Sappi Ltd S/Adr

Good day, and thank you for standing by. Welcome to the SAPI Q4 2025 results 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 1 on your telephone. You will then hear an automated message advising your hand is raised. 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. Thank you, everybody, for joining. As always, I'll go through the investor presentation, calling out page numbers as I move through. I'm just starting briefly on page two, just drawing your attention to the forward-looking statements disclosure. Turning to page three, which is summarizing the year. as a whole, the financial year 2025, and it's fair to say it was a challenging year marked by ongoing global economic weakness. We did see difficult market conditions across all our segments, actually, and obviously partially driven by the weak economic conditions, but also the global trade tensions. As a result of all that, we saw downward pressure on selling prices, and from a materiality perspective, particularly on dissolving pulp, they dropped quite sharply during the year. And on the paper side, added to that, we have seen excess supply globally in our key market segments. Despite all those challenges, we did have some operational highlights. We saw our DWP and packaging volumes growing year on year, and in the graphic paper space, we were able to gain market share. I'm thrilled to say that we've obviously completed the Somerset PM2 conversion and expansion. And that's an important step in our strategy, and the machine is performing well. In Europe, we continue to make further rationalization to take costs out of the business and to improve capacity utilization. And on slide four is a summary of the quarter itself. Relative to the prior quarter, Q3 of this financial year, numbers up a little bit. However, the market conditions remained challenging. We did see sales volumes pick up for pulp and packaging, and we also benefited, obviously, because there was no maintenance shuts. Regionally, Europe continues to be in a challenging place. situation there is still difficult for us, and across many of the paper grades we see excess capacity. North America, obviously beginning the ramp-up of the Somerset 2 conversion, we saw improvements in volumes and modest improvement in profitability. You're not at optimized levels, but we start to see that improvement come through. And then South Africa, I think South Africa had a pretty good quarter, actually. Obviously, lower dissolving pulp prices are the big story there, but on the packaging side, a reasonable quarter, albeit that on the packaging side, even selling prices there globally have an impact on the South African business. Slide five has the bridge from last year to the current year, and the big story is obviously the lower selling prices and its impact on our business. It's across all the segments, and that kind of dwarfs all the other variables when you look year on year. To give us the 111. On slide six, we did see relative to the prior quarter, we did see variable costs coming down in each of the regions. Pulp at relatively low levels and obviously that benefits the paper business, but obviously indirectly has a negative impact on DWP prices. energy prices coming down a little bit as well, but really across the board. And then turning to slide seven, which is the evolution of our net debt and our leverage over the last few years. And obviously, we saw the peak through the COVID period. We saw it coming down substantially. We made a decision to invest at Somerset, obviously, and then in the current year we've got the higher capex, which is now behind us. We also were negatively impacted by the exchange rates. The fact that a significant proportion of our debt is denominated in euros, and when you compare that to dollars you get the negative impact. But having said that now, the investments are now behind us and we would expect our debt to start coming down. You saw that it's coming down a little bit in this quarter and we would expect that to continue over the next quarters ahead and into the next few years. And then the debt maturity profile is reflected on page eight and maybe just a couple of call-outs. Short-term debt, which is 2026. You can see we've got a chunk of short-term debt in the box there, the 224 million. And we did put out an announcement on this. We are in the process of terming out some of that debt and making good progress, and we'll give an update as soon as that's complete. Major refinancing that we've got coming up over the next few years is the 2028 bonds. Eurobonds is about 400 million euros. We obviously monitor the markets and we'll pick the right time to refinance that as we move into the new year. And then on cash flow and CapEx, Obviously, a tough year and lower profitability, which has meant that we utilized cash during the year, and you add in the capex as well. So 360 million that we utilized during the year. Capex going forward, 2026, we're estimating at 290 million, and then 2027, We're committed to keeping that below $300 million. We haven't finalized the number yet, but it will be below $300 million. Taking that forward into page 10, as you all know, we gave a recent update on some of the work we were doing on the balance sheet and on the funding side. Obviously, with the lower profitability, our leverage ratio increased. And because of that, we proactively renegotiated our covenant levels through next year, great support from the banks, unanimous support, and we've negotiated significant, enough headroom to manage through this peak time. We're terming out the short-term debt, as I said. And overall, with that debt reduction focus, back to basics, focusing on productivity, cost containment. At the same time, we've obviously stopped the dividend, and we have some initiatives to reduce costs, particularly in the European business, and I've got a slide on that just now. The Thrive strategy is reflected on page 11, and obviously our focus in the short to medium term is this back to basics, but we must never lose sight of our strategic focus and obviously operational excellence is key to back to basics, maximizing productivity and efficiency and reducing costs. We continue to focus on enhancing trust across all our stakeholders in terms of growing our business. We're not going to be taking on any projects or any material projects in the next couple of years. Our focus is on ramping up the projects that we've done, and primarily, obviously, that's the Somerset PM2. Ultimately, we're laser focused on getting the debt below a billion. We know it's going to take a couple of years. With all the actions that we're taking, we're confident that we'll get there in the medium term. And then, obviously, with a strong focus on our maturity profile, which I talked about already. Slide 12, I'm not going to repeat, because a lot of this is similar to the prior slide. Just to say that we are in this consolidation phase. focus on cost, focus on efficiency, maximize production. We've got a 60 million target to take out costs in Europe, and much of that's already been made public. But it's not just Europe. We are focusing on the other regions and at the corporate level. And on top of all that, working capital optimization. It's only once we complete all that that we would consider dividend payments and any growth opportunities. Slide 13 just talks about our capital allocation priorities, and I've touched on this. So I'm not going to repeat everything here, but obviously strongly focused on reducing debt, ramping up on PM2, ensuring we get a return on capital employed above our costs – above 2 percent of our WECC, 2% above WECC, and then making sure that we optimize our product portfolio and matching graphic paper capacity to market demand. Slide 14 is a specific slide on Europe, which we thought would be useful. It just breaks down the $60 million saving that we've got. You can see it's across the mills and at the corporate level or the central regional level. We're closing two machines at Alfelt, one at Kotmimi. At Engen, we are reducing the shift details. And at Gratcom, which is our number one mill in Europe, looking at a number of initiatives to optimize. product production and profitability. Then turning to the segments, and again, I'm not going to go into detail, but just to summarize, and I'm on slide 16. The demand, the underlying demand for DWP remains good, and we are fully sold out. And we continue to have our customers pushing for volume. The challenge is obviously that global prices have come off. And that's linked to various macroeconomic conditions. And I also think that the lower paper pulp prices have not helped as well with carouseling and substitution there. But overall, volumes are good. Also, on the production side, things are going better as well. Packaging, a really tough year. Sorry, slide 17. Packaging, a tough year across all the regions, actually. Europe, a modest recovery, but as I said earlier, the European economy continues to be challenging. And there's overcapacity in all the key product categories. North America, we've begun that ramp up. The machine's performing well. We're adding volumes. And we're confident that we'll continue to do that in the quarters ahead. South Africa had a very good citrus market season, which is our primary product. That's our primary market for our South African container board business. Good season. The only challenge – well, the one challenge we have is that global container board prices are weak, and that does have an impact on domestic selling prices. And then on graphics, we continue to be proactive in terms of managing our capacity. In North America, the domestic market tightened. Obviously, we took out PM2 out of graphics, so that supported the market balance, and I think it's helped ensure that we have stable selling prices and good margins. The challenge in Europe is the excess supply, and that obviously impacted on selling prices in that region, which had a negative impact on profitability. And then slide 19. Just a very brief summary of the regions. And all in all, you can see selling prices across the board down. And then some of it we did get cost savings in Europe to offset some of that, however, not enough. And then in North America, costs obviously because we had the initial ramp up at Somerset and that obviously impacts on efficiencies and usage and the likes. And then in South Africa, we did have some of the raw material costs up year on year, some of the chemical costs and wood costs there. Slide 20 has some of our key awards and highlights. I'm not going to go through all of them. We're particularly proud of our rankings in the Forbes best employer and top companies for women. We were 144 in the world for top companies for women, the second in South Africa. Really very proud of that. But even, you know, best employers as well, you know, globally to come in at 289. And when you look at the companies on that list, We're very proud of that. Other than that, we continue to focus on our science-based targets and our wood set specification, which gives us a strategic advantage. And then you can see the links to our reports there as well. Turning to the output, and I don't intend going through every bullet. I'm on slide 22. I think it's fair to say that the market conditions continue to be challenging. We do believe that as we progressively move through 2026, things will get better. DWP has stabilized. You saw a little bit of an increase in that quarter, and we continue to think that that will be the case as we move through 2026. We'll obviously have the benefit of the ramp up in PM2 as we progress quarter on quarter. And then on the graphics side, it's about proactively managing that capacity. The cost side, some of the raw material costs are relatively low, and we'll look for opportunities there. We do have a maintenance shut, scheduled maintenance shut at Somerset. That's an 18-month shut, which will have an impact of about 20 million, and we obviously took that into account. in our guidance. You've heard me say it many times, back to basics, focus on what we can control, focus on efficiency, focus on cost, debt reduction, very disciplined capital allocation. Taking all that into account, and the shut obviously, we estimate that the adjusted EBITDA The first quarter of 2026 will be below that of the quarter we've just reported on. So, operator, I've gone through the presentation. I'm now going to put it back to you for questions.

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