Sappi Ltd S/Adr

Good day and thank you for standing by. Welcome to the SAPI Q3 2026 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 11 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'd now like to hand the conference over to your speaker today, CEO Steve Binnie. Please go ahead.

Thank you, operator. Good day to everyone. Thanks for joining. As always, move through the investor presentation, calling out page numbers as we move through. And just quickly starting on page two, I just draw your attention to the comments on forward-looking statements. Moving to page three, which is really just a high level summary of the quarter. It's fair to say that we still have challenging market conditions with volatile economic macro factors taking place, which has had an impact on a number of our costs, which is obviously impacting on the margins. and also selling prices for our products. On top of that, we continue to feel the impact of the strong Rand against the US dollar. On the positive side, I'm pleased with the progress that we're making in North America as we increase our sales volumes on the packaging side, on the SBS side specifically. This is a reminder that the quarter did contain the Ngadwana shut, the annual maintenance shut, which had an impact of $22 million. So all in all, a tough quarter, but we are beginning to see some green shoots and positive momentum on selling prices, and I'll talk a little bit more about that. and Eva Dov, 53 million, which was in line with the guidance that we put out a couple of weeks ago, the revised guidance that we put out a couple of weeks ago. Slide four, just two of the major drivers of performance is the slide we shared before, but the DWP price and the Rand dollar exchange rate do have a significant impact. And as I've said previously, normally they move in opposite directions, unfortunately both And just to highlight the sensitivity there, when you're selling 1.2 million tons plus of DWP a year, a 1% change can have a vast impact. And then on the Rand dollar exchange rate, it's $4 million for every 10 cents. Just a reminder, I know everybody knows this, but two, three years ago it was above 18 rands to the dollar and now closer to 60. So vast impact on the South African business and obviously through profitability. Moving to slide five, just to the more recent movements in dissolving pulp. It was down year on year, but we have seen positive momentum coming through In the quarter, the overall VWP price has risen by 53. A lot of that's not been felt yet in the numbers that we report because there is a little bit of a lag impact. So much of that benefit will be felt in the Q4 numbers, the current quarter that we're in. What is driving those higher prices for dissolving pulp? Well, firstly, on the fibre side, we have seen an increase in various prices of fibre, so that supports a price increase for the raw material, the dissolving pulp. We've also seen costs going up, specifically on the fibre pricing, the polyester fibre as you would imagine is closely linked to petrochemical costs. That's supporting higher prices. The ASF operating rates continue to be good and inventories continue to be low. So all of those things helped. You know, on the negative side, obviously, we, paper bulk prices continue to be relatively low and the uncertainty caused by the The war going on in the Middle East. Then slide six, one very pleasing aspect of our results has been the increased volumes coming through from our North American business. As you know, we made that investment. We were confident in that market. We believed that we could grow the volumes, and we're doing that. We're delivering that. We're gaining market share and we've recorded record volumes in the quarter and there's more to come. We continue to build our customer base. The machine, the new machine, Somerset PM2, as you would imagine, as you ramp up, the efficiencies of the machine get better. There's still more to come and we're pleased with the progress. Also pleased that there has been price increases now coming through. The first one, the first round of price increases has now substantially been reflected in the industry data. I think there'll be more to come and then as As many would be aware, there's been a second round of price increases announced very recently. The benefits of these price increases are not in the numbers yet. Some of it will be built in Q4 and some of that into Q1 of next year. So all in all, I'm feeling good about the progress, volumes rising, selling prices rising, gaining market share. Then turning to slide seven, The graphic paper market, it's our traditional business. On the last call, three months ago, we did spend some time talking about the increases that we had announced. The US, that market is tighter, following our conversion, and we were able to implement a price increase there. In Europe, we announced two. The first one was successful. The second one less so. We felt that we needed to push for it because of the higher costs, but it was more difficult to execute on the second one. So the graphs that you see only really reflect the first one. Europe is more difficult because there is excess capacity, as you know, and we've talked about that many times. The Jennings Bridge on page 8, I'm not going to go into detail, The big story here is that we are seeing the lowest selling prices coming through. And bear in mind, this is a year-on-year comparison. So year-on-year, across many of our product categories, they are less. They are improving quarter-on-quarter, but year-on-year were less. And then the currency conversion having a significant impact. Some of that is a lot of great work that we're doing on costs, and I'll talk a little bit more about that in a future slide. Just page 9, on costs generally, we have seen headwinds, right? The wood costs in Europe, North America, not in South Africa, but certainly in those regions But the big drivers of higher costs have been chemicals and delivery costs, and a lot of that's linked to the war in the Middle East. And we specifically, at the bottom of this slide, we quote some of the specific raw materials that have gone up, and we do have a slide specifically on sulfur, which is the biggest one. Other costs, like pulp, relatively stable, which have helped. and their proactive work that we're doing on taking costs out of our business have been able to mitigate some of this impact. So slide 10, we thought it would be useful to share with you. This is the sulfur price. And you can see a commodity that was below $200 a ton. It's jumped all the way up to close to $1,200. Just to put it in context for you, we quantified its impact. This is a year-on-year impact for the 26 financial year, $350 million just on that one raw material. So you can see it's a vast impact and hopefully when the markets normalize, there will be a potential reduction in these costs. Having said that, we are not resting on that and we are looking at alternatives to mitigate much of this impact or some of this impact. Similarly, on page 11, the logistics costs, the war has caused higher shipping costs, higher diesel costs. Specifically on delivery itself, We estimate this year will be 106 million but that's only on the direct delivery cost of the South African business. It doesn't include the forestry, the logistics, it doesn't include the other regions but I know there's been a lot of focus on specific and on South Africa and we thought it would be useful to share that information. Site 12 has our net debt to EBITDA and Obviously on the back of lower profitability, it's meant that the leverage ratio has increased. On the debt side, interestingly, you can see we've kept it relatively flat and I think that's a great effort on the back of the lower profitability. So it shows you that the actions that we're taking are reaping rewards and you see the benefits going through there. Specifically on the The Leverage Covenant, as you know and we announced last quarter, that's suspended until March 27. We continue to have strong relationships with our banks and they support the business, they understand the headwinds that we've been facing and I'm confident they will continue to be supportive into next year as well. Then on page 13, The debt maturity profile. I think the first important point to highlight is that we have substantial liquidity and reserves on hand and facilities on hand. That's on the left-hand side of the graph. On the right-hand side, the first big material debt refinancing is the 2028 and that's something we will monitor as we get closer to that maturity period. But otherwise, liquidity looks good despite the lower profitability. Then on slide 14, just again highlighting the same points that I've already raised, a disciplined approach to capital allocation despite the lower profits, only a small outflow and then as part of that the capex we're estimating 240 this year as I've mentioned previously we've pulled back on any expansionary capex this is focused on maintenance and essential capex we're not putting our assets at risk this is what we believe that we can reduce it to and maintain the quality of our assets Site 15 is our Thrive Strategy. I don't intend going into detail. It is a schedule we've seen many times. The emphasis shifts and at the moment with the back to basics focus, our priorities have to be on driving operational excellence, lowering our cost base, improving production and then ultimately sustaining our financial health with The number one priority to reduce debt Slide 16 takes us to another level and we call them our self-help pillars and I don't intend going through all these bullets but just to highlight a few in terms of optimizing our portfolio Somerset progressing very nicely and we're excited about the prospects ahead The work that we've done on the joint venture, and I've got a slide on that, but we're confident that that joint venture will bring substantial synergies and we were thrilled that the shareholders supported the transaction in the recent vote. We got 98.5% vote and we were pleased with that and We believe that this is the right course of action for our European business. We've been putting through selling price increases across all our key segments. It takes time, and yes, some of it is to offset higher costs, but market conditions in some of the segments are better, are getting better. And I specifically call that the US SPS market. The disciplined allocation Capital guides our principles. A number of these points I've already talked about. The one that we are excited about and we have been proactive, we've been able to take 120 million of costs out of our business. And I know that doesn't show up in the overall profits because of the other headwinds, but these are real actions that we have taken to mitigate Much of that impact of those headwinds. The savings are across the regions and include fixed costs and variable costs. Specifically on Europe, and that, by the way, the 29 is in the 129. Specifically in Europe, we've done a lot of great work to reduce our fixed cost base. And then deleveraging. I've said it once, I've said it twice, I've said it many times. Number one priority is to reduce debt. It's going to take some time because we need to get the profits back to normalised levels, but with the discipline around capital allocation and the improved profitability that we anticipate in the quarter and the year ahead, we will begin on that path and we will remain committed to getting our debt back to a manageable and more reasonable levels. Then on slide 17, again it's a, there's quite a bit of detail and I don't intend going through everything but just on the packaging side, we've got a strong business, a strong platform in North America, great assets and you can see the evidence of our ability to grow the portfolio. In dissolving leadership position with a strong influence on our profitability, a non-integrated supplier with long-term relationships and well established for increased profitability that we envisage will come in the future. And then graphics, we know that graphics demand is in structural decline. We've been proactive by proposing this joint venture with UPM. We think it will deliver substantial synergies and ultimately preserve flexibility for future up-site basements. And then on the joint venture, Page 18. We've already achieved a number of milestones. The big one, and we've talked about it previously, the big one is to get approval from the competition authorities and the big one there is Europe. That process is progressing and we're still feeling good about fulfilling the conditions by the end of 2026. Starting to the segments. Firstly, pulp. Underlying demand is good. I've mentioned it a couple of times. We have been impacted by the lower selling prices year on year and the Rand dollar exchange rate. But other shorter term dynamics have meant that we have seen an increase in price in the quarter. Just important to point out, the Ingrid Wanner shot was in this quarter as well. The next segment is on page 21, the packaging. We've gone through a tough period. The markets here globally have been tough. Excess capacity in Europe. We've had the project that we undertook at Somerset. And then more specifically in this quarter, the South African Business was impacted by the shutdown in Ljubljana. Looking forward, underlying demand for container board in South Africa is good. And we were starting to see global container board, certainly in North America and a little bit in Europe now starting to come through. Hopefully that will all be beneficial for pricing in the South African environment. And then we anticipate Thank you very much. In a more resilient or a more in balance position following our conversion and that will boost profitability and also seasonally Q3 is a lower quarter for graphics and normally Q4 is our bigger quarter. Slide 23 has the regions, I don't intend going through that, the big themes coming through here is lower selling prices year on year but Starting to rise quarterly and that's the overriding story with regards to the margins and a great ramp up on volumes in North America. Then on the outlook. Firstly, demand. I talked a few times over obviously about dissolving pulp being healthy and packaging ramping up as I referred to. Prices moving slowly in the right direction which will support profits going forward but importantly we're not just sitting back and doing nothing on the cost front and we've been proactive at taking costs out and we'll continue to look at opportunities across all our regions and if you move to slide 26 we are targeting further Operational Efficiency Improvement and Fixed Cost Reductions. We're going to finish the proposed joint venture as I referred to earlier. So taking that all into account, we do have a smaller shut in the quarter at Somerset, but it is smaller. But taking everything into account, and the improved conditions, the fact that we don't have a major shut, a higher dissolving pulp price coming through. Based on all of that, our guidance for the quarter is that Q4 will be materially above the Q3 numbers. So, operator, let me go through the presentation. I'm now going to hand it back to you for questions.

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