Sappi Ltd S/Adr

and thank you for standing by. Welcome to the SAPI Q3 2025 results 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 automatic 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 hand the conference over to your speaker today, Steve Binney, CEO. Please go ahead.

Good day, everybody, and thanks for joining. As always, I'll go through the investor presentation, calling out page numbers as I move through. And just starting on page two, we've got the comments around forward-looking statements there for you to refer to. Page three. Just putting the quarter in context, obviously it's been a challenging quarter marked by ongoing global economic weakness, partially obviously driven by the tariffs and the trade tensions, but broader microeconomic challenges as well. And that's had a significant impact on selling prices, particularly for us, obviously dissolving pulp. which we saw is substantially lower. But not only that, we've seen packaging grades in all our regions, packaging and speciality grades, coming under a bit of pressure. And then specifically, you know, in Europe and export markets, graphic papers also coming under some selling price pressure. We've talked about it in the past. Europe's never truly recovered from the COVID times, and that region continues to be challenged by broader macroeconomic weakness and, at the same time, oversupply in many of the categories of paper. Internally, we obviously had the Somerset PM2 conversion. which was completed. You'll recall from our last investor call, we finished that at the end of May. It was obviously later, and we shared that with you at the time. It was later than we originally expected, which meant that up to the date of completion, which was essentially April, there was obviously no production, and that meant that there was a negative earnings impact of 20%. $2 million. Subsequent to that date, you have the natural ramp-up of the new machine. As expected, you know, that starts at low levels and subsequently ramps up. And I'll talk a little bit more about that, but that's all as expected. The fact that there was delays in that early period of the quarter that had some knock-on effects in terms of operational disruptions on the other assets at the mill, and obviously impacted on people as well. So, you know, that's to be expected, but I can see things are ramping up from there, and we'll talk a little bit more about that as we move forward. So taking that all into account meant that we had EBITDA of $80 million, in the quarter relative to 148. You know, obviously a little bit lower than the guidance we gave last quarter, but predominantly linked to the lower selling prices that are referred to. Moving to page four, obviously the lower profitability has, caused us to combine with the investments that we've made, the strategic investments we've made primarily on Somerset PM2 has made that our net debt levels have risen, obviously coinciding with the weak economic conditions. Same time, unfortunately, we had a negative translation on our Euro debt. As you all know, the Euro substantially strengthened against the dollar, and obviously that all happened at the same time. That caused our absolute net debt number to rise. You can see that the net debt to adjusted EBITDA ratio rose to 3.2 from a covenant, and I know we probably get questions on this, so Just from a covenant perspective, the actual covenant net debt to adjusted EBITDA was only 2.9 times. The reason for the difference is really that on the balance sheet, as you all know, the operating lease liabilities that gets included, that's just over 100 million, that does not get counted for covenant properties. So with that all in mind, You know, a strong focus on reducing debt now. Our strategic projects are behind us. At least to say that, you know, we've managed to pull back on the capex. Well, firstly, in the current year, we've got it back down to 500 million, which is what the guidance was that we gave you at the beginning of the year. You know, we've eliminated any non-essential capex, obviously primarily focused on maintenance. And, you know, we've been going through our budgeting process in the last few weeks, and as we looked out to 26 and 27, also pleased to say that the capex numbers are going to be substantially less. Twenty-six will be less, you know, we're aiming for it to be less than 300, and obviously similarly into 27. We've also made the decision not to declare a dividend in the current year. So all of those things combined, you know, we believe will help as we focus on bringing our debt down. We want to get it back below a billion dollars. Page five of the earnings bridge, and much of this I've talked about. This is from last year's Q3 to the current years. You can see the Somerset impact, the 22 that I've referred to a couple of times. On the pricing front, I've already talked about as well the lower prices coming through, and then on the variable costs, also a negative. Interestingly, some of the variable costs, the actual raw material costs themselves are less, but With that disruption that I referred to earlier, you know, particularly at Somerset, it meant there was some negative usage variances which impacted that and as part of that. So overall, that gives you the $80 million that I referred to. Slide six turns to the major categories of variable cost. Interestingly, you know, in certain categories the domestic amounts were less, but when you translated it, when you translated the euros and the rands back to dollars, you also had a negative impact there. Specifically, pop, actually, that was one of them. Turning to the other costs in Europe, we have seen wood costs and some of the chemical costs increasing. North America, energy, and South Africa, across the board, a number of the categories. We're all together about 5% up. Turning to slide seven, which is our net debt evolution, and we share quite a long history line here. We felt that was important to, you know, as our debt levels have risen, we're now at the peak. And it was important to put this in context of our history. Clearly, the jump to 1.9 billion is higher than, you know, even we expected. You've got 100 odd million debtors. of the currency translation with the stronger Euro, which, you know, didn't help. A little bit of bad luck there, but it didn't help. And then, obviously, the capex coming through, you know, accounts for much, you know, much of that increase. And we obviously deferred the dividend earlier this year, right? We have to pay that in this year. So that is obviously not going to be repeated in the next year. So you can see as you scan across the page, our debt levels have been higher before. And as I say, a strong focus now, our strategic investments are behind us, and now a strong focus to bringing that back down in the next two years. Going to the maturity profile on page 8, with the lower profitability that's come through, and obviously the capex that we've had, it's meant that the short-term debt has risen a little bit. Our focus at the moment is to we're in discussions to term some of that short-term debt and we're confident that we can do it. That's a process that's underway and it's being proactively managed. Other than that, none of the major bonds are maturing anytime soon. We're comfortable with our our profile and obviously our primary focus at the moment is pushing out that short-term date that we're referred to. Slide nine has the CapEx and cash flow. Obviously, this year we've got the negative cash generation, which You know, obviously, primarily comes from the, you know, the higher capex coming through. The same themes, obviously, we declared a dividend with the lower profits. It meant that there is a cash utilization in the current year. The capex, as I said, reducing the current one to 500. In the last quarter, we had 550. We pulled that back and done a a very close focus on our capex for the next two years. And as I say, we want to get that under 300, and we're confident to do that. Slide 10, linked to all this, we're very much focused on our discipline capital allocation strategy. Strong focus on getting the debt under a billion again. And, you know, clearly, from a profitability perspective, there's going to be, there's no major projects coming. We need to ramp up on the label investment that we did at Gratcon, and then the SPS packaging conversion and expansion that we did at Somerset. And, you know, I'll touch on that a little bit more later as well. But, you know, all in all, our primary focus going forward is, in the next few years is on cost management, discipline, and reducing debt. Turning to the segments, and firstly on pulp, which is page 12, the current quarter, obviously significantly impacted by the lower selling prices coming through. Needless to say that It does look like it's bottomed and it started rising in the last couple of weeks. You see the price here dropped to 8. Actually, I think it dropped to 7.98 and it's now back at 8.10. And, you know, ultimately we're confident that prices will recover to where they were previously based on the economic fundamentals. And as I say, already recovered to 8.10. So feeling better about that. And then we had an 18-month shortage, which obviously impacted margins in that segment. We have a dissolving hotline there as well. Then turning to page 13, a tough quarter on packaging, and it's probably best to think about it regionally. I mean, firstly, in Europe, I've already talked the fact that you have your broader macroeconomic challenges, and that's also magnified by the oversupply in many of the paper, or many of the packaging paper categories. Some of the oversupply is obviously linked to the fact that the demand has been less than was expected, but there has been additional capacity coming through

from competitors and different product groups.