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Edited Transcript of SAP.J earnings conference call or presentation 1-Aug-19 1:00pm GMT

Q3 2019 Sappi Ltd Earnings Call

Johannesburg Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Sappi Ltd earnings conference call or presentation Thursday, August 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander van Coller Thiel

Sappi Limited - CEO of Sappi Southern Africa

* Berend John Wiersum

Sappi Limited - CEO of Sappi Europe

* Glen Thomas Pearce

Sappi Limited - CFO & Executive Director

* Mark Gardner

Sappi Limited - CEO & President of Sappi North America

* Stephen Robert Binnie

Sappi Limited - CEO & Executive Director

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Conference Call Participants

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* Brian Morgan

Morgan Stanley, Research Division - Equity Analyst

* Ross D. Krige

JP Morgan Chase & Co, Research Division - Analyst

* Wade Napier

Avior Capital Markets (Pty) Ltd. - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to Sappi Limited's First Quarter of 2019 Results Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I'd now like to hand the conference over to Mr. Steve Binnie. Please go ahead, sir.

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [2]

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Thank you. Good day, everybody, and thanks for joining us on the call today, where we're going to be talking about our third quarter 2019 results. As always, I'll call out the slides as I move through the presentation.

I'm going to start on Page 3, which has some of the highlights for the quarter. It was a challenging quarter for us across many of our major product categories. But the primary reasons that we encountered difficulty was firstly on graphic paper, we saw weak markets in Europe and U.S., both down double digit, which has meant that we had to take production downtime of about 89,000 tonnes. The impact of that was about $19 million on EBITDA. And then at the same time, we saw lower dissolving pulp prices. And that's on the back of excess VSF capacity, which pushed down VSF pricing and ultimately led to dissolving pulp prices pulling them downwards.

In terms of some of the ratios, perhaps the one I'll call out to you is that the leverage ratio net debt-to-EBITDA did rise to 2.4x, but that, obviously, was off the back of the lower profitability.

We -- this morning, we also announced the acquisition of the Matane Mill in Canada, and I do have a couple of slides on that later. So I'll talk to it then.

Moving to Slide 4. Our earnings bridge relative to last year, the same quarter last year. The -- and just calling out some of the major variances. Firstly, on volume, down on a year ago for the reasons that I highlighted on the first slide, the production downtime that we did check. On pricing and mix, we saw higher selling prices, which helped to offset some of the pressure that we faced. And then, obviously, as some of our higher-priced products continue to grow, we improved the product mix.

Variable costs were up on a year ago. And perhaps, just to call out the main reasons, it was primarily linked to higher wood costs in the U.S. and in South Africa, and then, also, we saw higher energy prices down in South Africa.

Pulp costs, and I'm guessing some of the people may have questions about that, pulp costs relative to last year were about flat on a year-on-year. But as we go forward, we would expect pulp costs to come down further.

The other thing that is in the variable cost here would be the fact that the euro and rand are weaker than a year ago. So you had the increased costs of raw materials and pulp being one of them being impacted by that. Then on exchange rates, that's a translation impact and that was favorable during the quarter by $8 million.

Moving to Slide 5. The contribution split across our segments. Dissolving pulp continuing to be the largest segment of 44% of EBITDA; and packaging and specialties, 17%. And as I've said to you in recent quarters, we will expect that to rise further as we move forward.

Slide 6 has our debt maturity profile. And you'll recall from the last quarter, we announced the refinancing of our 2022 bonds, now pushed out to 2026 bonds. So we have a fairly clear runway over the next few years. The next refinancing that we'll have to face will be a big one, would be the 2023 bonds, but we've got some time to look at that as we -- as they get closer to maturity.

Slide 7 has our CapEx, and the number estimated for this financial year is just over $500 million. It's primarily linked to the cycle expansion of dissolving pulp and the conversion that we've done at Lanaken. In 2020, I would expect the number to come down to about $470 million. We have the end of the -- primarily the end of the cycle project.

If we look beyond this, and it's not on the slide, but if we look into 2021, we would expect CapEx to come down further and certainly be below $400 million. It's important to call out that all the major CapEx projects that we have talked to you about over the last year or 2 are now either completed, or in the case of Saiccor, close to completion. So we don't anticipate and we haven't committed any other major CapEx projects. That is something, obviously, that we've planned.

The Matane acquisition, which I'll talk to you about a little bit later, we did envisage at some stage spending money on improving our pulp capacity. But that is no longer required because we've been able to get the additional pulp capacity. And as I say, I'll talk about that a little bit more later.

Moving to our segments. And firstly on Page 9, the graphic paper markets. As I said earlier, markets have been weak and they continue to be weak. We anticipate that there will be significant capacity reductions coming out from competitors over the next 18 months. And many of those have already been announced, and that will clearly benefit the balance in this market.

Paper prices have come off. That's held up reasonably okay, but they have started to come off a little bit, particularly in the U.S., with a little bit in Europe, but holding up reasonably well.

Pulp prices have fallen significantly from a cost perspective. And we were starting to see the benefit there, but we will see significant benefits as we move forward over the next few quarters. As always, our focus has to be on the cost side and ongoing improvements and productivity, all of those things. The operating rates will be crucial. We clearly took production downtime over the course of the last couple of quarters. We expect capacity to come out from competitors. But in Europe, we need to evaluate our own capacity. And I'll talk a little bit more about that on a further slide.

Pulp integration, as I've told you before, is critical because it does lower the cost base. And that's why we acquired Matane.

Turning to packaging and specialties. The -- broadly from a market perspective, we've seen additional containerboard conversions. However, on the specialty packaging front where a lot of our capacity is focused, we have seen some producers exiting because of cost pressures over the course of the last 12 months or so. Demand continues to be -- to grow, and we continue to believe that the long-term prospects are encouraging. As we know, there's a big shift for paper-based packaging solutions to replace paper -- to replace plastics, and that's creating significant opportunities. So strategically, we continue to believe that, that is an exciting opportunity.

In terms of selling prices, they did rise, and we include here a few of the categories where it did rise to expected levels on the silicon-based papers. The pulp prices falling will have a benefit on this segment as well.

In terms of the strategy going forward, we have to ramp up. Following those conversions, we have to ramp up as fast as possible. It is going according to plan, and we expect it to grow further as we move forward, pulp integration being critical as well.

Turning to the regions. Firstly, on Europe, it was because of the weak domestic graphic paper market. We took 30,000 tonnes, which equated to $8 million. Selling prices are still higher than they were a year ago across both graphics and specialties. Variable costs higher, although as I've pointed out to you, we would expect those to come down further as we move ahead. Pleased to say we completed the Lanaken conversion during the quarter on time, on budget, and we'll obviously, move forward with the carouseling following that, the completion of that project.

In North America, we -- which is on Slide 12, we took 59,000 tons of downtime, which is $11 million EBITDA impact; completed the Cloquet DWP debottlenecking project, which had added 30,000 tons of capacity. And going forward, the packaging volumes we would expect to continue to grow. Again, the variable costs were still higher, wood costs higher, as I mentioned earlier. But with the lower pulp prices coming through, and obviously, in timing with the benefits of Matane, that will reduce costs.

We announced a couple of weeks back that Mark Gardner, the CEO of North America, is retiring. And Mike Haws, who works with him, the Sappi North American team on the production side, he led the production team, he is taking over from him with effect from 1 October. And there's a transition process underway, and that's going smoothly.

Turning to Slide 13. The dissolving pulp market. The fixed cost has been under pressure. We saw significant amounts of capacity coming on board, and that squeezed pricing. I think it's fair to say that the trade wars between the U.S. and China have impacted on textile exports out of China into the U.S., and that has impacted on volumes. And what we've seen is that you saw a significant inventory build during 2018 and then softness coming through in 2019, which has further exacerbated the challenges we face. However, overall demand for dissolving pulp continues to be strong, and we continue to believe that it will grow at 6% per annum.

Selling prices have come down, and I've talked about it. And however, based on the additional supply that we expect to see coming through and the fact that, at these prices, there will be higher-cost producers under significant pressure and coming out of the market, we do think that the balance will improve, and that in time will improve pricing.

We've, obviously, got the project at Saiccor to increase our capacity by 110,000. That's the kind of the last -- as I said earlier, the last of the major internal projects. And I don't -- there are no further growth projects at this time planned. We evaluate externally, but we're not looking to add any additional capacity at this point in time.

On Slide 14, which is South Africa, the lower dissolving pulp. The U.S. dollar pricing did have an impact. The dissolving pulp price -- volumes were lower than Q2 because of the annual maintenance shuts in Ngodwana and Saiccor, but higher than a year ago, obviously because we added additional capacity last year. The containerboard volumes, a little bit of seasonality there, delayed start to the citrus season. But we do expect that to pick up nicely in Q4. Variable costs, 14% higher, wood and energy, but also the rand -- weaker rand having an impact on cost as well.

Turning to the strategy and the various pillars. And firstly on costs. As you know, it's an ongoing focus and particularly on the procurement side and continuous improvement. Firstly, on procurement, we've targeted another $60 million this year, and we're on track to achieve that. The pulp integration has been something that we've been working on for some time. And I'll talk to Matane just now. The cycle expansion that I referred to will lower variable cost per ton at the cycle now. And then as I said, we are evaluating the capacity in Europe for graphic paper. We know that other capacity is coming out. But based on our projections, we -- and if demand were to remain at these levels, we're probably one midsized graphic machine too much. So that's something we're evaluating at the moment and something that I will give feedback at the next quarterly results, but we are looking at our capacity.

Then on Slide 17, the Matane Mill acquisition. It's a high-yield pulp mill, 270,000 tons, hardwood to aspen and maple located in Matane, Quebec. You can see where it is on the map at Southern Quebec. It is near our Somerset Mill. And importantly, it's on a port. So from a logistics perspective, if volumes were to be exported, the costs are relatively low. I would stress to you that it's already a major supplier for our mills, both in Somerset and in Europe.

The -- and moving to Slide 18. The acquisition supports our strategy with a strong focus on costs. As I said, it is already a major supplier. There are other customers there. And clearly, we'll meet those commitments. But importantly, it's going to support the growth in the higher-margin packaging business, primarily that pulp is used in that segment. It increases our pulp integration. And as I said, it's going to supply both Somerset and our European operations.

Importantly, it does secure a supply of raw materials. And as you know, many of you know, these pulp mills have been in demand from various players across the world, and it was important that we had to secure our raw material supply. But at the same time, it does reduce our costs. Also as we all know, pulp does go through volatile times and it will reduce the volatility of our earnings by securing the raw material source. We did contemplate building our own pulp line at Somerset, and we estimated that to add about 200,000 tons of capacity, it would have cost us $210 million. So that's over $1,000 a ton. You do the math on this, you see it's about $600 a ton. So it's substantially lower costs for Sappi and strategically makes lot of sense, and as I said, supports our growth business on the packaging side.

The purchase price, if we look at the 2018 earnings, yes, they were higher because pulp prices were higher. It was about 3.3x the earnings of 2020 -- 2018. However, we know pulp prices are down. And we estimate on a sustainable basis through the cycle, it's about close to 7x the estimated EBITDA of $25 million.

Turning to Slide 20, which is maintaining a healthy balance sheet. We are committed to bringing our net debt-to-EBITDA to 2x. Obviously, with those softer earnings and the acquisition that we've made, we do temporarily go above those levels. But I've already talked through the fact that the CapEx levels will come down. We are a strong cash generator, and we -- by the end -- by the time we get to the end of 2021, we are very close back to those levels. We -- the CapEx program that we have talked about over the last couple of years is substantially complete. We have no major CapEx plans other than what we've already talked about, so we don't anticipate any change to our dividend policy. We have sufficient cash resources to maintain that dividend policy.

Turning to Slide 21, the accelerating in the higher-growth segments. The dissolving pulp, we have made these investments. We've got 110,000 coming from Saiccor. I don't expect anything more in the near future. On the packaging front, however, obviously, we will continue to ramp up at Somerset and Maastricht. That's a planned process. It does take time because you have to go through an accreditation process with customers. But it is progressing, and we -- the volumes each month continue to rise.

Turning to Slide 22, which is our outlook. As I've said, much of this I've covered already, but just to reemphasize, the dissolving pulp pricing is under pressure. However, volumes are good, and we're confident about utilizing the expanded capacity that I referred to earlier. Packaging and specialties, the end markets are variable. In Germany and in Europe, we obviously have seen a little bit of economic weakness. However, over time, we expect that to improve. And volumes are growing, and the ramp-up in the trials are continuing and progressing as planned. The further weakness in graphic grades could result in additional downtime. We estimate a similar amount of downtime in Q4 to what you saw in Q3. However, as I said, we expect significant industry capacity to come out over the course of the next 18 months, which will improve the balance. And as I said, we are looking at our capacity, our sales in Europe.

The CapEx for Q4 should be about $200 million. There's a little bit of the Lanaken cost still to come through, but the majority of that would be at Saiccor and into 2020 similarly. So based on the weak graphic paper markets and the dissolving pulp softness on pricing, we expect the results for Q4 will likely be below that of the same quarter last year.

So operator, that's me going through the slides. I'm going to put it back to you for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Ross Krige of JPMorgan.

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Ross D. Krige, JP Morgan Chase & Co, Research Division - Analyst [2]

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Just on dissolving pulp EBITDA. If you look at the margin there, it's significantly lower year-on-year despite the higher rand dissolving pulp price. So just wondering, I mean, you called out wood and energy costs in South Africa, is that the main driver? And how do you see the outlook there? And what exactly is driving high wood costs in SA? And then just a second question on pulp and cost savings. What index should we be looking at for pulp prices? Because if you look at Chinese net pulp prices, you would have kind of expected some savings in Q3. So just wondering what we should be looking at to get an idea of how to measure that benefit?

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [3]

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Yes. On the EBITDA for dissolving pulp, just remember, there is also a U.S. model in that segment. And the lower pricing would have had an impact on the profitability in the U.S. because although the rand prices were up, the dollar prices were down. And then to the other point that we talked about earlier, the higher wood costs in both regions also impacted on profitability.

On the pulp, yes, the Chinese prices came down substantially more. Look, the place where we buy most of our pulp is in Europe. We buy about 1 million tons there. So it's better to look at European pulp prices, both primarily hardwood but also softwood in Europe as well. And you should look at them in euros because, obviously, dollar prices may be coming down, but the dollar has strengthened against the euro. And that's not come down -- sorry, just to give you an example, on a euro basis, both hardwood and softwood this quarter, compared to a quarter a year ago, it was actually only 4% down.

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Ross D. Krige, JP Morgan Chase & Co, Research Division - Analyst [4]

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Okay. Makes sense. And on the wood cost, I mean...

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [5]

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I should stress to you, it is going to come down further as we go forward in the next couple of quarters.

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Ross D. Krige, JP Morgan Chase & Co, Research Division - Analyst [6]

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Okay. Perfect. Just on the wood cost in South Africa, I mean, what's behind that increase? They're not normally related to energy prices?

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [7]

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Yes. Yes. It's to do with the purchase -- the extra parity price for the wood. But I'll let Alex -- Alex, are you there? To talk a little bit further about that one.

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Alexander van Coller Thiel, Sappi Limited - CEO of Sappi Southern Africa [8]

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Steve, thank you. Basically, we're not fully self-sufficient in terms of wood supply. We're only about 2/3 self-sufficient. So we need to buy wood in the market. And we compete with woodchip exports, which effectively goes into China, into pulp producers, but it also goes into biomass requirements in the East. So having -- being exposed to that, that does affect the woodchip price. And then secondly, just in terms of the margin as well, because we've taken the shut in the third quarter, that obviously had an effect on costs as well.

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Operator [9]

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The next question comes from Brian Morgan, RMB Morgan Stanley.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [10]

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Can you give us an idea of the maintenance sets in South Africa during the quarter? Were they quite extensive? Just (inaudible)

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [11]

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Yes. In fact, all 4 of the mills took a shut this quarter. In terms of its impact, I'm just pulling out a slide, if you just give me a sec. Yes. We had the -- as I said, it's all 4 mills. It's -- in terms of its loss contribution in dollars, you had the big shut at Ngodwana, then we had the MGO2 shut at Saiccor. And then even at Tugela, we took a shut. The estimated loss contributions in dollars was about $14 million.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [12]

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$14 million.

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [13]

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Yes.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [14]

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Was that -- it's less than last year, that same time last year, right? Do you have that number?

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [15]

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Yes. You're right. It was there last year. And in fact, it was higher last year.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [16]

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It was higher last year. Okay.

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [17]

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Yes.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [18]

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In terms of the specialties, it looks to me that our customer approvals are taking -- it certainly feels like they're taking longer to come through than I originally thought. Is that the case? And if so, why would it be?

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [19]

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Okay. I'll let Mark check to that.

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Mark Gardner, Sappi Limited - CEO & President of Sappi North America [20]

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Sure. Brian, this is Mark. In the case of North America, we are -- ultimately, a lot of different customers who are going through their qualification process, and it is taking a little bit longer than what we originally had thought. But I would say, so far, we're very successful and quite pleased with the results. So it's just that the process of going through 2 to 4 different downstream runs of their customers, it just takes longer than what we had originally anticipated. So we're behind on the ramp-up due to that, although we're -- it's still moving up pretty quickly. And so far, we're winning a lot of accounts from the product attributes and the product quality that we're producing.

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [21]

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Thanks, Mark. Berry, on your side?

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Berend John Wiersum, Sappi Limited - CEO of Sappi Europe [22]

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Yes. On the European side, the paper pulp business is now growing nicely. It did take us quite a long time to get the product like we were. We did install the new technology. It did take us quite a while to get that back. And now we have got them right, and the orders are beginning to come in nicely.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [23]

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So when should we be a full ramp-up at the 2 -- in the 2 locations?

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [24]

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Well, firstly, in terms of the -- yes, in fact, in both locations, as we originally talked about, we would expect within 2 years. If we look at the evolution on the Somerset PM1, as I said, it gets bigger every quarter. And I would expect that to, next year, to be, on PM1, Mark, to be over 200,000.

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Mark Gardner, Sappi Limited - CEO & President of Sappi North America [25]

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Yes. 3 years from the start-up date, we anticipated the machine to be full.

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [26]

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Which is up to close to the 400 level.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [27]

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And that's at the full pricing?

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [28]

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And in a similar time horizon on the -- as we ramp up Maastricht as well.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [29]

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Okay. So that's at full price points that's running specialties, higher commodity grades?

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [30]

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Yes. And there's multiple benefits. Obviously, it's not -- obviously a benefit on the selling price side and optimizing the volumes but also on the cost side and the efficiency of the machine. So yes, up to the margins that we originally anticipated.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [31]

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And you're comfortable that the market can fully absorb all of this new capacity?

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Mark Gardner, Sappi Limited - CEO & President of Sappi North America [32]

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Yes. Brian, this is Mark again. Yes, in North America, we -- when we did the study and kicked off this project, we looked at that market, and we needed somewhere between 6% and 7% of market share, anticipated with the machine at full capacity. Since then and just rather recently, we've had the announcement that came out where another producer in North America is going to take out 360,000 tons of SBS, so that wasn't in our calculation. So that would much net out what our increase would be into the market.

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [33]

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And just to remind you, we are -- our strategy is built around targeting independent converters. And there is an appetite there to take up volumes from someone like Sappi, and it is progressing as we expected.

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Operator [34]

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The next question comes from Wade Napier of Avior Capital Markets.

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Wade Napier, Avior Capital Markets (Pty) Ltd. - Research Analyst [35]

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Just a quick one, with the balance sheet deteriorating, are you still going to pay a dividend at the end of the year?

Second question. I don't know if I heard you correct, but you mentioned that you don't currently envisage adding any more DWP capacity beyond your current projects. Does that mean that you're no longer looking at the second phase of Saiccor's brownfield expansion? And then the third question is with today's announcement that you're acquiring the Matane Mill in Canada, plus your sort of indication that you made, sort of take out a European paper mill over the coming months, are you sort of now no longer considering further European pulp debottlenecking projects, which you previously sort of described as extremely attractive investments?

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [36]

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Thanks for the questions. Firstly, on dividend, yes, we are committed to maintaining our dividend payments and cover. We don't anticipate any changes there. And with the cash that we're generating and now that we're at the end of this CapEx cycle, CapEx levels will come down, so we are very comfortable with that.

The DWP expansion, Phase 2 of Saiccor, yes, that could come in time. I don't envisage it coming in the next 2 or 3 years. As we've talked about, the market is a little bit softer at the moment. And hey, we've got to complete the Phase 1 of that project. We've got to bed it down and ramp up the volumes and all of those things. So I would say that, that's some years out now.

On the Matane, just remember one thing that some of the volumes coming out of Matane are going to Europe, so it does help with their pulp integration. Those pulp opportunities, there are other ones, some of them are smaller and some don't involve lots of CapEx. So we will continue to push pulp integration in spite -- even though we've acquired Matane. The close -- I just want to point out one thing, it wouldn't be a whole mill that we would close. It could be a machine, but not a whole mill. How much that would cost, it would depend on the machine. But -- and perhaps that's what you were alluding to in your question. It could be around EUR 30 million related to that.

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Wade Napier, Avior Capital Markets (Pty) Ltd. - Research Analyst [37]

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Maybe just a follow-up with today's acquisitions. I mean, just reading through the presentation material, you sort of discussed the BCTMP market as being 5 million tons, and about 40% of that market supplies printing and writing paper, and 60% paperboard and specialties. I mean you've got sort of operating rates for that grade increasing towards 96%. But I mean, if I just do the simple math here, 40% of a 5 million ton market is 2 million tons, and demand decline -- is declining in printing and writing paper at 5% to 10% a year. So you're losing sort of 100,000 to 200,000 tons of demand for this greater year. And then the specialty demand growth, which is the remaining 3 million tons, is increasing at 3% a year. So that's 90,000 tons. So demand is actually declining in totality for this grade of pulp, yet you've gone and bought a pulp mill. I mean I don't understand this.

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [38]

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But wait, we're going to be using it substantially for our own needs. It's to lower our own costs. So it's not that we -- yes, there are external volumes, but it's primarily for our own purposes. So it's not that we are exposed to that variability. And Mark, do you want to add to that?

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Wade Napier, Avior Capital Markets (Pty) Ltd. - Research Analyst [39]

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Yes. I mean, I understand that. Like I understand that, Steve. But you're essentially talking about a sustainable EBITDA of $25 million on a 270,000 ton per annum pulp mill. So you're talking less than $100 per ton on EBITDA profitability. Whereas investments in dissolving wood pulp, I mean, you all know this better than I do, your cash cost on dissolving wood pulp are sort of $450 to $500 a ton and your selling prices are $750 to $900 a ton. So the profitability just looks so much better. I mean, just help me out here.

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Mark Gardner, Sappi Limited - CEO & President of Sappi North America [40]

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Wade, maybe I can help a little bit here and hopefully not add too much confusion. The 5 million tons of high-yield capacity in the printing and writing segment, a lot of that is integrated. It's not market. So as printing and writing comes down, so it doesn't integrate it, pulp that goes with it come down. So you have to kind of look at the printing and writing segment as kind of not being in the market to buy, but most of those printing and writing mills have a BCTMP plan, right? They're very close or integrated with them.

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Operator [41]

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(Operator Instructions) The next question comes from [Maria Penne] of Camelot (inaudible)

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Unidentified Analyst, [42]

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It's just to ask regarding the acquisition. You said that you will be using internal resources to finance the acquisition. Could you give rough estimates as to what will be used? Will it be cash? Will it be the debt facilities that you have?

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Glen Thomas Pearce, Sappi Limited - CFO & Executive Director [43]

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Okay. Great. It's Glen here. So we'll be using our available debt facilities at [round and key]. We do have sufficient cash should the purchase -- the completion of the purchase happen soon, but we have available cash at our debt facilities that we will utilize as far as that is concerned.

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Unidentified Analyst, [44]

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So you will use 100% from the debt facilities in terms of cash? Just to understand you correctly.

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Glen Thomas Pearce, Sappi Limited - CFO & Executive Director [45]

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That's correct.

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Unidentified Analyst, [46]

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And how much will that increase your leverage in terms of net debt-to-EBITDA, please?

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Glen Thomas Pearce, Sappi Limited - CFO & Executive Director [47]

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It will be about 0.4x.

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Operator [48]

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The next question comes from [Peter Ostovich] of Ironshield Capital.

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [49]

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[Peter], are you there?

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Operator [50]

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Unfortunately, his line seems to have dropped. He's going to have to reconnect into the queue. (Operator Instructions) [Peter] is back in the queue.

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Unidentified Analyst, [51]

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Just if you could give us a bit more color on how you think about adding capacity in specialties? And specifically what kind of specialties you think are most beneficial for you to add? And how do you see the market for those developing?

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [52]

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Yes. And thanks, [Peter]. I don't think we're going to be looking to add any capacity in the near future. We've done the conversions at Somerset and Maastricht. And obviously, last year, we acquired the Cham mills in Italy. So it's not going to be additional capacity over and above that. So we need to ramp up further and grow our volumes based on the additional capacity that we've already added.

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Unidentified Analyst, [53]

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Okay. But in this case -- sorry, go on.

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [54]

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Sorry, someone was just reminding me. In South Africa, we do think there are packaging opportunities on linerboards, containerboard down in South Africa. And that's primarily into exports, food exports out of South Africa.

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Unidentified Analyst, [55]

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Understood. And can you please remind us what kind of specialties you are now focusing on ramping up? And how is it going?

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [56]

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There are a number of categories, but -- and it includes silicon-based paper, flex pack, various labels. Obviously, we've now invested in boxboard, the SBS. Berry, do you want to expand further?

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Berend John Wiersum, Sappi Limited - CEO of Sappi Europe [57]

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Perhaps the most significant one that's growing fastest is barrier technology papers to replace the plastic packaging. That is just getting going now, and there's big opportunities there. And then secondly, the digital imaging paper, which is sublimation paper, that also is growing very quickly. So those perhaps are the really exciting ones. The other ones, as Steve mentioned, are ones that grow constantly.

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Unidentified Analyst, [58]

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Right. And to what extent did you manage to fill up the new capacity? I mean, like 25%, 50%, 75%?

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Berend John Wiersum, Sappi Limited - CEO of Sappi Europe [59]

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If in terms of Europe, then the capacity for the lightweights, so also coming in and continue. They're pretty well full. For the paperboard, we've still got a long way to go in Maastricht, as we discussed before, and it will take another year or 2 before we got those full.

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [60]

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In the U.S., it was 88% up on a year ago.

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Unidentified Analyst, [61]

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You mean for the specialties?

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [62]

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Yes.

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Operator [63]

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Gentlemen, that was the final question. Do you have any closing comments?

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Stephen Robert Binnie, Sappi Limited - CEO & Executive Director [64]

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No. If there's no more questions, I just want to thank everybody for joining us on the call, and I look forward to spending time with you in 3 months' time at the end of the financial year. Thank you.