Q3 FY20 financial - Steve Binnie Chief Executive Officer, Sappi Limited 30 July 2020 - Reserved for
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Steve Binnie Chief Executive Officer, Sappi Limited 30 July 2020 Q3 FY20 financial results
Forward-looking statements and Regulation G disclosure
Forward-looking statements
Certain 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
of
or 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,
this document 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.
You should 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
actual results, 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 raw
material, energy and employee costs, and pricing)
• The impact on our business of adverse changes in global economic conditions
• The Covid-19 pandemic
• 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 disclosure
Certain 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
of certain 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.
2
Highlights—Q3 FY20
Excluding special items*
• Severe impact from Covid-19 on profitability
EBITDA* US$26m • Significant declines in demand and lower sales
Down 78% YOY prices for graphic paper and dissolving pulp
• Packaging and speciality papers segment continued
Net debt/EBITDA to grow volumes and profitability
4.0X** • Focus on preservation of liquidity and cash flow
• Liquidity comprised cash on hand US$190 million
and US$503 million from undrawn committed RCF
EPS* (10) US cents
* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 25 in our Q3 FY20 financial results booklet (available on
www.sappi.com) for a definition of special items.
3
** Adjusted covenant leverage ratio for information purposes. Covenant suspension to March 2021
EBITDA* reconciliation
Q3 FY20 to Q FY319
130
90
50
US$ million
10
(30)
(70)
(110)
(150)
118 (112) (127) 76 49 5 17 26
Q3 FY19 EBITDA Sales volume Price & mix Variable & delivery Fixed costs Other Exchange rate Q3 FY20 EBITDA
costs
1. All variances were calculated excluding Sappi Forestry.
2. ‘Currency conversion’ reflects translation and transactional effect on consolidation.
3. EBITDA* = EBITDA excluding special items. 4
Product contribution split—LTM
EBITDA excluding special items Operating profit excluding special items
10%
26% Dissolving pulp
37% 35% 34%
38%
Packaging and
specialities
Graphics
56%
37% 27%
* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 25 in our Q3 FY20 financial results booklet
(available on www.sappi.com) for a definition of special items. 5
Data above excludes treasury operations and insurance captive.
Segment volume & EBITDA* margin
1,100 350 20.0%
1,000 8.0% 300
900 15.0%
800 3.0% 250
10.0%
700 -2.0% 200
600 5.0%
-7.0% 150
500
400 -12.0% 100 0.0%
Graphics volume Graphics margin Packaging and specialities volume Packaging and specialities margin
400 40%
350
30%
300
250 20%
200
10%
150
100 0%
Dissolving pulp volume EBITDA margin
EBITDA* = EBITDA excluding special items. 6
Maturity profile*
Fiscal years
600
530
500
459
EUR450m bond
EUR350m bond
400
US$ million
300
237
221
190
200 US$221m bond
144
113 87
100 65
39 43 46 51
23 22 25
0
2020 2021 2022 2023 2024 2025 2026 2027 2032
Cash Short-term SPH term debt Securitisation SSA RCF
* Graph excludes US$97 million in IFRS16 leases – Average maturity of four years. 7
Capex
600
500
400
US$ million
300
200
100
0
2016 2017 2018 2019 2020E
Maintenance Efficiency and expansion
8
Segmental overview
Sappi Europe
Sappi North America
Sappi South Africa
9
Sappi Europe
• Declines in graphic paper demand across Europe
Sales tons -32% and key export markets
year-on-year • 369kt commercial downtime required,
approximately US$90m EBITDA impact
Variable costs -6% • Certain packaging and speciality paper grades
year-on-year unaffected by Covid-19 – profitability increased
• Variable costs lower; driven by pulp, latex and wood
costs
Packaging EBITDA*
• Fixed cost lower due to reduced headcount and
up 18%
temporary unemployment
• Alfeld PM3 operational again as of 20th July
* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 25 in our Q3 FY20 financial results booklet (available on
www.sappi.com) for a definition of special items. 10Sappi North America
• Strong growth in packaging volumes, with improved
Sales tons -4%* product mix towards higher value products
year-on-year • Graphic paper volumes severely impacted by
economic lockdown in the US, commercial
Packaging and downtime of 107kt
specialities vol +67% • Lower DP demand resulted in additional paper pulp
year-on-year production at Cloquet
• Fixed costs declined 14% due to SG&A savings and
Variable costs -10% furloughing of some employees
year-on-year
* Volumes down 18% excluding Matane Mill.
** Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 25 in our Q3 FY20 financial results booklet (available on
11
www.sappi.com) for a definition of special items.Sappi South Africa
• DP sales volumes 21% below the prior quarter
Sales tons -17% necessitating 76kt commercial downtime
year-on-year • DP US$ sales prices continued to decline; benefit
from weaker US$/ZAR exchange rate
R200m savings • Packaging volumes and prices were flat year-on-year
from shut
• Newsprint and uncoated woodfree volumes severely
postponement
impacted by lockdown in SA (– 62%)
• Lower wood, chemicals and energy costs resulted in
EBITDA* -42%
variable costs declining 12% year-on-year
year-on-year
• Postponement of annual maintenance shuts
resulted in 11% reduction in fixed cost
* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 25 in our Q3 FY20 financial results booklet (available on
www.sappi.com) for a definition of special items. 12Covid-19 update
Cash management
• Financing activities
– Negotiated covenant suspension for 12 months (to March 2021)
– Repaid SA debt maturities with a 12 month bank bridge facility and new SSA07 public bond
• Reviewed capital expenditure commitments—US$100m reduction in H2
– Force majeure on Saiccor Mill expansion project —completion now expected in Q3 FY2021
– Delayed shuts at Ngodwana, Saicccor and Tugela till FY2021
• Revised procurement savings target for 2020—from US$64m to US$100m
• Fixed costs savings of $67m (15%) in the quarter – some relates to
delayed shuts
13Covid-19 update Markets • Graphic papers – Lower advertising spend and lockdowns resulting in significant retail slowdown causing significant reduction in graphic papers demand globally – Demand declines of approximately -40% in Europe for CWF and CM, and -35% in US. – Newsprint and Office paper heavily impacted by lockdowns in SA, demand -60% in Q3, office paper now recovering – Declining input costs supported margins – Prices drifted downwards on lower costs—industry managing excess capacity through temporary shutdowns • Packaging and speciality papers – Many categories positively affected to date—food and hygiene related products – Others negatively impacted by lockdowns—advertising or industry related – Trials for new products started to resume, continued ramp up of Somerset and Maastricht – Lower pulp and chemical prices supported margins 14
Covid-19 update
Markets
• Dissolving pulp
– Retail lockdowns in many geographies have impacted entire textile supply chain
– Growth in e-commerce/online sales not enough to offset impact on brick and mortar stores
– Demand down approximately 29% in Q3, pace of recovery picking up
– Customers plants recommenced production in June
– Exchange rate movements lowering costs for many producers; DP price trending lower in line with VSF pricing
– VSF production increasing as lockdowns ease — excess capacity remains an issue with lower demand
– 86,000 tons of BCTMP and kraft paper pulp sales volumes included in the segment – pricing under pressure
15US retail clothing sales start to recover in May, inventories
decline
US$m US$m
Source: US Federal Reserve
16Sappi’s 2025 strategy will
cover two phases
17Phase 1
Strengthen balance sheet (2020–2021)
Objective Strategy
Reduce debt and • Complete approved projects on
time and within budget
maximise cash
• Drive further margin
generation improvement opportunities
• Investigate capacity
expansions
• Investigate new growth
opportunities
18Phase 2
Invest for profit growth (2022+)
Objective Strategy
• Deliver smaller growth
Invest in new opportunities
opportunities • Make decision on expansions and
conversions
• Commercialise new products at
scale
• Execute sustainability strategy
• Invest in R&D
19Our business strategy
How we’ll get there
Through collaboration and innovation we will
grow profitably, using our strength as a sustainable
and diversified global woodfibre group, focused on
dissolving pulp, graphic, packaging and speciality
papers, and biomaterials.
20Group strategy Update • Achieve cost advantages – Group efficiency and procurement saving initiatives in FY20: US$100m—an increase of US$36m – Saiccor Mill expansion delay due to Force Majeure, project has commenced; Completion in Q3 FY21—will improve efficiency and lower costs once complete • Rationalise declining businesses – Rapidly matching production to demand; Stockstadt Mill PM2 and Westbrook PM9 to shut • Maintain a healthy balance sheet – Covenant suspension through to March 2021 – Strict focus on cash generation and liquidity – Shifted US$100m of capex to 2021 • Accelerate growth in higher-margin growth segments – Ramp up of board grades at Somerset and Maastricht Mills—somewhat slower due to delays in trials which are now recommencing – Continue to evaluate barrier coating and technology opportunities for growth 21
Outlook
• Estimate dissolving pulp and graphic paper volumes to be 75% and 70% of prior year levels respectively
• Market for DP recovering faster than this; pricing under pressure, resulting in additional paper pulp at Cloquet
• Port and shipping issues in South Africa hampering a further recovery in sales volumes
• Packaging and specialities segment continues to grow, certain grades more resilient during the crisis and release liner
and digital imaging expected to accelerate as lockdowns ease and industries recover
• Slow recovery underway in the graphic paper segment as economies open up and retail and advertising activity
increase
• Saiccor expansion project fully underway in July; completion estimated in the third quarter of FY2021
• Focus remains on liquidity and cash flow
22Thank you
23Supplementary
information
24EBITDA and operating profit
Excluding special items*
250
200
224
221
211
208
152
201
148
197
145
142
136
187
185
128
150
172
117
109
105
155
155
139
93
131
100
85
118
62
US$ million
52
48
50
26
0
-50
-52
-100
EBITDA
* Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 25 in our Q3 FY20 financial results booklet (available on
www.sappi.com) for a definition of special items.
25Net debt/EBITDA* development
2,600
4.1 4.5
2,400 4.0
3.5
2,200 2.6
3.0
2,000
2.5
1977
1,916
1,800
1,879
US$ million
2.0
1,734
1,728
1,600
1,680
1,652
1.5
1,632
1,603
1,583
1,568
1,557
1,400
1,501
1.0
1,408
1,349
1,338
1,329
1,322
1,318
1,200 0.5
1,000 0.0
Net debt Net debt/LTM EBITDA**
* EBITDA is excluding special items.
** The covenant Net debt/LTM EBITDA calculation has adjustments and therefore differs from that shown above. 26Global packaging and speciality papers production sites
Alfeld Mill (Germany) Stockstadt Mill (Germany) Condino Mill (Italy) Somerset Mill (USA) Tugela Mill (South Africa)
Flexible packaging, label paper, Label paper, flexible packaging, Flexible packaging, silicone base paper, Label paper, paperboard, Containerboard
paperboard, containerboard, silicone containerboard dye sublimation paper flexible packaging
base paper,
functional paper
Maastricht Mill (Netherlands) Lanaken Mill (Belgium) Rockwell Solutions (Scotland) Cloquet Mill (USA) Ngodwana Mill (South Africa)
Paperboard Functional paper Functional papers and Label paper Containerboard
flexible packaging
Ehingen Mill (Germany) Carmignano Mill (Italy) Westbrook Mill (USA)
Containerboard Flexible packaging, label paper, Casting and Release paper
inkjet paper, dye sublimation paper 27Packaging and speciality papers
Sappi Europe
28Packaging and speciality papers
Sappi North America
Paperboard
C1S Paper
(SBS)
Food service
Label paper Bag paper Bristols Folding carton Litho lamination
board
Spectro Proto C1S LusterFSB
LusterCote LusterPrint Proto Litho
(C1S & C2S) Spectro C1S LusterPlate
29Packaging and speciality papers volume growth 2015 to 2020
1,400
1,200 1,129
1,009
1,000
884 887
854
800
600
400
200
-
2015 2016 2017 2018 2019 2020F
Flexpack Label Paperboard Self Adhesives Digital Imaging Functional papers Casting Containerboard Tissue Other
30Sustainability focus
EU consumer and brand owner
• Desired outcome
- Prevent or reduce the impact of packaging waste
on the environment by avoiding and recycling
packaging waste; preference for Monomaterials
• Consequences
- Product design requires a ‘designed for recycling’
approach
- Recycling systems to be established and/or
heavily expanded
- Rewards easy to recycle packaging
- Replacement for paper laminates and aluminium
- Huge potential for barrier papers and board
- Low carbon footprint is a competitive advantage
4EverGreen initiative just started with more than 60
participants
31
31Paperboard segments
North America
Quality
Premium
Premium
Spectro (commercial print,
(92 brightness) premium folding carton)
400k tons (10%)
Performance
(88 Brightness) Performance
2.0m tons (45%) Proto and Proto Litho
(folding carton and litho
Food service lamination applications)
& cup stock
(88 brightness)
2.0m tons (45%) Food service
LusterFSB and LusterCup
(plates, trays & cup stock)
Price
Sources: RISI, Poyry, & Chartic; premium volume includes a range of premium folding carton from Sappi estimations. 32Total containerboard market—local market share
South Africa
Includes Cape Kraft and Enstra Mills
1,020 50% Other+Import
Neopak
44%
45%
1,010 Sappi
37% 37% 37% 40% New Era
1,000 36%
35%
990
30%
Corruseal
980 25%
1,012
20%
1,000
970
992
15%
960
10%
967
966
950 Mondi
5% Mpact
940 0%
FY15 FY16 FY17 FY18 FY19
Market size (kton) Sappi market share Market share
The above market size includes virgin and recycled containerboard. 33Market size—paperboard (SBB) Europe
Sappi is no 3 in SBB market in Europe with 12% market share
760 10% 12%
Others Sappi
Burgo
750
8% 10%
Fedrigoni
740
8% 8%
730 8%
720 6%
6%
710
748
735
700 4%
722 Stora
712
690
700
2%
680 Iggesund
670 0%
FY15 FY16 FY17 FY18 FY19
Market size (kton) Sappi market share Market share
Source: Smithers Pira/RISI/Own estimation. 34Market size—flexible packaging paper Europe
Sappi is the market leader in flexible packaging paper in Europe
Capacity limit reached
1,580 14%
13%
12% Sappi
1,560 Others
12%
1,540
10%
9% 9%
1,520 Billerud
8%
1,500 8%
1,557
1,480 6%
1,534
1,512
1,460
4% Mondi
1,483
1,440
1,455
2%
1,420
Ahlstrom
1,400 0%
FY15 FY16 FY17 FY18 FY19
Market size (kton) Sappi market share Market share
Source: Smithers Pira/RISI/Own estimation. 35Market size—label paper Europe
Sappi is focusing on niches within label paper (eg metallisation)
725 7%
6%
6% UPM
720
5%
5%
715
3% 4% Others
710
2%
2% 3%
719
715
705
711 2%
707
Brigl
700
1%
703
695 0%
Feldmühle Sappi
FY15 FY16 FY17 FY18 FY19
Market size (kton) Sappi market share Market share
Source: Smithers Pira/RISI/Own estimation. 36Market size—self-adhesive paper Europe
Sappi is no 3 in Europe after UPM and Ahlstrom
Capacity limit reached
540 25% Others
20%
530
20%
18% Delfort
UPM
520
13%
15%
510
11%
533
500 10%
10%
522
490 512
502
5%
Sappi
491
480
470 0% Ahlstrom
FY15 FY16 FY17 FY18 FY19
Market size (kton) Sappi market share Market share
Source: Smithers Pira/RISI/Own estimation. 37Market size—digital solutions Europe
Sappi is market leader in dye sublimation paper in Europe
70 0.3
25% Others
60 Sappi
0.25
17%
50
0.2
40
0.15
30 Hansol
58
50
0.1
20 45
40
35
Beaver
0.05
10
Neenah
- 0
F Schoeller
FY15 FY16 FY17 FY18 FY19
Market size (kton) Sappi market share Market share
Source: Smithers Pira/Pöyry/RISI/Own estimation. 38Sappi Europe
Q3 FY20 Q2 FY20 Q3 FY19
Tons sold (‘000) 540 793 789
Sales (EURm) 420 606 637
Price/Ton (EUR) 778 764 807
Cost/Ton* (EUR) 837 733 785
Operating profit excluding special items** (EURm) (32) 25 18
* 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 25 in our Q3 FY20 financial results booklet (available on
www.sappi.com) for a definition of special items. 39Coated paper deliveries and prices
Western Europe
1.2
1.1
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
CWF demand MCR demand CWF 100 gsm sheets LWC 60 gsm offset reels
Western Europe shipments including export.
Source: Cepifine, Cepiprint and RISI indexed to calendar 1Q 2008. 40Sappi North America
Q3 FY20 Q2 FY20 Q3 FY19
Tons sold (‘000) 307 416 320
Sales (USDm) 267 387 343
Price/Ton (USD) 870 930 1,072
Cost/Ton* (USD) 974 921 1,100
Operating profit excluding special items** (USDm) (32) 4 (9)
* 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 25 in our Q3 FY20 financial results booklet (available on
www.sappi.com) for a definition of special items. 41Coated paper deliveries and prices
United States of America
1.2
1.1
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
Domestic CWF shipments Domestic CWF purchases
US industry purchases defined as industry shipments, plus imports, less exports.
Source: AF&PA and RISI indexed to calendar Q1 FY08. 42Sappi South Africa
Q3 FY20 Q2 FY20 Q3 FY19
Tons sold (‘000) 310 389 375
Sales (ZARm) 3,506 3,979 4,418
Price/Ton (ZAR) 11,310 10,229 11,781
Cost/Ton* (ZAR) 10,452 9,404 10,459
Operating profit excluding special items** (ZARm) 266 321 496
* 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 25 in our Q3 FY20 financial results booklet (available on
www.sappi.com) for a definition of special items. 43Paper pulp prices
1,300 1,100
1,200
1,000
1,100
900
1,000
800
US$/ton
900
800 700
700
600
600
500
500
400 400
2-Apr
2-Apr
2-Apr
2-Nov
2-Nov
2-May
2-Sep
2-May
2-Sep
2-May
2-Feb
2-Mar
2-Oct
2-Dec
2-Feb
2-Mar
2-Oct
2-Dec
2-Feb
2-Mar
2-Jan
2-Aug
2-Jan
2-Aug
2-Jan
2-Jun
2-Jun
2-Jun
2-Jul
2-Jul
2-Jul
NBSK Europe (US$) BHKP Europe (US$) Net BHKP China (US$)
NBSK Europe (EUR) BHKP Europe (EUR) BCTMP, HW, Imports China (US$)
Source: FOEX, CCF group, RISI. 44Dissolving pulp prices
1,100
1,050
1,000
950
900
US$/ton
850
800
750
700
650
600
Imp SW DP Imp HW DP China origin DP
Source: CCF group. 45Textile fibre prices
3,000
2,500
2,000
US$\ton
1,500
1,000
500
0
Cotton 328 Cotton "A" Index PSF 1.4 D VSF 1.2 D VSF 1.5 D
Source: CCF group. 46Cash flow
US$m Q3 FY20 Q2 FY20 Q3 FY19
Cash generated from operations 25 116 118
Movement in working capital 20 (14) 20
Finance costs paid (48) (18) (16)
Finance income received 1 1 1
Taxation (paid) refund 13 (11) (5)
Dividend paid - - -
Cash generated from operating activities 11 74 118
Cash utilised in investing activities (78) (74) (135)
Capital expenditure (74) (70) (135)
Proceeds on disposal of assets - - 1
Acquisition of subsidiary (2) - -
Other non-current asset movements (2) (4) (1)
Net cash generated (utilised) (67) - (17)
47EBITDA and operating profit
Excluding special items* reconciliation to reported operating profit
US$m Q3 FY20 Q2 FY20 Q3 FY19
EBITDA excluding special items* 26 131 118
Depreciation and amortisation (78) (79) (70)
Operating profit excluding special items* (52) 52 48
Special items* - gains (losses) (20) (29) (2)
Plantation price fair value adjustment 5 3 1
Acquisition cost - - -
Net restructuring provisions (5) (12) -
Profit (loss) on disposal and written off assets 1 - (1)
PPE impairments - (11) -
Equity investment impairments (10) - -
Fire, flood, storm and other events (11) (9) (2)
Operating profit (72) 23 46
* Refer to page 25 in our Q3 FY20 results booklet (available on www.sappi.com) for a definition of special items. 48Thank you
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