Q3 FY20 financial - Steve Binnie Chief Executive Officer, Sappi Limited 30 July 2020 - Reserved for
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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
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$90m EBITDA impact Variable costs -6% • Certain packaging and speciality paper grades year-on-year unaffected by Covid-19 – profitability increased • Variable costs lower; driven by pulp, latex and wood costs Packaging EBITDA* • Fixed cost lower due to reduced headcount and up 18% temporary unemployment • Alfeld PM3 operational again as of 20th July * Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 25 in our Q3 FY20 financial results booklet (available on www.sappi.com) for a definition of special items. 10
Sappi North America • Strong growth in packaging volumes, with improved Sales tons -4%* product mix towards higher value products year-on-year • Graphic paper volumes severely impacted by economic lockdown in the US, commercial Packaging and downtime of 107kt specialities vol +67% • Lower DP demand resulted in additional paper pulp year-on-year production at Cloquet • Fixed costs declined 14% due to SG&A savings and Variable costs -10% furloughing of some employees year-on-year * Volumes down 18% excluding Matane Mill. ** Refer to the supplementary information in this presentation for a reconciliation of EBITDA to reported operating profit and page 25 in our Q3 FY20 financial results booklet (available on 11 www.sappi.com) for a definition of special items.
Sappi South Africa • DP sales volumes 21% below the prior quarter Sales tons -17% necessitating 76kt commercial downtime year-on-year • DP US$ 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. 12
Covid-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 $67m (15%) in the quarter – some relates to delayed shuts 13
Covid-19 update Markets • Graphic papers – Lower advertising spend and lockdowns resulting in significant retail slowdown causing significant reduction in graphic papers demand globally – Demand declines of approximately -40% in Europe for CWF and CM, and -35% in US. – Newsprint and Office paper heavily impacted by lockdowns in SA, demand -60% in Q3, office paper now recovering – Declining input costs supported margins – Prices drifted downwards on lower costs—industry managing excess capacity through temporary shutdowns • Packaging and speciality papers – Many categories positively affected to date—food and hygiene related products – Others negatively impacted by lockdowns—advertising or industry related – Trials for new products started to resume, continued ramp up of Somerset and Maastricht – Lower pulp and chemical prices supported margins 14
Covid-19 update Markets • Dissolving pulp – Retail lockdowns in many geographies have impacted entire textile supply chain – Growth in e-commerce/online sales not enough to offset impact on brick and mortar stores – Demand down approximately 29% in Q3, pace of recovery picking up – Customers plants recommenced production in June – Exchange rate movements lowering costs for many producers; DP price trending lower in line with VSF pricing – VSF production increasing as lockdowns ease — excess capacity remains an issue with lower demand – 86,000 tons of BCTMP and kraft paper pulp sales volumes included in the segment – pricing under pressure 15
US retail clothing sales start to recover in May, inventories decline US$m US$m Source: US Federal Reserve 16
Sappi’s 2025 strategy will cover two phases 17
Phase 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 18
Phase 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 19
Our 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. 20
Group 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$100m of capex to 2021 • Accelerate growth in higher-margin growth segments – Ramp up of board grades at Somerset and Maastricht Mills—somewhat slower due to delays in trials which are now recommencing – Continue to evaluate barrier coating and technology opportunities for growth 21
Outlook • Estimate dissolving pulp and graphic paper volumes to be 75% and 70% of prior year levels respectively • Market for DP recovering faster than this; pricing under pressure, resulting in additional paper pulp at Cloquet • Port and shipping issues in South Africa hampering a further recovery in sales volumes • Packaging and specialities segment continues to grow, certain grades more resilient during the crisis and release liner and digital imaging expected to accelerate as lockdowns ease and industries recover • Slow recovery underway in the graphic paper segment as economies open up and retail and advertising activity increase • Saiccor expansion project fully underway in July; completion estimated in the third quarter of FY2021 • Focus remains on liquidity and cash flow 22
Thank you 23
Supplementary information 24
EBITDA and operating profit Excluding special items* 250 200 224 221 211 208 152 201 148 197 145 142 136 187 185 128 150 172 117 109 105 155 155 139 93 131 100 85 118 62 US$ 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. 25
Net 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. 26
Global 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 27
Packaging and speciality papers Sappi Europe 28
Packaging 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 29
Packaging 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 30
Sustainability 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 31
Paperboard 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. 32
Total 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. 33
Market 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. 34
Market 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. 35
Market 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. 36
Market 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. 37
Market 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. 38
Sappi 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. 39
Coated 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. 40
Sappi 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. 41
Coated 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. 42
Sappi 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. 43
Paper 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$) Source: FOEX, CCF group, RISI. 44
Dissolving pulp prices 1,100 1,050 1,000 950 900 US$/ton 850 800 750 700 650 600 Imp SW DP Imp HW DP China origin DP Source: CCF group. 45
Textile fibre prices 3,000 2,500 2,000 US$\ton 1,500 1,000 500 0 Cotton 328 Cotton "A" Index PSF 1.4 D VSF 1.2 D VSF 1.5 D Source: CCF group. 46
Cash flow US$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) 47
EBITDA 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. 48
Thank you 49
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