q2 fy19 financial results - sappi* refer to the supplementary information in this presentation for a...
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9 May 2019
Chief Executive Officer
Steve Binnie
Sappi Limited
Q2 FY19 financial results delivering on
strategy
2019
Vision2020
intentionalevolution
next phase
growth
1
Forward-looking statements and Regulation G
2
Forward-looking statementsCertain statements in this release that are neither reported financial results nor other historical information, are forward-looking statements, including but not limited to statements that are predictions ofor indicate future earnings, savings, synergies, events, trends, plans or objectives. The words “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “assume”, “positioned”, “will”, “may”, “should”,“risk” and other similar expressions, which are predictions of or indicate future events and future trends and which do not relate to historical matters, identify forward-looking statements. In addition, thisdocument includes forward-looking statements relating to our potential exposure to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity price risk. Youshould not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which are in some cases beyond our control and may cause our actualresults, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements (and from past results,performance or achievements). Certain factors that may cause such differences include but are not limited to:
The highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand, production capacity, production, input costs including rawmaterial, energy and employee costs, and pricing)
The impact on our business of adverse changes in global economic conditions Unanticipated production disruptions (including as a result of planned or unexpected power outages) Changes in environmental, tax and other laws and regulations Adverse changes in the markets for our products The emergence of new technologies and changes in consumer trends including increased preferences for digital media Consequences of our leverage, including as a result of adverse changes in credit markets that affect our ability to raise capital when needed Adverse changes in the political situation and economy in the countries in which we operate or the effect of governmental efforts to address present or future economic or social problems The impact of restructurings, investments, acquisitions, dispositions and other strategic initiatives (including related financing), any delays, unexpected costs or other problems experienced in
connection with dispositions or with integrating acquisitions or implementing restructurings or other strategic initiatives, and achieving expected savings and synergies, and Currency fluctuations.
We undertake no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or circumstances or otherwise.
Regulation G disclosureCertain non-GAAP financial information is contained in this presentation that management believe may be useful in comparing the company’s operating results from period to period. Reconciliation's ofcertain of the non-GAAP measures to the corresponding GAAP measures can be found in the quarterly results booklet for the relevant period. These booklets are available on our website:https://www.sappi.com/quarterly-reports.
Highlights – Q2 2019
3
EBITDA* -11%year-on-year
Profit for the periodUS$72 million
EPS 13 US cents
Net debt +3%year-on-year
o Unexpectedly weak global market conditions for printing and writing papers
o Downtime of ~85,000t graphic paper• US$23m EBITDA impact estimated• Our inventory levels have normalized
o Good DWP sales volumes post debottlenecking
Key ratios Q2 FY17 Q2 FY18 Q2 FY19
Net debt/LTM EBITDA 1.7 2.2 2.1
Interest cover 7.7 11.0 10.5
EBITDA % 15.8 14.1 12.4
ROCE % 20.5 16.8 13.1
* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 22 in our Q2 FY19 financial results booklet (available on www.sappi.com) for a definition of special items.
Excluding special items*
EBITDA* reconciliation
4
140
180
220
260
300
211 1 79 (76) (44) 9 7 187
Q2 FY18 EBITDA Sales volume Price & mix Variable & deliverycosts
Fixed costs Other Exchange rate Q2 FY19 EBITDA
Q2 FY18 to Q2 FY19
US$
milli
on
Notes:
1. All variances were calculated excluding Sappi Forestry.
2. “Currency conversion” reflects translation and transactional effect on consolidation.
3. EBITDA = EBITDA excluding special tems
2019 2018Exchange rates:Average rate for the Quarter: US$1 = ZAR 14.0203 11.9577Average rate for the Quarter: €1 = US$ 1.1360 1.2286
Mar
Product contribution split – LTM
5
* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 22 in our Q2 FY19 financial results booklet (available on www.sappi.com) for a definition of special items. Data above excludes treasury operations and insurance captive.
44%
17%
39%
Dissolving WoodPulpPackaging &Speciality PapersPrinting & WritingPapers
57%
13%
30%
EBITDA excluding special items Operating profit excluding special items
Maturity profile*Fiscal years
6
215
9843 43 43 20
393
88
505
221
381
79
0
100
200
300
400
500
600
2019 2020 2021 2022 2023 2024 2025 2026 2032
US$
milli
on
Cash Short-term SPH term debt Securitisation SSA
EUR450m bond
EUR350m bond
US$221m bond
*The maturity profile is adjusted for the repayment of the 2022 bond post quarter-end and the resulting reduction in cash.
Capex development
7
0
100
200
300
400
500
600
2013 2014 2015 2016 2017 2018 2019E 2020F
US$
milli
on
Maintenance Efficiency and expansion Forecast
8
Market and Segmental overview
Global P&W paper market trends
9
Supply and demand Demand softening globally Capacity reductions expected in US and Europe over next 18 months
Selling prices and input costs Paper prices stable in US and EU Pulp prices falling from historical highs on weak Chinese demand – declines differ by
geography
Strategy Focus on costs to maintain margins Manage operating rates through downtime, conversions, market share, flexibility of machines Increase pulp integration over time
Global packaging and speciality paper market trends
10
Supply and demand Additional containerboard conversions entering the market Smaller speciality packaging producers exiting due to cost pressures Demand continues to grow, long-term prospects encouraging, driven by legislation and
consumer preference Brand owners pushing for paper based packaging solutions
Selling prices and input costs Realised prices rose, particularly for flexible packaging, labels, and silicone base papers Pulp prices declining slowly
Strategy Ramp-up volumes from conversions, grow into new markets We aim to be an innovative and sustainable supplier Improve pulp integration
Sappi Europe
11
Sales Tons +1%year-on-year
Sales +1.5%year-on-year
EBITDA* -27%year-on-year
* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 22 in our Q2 FY19 financial results booklet (available on www.sappi.com) for a definition of special items.
o Market demand weaker than expected –necessitating 46,000t of downtime
o Higher selling prices did not offset higher variable costs
o Pulp prices have reduced, but remain elevated
o Some packaging and speciality segments showed renewed growth, self-adhesives remains weak
Sappi North America
12
Sales Tons +1%year-on-year
Sales +4%year-on-year
EBITDA* -16%year-on-year
* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 22 in our Q2 FY19 financial results booklet (available on www.sappi.com) for a definition of special items.
o Weak domestic graphic paper demand exacerbated by increased imports - 39,000t of downtime taken
o Growth in legacy packaging and paperboard volumes
o Ramp-up of Somerset continues – product mix not yet optimal
o Good DWP sales volumes – debottlenecking of Cloquet complete
Global DWP market trends
13
Supply and demand VSF capacity growing faster than demand, operating rates declining Demand continues to be strong, growing by ~6% per annum Most swing capacity now on DWP New DWP capacity entering the market by year-end
Selling prices and input costs DWP selling prices declining as VSF prices and margins fall Wood price increases, chemical costs declining
Strategy Grow with the market (debottlenecked volumes 2018/19, 110kt expansion at Saiccor underway) Evaluate external opportunities for more substantial increase in volumes – ROCE critical Commitment to sustainability key
Sappi South Africa
14
Sales Tons +1%year-on-year
Sales -1%year-on-year
EBITDA* +1%year-on-year
* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 22 in our Q2 FY19 financial results booklet (available on www.sappi.com) for a definition of special items.
o DWP sales volumes increased post debottlecking and with good operational performance
o Packaging sales volumes lower based on timing of seasonal demand
o Price increases and weaker Rand offset higher wood and energy prices
Maintaina healthybalancesheet
Rationalisedeclining
businesses
Accelerate growth in
higher margin growth
segments
Achievecost
advantages
Improveoperational
and machineefficiencies
Maximiseprocurement
benefits Optimisebusiness
processes
Continuouslybalance
paper supplyand demandin all regions
Wherepossible
convert papermachines tohigher marginbusinesses
Optimiseworkingcapital
Strongcash
generationSmart
financing
Expandpaper
packaginggrades
Enhancespecialised celluloseportfolio
Extractvalue from our
biorefinerystream
Our group strategy
15
At Sappi we do business with integrity and courage; making smart decisions which we execute with speed.Our values are underpinned by an unrelenting focus on and commitment to safety.
Achievecost
advantages
Improveoperational
and machine efficiencies
Maximiseprocurement
benefitsOptimisebusiness
processes
Our group strategy
16
We work to lower fixed and variable costs, increase cost efficiencies and invest for cost advantages. Group efficiency and procurement initiatives US$60m
target for 2019: +US$80m achieved in 2018 Ongoing continuous improvement across all mills. Investigate pulp integration opportunities in US and
EU Saiccor expansion will lead to lower variable costs €30m upgrade to Gratkorn mill completed
Rationalisedeclining
businesses
Continuouslybalance
paper supplyand demand in all regions
Wherepossible
convert paper machines tohigher margin
businesses
Our group strategy
17
Recognising the decreasing demand for graphic paper, we manage our capacity to strengthen our leadership position in these markets, realising their strategic importance to the group and maximising their significant cash flow generation. Downtime taken at mills to lower inventories Progressive transition of Lanaken Mill out of LWC Reduced CWF exposure at Maastricht Mill, Ehingen
Mill and Somerset Mill PM1
Maintaina healthybalancesheet
Optimiseworkingcapital
Strongcash
generationSmart
financing
Our group strategy
18
Maintain leverage below 2x Net debt:EBITDA Finance costs US$60-70m/annum going
forward 7 yr €450m bond raised @3.125% - used to
repay €450m 2022 bond
Accelerategrowth in
higher margingrowth
segments
Extractvalue from our
biorefinerystream
Enhancespecialisedcelluloseportfolio
Expandpaper
packaginggrades
Our group strategy
19
We will make investments in existing and adjacent areas with strong potential growth. Debottlenecking of Saiccor, Ngodwana and Cloquet
DWP complete Expansion of Saiccor by 110kt/annum has started Additional packaging at Ngodwana and Tugela Mills Securing additional HW and SW timber supply Biomaterials, bio-chemicals – lignins, sugars Ramp-up of board grades at Maastricht and Somerset
We expect continued healthy demand for DWP. Lower prices/volumes next quarter due to
market pricing and shuts.
Most grades continue to grow for our packaging and specialities segment. Product qualifications
and customer trials proceeding.
Weak demand for graphics, Lanaken conversion forthcoming .
Capex for the remainder of the year is expected to be approximately $370m – majority at
Saiccor, Cloquet and Lanaken for expansion/conversion.
For the remainder of the financial year, given weak graphic paper markets, pricing pressure for
DWP and a more conservative outlook on the global economy, we have revised our forecast
downward relative to last year.
20
Outlook
Thank you
21
22
Supplementary information
Excluding special items*
23
EBITDA and operating profit
* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 22 in our Q2 FY19 financial results booklet (available on www.sappi.com) for a definition of special items.
201 20
8
155
221
172
211
155
224
197
187
136 14
5
93
152
105
142
85
148
128
117
0
50
100
150
200
250
US$
milli
on
EBITDA Operating profit ex special items
24
Net debt/EBITDA development
* EBITDA is excluding special items.** The covenant Net debt/LTM EBITDA calculation has adjustments and therefore differs from that shown above.
2,38
0
2,24
8
2,28
6
1,94
6 2,04
0
1,91
6
1,91
7
1,77
1
1,73
4
1,65
2
1583
1408
1338
1329
1318
1322 1349
1632
1603
1568
1557
1680
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19
US$
milli
on
Net debt Net debt/LTM EBITDA**
2.2
4.6
Sappi specialities and packaging papers
25
Global production sites with the ability to switch between graphics and packaging at various sites*
Alfeld Mill (Germany)Containerboard, flex-pack, label,
paperboard, silicone base papers
Carmignano Mill (Italy)Flexible packagingand functional papers
Condino Mill (Italy)Flexible packaging
and functional packaging
Cloquet Mill* (USA)Label papers
Ehingen Mill* (Germany)Containerboard
Maastricht Mill* (The Netherlands)Paperboard
Ngodwana Mill (South Africa)Containerboard
Somerset Mill* (USA)Label paper and flexible packaging paper
Tugela Mill (South Africa)Containerboard
Westbrook Mill (USA)Release papers
Stockstadt Mill* (Germany)Flexible packaging
and functional papers
26
Product Groups and ProductsEU Packaging
and Specialities
Accelerategrowth in
higher margingrowth
segments
Extractvalue from our
biorefinerystream
Enhancespecialisedcelluloseportfolio
Expandpaper
packaginggrades
Packaging and Speciality papers expansion plans
27
Europe Maastricht: complete, ramp-up by 2021
-160k CWF, +150k specialities (FBB) Ehingen: complete
-75k CWF, +60k specialities (WTL) Alfeld: construction to start FY19, complete by Q4 FY20
+10k specialities (Various) Lanaken: enable CWF on PM8, as market develops
North America Somerset: construction done, 3 year ramp up
-150k CWF, +350k specialities (SBS)
28
Sappi Europe
* Sales less operating profit excluding special items divided by tons sold.** Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 22 in our Q2 FY19 financial results booklet (available on www.sappi.com) for a definition of special items.
Q2 FY19 Q2 FY18 YTD 19 YTD 18
Tons sold (‘000) 842 847 1,651 1,669
Sales (EURm) 675 616 1,317 1,188
Price/Ton (EUR) 802 727 798 712
Cost/Ton* (EUR) 773 684 765 671
Operating profit excluding special items** (EURm) 24 37 54 68
Western Europe
29
Coated paper deliveries and prices
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
Q1
08
Q1
09
Q1
10
Q1
11
Q1
12
Q1
13
Q1
14
Q1
15
Q1
16
Q1
17
Q1
18
Q1
19
CWF Demand MCR Demand CWF 100gsm Sheets LWC 60gsm offset reels
Western Europe shipments including export.Source: Cepifine, Cepiprint and RISI indexed to calendar 1Q 2008.
30
Sappi North America
* Sales less operating profit excluding special items divided by tons sold.** Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 22 in our Q2 FY19 financial results booklet (available on www.sappi.com) for a definition of special items.
Q2 FY19 Q2 FY18 YTD 19 YTD 18
Tons sold (‘000) 350 347 671 690
Sales (USDm) 378 363 729 705
Price/Ton (USD) 1,080 1,046 1,086 1,022
Cost/Ton* (USD) 1,051 994 1,058 997
Operating profit excluding special items** (USDm) 10 18 19 17
United States of America
31
Coated paper prices and shipments
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
Q1
08
Q1
09
Q1
10
Q1
11
Q1
12
Q1
13
Q1
14
Q1
15
Q1
16
Q1
17
Q1
18
Q1
19
Domestic CWF shipments Domestic CWF purchases RISI price CFS #3 60lb rolls
US industry purchases defined as industry shipments, plus imports, less exports.Source: AF&PA and RISI indexed to calendar Q1 FY08.
32
Sappi South Africa
* Sales less operating profit excluding special items divided by tons sold.** Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 22 in our Q2 FY19 financial results booklet (available on www.sappi.com) for a definition of special items.
Q2 FY19 Q2 FY18 YTD 19 YTD 18
Tons sold (‘000) 418 413 814 796
Sales (ZARm) 4,981 4,331 9,690 8,404
Price/Ton (ZAR) 11,916 10,487 11,904 10,558
Cost/Ton* (ZAR) 9,234 8,816 9,033 8,813
Operating profit excluding special items** (ZARm) 1,121 950 2,338 1,890
Excludes forestry
33
Pulp prices*
* Source: FOEX, CCF group.
600
700
800
900
1,000
1,100
1,200
1,300
US$
/ton
NBSK Europe BHKP Europe Commodity DWP Cotton linter pulp
34
Textile fibre prices*
* Source: CCF group.
800
1,200
1,600
2,000
2,400
2,800
Cotton 328 Cotton "A" Index PSF 1.4 D VSF 1.2 D VSF 1.5 D
US$
/ton
Cash flow
35
US$m Q2 FY19 Q2 FY18 1H 19 1H 18Cash generated from operations 182 194 379 356Movement in working capital (80) (35) (167) (118)
Net finance costs paid (20) (15) (25) (21)
Taxation (paid) (43) (50) (46) (44)
Dividend paid (92) (81) (92) (81)
Cash generated from operating activities (53) 13 49 92Cash utilised in investing activities (95) (238) (204) (331)Capital expenditure (95) (119) (201) (207)
Proceeds on disposal of assets 1 10 1 10
Acquisition of subsidiary - (132) - (132)
Other non-current asset movements (1) 3 (4) (2)
Net cash generated (utilised) (148) (225) (155) (239)
Excluding special items* reconciliation to reported operating profit
36
EBITDA and operating profit
* Refer to page 22 in our Q2 FY19 results booklet (available on www.sappi.com) for a definition of special items.
US$m Q2 FY19 Q2 FY18 1H FY19 1H FY18
EBITDA excluding special items* 187 211 384 383Depreciation and amortisation (70) (69) (139) (136)
Operating profit excluding special items* 117 142 245 247Special items* - gains (losses) - 12 (5) 23
Plantation price fair value adjustment 10 6 13 22
Acquisition cost - (2) - (2)
Net restructuring provisions - 2 - 2
Profit on disposal and written off assets (3) 9 (3) 9
Asset impairments (11) - (11) -
Asset impairment reversals 8 - 8 -
Black Economic Empowerment charge - (1) - (1)
Fire, flood, storm and other events (4) (2) (12) (7)
Segment operating profit 117 154 240 270
Fibre properties and applications
37
Cellulosic fibre properties helping drive that growth
Source: IHS Global, RISI, Hawkins Wright.
Key strength Qualifies Issue
ApparelHome textilesNonwovens/Technical textiles
Overall value proposition
Applications
Function and feel
Appearance
Sustainability
1762
21
6627
7
5220
28
Cellulosic fibres Cotton Polyester
• On a pure property basis, cellulosic fibres are superior to cotton and differentiated on sustainability.
• Polyester is differentiated on strength/durability versus cotton and cellulosic fibres.
• Natural and attractive, ‘greener’ alternative to cotton
• Natural, functional and well established
• Cheap, durable and versatile
Durability
Absorbency Breathability Softness
Drape Dyeability
Brightness/Lustre
Renewable and biodegradeable
Resource efficiency
38
There is still significant headroom to increase the level of cellulosic fibre blending in most sub-categories
Source: Expert interviews.
POLYESTER
Future Today Gap Today Future Gap Today Future Gap COTTON CELLULOSIC
Apparel
Home textile
Towels 5% 5% 0% 80% 75% -6% 15% 20% +33%
Bedding 45% 55% +22% 45% 40% -11% 1% 2% +100%
Denim 5% 5% 0 95% 95% 0% 0% 0% 0%
Shirts 35% 40% +14% 50% 40% -20% 15% 20% +33%
T-shirts 30% 50% +67% 70% 50% -29% 3% 5% 0%
Dresses 10% 10% 0% 35% 25% -29% 55% 65% +18%
Suits 35% 40% +14% 25% 20% -20% ~1% ~2% +100%
Sportswear 85% 85% 0% 0% 0% 0% 15% 15% 0%
Casual wear 45% 50% +11% 45% 35% -22% 10% 15% +50%
Product Segments
39
Q1 18 Q2 Q3 Q4 FY18 Q1 19 Q2Tons sold (‘000) 1,063 1,074 968 1,045 4,150 977 987Sales 877 945 851 927 3,600 867 880EBITDA 69 91 57 101 317 76 65
margin 8% 10% 7% 11% 9% 9% 7%
Q1 18 Q2 Q3 Q4 FY18 Q1 19 Q2 Tons sold (‘000) 287 302 277 332 1,198 297 350Sales 241 279 245 278 1,043 263 308EBITDA 78 83 60 88 306 91 92
margin 32% 30% 25% 32% 29% 35% 30%
Q1 18 Q2 Q3 Q4 FY18 Q1 19 Q2Tons sold (‘000) 198 231 289 291 1,009 252 273Sales 196 254 327 310 1,087 282 312EBITDA 27 38 33 40 139 30 29
margin 14% 15% 10% 13% 13% 11% 9%
Packaging & Speciality Papers
Printing & Writing Papers
Dissolving Wood Pulp
Thank you
40
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