Sappi Ltd S/Adr

Good day, everybody, and thanks for joining us. As always, I'll go through the presentation, calling out the page numbers as I move through. And I'm going to start on page three, which is some of the key highlights for the quarter. Overall, we were pretty pleased with the quarter, a good set of numbers, good start to the year, ahead of expectations both internally and externally. So we're obviously pleased with that. Segmentally, the pulp segment delivered another strong performance. We continue to see good demand. Our mills are fully sold out, and we continue to be optimistic about that business going forward. Graphics, good quarter, good margins. We did get cost savings. I'll go into more detail on this. But overall, very satisfied. Packaging was more difficult, but there was some specific unique circumstances there. And once again, I've got a slide on that, which I'll go into. Having said that, profitability was better than a year ago. So obviously pleased there. The other aspect of the results is that despite the higher capex, I'm pleased to say that our debt leverage ratio did come down to 1.9. Obviously, we knew it was going to go up at the end of last year, and obviously, as we complete the CAPEX projects in the next quarter, it is higher. But all in all, it's as expected, and we would expect it to come down significantly once the projects are completed. Slide 4, which is our year-on-year EBITDA bridge, always good to see lots of greens on the page. So we're pleased there, volumes higher and a favorable pricing mix, primarily pricing obviously driven by dissolving pulp, which has seen further increases throughout the year. But generally, prices have been better than we had anticipated. We had cost savings. both on variable costs, raw materials, predominantly linked to pulp, and I'll talk about that on the next slide, and then fixed costs, also savings. And you'll recall we obviously closed Larniken last year, and we get the benefit of the fixed cost savings there. So all in all, a pretty pleasing set of numbers. Slide five has the input costs. Obviously, this is across the regions, and sometimes there's local dynamics that influence the respective markets. But at a broad level, pulp prices are coming down and are pretty low levels at the moment. Obviously, it does take time to realize some of that benefit. in Q1, and hopefully that will continue in Q2. Wood costs were up a little bit overall, but again, that was a mixed issue, so I'm not overly concerned. We are seeing relatively low wood prices in South Africa, which will help us. Turning to slide six, our net debt evolution. As I said earlier, I'm pleased with this result. Leverage under two. It will rise a little bit obviously in the next quarter as we incur the big capex for our Somerset project, but we continue to maintain a tight control here. We did benefit in the quarter. from the fact that we had a stronger dollar relative to the euro and obviously as you all know a big chunk of our our debt is denominated in euros so we benefited from that and that brings me to slide 7 which is the debt maturity profile very pleased to announce that we extended our securitization program that's the dark blue bar in the 2028 year. It's been a great program for us. We get a very low cost and we've extended it once again and the only other major or maturity that we have in the next two years is obviously our 2026 bond. That's for about 240 million dollars. We continue to watch the markets, and we will pick the optimal time to refinance that. Obviously, these were issued at a time a few years ago when interest rates were pretty low, so we're making the most and capitalizing on the lower interest rates. And as I say, we'll pick the right time to refinance there. Slide eight has the cash flow and capex. Firstly, on the left-hand side, the capex, cash generated from operations. Nice start to the year, obviously on the higher profitability and that coming through. At the bottom line, obviously we had to fund the higher capex that came through, so giving us a net outflow for the year of 62, which that was offset by the impact of the stronger dollar that I said. On the right-hand side is the capex. Previously, we had guided you to 500 million for the year. As we got closer to the completion of our Somerset project, we have seen a rise in labor costs associated with that project. And obviously, we're at a very important stage. We're in the shut at the moment, actually. And as we've got closer to the completion stage, we have estimated that the labor costs will be higher. And as a result of that, we have adjusted the overall capex for the year to 525. The project is going very well. As I said, we're in the shot. We're meeting our deadlines, and we're still very confident about the start update, which will happen in April. So very pleased with the progress. Unfortunately, you have had wage inflation in the US, and that had an impact on labor costs coming through. Slide nine is our Capital allocation, we continue to be very disciplined. It's a busy slide, so I'm not going to go into detail, but just to focus on the fact that we are committed to our longer-term net debt targets. In absolute terms, it's about a billion. Once the project is complete, which I've just indicated was There's going to be a strong focus across the business on debt reduction. We've got no major capital projects in the second half of this financial year and into 2026. So by the time we get to the end of 2026, we're confident that the debt will be substantially lower and obviously much closer to this target that we've set ourselves. Profit improvements. We're going to start to reap the rewards of the two big projects that we've had. Obviously, at Somerset, we will complete in April, and then we're going to see a progressive ramp up thereafter. A very exciting project with very good returns, and as I say, ramping up quarter by quarter. And then at Grant Corn, as you know, we spent some money there to give us the capability of making Wake Blue Labels and that is now complete and we're ramping up there quite nicely. So feeling good about the two big projects and that they can deliver the exciting returns that we had in our business cases. Then moving to slide, I'm moving forward now to slide 11 and focusing on the product segments. Just another good quarter. I'm pleased to say production cycle was excellent. We really have made some nice, impressive improvements at the mill over the last couple of years and very pleased with the progress. The volumes, quarter on quarter, we may get asked that. It was really because we had such a We started the year with low inventories because of a good prior quarter, but we're fully sold out on our production and as I said earlier, strong demand from our customers to give them volume. Then on the packaging segment, it was a more difficult quarter. If I look at it from a regional perspective, well, firstly, very pleased with the volumes in North America. So that's good progress. Obviously, as we get closer to the completion of the PM2, At Somerset, we are signing up new customers, but there's a little bit of a mix difference ahead of that, and that did impact a little bit on the margins. But all in all, feeling very confident. The European recovery continues to lag. It's predominantly linked to the European economy. It's much slower. And then across a number of the product categories, not just within SAPI, but across packaging and specialities in Europe, we're still not seeing volumes back at pre-COVID levels. So it is lagging, but we are confident that we will see progressive recovery. It's just taking longer. And then in South Africa, nice Operational efficiency improvements helped us. On the volume side, the citrus season in South Africa was lower than prior estimates, which meant that our customers were carrying a little bit of extra inventory, which impacted on Q1. But the underlying business is great, and we would expect volumes to pick up later in the year. And then on graphics, very pleased. Obviously, we all know that this is a segment, a category that's in long-term decline. But I think what this page highlights to you is that if you manage your capacity, your efficiencies, you can make good margins. And so we're pleased with the progress. We continue to try and be proactive. We benefited from the lower costs. And we'll continue to do that. And then regionally, on slide 14, I don't intend going into great detail. The key numbers are there. Firstly, Europe, the year-on-year tons is down, but that is predominantly linked to the decline of graphics, which we've talked about before and I referred to on the prior slide. We know that graphic volumes will decline over time. The reason the margin is lower is not graphics. It's actually the packaging, and it's linked to the difficult market conditions that we are facing in Europe. North America, good improvement, good margins, and similarly in South Africa. And you see that graphically on page 15. I don't intend going through this, but obviously very pleased with the margins that we're getting in North America and South Africa. North America will obviously, once the project is complete, we're going to see higher volumes coming through and good margins on the back of that. Europe taking longer to recover, as I indicated, predominantly. linked to the packaging segment. Then on slide 16, the Thrive Strategy. Again, we shared this list with you many times. My intention is not to go through this, but just to highlight that this continues to guide us as we move forward. Obviously, a strong focus on operational excellence, and I think we've seen the benefits of that coming through in the last year. On the cost side in these volatile times there are opportunities there It's very important that we optimize supply chain, but but in these volatile times There are there can be opportunities and I think we've demonstrated that and we will continue to do so On growing the business obviously We've got the two big projects, Spratcom now behind us, we're ramping up, and then Somerset very close to completion. And then being very disciplined on the balance sheet side and, as I say, getting back down to those longer-term targets. Then turning to slide 18, which is our outlook, these are interesting times, lots of challenging global macroeconomic conditions and lots of volatility. We obviously have to navigate through that. But within our product groups, DP remains strong. Obviously, we've just finished the Chinese New Year, which is typically the quiet time. And we're going to see more activity as we go forward post that period. Packaging. Generally stable. Obviously, as I indicated earlier, South Africa pick up in volumes in the second half of the year. We've got North America completing the project, the subsequent ramp up, and then I think a gradual improvement in Europe. But it's going to be linked to the economic situation. And then graphics. It's resumed its historical decline, but we're managing that very effectively, and we'll continue to be proactive. The one thing I should call out is obviously when we convert that PM2 machine, that's effectively taking out more capacity in that space. And in Europe, with the ramp-up of labels at Gratcon, that's also the equivalent of taking out a machine. keeps the market tight, and hopefully boosts the margins and keeps them at these healthy levels. On the cost side, the paper businesses will benefit from the lower pulp costs, and clearly we want that to last as long as possible. We do have the two shots in South Africa, in Gurdwara and Sycor. Last year they were in Q1, this year they're in Q2. In Gdwana, you may recall from last year, we did an 18-month shut. We felt it was not appropriate to do another 18-month shut, so we went for 15 months this time, and we think that is the optimal period. But the net impact of those two, if you were comparing or looking at the earnings was in absolute terms was 45 million. Moving to the next slide we've obviously got the Somerset extended shot and we're in that at the moment things are going well and we estimate the impact on this quarter's earnings of 21 million. The capex I've already spoken about and obviously The biggest proportion of this number relates to the project. And then ultimately the guidance is that if you take into account the two shuts in South Africa, the Somerset extended shut ahead of the project, if you take those into account, and I want to stress to you that the underlying conditions are still stable. They haven't changed. We don't see any material change in those conditions in this quarter. But if you take into account those impacts that I referred to, then that means that the adjusted EBITDA would be below that. The Q2 number will be below that of Q1. Operator, that's me gone through the presentation. I'll now hand it back to you for questions.

Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered, or you wish to move yourself from the queue, please press star 1-1 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Lars Gelberg with Stifel. Your line is open.

Thank you. Thanks for providing all the details that you've done, especially around the closure, et cetera, and maintenance activities in Q2. I'd just like to fast forward to Q3. Again, as far as I understand, cycle goes down again and Cloquet. And then, of course, we need to consider, as you start to ramp up the new Somerset machine, do you have any ways to guide us what you expect in terms of costs for that quarter? as well, and then of course there's a translation into Q4. That should be a fairly smooth quarter, I would assume. That's my first question. The other one refers to GraphCon. I can only assume that you're in now some sort of approval phase, testing phase with your clients. When should we expect that to start to contribute to your numbers? And then I thought you made some comments around you know, the dissolving wood pulp business seeing some pricing pressures around the China Lunar New Year. But do you see that as a temporary effect and then you would expect prices to recover? And the final thing on paper pulps, one of the suppliers talked about increasing rebates. That's going to offset the first price increase they've announced of $50 per ton for softwood. Are you seeing increasing rebates across the board in the purchase pulp that you're buying.