...Welcome to the Sappi Q2 2024 results call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star one one on your telephone keypad to join the queue. To withdraw your question, press star one one again. Please be advised that today's conference is being recorded. I would now like to hand you over to Steve Binnie, CEO. Please go ahead.
Thank you, and good day to everyone. Thanks for joining us on the call. As always, I'll move through the investor presentation deck, calling out the page numbers as I move along. And I'm gonna start on page three, which just has some of the key highlights for the quarter. We generated EBITDA of $183 million, which included a small Fair Value Adjustment of $3 million. I'm pleased to say, obviously, that these earnings were 10% up on the prior year, and also a progressive improvement on the last quarter. And ahead of expectations that we had given 3 months ago, so but pleased with that result.
Contributors to the success, firstly, on the pulp segment, improved profitability there, and we'll talk a little bit more about that. We saw modest recovery in global paper markets. Obviously, still a little bit slow and we did take some curtailment, but it is progressively improving. And once again, we do have slides on that. The other contributor to profitability improvement was a substantial reduction in costs, mainly fixed costs, 9% year-on-year. And clearly a big chunk of that related to the closure of the two mills in Europe. And pleased to say that those closures were completed in the quarter. Moving to slide four, the product contribution slide.
On the left is earnings, and it has been pretty volatile in the last couple of years with COVID and the recovery and then the macroeconomic situation. So a little bit up and down, but broadly, the story remains, and you see that on the right in terms of sales volumes, that we progressively reduce our contribution from Graphic Papers and increase obviously in the packaging side. The big project that we have underway at the moment to add capacity and convert at Somerset in the U.S., that's gonna extend it even further. And, you know, obviously we've set ourselves a goal of getting the contribution from revenue contribution from Graphics to below 30% by 2027.
So we're on, we're on that journey. Then turning to slide five, the EBITDA bridge. We've done it quarter on quarter, as we thought that that would be more meaningful, just to highlight the key variables. And as I said earlier, the two big contributors on the positive side are the sales volume increase, and you'll see that it's across the segments. So progressive improvement, and then the substantial savings in fixed costs coming through. The big red bar on the right is the fair value adjustment, and it's quarter on quarter, so it was still positive, but obviously lower than the prior quarter.
Slide six has the cost inflation developments, and what we've seen in the last couple of quarters is a little bit of upward movement in some of the categories. And obviously, predominantly wood and pulp. We would expect that to continue in the next few months and quarters ahead. Albeit in this quarter, we did have some decreases, lower energy prices coming through, and chemicals were also negative, but I would expect that to turn upwards as we move to the next quarter. Slide seven has the Net Debt evolution, and obviously we closed the mills in the quarter, so there was the cash outflow related to that. That's the reason for the jump.
When we look forward to the rest of the year, we do expect to be cash positive. Typically, always, as you know, the Q4 is our big cash generative quarter, and that's gonna be the same this year. So, you know, we're obviously at the peak now, so that, that's good. Slide eight has the debt maturity profile, and, you know, once again, it tells a good story. The only maturity in the next two years that's reflected here, you can see the one at 159 in the 2024 year, which relates to a South African bond for ZAR 1.5 billion, and I'm pleased to say, obviously, that that's been refinanced in April, so that, that's gone now as well. The 2026 EUR bonds...
As you know, we brought some back a little while ago, so we're only down to $240, and you know, we continue to monitor that and we'll pick the right time to optimize the refinance there. Moving to slide nine, cash flow and CapEx. On the right, sorry, on the left, the cash flow, you can see the positive cash from operations and free cash flow. The negative, obviously, and this is a year-to-date number, the negative relates to the closure costs for the two mills. Obviously, we've got a dividend that came through earlier in the year. Then the CapEx for the expansion conversion project, mainly at Somerset. At slide 10, we have the capital allocation.
It's a slide you've seen before, and it just once again re-emphasizes our priorities, and obviously, the immediate and the most necessary capital allocation comes with regulatory, and we have some sustainability commitments. We, on profit improvement, continue to look at optimizing our asset portfolio, and that's why we closed the mills. The project at Gratkorn to convert the one machine to labels, that's underway, and once again, that will reduce effectively a machine conversion, 'cause effectively it comes out of graphics into the labels and will boost profitability. The dividend, we obviously declared one at the end of last year and was paid this year, and we are committed to keeping the dividend going.
And then ultimately on the growth side, the project that I referred to earlier. Turning to the segments, and firstly, pulp, which is on 12. To summarize pulp, pretty good quarter. Demand is good, and interestingly, supply is tight. You know, there's a little bit of capacity that's come out of the marketplace, so that helps. Obviously, downstream fiber prices have been a little bit weak, and viscose price is under a bit of pressure, but net-net, it's positive. We also were able to take costs out, and that helped with the improved profitability. And you can see DP prices jump from $880-$940 during the quarter, $940 today, as we talk.
Slide 13 has the packaging and specialty papers segment and a mixed performance. Overall volumes improved, which is obviously encouraging. Margins up a little bit. The mixed performance, you know, if we take each of the regions, North America looking good. We've seen strong recovery in demand. Orders are good. The machine capacity is full again, and the outlook is pretty positive. In the middle, you've got the South Africa business, whereby the demand, the underlying demand is strong. However, there was some excess inventories downstream, which working their way through the system, but the outlook is very positive, and you know, we're looking good there. Europe, obviously, where more of the challenges lay, and it's linked to the economic situation in Europe.
A little bit of, in one or two of the categories, some positive signs, but generally, Europe continues to remain challenging. Then on slide 14 is the graphics. And, you know, we see a gradual recovery. Clearly, we don't anticipate it getting back to where it was in 2022 when we made record profits, but it's progressively getting a little bit better. Obviously, with the closure of the two mills now, we've shifted that production to our remaining mills, coated woodfree mills, and I'm pleased to say that that's gone successfully, and we are, we're pretty full now. In fact, we're we are full at those coated woodfree machines.
The year-on-year profitability improvement comes from the better sales volumes and obviously the cost savings that we implemented, which I talked about earlier. Then on slide 15, just very briefly on the regions. The overall story, improvement generally in sales volumes. Selling price is holding up better and pretty stable. You'll obviously, some of you would have seen we have announced some price increases in certain of the markets, and you know that should help mitigate some of the cost pressures that are beginning to creep in. And all in all, you know, North America and South Africa good margins. Europe obviously taking a little bit longer to come back. And you see that again on slide 16.
The margin growth, although Europe was obviously under pressure from a volume because of the good costs, at least, you know, at least margins were up a bit. And volumes slightly ahead and unexpected to continue that trend. And then the North America, higher volumes linked to the improved performance or demand. And on the back of that, higher volumes, you know, at least we were able to keep our margins, EBITDA margins, stable. And then in South Africa, margins improving and on strong underlying demand. Slide 17 has our Thrive strategy and the four pillars.
Again, this is not a new slide, we do update it, but it's just reinforces the focus areas for us across the four pillars. Operational excellence, which obviously focuses on safety, on costs, on efficiency. And I think the success there is demonstrated by the costs that we've been able to take out of the business. Enhancing trust, we continue to have a strong certification competitive positioning. We do have some sustainability CapEx commitments, and that's not changed. It's what we've talked about previously. In terms of growing our business, you know, we've obviously got the two conversions underway at the moment at Gratkorn and the bigger one at Somerset.
You know, those are on track and, you know, help with our strategy to continue to transform the business. And then in terms of the financial health, as I said, I mentioned earlier, we do have, we did have a cash outlay related to the closure, that's not a surprise, the closure of those mills. But we are committed to getting our debt back down to $1 billion and below. Obviously, we've got to finish the project at Somerset, which will, you know, be complete next year. We haven't committed to any other big CapEx at this stage. And on the next page, you do see a couple of pictures on the Somerset conversion and expansion. Pleased to say it's going well.
It's on track, in budget, and we're very excited by that, and we will obviously start up in the second half of next year, in April next year. Next financial year. Slide 19, a number of awards and certificates and the likes. And, you know, we're obviously proud of this, and we remain committed to our environmental and sustainability commitments, and I think we do a great job there. Turning to the outlook, and I'll move to page 21. Firstly, on the demand side, generally, it continues to improve. DP is healthy. It's as I said at the beginning of the call, yeah, there are certain negative factors, but they're far outweighed by the positives.
The market is tight, and we're feeling good there. The graphics will continue to slowly recover, but not getting back to 2022 levels. Obviously in Europe now, we are—we've sold our machines for coated woodfree. In the U.S., you know, we're converting the machine, so that will help. And then in the packaging segment, I talked a little bit in detail earlier. U.S. and South Africa are looking good, and Europe, we expect further improvement as we move forward. The restructuring program that we've done, as I say, it's increased our operating rates, and when combined with those fixed cost savings, will improve our competitive positioning. And in the U.S., we've got the conversion. Slide 22. Pulp market prices from a cost perspective now.
The pulp and paper pulp prices have started rising and you saw on that earlier slide, so that's clearly a risk. But you know, as I said, we have announced some price increases, selling price increases. In the quarter, we have two shuts. Somerset, which is an 18-month shut, it's scheduled, and then we've got a shut at Saiccor, which once again, is scheduled. The combined impact of those two on profitability, if you're looking at quarter-on-quarter growth, Q2 versus Q3, is about $30 million. The CapEx, same as we've been talking about, $500 million, including the biggest project being Somerset. The Somerset sitting at $154 million. We were very specific on our plantations fair value price guidance adjustment, and it will be a negative in Q3.
And a small negative, and that relates to the way that the model works and different discount rates and there's higher fuel costs which get embedded into the valuation, and that, and that's why it's negative. The wood prices in South Africa have not risen in recent months. So all in all, the underlying profit and demand in our business, we expect to continue to improve. But obviously, when you deduct the shuts quarter on quarter, it means that the third quarter will be below the second quarter. But as I said, the underlying business continues to improve. And then obviously comparing it to the prior year, substantially better. So that's the end of the presentation, operator.
I'm gonna put it back to you, for questions.
Thank you. As a reminder, if you wish to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, press star one one again. Please stand by for the first question. First question comes from James Twyman at Prescient. Your line is open. Please go ahead.
Thank you very much, and thank you for the presentation. I've got a few questions, if I may. The first one is, you're trying to raise prices in Europe because obviously because of the rise in pulp costs, and that's clear for coated paper, but it is always more difficult to do that in specialities. Could you talk about what you are trying to do there, and whether you think you can achieve anything there? And secondly, you did mention a few times that you benefited from cost savings in South Africa. Could you just talk about what it is that you've done there and what sort of scale you're talking about? Thanks.
All right, I'll start and obviously, you know, on the European question, I'll let Marco elaborate further. And similarly on the costs in South Africa, you know, I'll ask you to elaborate further. In Europe, look, we're striving to get price increases across all our categories, not just graphic, on the specialties as well. You know, what we're finding with the market situation and as I said, Marco will elaborate further. What I'm finding is that on the graphic side, the prices have been holding up pretty well.
I guess because, you know, I'm not guessing, fortunately, that's because the operating rates are low and margins are pretty, pretty thin. So the various players have been holding their prices and now with a little bit of cost increased pressure, a number of players have announced selling price increases. On the specialty side, we have seen prices come down in recent quarters, and a lot of that's linked now to the general weakness in the market. Nevertheless, obviously, that same cost pressure is starting to come through and we, you know, are trying to implement selling price increases and as are other players as well.
So, the market conditions are, as I said, slightly better than they were recently, so the ability to try and achieve price increases is, it's still tough, right? But it's become slightly easier. Marco, do you maybe want to talk more about that?
Yeah. Thank you, Steve. And your summary is very accurate. If I just divide it between the efforts that we're doing on the graphics side and specialty side, and starting with graphics, James, we already had one wave of price increases in the first calendar quarter. However, we're pulling that through as the costs have started to increase, particularly on the pulp side. And we see that coming in the next coming months, so we need to anticipate with further price rises on the graphics side.
As Steve rightly said, we feel a bit more comfortable with the capacity utilization that has improved for us, for the industry, after the two mill closures that have taken place and that are completed this quarter. So, that's on the graphics side. On the packaging and specialty side, it's somewhat of a mixed bag.
Also, internally in our portfolio in Europe, there's some segments that see a recovery, and linked to that, we see some successful increases. And there, let's face it, there are others that still are hampered by the macroeconomic situation or a lack of sufficient capacity utilization, as not a lot of capacity has come out of the packaging and specialty side, or conversions have not taken place from to other grades to the extent that it would help us enough. So on the packaging specialty, certainly a challenge. Graphics, we had a first step, we're preparing ourselves for the next step as the pulp prices are starting to rise in the next coming quarters.
Thanks, Marco. And then just, as I said, Alex, expand further on the cost side. But across the board in a number of the categories, and one of them I touched on earlier was the wood side, that we haven't seen increases. Those have been relatively flat. But there's other cost saving opportunities and— Here's Alex.
James, a couple of areas. Energy, obviously, with a much better operation at Saiccor and the stability there, we do benefit from own power generation there. We've seen some savings on the chemical, the pulping chemical side, just better negotiations on obviously the volumes that we buy as well as well. And then on the logistics side, we're actually making good progress to address the logistics infrastructure challenges. We've managed to get more of our coal back onto rail. And we've had very good opportunities with Transnet, the state-owned logistics provider, in terms of better rates to bring timber back into the mill.
Okay, James?
Thank you very much.
Please stand by for the next question. The next question comes from Brian Morgan of RMB Morgan Stanley. Your line is open. Please go ahead.
Hi, guys. Thanks very much for the time. Thanks for the call. Just, if I may just carry on with this European packaging business. Just looking at the volumes there, your volumes are down back to levels, and have been for the last five quarters, back to levels as they were in the lockdown in 2020. And I'm just wondering, when you think it would be time to start thinking about rationalizing some capacity in that business? You're talking about some lines where you've seen no signs of recovery yet. Would that not be areas where you could potentially take capacity out?
No, I don't think at this early stage, Brian. We do anticipate that there will be a recovery. And you're right, it has... It is back at those levels. And funny enough, the reason has changed, right? Because initially it was a stocking issue or an excess inventory issue, and that's shifted now to being, you know, the macro situation. We still believe that the categories, the key categories that we're in, that there will be meaningful recovery. It's taking longer, and we want to give it more time. Marco, do you want-
Yeah, Steve, you highlighted the most important points. If I may, Brian, maybe one additional point that has not helped over the last 12-18 months was the uncertainty around European regulation. And you might have heard of the Packaging and Packaging Waste Regulation or the Single-Use Plastics Directive, but particularly the first one has only been decided effectively by the commission in March. But it has lingered on for a very long time, putting the industry in a bit of an uncertainty when it came to demand, but also additional capacities or additional investments, sorry. So the European regulation as we see it right now has reached the next stage.
There's more clarity, and that will add to what Steve already said, that are confident in some of these segments now picking up, is growing.
Thanks, Marco. If I may just follow up there, what sort of demand tailwind would you expect PPWR to provide to your packaging volumes?
Well, it will get. I think you need to see it the other way around. It has hindered the traditional demand growth that goes with these type of packaging material between, call it 2%-4%. That turned negative the last couple of months. Therefore, we're confident that it will ultimately normalize and go back to its traditional growth rates.
Okay, thank you.
Please stand by for your next question. The next question comes from Patrick Mann at Bank of America. Your line is open. Please go ahead.
Thank you very much for the call, and thanks for taking my question. I just wanted to ask about the, the lags with the pulp price. Is there a difference between the revenue and the cost lag? So, you know, effectively, with pulp prices increasing now, is it sort of beneficial to the margins and then later they squeeze, or other way around, or do they come through, do they come through at roughly the same time? That's the first question. Thanks.
Yeah, there is a difference in that time lag. I think on the selling side, you know, most of the pricing benefit, most but not all, we get pretty fast, right? Because, you know, some of it's priced quarterly in arrears, but a big chunk is monthly in arrears or on spot business. So generally speaking, we do get it fairly quickly. On the cost side, if you look forward now, a little bit is gonna come through in Q3. But most of the current rises that we've seen will probably more impact on Q4. So it's probably more of... it's probably a quarter in arrears.
But what I will say to you net-net is we obviously sell more volumes than we buy in the different categories. So net-net, if you look back in history, when pulp prices are high, this business makes more money.
Got it. Thanks. And then the second question is, very quick. I just wanted to confirm, is there any cash out remaining related to the restructuring, or is it all in, it's all out, there's no provisions or anything left to pay out, right?
Patrick, it's Glen here. Yeah, there is still to pay out and-
Okay.
- and to collect as well. So, if you look through our, our volumes, sorry, our provisions that we, that we made, we- there's still about EUR 60 million still to be paid. And then we also included in our post-balance sheet events, if you look at our note there, we received the proceeds on the sale of the Stockstadt land, and that came through a couple of days ago, and that was about EUR 43 million. So there's a netting off there.
Okay. T hat's, EUR 60 million is the last. So the net amount is EUR 17 million for this quarter, and that's it?
It's closer to EUR 20 million. I'm rounding out my numbers, but it's closer to EUR 20 million.
Okay. Thank you. Thanks very much.
And maybe just to say that we're also still obviously exploring the sale of the Lanaken land as well. And so that would be-
Got it.
Once, presumably when that's concluded, that will be a positive when it is done.
Got it. Thank you. Thank you both.
Please stand by for your next question. The next question comes from Andrew Jones at UBS. Andrew, your line is open. Please go ahead.
Hi, Steve. A couple of questions. First of all, on M&A, obviously there's been a lot of activity in the sector more broadly in recent times. I'm just wondering how you think about M&A in the context of your business, and I wonder if there's certain areas in which you might want to grow through that approach. You know, in particular, maybe the fact that you obviously have this sort of short pulp position in the graphic paper business. I mean, does it make sense to add something there? And then secondly, just on the demand outlook, you talk... I mean, some of your peers have been talking about, you know, seasonal improvement, you know, we've got the Olympics coming, the Euros, we've got improving weather, et cetera.
I think, you know, there's a bit of optimism that we could see a pickup in real demand. Do you share that optimism, or... And if not, you know, when do you think that sort of European packaging demand line start to actually fundamentally start to, to really recover?
Yeah. Thank you. I think on the M&A, look, our focus is on our business. We've obviously committed to the project at Somerset. We're not looking at anything on the M&A front at this stage. We want to continue to transform this business, de-risk the business, and make the necessary investments to internally grow on the packaging side. So there's nothing on that front. The demand outlook, look, as we said, there are pockets of improvement coming through. We were naturally cautious because these markets have taken longer to recover. But what we don't think it's gonna be a sharp recovery, we think it's gonna be progressive.
So, the Q3 outlook that I described earlier, you know, on top of that, you know, when we look at Q4, we're expecting further recovery. Now, Q4, as you know, is typically our best quarter each year. And we're gonna, you know, we expect that to be the same, and by then, obviously, those annual shuts will be behind us. So we're, you know, we're even more positive about Q4.
Okay. Understood. Thank you.
As a reminder, if you wish to ask a question, please press star one one on your telephone and wait for your name to be announced. Please stand by for the next question. And this is from James Twyman at Prescient. James, your line is open. Please go ahead.
Yeah, thanks. Thanks for the follow-up. So I've got a few more. The first one is, your restructuring costs were $176 million in the half. And it looks like then there's, the net number is gonna go up to about $196 million for the year. Could you split out what those numbers are? Because I'm assuming Stockstadt's gonna be pretty minimal there. Just explaining where that net number comes from. Secondly, could you give us some idea of where your operating rates are in pulp, Europe for the specialty business, and, you know, whether that's broadly in line with what you're seeing in Europe. And then I've got one more as well. Thanks.
In terms of the restructuring, net, the vast, vast majority is Lanaken. The, the, the, there's a little bit at Stockstadt, but the vast majority is Lanaken. And as I said, we are still in the process of trying to sell the Lanaken land, and you know, hopefully, with that, that will happen soon. So you'll get a further cash inflow related to that. In terms of operating rates in the specialities, in Europe, we are looking at about... Sorry, I've just got the numbers in front of me. About 70, yeah, about, yeah, it, it, it's in the 70s at the moment, mid-70s, for us. And you know, we are anticipating an improvement in the next couple of quarters.
I guess it comes back to the question that we were asked earlier. We do think the recovery is gonna come through, but at the moment we're in the seventies.
Okay. Thank you very much. And then my final one was just, you, you've been increasing your production at Saiccor over the last 12 months. But the South African volumes, when I look at them, are still significantly below last year, and with the maintenance downtime in Q3, it will clearly be lower this year on last year. And I'm wondering where that comes from on a sort of net basis.
Just remember, we started the year, the last quarter of last year, we, you know, we started the year with pretty low opening inventories. And then the, on, on the packaging side, you know, we talked about the fact that there's excess inventories in the, in the downstream. So all in all, you know, from a production perspective, Saiccor will continue to improve, and we are anticipating stronger sales in the second half of the year from containerboard. And oh, yeah, on top of that, in the current year, we also had an extended 18 months in the Ngodwana shutdown, you recall earlier in the financial year. So all of those have contributed.
I think the main story, James, is that things are improving from a production perspective. The demand is good, and we would expect, albeit we've got a scheduled shut at Saiccor in the next quarter. But, you know, looking through that, demand will be strong and volumes will continue to flow.
Great. Thank you very much.
Thank you. There are no further questions, so back to you for any final remarks.
Yeah, just let me take the opportunity to thank everybody for joining us on the call, and look forward to discussing the Q3 results in two months time. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.