Sappi Ltd S/Adr

Thank you, and good day, everybody. Thanks for joining us. As always, as I move through the investor presentation, I'll call out page numbers. Just starting on page two, just refer you to the forward-looking statements disclosure, if you can take a read of that. And then moving to page three, The second quarter in context, it's fair to say we did see a deterioration in the market conditions across all segments from where we were obviously three months ago. We did know that the earnings were going to be lessened and certainly we guided that way because we had material shuts in the quarter. Firstly, we had the shut for the Somerset project. which had about a $20 million impact, which was as expected. And then we had two big maintenance shuts at our two big South African mills, Sycor and then Gdwana. Those took longer than anticipated. We did pick up some issues during the shut. And overall, that had an impact of an additional 13 million tons. Broadly speaking, that is the main reason for the the differential to the guidance that we provided. Having said that, as I said earlier, the market conditions did deteriorate. We saw our selling prices across all the segments coming under some pressure, and obviously that picked up momentum as we got to the end of the quarter, particularly in anticipation of the announcements of the tariffs in the US by President Trump. we certainly saw a slowdown as it progressed. Overall, the actual sales volumes themselves were actually reasonably stable. And I'm pleased to say that we did see volumes in the packaging segment higher than they were previously. But obviously, the impact on shots is that you have lower production And you have higher fixed cost absorption and obviously lower inventories at the end of the quarter. Moving to slide four, just some of our metrics on a 12-month basis. The cash generated from operations, despite the tough last quarter, still strong. And our net debt to EBITDA, you can see, up to 2.4. But we did anticipate that because we had the higher capex coming through. I'm pleased to say that we successfully completed a refinancing of our 2026 bonds during the quarter. Good demand there, nice pricing, and replaced that with 2032 bonds. Slide five has the year-on-year EBITDA reconciliation bridge. And what is interesting is that on the sales revenue side, things were reasonably stable, as I indicated earlier. And the big reason for the shortfall year-on-year is driven by the fixed costs, which is primarily linked to the shuts. And as I said, you have lower production, the cost of the shuts themselves, and because you have lower production, higher fixed costs, absorption rates on the remaining tons that you produce. That is the big reason for the year-on-year adjustment or difference. The other thing to call out, there was a negative fair value adjustment on the plantations in South Africa. That was something that we talked about in earlier quarters. The prices haven't gone down any further, but as you annualize these, you have the remaining impact coming through, and that is expected. That will level off as we fully annualize. Turning to slide six. Just directionally, some of our major variable costs, energy up in Europe, there was some higher energy costs coming through, albeit that that has reversed a little bit in more recent times. In South Africa, because of the shuts, once again, your energy costs, because you're You're not getting the efficiency and the usage of your boilers, so you have higher energy costs, and that pushed that up there. Pulp and wood was lower. Similarly, chemicals and delivery costs relatively flat. Moving to slide seven. This is an expanded slide, and we thought it was important to show this because it tells a very important story. debt levels are a little bit higher at the moment and that's by design because we had the well firstly we had the closures in Europe last year which we had to fund and then we have the Somerset project the these this was anticipated the only the only I guess the only surprise is the fact that the the dollar versus the euro has weakened and That has added some to the debt number. But overall, as expected, you can see our debt levels are substantially lower than in the past, and we remain committed to reducing debt. And over the next two years, you're going to see a substantial reduction. The Somerset project is obviously now complete. And as we move through 26 and 27, you'll see a substantial reduction towards our longer-term debt targets. Turning to slide 8, once again, from a liquidity perspective, I think it tells a good story. We've now refinanced the 26s. There was a little bit of short-term debt. The next big one now is way out in 2028. So we're feeling good about the run, the outlook and profile, and that continues to be tightly managed. Turning to slide nine on the cash flow and CapEx. Firstly, on the cash flow on the left there, Obviously, the free cash flow is lower than the prior year, and that's predominantly linked to the shuts. It is a year-to-date number, so you don't have the full impact, but we've obviously got the shuts there. And then the timing of working capital. The reason I call it out that it's a year-to-date is we typically have a positive working capital movement in the last quarter of the year. And then just to come to the net cash, obviously we had the dividends and the capex that we had to fund. On the right-hand side are capex projections. The estimate for this year has gone up. It's $550 million. The reason it's higher than we spoke about last time is that The completion of the Somerset took a little bit longer than we expected. It's now done, and based on our final estimates for that project, we are estimating $550 million for the year. Just to say, and I know we'll get asked it later. Our estimates of the cost of the project are close to $500 million. The reason for the overrun, well, one was higher labor costs, and we talked about it last time. The further increase we've seen in this quarter is due to it taking a couple of weeks longer than we had anticipated. Now that that's behind us, we're strongly committed to reducing debt. With that in mind, our CapEx is going to be primarily focused on maintenance and legal commitments. For the next two years, at least, we're going to keep our CapEx levels below $350 million. With that, obviously, we're going to see a substantial reduction in debt. That's a strong priority, our immediate priority as a business moving forward. Slide 10 is a new slide that we felt was appropriate to show. And it's our returns relative to our WEC. And we've gone back some time. We felt it was important to demonstrate that our returns have consistently been above our cost of capital. The only time that we didn't make that was during the COVID period. Obviously, this year is challenging. We have a target of achieving at least 2% above, and certainly when we consider projects and opportunities moving forward, we will continue to apply that. So we thought it was important for shareholders to see that. And with that in mind, we move to slide 11. We have a disciplined capital allocation strategy. Maintenance comes first, maintenance capital, any regulatory commitments that we have to make. We've committed to science-based targets, so there's a little bit of sustainability cost there. Some of it's legal, but overall, we've got to take those commitments into account. And then moving down, as I say, our balance sheet sustainability is very, very important. You're going to see a substantial reduction from Q4 onwards and into the next few financial years. Our immediate or our medium term target is a billion, and we certainly want to get it below those levels. Then moving further down the capital allocation, we have some cost savings initiatives, efficiencies. These tend to be smaller projects, but with very short paybacks and then ultimately we move towards said the dividends and obviously we've been paying dividends over the last few years and then only then you know once we take that all into account will we consider you know future growth projects and There are no major that there are no projects that we're looking at at the moment or looking to do in the next couple of years and Slide 12, very excited to say that the project is now complete. Very exciting. We think the U.S. market is a core market for us. The packaging in the U.S., it's achieved positive growth in the last 12 months, resumed its growth. project will double our capacity on the machine and give us 470,000 tons of SBS. Machine's looking great. The team are excited. We are signing up customers. It's very much aligned to our strategy to reduce exposure to graphic paper and growing the packaging segment. Some nice pictures there. We have many pictures, but it's great to see the paper going through the machine. And we've given you a video link where you can see some of the team that worked on the project, and you can see their excitement to having this done and their enthusiasm for ramping up as we move ahead. So we're very proud of this, and it's an important strategic step for SAPI's sustainable future. Moving to the segmentals. slide 14 starting with pulp you know generally uh well in the quarter itself the pulp numbers were were okay and we did see dp prices um reduced during the quarter um if you recall they started at 970 dropped to 900 by the end of the quarter so there was a little bit of price downward pressure that has affected us some of our contracts are lagged but obviously we do have exposure to a substantial portion of our volumes. And then the other factor is the shucks themselves. The fact that we had Sycor and then Gdwana, the lower production. Yes, the sales volume was the same, but because we produce less, as I said earlier, you have to spread the fixed costs and the maintenance costs and that's what impacted the volumes. You know, obviously there has been downward pressure and it's in prices and that's been linked to the geopolitical trade tensions. Normally we see a bounce back post the Chinese New Year, but obviously by then we started to various industry players started to anticipate the tariffs that were about to come and we saw We saw activity slow, and it further slowed after the quarter end, and I'll talk a little bit more about that when we get to the output. Page 15 is the packaging segment. Generally okay in terms of demand. We did see positive growth in the U.S. and South Africa. Once again, those markets or the profitability in those regions was impacted by the respective shots that we had. The other thing I would say is that in the U.S., on our Somerset PM1 offering, there was a little bit of a product mix adjustment in anticipation of commissioning on Somerset PM2. So that did impact profitability, but we regard that as one-off issues. Moving to graphics on slide 16. Overall, reasonably stable volumes. We've been gaining market share both in U.S. and in Europe. A little bit of downward pressure there. on selling prices, which impacted overall margins. But obviously, once again, you had the shut in the U.S. as well, which would have had an impact on profitability. Selling prices, although they're down, they are reasonably resilient. Which brings me to slide 17, which just very briefly summarizes all the regions. The quick takeaway from this one is that on the top line, okay, the revenue is reasonably stable. You've seen that on the graph earlier. We did see higher variable costs in North America and South Africa. Once again, that is linked to the shuts. and the production associated with what's left at the mill during those shots. And then just graphically on page 18, Europe continues to be challenged by difficult macroeconomic conditions. It's never fully recovered in Europe since COVID. So it is challenging conditions. And obviously now we have the kind of latest trade tensions, which is not allowing for a meaningful improvement. The U.S. was affected by the shut on PM2 and lower selling prices for SPS. And then in South Africa, as I said, once again, the two big shuts. Slide 19 has our Thrive Strategy. It's something that we continue to focus on. It guides us as we look forward. And once again, you've seen it before, and I'm not going to talk about too much other than to say, firstly, on operational excellence. Obviously, when you move into times, difficult market conditions, a focus on costs, focus on efficiencies, is ever more important, and that's what we're working on. I do think that with the current market conditions, and albeit the uncertainty around tariffs, there could be raw material cost opportunities, and it's important that we take advantage of those. On enhancing trust, obviously sustainability is very important. Particularly, well, it's across all our segments, but the fact that our wood is certified, I always say it gives us a strong strategic positioning against our competitors. In terms of growing our business, we've made these investments now, and it's important that we ramp up, realize the profitability, and obviously, we continue to reduce exposure to graphics. And then on financial health, you've heard me say many times, bringing the debt down is our number one priority. You see the one and a half times here, obviously, based on roughly where EBITDA levels are, that roughly equates to the billion dollars. And that's why we are strongly committed and a strong balance sheet and optimizing our capital turning to tariffs on slide 20 firstly the direct impact of tariffs is not that material you know we do have about seven percent of our sales volumes across border US trade so it's not that material and and we look at the the individual categories, we don't think it's going to have a significant impact on our business. We do have some raw materials, but we would look to source those. The tariff situation is evolving and it's important that we are flexible in terms of our suppliers. On the graphic side, The U.S. is a net importer of graphic paper, roughly 500,000 tons. And the fact that we're a domestic producer could create opportunities for us. Our European business imports about 50,000 tons of graphic paper, so we have a little bit of exposure there. And then similarly on the packaging and the SPS side, overall the U.S. is a net importer. So once again, this could create opportunities. And I think, which is nice, as you start up on the PM2 at Somerset, this could create additional opportunities. We've obviously been signing up customers for a period of time, and this could be additional on top of that. We do have a little bit of exposure from Europe, being 25,000 tons of various spread across a number of products on the packaging and speciality front. Then turning to dissolving pulp, we export about 30,000 tons of DWP to the US. So it's a relatively small portion of the total. Our Cloquet mill in the US exports 200,000 to other countries which I guess potentially could have there could be reciprocal tariffs but it's important to say that's not China this is other countries and clearly at Cloquet we have the ability to swing so that that gives us some mitigating potential mitigating factors that we could take into account So overall, you can see the direct is not material. And if anything, there are potentially more opportunities. The bigger worry is the indirect impact and its impact on global trade flows and ultimately inflation and consumer demand. And, you know, most specifically, it's on the tariffs imposed by the U.S., text that was not just textiles but for us it's obviously textile and apparel manufacturers in China that is impacting on demand for clothing and you know we we export a significant amount of our volumes to Asia and more specifically China what we're seeing at the moment is that various industry players are adopting a wait-and-see attitude. The trade flows between China and the US have slowed considerably, the vessels are not flowing, and everybody is waiting to see what happens. For us, it's not so much that we sell huge volumes into China, but we are exposed to Chinese selling prices. So because the conditions have deteriorated rapidly, it has meant that the DWP price has dropped. I talked about it earlier. After the quarter end, today it's $830 a ton. And it's for that reason we had to be cautious about our outlook statements. Now, we believe this is a short-term impact. You saw it, obviously, during COVID. Ultimately, the U.S. will need clothing, and ultimately, volumes will flow once again overall. But at the moment, on a very short-term basis, there is not a lot of activity, and that is having an indirect impact on DWP selling prices. I'm not concerned about the volumes because most of our volumes either goes contractually to our long-standing contractual customers or they go to other markets outside of China. But we are exposed to the Chinese price, the selling price of DWP. So with that in mind and moving to page 23, our outlook statement, as I said, this disruption of trade flows and in particular on the clothing sector, that is why we've been very cautious. On the cost front, yes, there's a risk of inflationary pressures, but as I said earlier, Some of our raw material costs are starting to come down now. So that could create opportunities. We do have some shuts in the quarter. Those are normal. But we wanted to be transparent and just call those out to you. And then on the summer set, as I say, completed. Now we're focused on ramping up and Q3 will be progressively ramping up. Turning to page 24, firstly on capital allocation, obviously I've indicated that the capex for the year is 550. The final payments for the PM2 conversion occur in Q3, and then – so you'll see the peak at the end of the quarter, and then Q4 that reverses, and then we you know we start to come down fairly fast thereafter and so taking all that into account and giving this uncertainty and primarily given the DWP price at eight hundred and thirty dollars a ton we have adopted a cautious outlook and based on that we've estimated that adjusted EBITDA for the quarter will be at a similar level to Q2. So, operator, I've gone through the presentation. I'm now going to hand it back to you for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Please stand by while we compile a Q&A roster. Our first question comes from the line of James Twyman of Prescient. Please go ahead. Your line is open.

Yeah, thank you very much. Yeah, the question's from me. Firstly, in terms of the U.S. market, what reaction have you seen from the import competitors in terms of any movements in pricing that they've done? And I suppose you would be an example of that. So have you adjusted your prices for imports into the US, for example? And secondly, how exposed are the Chinese visco producers to the US market? I mean, roughly, what percentage do you think of their sales ends up in the US? And then the third question is, In terms of the timing of the startup of the new machine, Somerset, do you think we can assume that in Q4 it will be ramping up and breaking even, or do you think that's been delayed a little bit further? Thank you.