Sappi Ltd S/Adr

Good day and thank you for standing by. Welcome to the Financial Results Announcement Q1 2024 webcast and conference 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 during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Please be advised that today's conference is being recorded. I would now like to have the conference over to your speaker today, Steve Binney. Please go ahead.

Thank you. Good day, everybody. Thanks for joining. As always, I'll move through the investor presentation, calling out the page numbers as we move. And I'm going to start on page three, which has some of the highlights for the quarter. Firstly, our EBITDA was $156 million, which was in line with our guidance. that we gave at the end of the last quarter. Overall, we were satisfied with those results against the challenging global macroeconomic environment. We did see gradual recovery across our segments. Graphic paper volumes were higher quarter on quarter. But obviously to point out to you that we did have some big shuts. scheduled shots and those were successful for us. But naturally there were lower volumes as a result of that and it impacted our profits by $45 million because of the lower volume. For the first time we've included forestry fair value adjustment in our EBITDA. That's something that we took a decision because we regard forestry as an integral part of the business. Obviously, the timber is sold into our operations. And because of the adjustment to the forestry valuation, it was pushing up the cost. and we felt it was appropriate to reflect the fair value adjustment to offset that higher internal cost. The mills in Europe, Stockstadt and Larnaken, we had announced previously, obviously, that we were looking to close those. Those permanently ceased production, and we will start to see the benefits of that in terms of lower costs later in the financial year. Moving to slide four, the product contribution split. On the left-hand side is the EBITDA, and obviously the last couple of years has been pretty volatile because of obviously COVID, and then we had the global supply chain challenges, then we had the bounce back from COVID, and then more recently the the macroeconomic challenges. So it has been a little bit up and down. But on the right-hand side, I think in terms of our strategy, you can see that we continue to push the business towards the higher margin growth segments. Our percentage of sales coming from graphics continues to continues to come down and that will be the same going forward, particularly obviously after the closure of the two mills and the big projects that we're undertaking at the moment to convert capacity both in Somerset and in Gratcombe. Moving to slide five, the earnings bridge. We thought it was more relevant to compare Q4 with Q1 to reflect the relative performance. Sales volumes negatively impacted, but that's because of the shuts. The underlying performance is positive across the segments. Included in variable costs was an offset of some once-off Government energy related subsidies in Europe of about 17 million euros. And then the plantation fair value adjustment is on the far right. We have been getting some questions today about the split of that. So I'm going to give you the splits. Pulp segment was 10. packaging 14 and graphics two to make up the split of that 26. Then moving to slide six is the variable cost movements. This is consistent with what we've talked about. We saw the peaks in the prior year and then starting to come down across the board through towards the end of 2023. And in Q1, we did see a little bit of a pickup. And all in all, bearable costs were 5% up quarter on quarter. Then slide seven, as our net debt, we remain committed and focused on keeping a tight control on the debt. Obviously, there was an outflow of cash in the current quarter, which I think is on a future slide. And then on top of that, we had an adjustment because of the movement in the exchange rates. Ironically, the dollar had weakened against the euro, but Subsequent to that, it's obviously come back. But in the quarter, there was I think it was 69 million impact because of that. The page 8 has the debt maturity profile. And again, I think it's a good picture. In the 2024 numbers, which I'll focus on, we've got two maturities in the current year. In what we call SDH term date of terms loans in Europe that's maturing in the current year and we're in the process of finalizing that refinancing so there's no concerns there and in terms of South Africa included in the 164 there's about 1.5 billion rand of bonds which are maturing soon and we're confident that we'll be able to refinance that. Moving on to slide nine, which is the cash generation on the left-hand side. The 69 I referred to earlier, actually I made a mistake. The cash generation, utilized in the current quarter was 69 million, and that was a seasonal thing, that's normal. The capex is reflected on the right-hand side, and as consistent with prior quarter, which we referred to, we expect it to be around 500 million for the year. Turning to slide 10, the focus on a disciplined capital allocation remains, and you can see our priorities. In the far right-hand column, some of our targets for the year and some of the things that we're working on. Obviously, we continue to focus on our sustainability targets, our journey towards the science-based targets. So there's some projects there which are on track we remain focused on getting our debt below a billion. Obviously, the current year will be impacted negatively by the shuts in Europe, but in a longer term, once we've completed the projects that I referred to, the debt will come down. Then, in terms of profit improvement and growth, We've obviously got two nice projects underway. BrackCon basically converting one of the machines to labels and giving it the functionality to make wet strength labels. And then we've got the conversion and expansion of Somerset PM2. That's going well so far in time, on budget. And we included in the CAPEX number, the biggest chunk of the CAPEX relates to this project, 154 million. Moving forward to the segmental overview. And firstly, on the product segments, slide 12, the quarter-on-quarter tons were down, but that was for two reasons. One, we had the big shut. that came through. And then the other reason was the fact that we had high volume sales at the end of last year. So our inventory levels going into the quarter were less. The underlying demand is very good. And we expect that to continue to be so. The DP market prices were in a fairly narrow bend in the quarter, subdued ahead of the Chinese Lunar New Year. That's normal. Having said that, the last week or two, it's crept up a little bit. I think the latest prices in China, spot prices are $895 a ton. So that's encouraging. In this period, that's encouraging. and obviously the fact that there were the lower volumes that would have impacted on margins. Moving to the packaging segment, once again impacted by the shuts. In Gurdwana was an extended shut because it was an 18-month period. It's a product category that we make there, container board, which is very profitable for us. So that would have had a negative impact on margins. Having said that, after a slow start to the year, we are seeing more encouraging signs coming out of South Africa. North America, the paper board demand is showing signs of recovery and volumes were up. And in Europe, although volume is a little bit better, the underlying demand still remains sluggish there. And then in page 14, graphics showing signs of a muted recovery. Volumes were up. And you see the benefit coming through into the margins. And then, you know, on top of that, we concluded the closure of the Stockstack Mill. the carouseling of that product to the other mills has been successful. And then more recently, we concluded the consultation process for the closure of Lanican. It did cease production, and we are similar to Stockstadt. We're moving those volumes to our other mills. Moving to the geographic regions on slide 15. All in all, looking at the volumes, Europe, as I said, a slow recovery, volumes up, but it's not a sharp recovery, but things are gradually improving. We've had to give up a little bit of pricing, but it held up relatively well. In North America and South Africa, both of those regions impacted by the shock. The underlying businesses are continuing to improve and selling price is pretty good, actually. You can see the impact on margins graphically on slide 16, Europe a little bit better, obviously coming off a low. North America being impacted by the shock, but as I said earlier, underlying, demand for paper continues to recover. And in South Africa, you know, good margins despite the big impact from the shut. Slide 17 has the strategy or strategic pillars. And, you know, once again, I'm not going to go through this in detail, just highlight a few key items. driving operational excellence is critical for us and particularly relevant now as we close the two mills in Europe and we move that production, that enables us to fill up the remaining mills. As the demand for our product continues to recover in all the regions, it means that then the mills become full once again, and that enables you to achieve better operational efficiency rather than stop starting the whole time. And then enhancing trust, we're very proud of our BE certification, and we continue to believe that our sustainability positions gives us a strong competitive advantage across all the Pyrrhic segments, but in particular in the dissolving pulp space. And then in terms of growing the business, we've got the two projects that I talked about, labels at Gratcorn and the Somerset conversion and expansion. And then in terms of sustaining financial health, ongoing focus on costs and never losing sight of the long-term target of uh net debt at a billion slide 18 uh esg uh we continue to focus on this and and and rethinking what we do and and and and how we do it um you know there's a number of awards that we've achieved um maybe two to call out uh the the bbp the bbb double e um certification came through once again and we're at the highest level, level one. And we've been there for a couple of years now. So we're very proud of that. And then on the CDP front, yesterday actually, we got feedback that our climate change score had improved and our water score. So that's more good news on that front. Then turning to the outlook. Page 20. Obviously, we're still facing the challenges of the weak global consumer environment and high interest rates and low economic growth. Having said that, order activity is improving, albeit slower than we'd like, but it's improving and it's progressive. And the DP demand remains robust. We will complete the restructuring and closing at Larnacan Mill. Just to remind you all that there's over 100 million euros of savings, fixed cost savings, that we should achieve because of the closure of these two mills. Obviously, you're not going to get the full benefit in the Q2. You'll get a little bit of the benefit. but ultimately when we get into the second half of the year on a run rate basis, we will achieve those savings. And on top of that, obviously, as I said earlier, it enables us to fill our other coated wood-free mills in Europe, and that leads to efficiency benefits. Then in terms of slide 21, cost inflation remains a risk. It's stable at the moment but obviously it remains a risk. We've got a little bit of risk on costs related to logistics because of the various challenges that are out there including the Middle East conflict and Obviously, that pushes up the costs a little bit, and it also creates a little bit of pressure in terms of securing capacity on the ships because they're on the water longer. The CAPEX I've spoken about, and then in terms of our guidance for Q2, we say in the announcement that our EBITDA for the second quarter will be in line or similar to the first quarter. And that's obviously despite the macroeconomic uncertainty. What I want to add to that is that obviously in the first quarter, we had the benefits of the once-off environmental subsidies in Europe. which was, as I said, 17 million euros, $18 million. And the other number that was in there was the forestry fair value adjustment. Now, our estimate for Q2 on the forestry fair value adjustment is that it will be lower, at least half of what the Q1 number is. So if you back that into the numbers, both the once-off impact of the subsidies and a lower forestry fair value, that will tell you that the underlying business is better in Q2 to enable us to achieve the even or similar earnings to Q1. Operator, that's me finished going through the deck. I will hand it back to you for questions.

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