
We have available facilities as far as our RCF is concerned of 1,000,000. We're busy renegotiating those the RCF levels, to levels higher than the 350 that still needs be finalized. But as an ongoing on an ongoing basis to take account of the volatility that we experienced
on the working capital, we need cash reserves. We feel comfortable with cash reserves of between $150,000,000 to $200,000,000. Thanks, Glenn. Mark, do you want to just talk briefly to the wood inventory?
Yeah. Sure. We're, we're gaining some good ground on the wood inventory from quite a low point a quarter ago where we were. We've had good harvesting go on both in the Midwest and up in the northeast of the states. Which is typical with winter.
And we're making ground. We're not where we would like to be normally at this point in time because of, the how low we were coming into the winter season, but we're making good progress and pretty, pretty comfortable that, we'll be coming out of the winter harvesting season very close to our targets.
Okay. In terms of the thanks, Mark, in terms of the boiler good one. As I said, there was no impact on sales for Q1. Alex, you just want to talk for the remaining quarters for the rest of the year, the net impact will be about 10,000 tons of sales.
Great. Okay. Thank you very much. That's helpful. Thank you.
Our next question comes from Nishal Rumlop of UBS. Please go ahead.
Hi. Yes. Good day guys. Just a couple of questions from me if I may. Just on cloquet, considering that you're now running a hardwood pulp, will we see an impairment on cloquet?
Then also slunk, okay, just what sort of level would dissolving pulp prices need to increase by it, assuming current target pulp prices to actually make you switch back to producing full disordered pulp from that mill. So even if you give a percentage sort of increased 10% of that sort of impact. And then just on lower oil prices, I mean, just give us some guidance in terms of what is the impact? I know you mentioned a few things in the presentation, but how much more can we see, how much of oil price is your cost base actually exposed to? And then just finally, I see Eskom, they are looking for bids in terms of electricity generation from different companies.
And then, I mean, you'd be one of the suitable candidates. So I just wanted to understand if you are actually involved in that.
Yes. Okay. Thank you. In terms of the impairment, as I said to you earlier, I I the long term fundamentals are, still good for that business and we don't expect any impairments related to that. Bear in mind, this is a competitive strength, the fact that we can switch between the 2, and that helps helps boost our profitability.
In terms of what, how much does it need to go up for us to go back to, dissolving pulp, you can't really quantify that because there's too many moving parts there. You you you've got, you've got hardwood craft pulp price is dropping. And and that may help the the switch backwards. So we we we can't we can't give you number there. But naturally, the opportunity in the long term we think will be to switch back.
On the lower oil prices, we've done some high level maths there, and we estimate it's probably smaller than you would expect. It's probably between $5,000,000 to $10,000,000 annually, the lower oil prices. And the reason for that is the oil is a small portion of our purchased energy profile, and it's actually less than 2% of our overall energy costs. Bear in mind that our energy costs are about 10% of our cost of sales. There will be opportunities on the transport and logistics site.
To bring down costs. And the related chemicals as well, there'll be some savings opportunities as well. But overall, if you take everything into account, it's not a major impact on our overall profitability numbers. The final question related to Eskom, other large manufacturing producers in South Africa have been approached to see whether we would be able to generate more electricity to sell into the grid. This approach has come through, and and it's something that we we we we're working on at the moment.
With all the challenges in the country, there is a demand for that increased capacity, and we're working with our Eskom to to hopefully, be able to do something on that front.
Okay. I mean, do
do you have any sort of estimates on that Escom electricity sale if you do go ahead with that?
It it's still early days. They they've they've only approached in the last couple of weeks and and they've asked us for, proposals in terms of how much additional capacity we could produce for them It's too early to give a specific amount, but, we are what working with them and that this could be quite a significant opportunity for CEPI.
Our next question comes from Roger Spitz of Merrill Lynch.
Three questions. See you sw swing your cloquet mill between viscous grade zolgular pulp paper pulp for internal use. Is there any sense in in in keeping this producing dissolving wood pulp and shifting some of your South African, dissolving wood pulp mills, especially design with pulp, or does the Chinese antidumping duties on US design with pulp on the one hand and the challenges disruptions of moving into Zovlinwood Pulp on the other make that attractive option less attractive?
Yeah. That's
we have a number of options available for us. You're right about the the Chinese dumping duty or restrictions that are in place and we doesn't make sense for us to to sell from the U. S. So what we've done is we've switched our Chinese production, or the production that we sell into China. We switched back to South Africa.
And within the U S, it makes sense for us at current levels to to produce the craft pulp for our own usage, but over and above that doesn't make sense for us at current levels. It doesn't make sense for us to produce any more kraft right. So I just want Mark to add to that one.
If I could just add a had a point and kind of remind people that when we built this did this conversion, we actually built it with the idea that we could swing back and forth and transition quite easily. And we do. And, so there's no real cost or losses to us going from pulp to crap, pulp, and back and forth. The team out there is very good at it. And, and, it gives us a lot of flexibility in terms of what we can do with that plan.
Excellent. Do you sell any of your South African dissolving wood pulp into the specialty markets today And if so, are you do you sell into the acetate or ethers or other markets?
The best proportion of our product is sold into the textiles market this course?
Are you selling any answers?
We're not selling acetate at the moment. No.
No acetate. Okay. And it looks like from your guidance, fiscal fifteen outlook, you said, is roughly flat, going to be flat year over year with, dissolving wood pulp under some price pressure. Should we take the implication that the paper segment EBITDA will therefore be up 15 year over year. Is that the right way to read that?
Yes. That's correct.
All right. Thank you very much.
Our next question comes from Bill Hoffman at RBC Capital Markets. Please go ahead.
Yes, thanks. Steve, I wonder if you could just talk a little bit more about the paper market balances. I mean, what we're seeing is price increases announced over here in the U. S. For both quota free and quota mechanical.
Interestingly or in the season. So I wonder if you can talk a little bit about why you're seeing the firmness in the market is because of some of the closures And then the second question is just given the shift in the U. S. Dollar versus euro, how do you think about your European assets and potential ship into the U. S.
Markets, given the softness in Europe right now?
Yes. On your first question in terms of the U. S, I'll start the answer and then I'll I'll I'll hand over to Mark. We did put through a price increase in the middle of last year, and, we were able to execute on that and pull through on that. More recently, we announced towards, I think it was in October, we announced second price increase, which was effective in January.
We didn't get through the full amount initially, but some of our competitors have now followed us with their price increase, and we're feeling pretty confident that we can, we can, we can get that full price increase through as well. There has been significant capacity reductions, Mark. And
Yes. The coated mechanical side or the publication papers, particularly are very, very tight. I think the operating rates in North America are in the high 90s right now, which is allowing for the industry to move a little bit on price. That carousels or that spills over into the coated wood free market as well. And we've been very very pleased with the demand that we've been having and, foresee it probably continuing into the near future.
And then in terms of the euro impact on the European business, obviously the weaker euro is creating a opportunity for us. And that's improving our profitability in the export space, which includes the U. S. As well as the Asian and American markets as well. So that boosting profitability.
Barry, I don't know. Is there anything you want to add to that?
We've had a position in North America quite a long time as part of our strategy. And over the last year, we've been creating some new products to expand that business and sit alongside our North America mills. And that's working extremely well. What has happened, of course, is that the margin that business now looks a great deal better than it did before.
And with that, margin in place? Do you see opportunity for incremental volumes moving into the U. S?
There's some, yes. But
I certainly wouldn't say that the U. Is the only opportunity. There are lots of dollar based markets where the opportunities are extending South America, Central America, Middle East all these markets are dollar based and then there you see a similar sort of opportunity.
Then, Steve, just a final question on the dissolving markets.
Can you just talk a
little bit about your contract positions in 2015 versus 2014, just a general characterization, were you basically at similar volume levels and prices or how should we think about the general dissolving markets in 2015 versus 2014?
Yes. As you know, we've had long term contracts in place, which incorporated pricing arrangements, but with the market coming down as significantly as it has. We've had to make some concessions with our our key customers. And we've basically followed the market down with our pricing. So if you look at the prices, that you're seeing in China for dissolving pulp, our prices have moved alongside those.
Gary, anything you want to add?
And then just as your comment on volume wise relatively stable year on year?
Yes. Volumes are fine. Other than the issue about switching to, the kraft pulp, but, okay, the volumes elsewhere are good. And we've been able to sell that demand.
Great. Thank
you. Next question comes from Wade Napier at Avior Research.
Could probably unpack the performance of the AlfaULT Specialty Mill in Europe. You said volumes have improved and pricing and product mix has improved I just want to try and understand what percentage of Europe's revenue and what percentage of Europe's EBITDA does that specialty provide and what scope is there going forward for further improvement from that mill? And then second, my second question, be, given Metzabaud's announced exit from the graphic paper market, I mean, what and what volumes of coated mechanical and the timing of those volumes does Zapier expect to inherit going forward given that Metza exiting the market? Thank you.
Yes. On Alfeld as I said earlier, we've seen a significant pickup. That was generating losses last year and has moved into a profitable situation don't specifically disclose that number separately. So, I'm not gonna give the number. What I would say is that you look at it relative to our overall business, it's a relatively small percentage of Europe's overall EBITDA generation.
Barry, do you want to talk about Mita?
Yeah. The Hussum Mill, is scheduled to be rebuilt into a different product line, that particular PM8, starting sometime at the back end of the year. We don't have a precise date for when it's going to stop producing yet. Its capacity is well known as about 300,000 tons. At this moment in time, it splits its capacity between some papers for Mesa's own sale and some of ours.
But there will be north of 200,000 tons of paper that we can, carousel to other mills at one point. So we'll see, of course, how the market develops by then, if it continues to decline at the current rate Of course, that, that volume will come down as well. So an exact volume number I cannot give you, but yes, there will be some that we can carry out
Our next question comes from Chris Ellis of Babson Capital. Please go ahead.
Hi guys. Can you just quantify the Cajun Woodfrew price increase in Europe? And also, when I look at volume clients in Q4, they look quite high. Could you split that sort of out between coated mechanical and coated wood through?
On your second question, as I said earlier, we over the last year or so, we've seen coated woodfree demand down about 2 percentage points. The coated mechanical has been in the high single digit 7% to 8% level. In terms of the price increase, Barry, do you want to talk to that?
Yeah, it's, what's see, of course, is the beginnings of the effect of the exchange rate already in this quarter. And that is a noise factor because that obviously pushes price up by a fair degree on those sales outside Europe. Within Europe, there was a price rise in the autumn of between 3% 4%. It depends on the country. And that's largely stuck.
Okay. Thank you. I mean, I was asking specifically in Q4 volumes off the back of that price increase just because I want to check that coated woodfree volumes hadn't sort of come off given the price increase had gone through?
No, there's been no effect like that.
Yes, volumes in Q4 were fine. You may be looking at the volumes that are in the accounts, but bear in mind we had the shut from related to Grakon with the project. So that's also changing the trend lines that you're seeing.
Okay. So underlying market is still 2%.
Yes.
And so just to check on reading it right, the million european EBITDA, that doesn't or takes into account the 12,000,001 off costs. So we in theory, it would have been 54 without the Gratkorn.
Correct.
For the 40? Okay, right. That's brilliant.
You. Gentlemen, it would appear we have no further questions. Do you have any closing comments?
No, I just want to thank everybody for joining us on the call and we look forward to discussing our next quarterly results in 3 months time. Thank
you. Sir. Ladies and gentlemen, on behalf of SAPI Limited, that concludes this conference call. Thank you for joining us. You may now disconnect your lines.