Q1 FY19 financial results - Sappi › s3fs-public › Q1-FY19... · Global P&W paper market trends...

6 February 2019

Chief Executive Officer

Steve Binnie

Sappi Limited

Q1 FY19 financial results delivering on

strategy

2019

Vision2020

intentionalevolution

next phase

growth

1

Forward-looking statements and Regulation G

2

Forward-looking statementsCertain statements in this release that are neither reported financial results nor other historical information, are forward-looking statements, including but not limited to statements that are predictions ofor indicate future earnings, savings, synergies, events, trends, plans or objectives. The words “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “assume”, “positioned”, “will”, “may”, “should”,“risk” and other similar expressions, which are predictions of or indicate future events and future trends and which do not relate to historical matters, identify forward-looking statements. In addition, thisdocument includes forward-looking statements relating to our potential exposure to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity price risk. Youshould not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which are in some cases beyond our control and may cause our actualresults, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements (and from past results,performance or achievements). Certain factors that may cause such differences include but are not limited to:

The highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand, production capacity, production, input costs including rawmaterial, energy and employee costs, and pricing)

The impact on our business of adverse changes in global economic conditions Unanticipated production disruptions (including as a result of planned or unexpected power outages) Changes in environmental, tax and other laws and regulations Adverse changes in the markets for our products The emergence of new technologies and changes in consumer trends including increased preferences for digital media Consequences of our leverage, including as a result of adverse changes in credit markets that affect our ability to raise capital when needed Adverse changes in the political situation and economy in the countries in which we operate or the effect of governmental efforts to address present or future economic or social problems The impact of restructurings, investments, acquisitions, dispositions and other strategic initiatives (including related financing), any delays, unexpected costs or other problems experienced in

connection with dispositions or with integrating acquisitions or implementing restructurings or other strategic initiatives, and achieving expected savings and synergies, and Currency fluctuations.

We undertake no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or circumstances or otherwise.

Regulation G disclosureCertain non-GAAP financial information is contained in this presentation that management believe may be useful in comparing the company’s operating results from period to period. Reconciliation's ofcertain of the non-GAAP measures to the corresponding GAAP measures can be found in the quarterly results booklet for the relevant period. These booklets are available on our website:https://www.sappi.com/quarterly-reports.

https://www.sappi.com/quarterly-reports

Highlights – Q1 2019

3

EBITDA* +15%year-on-year

Net Profit +29%year-on-year

EPS* +14%year-on-year

Net debt +15%year-on-year

• Improved performance in difficult operating climate

• Strong growth in packaging volumes

• Net debt increased due to Cham acquisition and higher capital expenditure

Key ratios Q1 FY17 Q1 FY18 Q1 FY19

Net debt/LTM EBITDA 1.7 1.8 2.0

Interest cover 7.7 9.9 10.9

EBITDA % 15.4 12.9 13.9

ROCE % 19.5 14.1 14.7

* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 18 in our Q1 FY19 financial results booklet (available on www.sappi.com) for a definition of special items.

Excluding special items*

http://www.sappi.com/

100

140

180

220

260

300

172 (7) 131 (84) (11) (5) 1 197

Q1 FY18 EBITDA Sales volume Price & mix Variable & deliverycosts

Fixed costs Other Exchange rate Q1 FY19 EBITDA

EBITDA* reconciliationQ1 FY18 to Q1 FY19

4

* EBITDA = EBITDA excluding special items

Sales revenue

US$

milli

on

Notes:

1. All variances were calculated excluding Sappi Forestry.

2. “Currency conversion” reflects translation and transactional effect on consolidation.

2018 2017Exchange rates:Average rate for the Quarter: US$1 = ZAR 14.3127 13.6220Average rate for the Quarter: €1 = US$ 1.1409 1.1778

Dec

Product contribution split – LTM

5

* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 18 in our Q1 FY19 financial results booklet (available on www.sappi.com) for a definition of special items. Data above excludes treasury operations and insurance captive.

41%

18%

41%

SpecialisedCellulosePackaging &Speciality PapersPrinting Papers

53%

15%

32%

EBITDA excluding special items Operating profit excluding special items


Maturity profileFiscal years

6

350

8027 47 45

536

442

69

0

221

376

79

0

100

200

300

400

500

600

2019 2020 2021 2022 2023 2024 2025 2032

US$

milli

on

Cash Short-term SPH term debt Securitisation SSA

EUR450m bond

EUR350m bond

US$221m bond

Capex development

7

0

100

200

300

400

500

600

700

2013 2014 2015 2016 2017 2018 2019E

US$

milli

on

Maintenance Efficiency and expansion

8

Divisional overview

Global P&W paper market trends

9

Supply and demand Demand softening globally Capacity reductions expected in US and Europe

Selling prices and input costs Pulp prices falling from historical highs on weak Chinese demand – declines differ by

geography Paper prices stable

Strategy Focus on costs to maintain margins Manage operating rates through conversions, market share, flexibility of machines Increase pulp integration over time

Global speciality & packaging paper market trends

10

Supply and demand More capacity entering the space – mostly containerboard Brand owners pushing for paper based packaging solutions Short term pressure on demand in consumer packaging and self-adhesives

Selling prices and input costs Most sales prices rose into 2019, though insufficient to counter cost inflation Pulp prices have begun to decline from their historical highs

Strategy More M&A in the industry Ramp-up volumes from conversions, grow into new markets Maximise opportunities in paper-for-plastics shift

Global DWP market trends

11

Supply and demand Continued DWP and VSF capacity growth – both integrated and market 80% of swing capacity moved to DWP as paper pulp demand in China dried up

Selling prices and input costs DWP selling prices are down as VSF prices decline on excess capacity. Weak RMB places further pressure on US$ input costs of VSF producers

Strategy Grow in-step with the market (debottlenecked volumes 2018/19, future plans for Saiccor) Evaluate external opportunities which will enable a substantial increase in volumes Align growth with leading VSF customers – environmental and social performance key

Sappi Europe

12

Sales Tons -1.6%year-on-year

Sales +9%year-on-year

EBITDA* -2.9%year-on-year

o Printing and Writing volumes down 7%, while specialities and packaging volumes up 50% (4% like-for-like) from last year

o Packaging and specialities average net selling prices were 17% (10% like-for-like) higher as a result of mix and price increases

o Fixed costs 12% higher due to increased headcount from Cham

o Variable costs 17% higher primarily due to purchased paper pulp




Sappi North America

13

Sales Tons -6%year-on-year



o Higher prices for most products and higher DWP volumes lifted profitability

o Coated paper markets weakened during the quarter, however we increased volumes from European mills

o Packaging and specialities volumes up 68%, paperboard volumes and prices set to improve

o Variable costs were higher due to purchased paper pulps and optimization of PM1




Sappi South Africa

14

Sales Tons +3%year-on-year



o Strong improvement in performance due to increases in volumes and selling prices

o DWP volumes were lower sequentially due to low inventories, but higher year-on-year

o Volumes and prices were up for our packaging grades. Price rose for our paper products, offsetting lower volumes

o Fixed costs rose in-line with inflation.

o Variable costs were higher due to the weaker Rand, and higher US$ prices for coal, wood and paper pulps




Maintaina healthybalancesheet

Rationalisedeclining

businesses

Accelerate growth in

higher margin growth

segments

Achievecost

advantages

Improveoperational

and machineefficiencies

Maximiseprocurement

benefits Optimisebusiness

processes

Continuouslybalance

paper supplyand demandin all regions

Wherepossible

convert papermachines tohigher marginbusinesses

Optimiseworkingcapital

Strongcash

generationSmart

financing

Expandpaper

packaginggrades

Enhancespecialised celluloseportfolio

Extractvalue from our

biorefinerystream

Our group strategy

15

At Sappi we do business with integrity and courage; making smart decisions which we execute with speed.Our values are underpinned by an unrelenting focus on and commitment to safety.

Achievecost

advantages

Improveoperational

and machine efficiencies

Maximiseprocurement

benefitsOptimisebusiness

processes

Our group strategy

16

We work to lower fixed and variable costs, increase cost efficiencies and invest for cost advantages. Group efficiency and procurement initiatives US$60m

target for 2019: +US$80m achieved in 2018 Ongoing continuous improvement across all mills. Investigate pulp integration opportunities in US and

EU Saiccor expansion will lead to lower variable costs €30m upgrade to Gratkorn mill

Rationalisedeclining

businesses

Continuouslybalance

paper supplyand demand in all regions

Wherepossible

convert paper machines tohigher margin

businesses

Our group strategy

17

Recognising the decreasing demand for graphic paper, we manage our capacity to strengthen our leadership position in these markets, realising their strategic importance to the group and maximising their significant cash flow generation. Progressive transition of Lanaken Mill out of LWC. Reduced CWF exposure at Maastricht Mill, Ehingen

Mill and Somerset Mill PM1.

Maintaina healthybalancesheet

Optimiseworkingcapital

Strongcash

generationSmart

financing

Our group strategy

18

Maintain leverage below 2x Net debt:EBITDA Finance costs US$60-70m/annum going

forward. Renewal of RCF Lower spread (165bp), cost and commitment fee Additional flexibility for acquisitions and disposals

Will monitor bond markets for opportunities to refinance at lower cost

Accelerategrowth in

higher margingrowth

segments


biorefinerystream

Enhancespecialisedcelluloseportfolio

Expandpaper

packaginggrades

Our group strategy

19

We will make investments in existing and adjacent areas with strong potential growth. Debottlenecking of Saiccor and Ngodwana DWP

complete, Cloquet in 2019. Additional packaging at Ngodwana and Tugela Mills. Securing additional HW timber supply. Biomaterials, bio-chemicals – lignins, sugars. Xylitol and Furfural demo plant to be built at Ngodwana Expansion of Saiccor by 110kt/annum has started Ramp-up of board grades at Maastricht and Somerset

We expect DWP sales volumes to increase this year following the completion of debottlenecking

of Saiccor and Ngodwana.

Variable market conditions for speciality papers. Packaging and paperboard markets remain

strong. Increased volumes from Somerset and Maastricht forthcoming.

Graphic paper markets have been weak, short term profitability will be negatively impacted if

demand continues to be as weak as it has been recently.

2019 capex expected to be approximately $590m – majority at Saiccor, Lanaken and Gratkorn

Given weak graphic paper markets and elevated pulp prices, we expect EBITDA in Q2 to be

slightly below that of last year. FY 2019 expected to be higher than that of last year.

20

Outlook

Thank you

21

22

Supplementary information


23

EBITDA and operating profit


175

195

160

209

201 20

8

155

221

172

211

155

224

197

112

133

97

145

136 14

5

93

152

105

142

85

148

128

0

50

100

150

200

250

US$

milli

on

EBITDA Operating profit ex special items


24

Net debt/EBITDA development

* EBITDA is excluding special items.** The covenant Net debt/LTM EBITDA calculation has adjustments and therefore differs from that shown above.

2,38

0

2,24

8

2,28

6

1,94

6 2,04

0

1,91

6

1,91

7

1,77

1

1,73

4

1,65

2

1583

1408

1338

1329

1318

1322 1349

1632

1603

1568

1557

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19

US$

milli

on

Net debt Net debt/LTM EBITDA**

2.0

4.6

Sappi specialities and packaging papers

25

Global production sites with the ability to switch between graphics and packaging at various sites*

Alfeld Mill (Germany)Containerboard, flex-pack, label,

paperboard, silicone base papers

Carmignano Mill (Italy)Flexible packagingand functional papers

Condino Mill (Italy)Flexible packaging

and functional packaging

Cloquet Mill* (USA)Label papers

Ehingen Mill* (Germany)Containerboard

Maastricht Mill* (The Netherlands)Paperboard

Ngodwana Mill (South Africa)Containerboard

Somerset Mill* (USA)Label paper and flexible packaging paper

Tugela Mill (South Africa)Containerboard

Westbrook Mill (USA)Silicone base papers

Stockstadt Mill* (Germany)Flexible packaging

and functional papers

Accelerategrowth in

higher margingrowth

segments


biorefinerystream


Expandpaper

packaginggrades

Speciality and packaging papers expansion plans

26

Europe Maastricht: complete, ramp-up by 2021

-160k CWF, +150k specialities (FBB) Ehingen: complete

-75k CWF, +60k specialities (WTL) Alfeld: construction to start FY19, complete by Q4 FY20

+10k specialities (Various) Lanaken: enable CWF on PM8, as market develops

North America Somerset: construction done, 3 year ramp up

-150k CWF, +350k specialities (SBS)

Accelerategrowth in

higher margingrowth

segments


biorefinerystream


Expandpaper

packaginggrades

DWP expansions

27

Debottlenecking Saiccor – 10kt complete April 2018 Ngodwana – 50kt complete September 2018 Cloquet – 30kt complete Q3 2019

additional 70kt swing capacity available

Expansion Saiccor – 110kt ≈Q3 2020, construction has commenced

External Paper pulp prices impacting valuations and returns

28

Sappi Europe

* Sales less operating profit excluding special items divided by tons sold.** Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 18 in our Q1 FY19 financial results booklet (available on www.sappi.com) for a definition of special items.

Q1 FY19 Q4 FY18 Q1 FY18Tons sold (‘000) 809 864 822Sales (EURm) 642 671 571

Price/Ton (EUR) 794 777 695Cost/Ton* (EUR) 756 733 657

Operating profit excluding special items** (EURm) 30 38 31


Western Europe

29

Coated paper deliveries and prices

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

Q1

08

Q1

09

Q1

10

Q1

11

Q1

12

Q1

13

Q1

14

Q1

15

Q1

16

Q1

17

Q1

18

CWF Demand MCR Demand CWF 100gsm Sheets LWC 60gsm offset reels

Western Europe shipments including export.Source: Cepifine, Cepiprint and RISI indexed to calendar 1Q 2008.

30

Sappi North America


Q1 FY19 Q4 FY18 Q1 FY18Tons sold (‘000) 321 363 343Sales (USDm) 351 388 342

Price/Ton (USD) 1,093 1,069 997Cost/Ton* (USD) 1,065 983 1,000

Operating profit excluding special items** (USDm) 9 31 (1)


United States of America

31

Coated paper prices and shipments

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

Q1

08

Q1

09

Q1

10

Q1

11

Q1

12

Q1

13

Q1

14

Q1

15

Q1

16

Q1

17

Q1

18

Domestic CWF shipments Domestic CWF purchases RISI price CFS #3 60lb rollsUS industry purchases defined as industry shipments, plus imports, less exports.Source: AF&PA and RISI indexed to calendar Q1 FY08.

32

Sappi South Africa


Q1 FY19 Q4 FY18 Q1 FY18Tons sold (‘000) 396 441 383Sales (ZARm) 4,709 4,824 4,073

Price/Ton (ZAR) 11,891 10,939 10,634Cost/Ton* (ZAR) 8,818 8,488 8,180

Operating profit excluding special items** (ZARm) 1,217 1,081 940


33

Pulp prices*

* Source: FOEX, CCF group.

600

700

800

900

1,000

1,100

1,200

1,300

US$

/ton

NBSK Europe BHKP Europe Commodity DWP Cotton linter pulp

34

Textile fibre prices*

* Source: CCF group.

800

1,200

1,600

2,000

2,400

2,800

Cotton 328 Cotton "A" Index PSF 1.4 D VSF 1.2 D VSF 1.5 D

US$

/ton

Cash flow

35

US$m Q1 FY19 Q4 FY18 Q1 FY18Cash generated from operations 197 212 162Movement in working capital (87) 6 (83)

Net finance costs paid (5) (24) (6)

Taxation (paid) (3) (23) 6

Cash generated from operating activities 102 171 79Cash utilised in investing activities (109) (145) (93)Capital expenditure (106) (146) (88)

Other movements (3) 1 (5)

Net cash generated (utilised) (7) 26 (14)

Excluding special items reconciliation to reported operating profit

36

EBITDA and operating profit

* Refer to page 18 in our Q1 FY19 results booklet (available on www.sappi.com) for a definition of special items.

US$m Q1 FY19 Q4 FY18 Q1 FY18

EBITDA excluding special items* 197 224 172Depreciation and amortisation (69) (76) (67)

Operating profit excluding special items* 128 148 105

Special items* - gains (losses) (5) (13) 11

Plantation price fair value adjustment 3 (3) 16

Net restructuring provisions - (3) -

Profit on disposal and written off assets - (4) -

Fire, flood, storm and other events (8) (3) (5)

Segment operating profit 123 135 116


Fibre properties and applications

37

Cellulosic fibre properties helping drive that growth

Source: IHS Global, RISI, Hawkins Wright.

Key strength Qualifies Issue

ApparelHome textilesNonwovens/Technical textiles

Overall value proposition

Applications

Function and feel

Appearance

Sustainability

1762

21

6627

7

5220

28

Cellulosic fibres Cotton Polyester

• On a pure property basis, cellulosic fibres are superior to cotton and differentiated on sustainability.

• Polyester is differentiated on strength/durability versus cotton and cellulosic fibres.

• Natural and attractive, ‘greener’ alternative to cotton

• Natural, functional and well established

• Cheap, durable and versatile

Durability

Absorbency Breathability Softness

Drape Dyeability

Brightness/Lustre

Renewable and biodegradeable

Resource efficiency

Dissolving wood pulp market

38

Viscose-grade DWP demand growth

Source: Sappi; Hawkins Wright; RISI.

OtherEurope Americas China

0.2

6.1

0.6

0.6

1.7

3.7

1.9

7.5

Market size 2017 Mtpa

CAGR 2010-17%

Viscose

Cellulose ethers and MCC

Cellulose acetate tow

Nitro-cellulose and other

Products (examples)

7.5 ~6-7Total

Rayon Grade

High-alpha/Speciality

DWP gradeDemand geography

Applications (examples)• Textiles (viscose)• Non-wovens• Cellophane• Sausage skins

• Construction• Food additives• Medicine fillers• Cosmetics

• Cigarette filters• Paints and coatings• Films• Plastics

• Explosives• Inks• Lacquers• Nail polish

39

There is still significant headroom to increase the level of cellulosic fibre blending in most sub-categories

Source: Expert interviews.

POLYESTER

Future Today Gap Today Future Gap Today Future Gap COTTON CELLULOSIC

Apparel

Home textile

Towels 5% 5% 0% 80% 75% -6% 15% 20% +33%

Bedding 45% 55% +22% 45% 40% -11% 1% 2% +100%

Denim 5% 5% 0 95% 95% 0% 0% 0% 0%

Shirts 35% 40% +14% 50% 40% -20% 15% 20% +33%

T-shirts 30% 50% +67% 70% 50% -29% 3% 5% 0%

Dresses 10% 10% 0% 35% 25% -29% 55% 65% +18%

Suits 35% 40% +14% 25% 20% -20% ~1% ~2% +100%

Sportswear 85% 85% 0% 0% 0% 0% 15% 15% 0%

Casual wear 45% 50% +11% 45% 35% -22% 10% 15% +50%

Product Segments

40

Q1 Q2 Q3 Q4 FY18 Q1 19Tons sold (‘000) 1,063 1,074 968 1,045 4,150 977Sales 877 945 851 927 3,600 867EBITDA 69 90 57 101 317 76

margin 8% 10% 7% 11% 9% 9%

Q1 Q2 Q3 Q4 FY18 Q1 19Tons sold (‘000) 287 302 277 332 1,198 297Sales 241 279 245 278 1,043 263EBITDA 78 83 60 88 306 91

margin 32% 30% 25% 32% 29% 35%

Q1 Q2 Q3 Q4 FY18 Q1 19Tons sold (‘000) 198 231 289 291 1,009 252Sales 196 254 327 310 1,087 282EBITDA 27 39 33 40 139 30

margin 14% 15% 10% 13% 13% 11%

Packaging & Speciality Papers

Printing & Writing Papers

Dissolving Wood Pulp

Thank you

41

Q1 FY19 financial results - Sappi › s3fs-public › Q1-FY19... · Global P&W paper market trends...

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