Sappi Limited

Steve Binnie - CEO Glen Pearce - CFO Mark Gardner - CEO of Sappi North America Alex Thiel - CEO of Sappi South Africa Berry Wiersum - CEO of Sappi Europe Gary Bowles - EVP of Sappi Specialised Cellulose

Caroline Learmonth - Barclays Nishal Ramloutan - UBS Roger Spitz - BofA Merrill Lynch Bill Hoffmann - RBC Capital Markets Wade Napier - Avior Research Chris Ellis - Babson Capital

Thank you. Good morning and good afternoon.

I'm going to go straight to slide 4 of our presentation pack that was loaded on our website, and the first item is the highlights for the quarter. Our profit for the period was $24 million, compared with $18 million for the same quarter last year.

Similarly, EPS excluding special items was $0.05; up from $0.02 last year. EBITDA, which is an important measure that we measure ourselves against, and our -- we generated $140 million.

That's broadly in line with the $147 million that we achieved last year. Net debt was $2,040 million and that's a significant reduction of $340 million from a year ago.

Moving to the next slide, you can see our trend with regards to EBITDA and operating profit. And you can see that typically Q1 is a relatively smaller quarter.

Our big -- our most important quarter is Q4, and Q2 as well. Overall the trends are in line with last year and we would expect that momentum to continue throughout the rest of the financial year.

Moving to slide 5 we have an earnings bridge comparing our EBITDA in 2014 with our EBITDA in 2015. Firstly you can see a negative impact there coming through on sales volumes, and that's all associated with our CapEx projects that we had underway, and that impacted volumes in each of the regions.

We had some favorable price movements and mix improvements, which boosted our profitability. Then on the cost front, variable and delivery costs were up slightly.

That's why it's a red bar. And that's associated with the higher pulp cost, mainly in Europe, and higher wood costs in the US.

Fixed costs came down and we continue to do good work on that front. And then we had an overall net impact related to exchange rates, negative of $11 million.

The next slide shows the product contribution split between paper and specialized sales, and the trends are broadly in line with what we've seen in recent times. EBITDA roughly half/half between the two, and obviously that's reflective of the cash generation of the respective businesses.

Operating profit geared, or slanted towards specialized sales, at 76%, with paper 24%. On the next slide we have our net debt/EBITDA development, and you can see that net debt/EBITDA rose slightly during the quarter, to just above three times.

That's to be expected; we always have a seasonal outflow of cash related to working capital. In Q1 you'll see that trend in prior years as well.

Over the course of the rest of the year we would expect that trend line to start coming downwards, and we'll end the year below where we were last year. Our maturity profile for our debt is reflected on the next page, and you can see that there's no significant debt maturing in 2015.

2016, we've got our securitization structure, our international securitization structure. We don't anticipate any problems with that and we should be able to roll that.

And then we start to look beyond 2017 onwards, related to our international bonds. Some of those have call windows coming up soon and we'll talk about that a little bit more later.

Our CapEx development is shown on the next slide, and we estimate this year that our CapEx numbers will be just below $300 million, split roughly half/half between maintenance CapEx and expansionary CapEx, but I guess we use that term expansionary quite loosely. It's mainly linked to efficiency-improvement projects, some of which we saw coming through in the first quarter.

Turning our attention then to the divisions, and on slide 12 we have Europe. On the left-hand side you can see the margin development and, if you look across the last six or seven quarters, we've seen significant recovery from the lows of mid-2013.

Obviously a lot of that's down to the good work done on the cost front in the Business. Q1 you would expect to be lower than Q4, for the reasons that I described earlier; that it is a -- typically a lower-volume quarter.

So we would expect that trend line to continue in the same direction. On the top-right-hand side of the page you can see the demand development for our key product categories; the blue bars coated woodfree; red is coated mechanical.

And you can see that in 2014 we did see a slowdown in demand declines, and that's helped us from a pricing perspective, particularly with regards to coated woodfree. Going forward we have the RISI forecasts; they are about 4% negative.

We -- our belief is that coated woodfree would be a little bit better than that. We estimate about minus 2%, but on the mechanical side it's probably -- certainly in the short term likely to be worse than that.

In terms of the performance we saw better sales prices coming through on coated woodfree, and the good work done on fixed-cost controls has helped to improve performance. The weaker euro has negatively impacted or affected US-dollar-denominated variable costs, and that's mainly pulp for us, which is still very high.

However, we did see benefits coming through from improved export margins because of the weaker euro. Good news is on the specialty business at our Alfeld mill.

We've seen improved mix there and we've been able to achieve higher pricing. And we are pleased with the progress that that business is making.

The -- perhaps the biggest headache we've got in Europe at the moment relates to coated mechanical; the market is very tough. And that's not unique to Europe; it's globally.

And as I said earlier that's where we anticipate the most demand decline will come from. The numbers that we included include a once-off charge related to the Gratkorn project underway; a EUR12 million once-off impact.

Moving to North America, on slide 13 we have a similar graph -- or we have similar graphs and, as you can see, 2013 -- sorry 2014 was a tough year for North America. We -- as the year progressed and we moved into Q4, we saw a significant recovery.

Q1, although it's down on Q4 of last year -- bear in mind that it does include the $10 million once-off impact from the Somerset project. So the underlying trend for the US is also moving in the right direction as well.

Demand development is on the top-right-hand side, and you can see from this that demand declines have been -- in recent years -- have been a little bit better than you saw on the last slide in Europe; down about 2%. Interestingly, in recent times -- when we compare 2015 to 2014, we've actually seen a flattening of that.

And that's enabled us to get some prices increases through in the US. And we've been able to successfully implement them.

Going forward, as we project, we anticipate between 1% and 2% declines as well. The improvement came through from improved sales prices, which I talked about, and the mix.

Dissolving wood pulp sales volumes at Cloquet were impacted by the fact that we did switch some of the production back to paper pulp for our own use -- and that boosted profitability. Good work done on fixed and variable costs, and they are flat to down on last year, and that's despite the extended shut at Somerset, which would have had an impact on cost.

We have a headache at the moment, a short-term headache, which is related to our release business, and that's been affected by weak demand in China. And the currencies do have an impact because we convert our European sales back to dollars, and that has a negative impact on profitability.

Turning to South Africa, on slide 14, on the left-hand side at the top you can see the very strong progress that we've made in this business, from a profitability perspective. And margins have been progressively increasing now for some time.

The dissolving pulp margins, as you know, have been relatively stable, and a lot of this improvement, I'm pleased to say, is coming from our packaging business, which is -- only a couple of years ago was -- was actually making operating losses, has now moved significantly upwards. The graph on the right-hand side has the dissolving wood pulp demand.

And you can see in recent times demand has been rising, at 7%/8% levels, and has been strong. And even if you look at the long-term forecast going ahead, we would expect that to continue.

So the long-term fundamentals remain very strong for the business. The profitability improvement came from a number of sources.

Firstly, the exchange rate gains that we do get on export sales. Locally in South Africa we got improved pricing on our packaging grades, and there were some savings on our variable costs.

The dissolving pulp volumes and the rand pricing for dissolving pulp improved year on year. Important to note that in Ngodwana we did have some boiler tube leaks in December.

That didn't have an impact on sales, but it did have a negative impact on production. So on slide 15, if we are to summarize, firstly on the global paper market trends, supply and demand, I think what we are seeing is that closures have broadly offset the demand declines.

I've talked to this that coated woodfree demand declines appear to be moderating; still downwards, but they are moderating. The biggest concern at the moment is on the mechanical side.

In terms of costs and selling prices, coated woodfree selling prices have moved up, both in the US and in Europe, and certainly that's encouraging. However, on the cost side we have seen a strengthening of US dollar, and that has had an impact on certain of our input costs.

However, oil and chemical prices have been coming down as well, so that we do get benefits. There's a bit of a mix there, as you look at those issues.

So our strategy is to implement price increases when the market allows. We'll never lose sight of the fact that we have to be amongst the lowest-cost producers, and there will be a continued focus on both fixed and variable costs.

And we'll continue to reduce capacity in line with those demand declines. On specialized cellulose, in terms of supply and demand we have seen a significant slowdown in capacity additions.

There's been no new announcements in recent months and the demand growth is normalizing, as we see competing fiber pricing declining. However, as I said the long-term prospects are so very good and we've talked about the 6% tight growth going forward.

From a cost- and selling-price perspective, selling prices have come down, probably more than we would have expected. However, input costs have declined and that's particularly for producers with non-US-dollar cost bases, and obviously with us having a strong presence in South Africa we've been able to benefit from the weaker rand.

Our strategy is to manage capacity; strong focus on production and to continue working very closely with those key customers. Moving to slide 18, this is a slide you'll have seen previously, and just outlines our strategy as we move forward, the three short-term pillars; achieving cost advantages; rationalizing declining businesses and going through moderate investments.

I have slides later which I'll talk to each. Ultimately we want to focus on those, but our -- our ultimate goal is to strengthen our balance sheet, reduce our net debt, and that puts us in a much stronger position longer term to grow the Business.

Slide 19, and I -- talking to each of those three pillars, firstly achieving cost advantages. We will work to lower our fixed and variable costs, increase cost efficiencies and invest for cost advantages.

And we've just listed a few of the projects, and I've talked about them on the call; the Somerset lime kiln and boiler gas conversion project; at Gratkorn, the paper machine and pulp mill upgrade; the Kirkniemi power plant investment, and a bunch of initiatives that we are doing with global procurement. In terms of optimizing and rationalizing declining businesses, we spend a lot of time thinking about our future outlook for demand, and we recognize that graphic paper will continue to decline and we will manage our capacity around that anticipated demand.

And we will continue to focus on strengthening our leadership position in those markets. There's some smaller examples there, but we have stopped coated paper production in South Africa recently, and in Europe we continue to monitor that decreasing demand that I talked about.

We -- third pillar is on page 20, which is growing through moderate investments. We will make smaller investments in existing areas, where we think there's strong potential growth and quick payback, with a strong focus on pulp, specialty grades, packaging papers and probably, within South Africa, the energy opportunities that are out there for us.

Some recent examples are the investment in lightweight recycled packaging paper at Enstra, and then we made some small upgrades to our capabilities at Tugela and Ngodwana on the pulp side. Ultimately we want to strengthen our balance sheet.

The next two years we think it will come down significantly -- the net debt. We want to have a cleaner balance sheet, which will allow us to grow in adjacent businesses.

Some -- again we have examples. We continue to work on that Twello forestry deal, which we talked about last quarter.

That's an ongoing process and -- hopefully we can secure that as we move through the rest of the year. And then there's a lot of opportunities on the debt side to repay some of the bonds and re-finance some of the more expensive stuff with significantly lower interest rates.

Finally, on the outlook, moving to slide 22. As I said, the graphic paper markets remain challenging, but they are a little bit better than our expectations last year, when we built our budget, and that's particularly true in Europe and in North America.

Demand has declined at a lower rate, and our pricing expectations have been met. The exchange rate volatility may affect, in a positive manner -- would affect selling prices, particularly in Europe.

Dissolving wood pulp markets have been under further pressure, and yes, the prices have probably gone -- in dollar terms -- have probably gone a little bit lower than we expected. But that's alongside viscose, polyester and cotton.

However, I should point out that these lower prices are likely to be substantially offset by the weaker rand/dollar exchange rate. And as we've seen today the rand has depreciated significantly further as well, so that will help us a little bit.

The currency movements that we've seen, both with the rand the euro -- the euro has depreciated some 20% over the last year or so. That will have a both -- with have both a transactional and translational impact on our numbers.

The weaker euro and rand, relative to the US dollar, does support local pricing, selling prices, and that tends to offset input-cost increases. As discussed last quarter, we are evaluating opportunities to utilize our cash resources, to re-finance a portion of our debt in order to lower our future interest costs.

And we expect to reduce net debt levels to -- by the end of our 2015 financial year -- to below that of 2014. We are still on track to do that; nothing has changed there.

The 2015 performance from an operational perspective will be largely in line with 2014. The improvement that we are seeing in the paper business is expected to be offset by the lower dollar dissolving pulp prices, and those once-off impacts that I talked about earlier, related to Gratkorn and Somerset.

The other thing to bear in mind is that at current exchange rates we have to translate our European and South-African rand numbers back into dollars. And when you do that conversion they naturally would be negatively impacted by the currency movements.

So that's everything in the presentation. We want to hand it over now for questions.

Thank you. Thanks very much, a couple of questions please.

In terms of Cloquet, what proportion of the dissolving pulp capacity has been switched into paper pulp? And what has been the incremental margin impact of that switch?

Secondly, you've explained EBITDA margins in Europe impacted by the Gratkorn outage. But even adding that back EBITDA margin seems to have contracted.

So presumably that's around the currency impact. So maybe can you go into a little bit more detail of how it works in terms of higher pulp prices versus the paper export impact?

And then in terms of your stated aims to redeem some of the debt or to pay down some of the debt, what level of liquidity do you need ideally in the business in the longer term in terms of potential debt levels longer term. And then just very quickly how have wood inventory levels in North America changed since the end of the quarter?

And the boiler leak at Ngodwana just to check I think you said it didn't impact sales in the quarter, or sorry will it impact sales in the next quarter? Thank you.

Yes, okay that's a few questions. Firstly on the switch between dissolving pulp and paper pulp we are approximately just above 200,000 tonnes of dissolving pulp and 150,000 of kraft pulp in terms of the volume.

In terms of impact on profitability it's not a significant impact. That's not a number that we've been disclosing to the markets.

The European margins Caroline what you're forgetting is its Q1 so you can't really compare it to Q4. So you've got to compare it to similar quarters in last year.

So the underlying trend in the business are better and continue to be so. The next question relates to the redemption of the debt and how much cash we need to hold, and I'll let Glen our CFO handle that one.

We finished off the quarter with cash reserves in excess of $300 million. We have available facilities as far as our RCF is concerned of EUR350 million.

We are busy renegotiating those -- the RCF levels to levels higher than the EUR350 million. That still needs to be finalized.

But as an ongoing -- on an ongoing basis to take account of the volatility that we experience on the working capital we need cash reserves. We feel comfortable with cash reserves of between $150 million to $200 million.

Thanks Glen. Mark, do you want to just talk briefly to the wood inventory?

Yes, sure. We are gaining some good ground on the wood inventory from quite a low point a quarter ago where we were.

We've had good harvesting go on both in the Midwest and up in the Northeast of the States, which is typical with winter. And we are making ground, we are not where we would like to be normally at this point in time because of how low we were coming into the winter season but we are making good progress and pretty comfortable that we'll be coming out of the winter harvesting season very close to our targets.

Okay. In terms of the -- thanks Mark.

In terms of the boiler tube leaks in Ngodwana as I said there was no impact on sales for Q1. Alex, do you just want to talk for the reminding quarters [Multiple Speakers].

Yes. For the rest of the year the net impact will be about 10,000 tonnes or so.

Hi, yes good day guys. Just a couple of questions from me if I may.

Just on Cloquet considering that you are now running hardwood pulp will we see an impairment on Cloquet. Then also still on Cloquet just what sort of level would dissolving pulp prices need to increase by assuming current hardwood pulp prices to actually make you switch back to producing full dissolving pulp from that mill.

So even if you give a percentage increase 10% or that sort of impact. And then just on lower oil prices can you just give us some guidance in terms of what is the impact.

I know you mentioned a few things in the presentation, but how much more can we see? How much of oil price is your cost base actually exposed to?

And then just finally I see Eskom they are looking for bids in terms of electricity generation from different companies, and then you'd be one of the suitable candidates. I just wanted to understand if you are actually involved in that.

Yes. Okay, thank you.

In terms of the impairment as I said to you earlier the long term fundamentals are still good for that business and we don't expect any impairments related to that. Bear in mind this is a competitive strength the fact that we can switch between the two, and that helps boost our profitability.

In terms of what -- how much does it need to go up for us to go back to dissolving pulp, you can't really quantify that because there's too many moving parts there. You've got hardwood kraft pulp prices dropping and that may help the switch backwards.

So we can't give you a specific number there. But naturally the opportunity in the long term we think will be to switch back.

On the lower oil prices we've done some high level maths there and we estimate -- it's probably smaller than you would expect, it's probably between $5 million to $10 million annually the lower oil prices. And the reason for that is the oil is a small portion of our purchased energy profile and it's actually less than 2% of our overall energy costs.

Bear in mind there are energy costs of about 10% of our cost of sales. There will be opportunities on the transport and logistics side to bring down costs.

And the related chemicals as well will be -- there will be some savings opportunity as well. But overall if you take everything into account it's not a major impact on our overall profitability number.

Your final question related to Eskom we along with a number of other large manufacturing producers in South Africa have been approached to see whether we would be able to generate more electricity to sell into the grid. This approach has come through and it's something that we are working on at the moment.

With all the challenges in the country there is a demand for that increased capacity and we are working with Eskom to hopefully be able to do something on that front.

Okay, do you have any sort of estimates on that Eskom electricity sale if you do go ahead with that?

It's still early days. They've only approached in the last couple of weeks.

And they've asked us for proposals in terms of how much additional capacity we could produce for them. It's too early to give a specific amount.

But we are working with them and this could be quite a significant opportunity for Sappi.

Thank you. Three questions, I see you swing your Croquet mill between viscose grades dissolving pulp and paper pulp for internal use.

Is there any sense in keeping this producing dissolving wood pulp and shifting some of your South African dissolving wood pulp mills to specialty dissolving wood pulp? Or does the Chinese antidumping duties on US dissolving wood pulp on the one hand and the challenges disruptions of moving into specialty dissolving wood pulp on the other make that an attractive -- option less attractive?

Yes that's -- we have a number of options available for us. You are right about the Chinese dumping duty or restrictions that are in place, and it doesn't make sense for us to sell from the US.

So what we've done is we've switched our Chinese production or the production that we sell into China we've switched back to South Africa. Within the US it makes sense for us at current levels to produce the kraft pulp for our own usage.

But over and above that it doesn't make sense for us -- at current levels it doesn't make sense for us to produce any more kraft pulp. Mark if I could -- sorry I just want Mark to add to that one.

If I could just add a point to remind people that when we built this -- did this conversion we actually built it with the idea that we could swing back and forth and transition quite easily, and we do. So there's no real cost or losses to us going from SC pulp to kraft pulp and back and forth.

The team out there is very good at it and it gives us a lot of flexibility in terms of what we can do with it.

Excellent. Do you sell any of your South African dissolving wood pulp to the specialty markets today?

And if so do you sell into the acetate or ethers or other markets?

The vast proportion of our product is sold into the textiles market viscose.

Are you selling any into --.

We are not selling acetate at the moment no.

No acetate, okay. And it looks like from your guidance fiscal 2015 outlook you said is roughly flat, going to be flat year over year with dissolving wood pulp under some pricing pressure.

Should we take the implication that the paper segment EBITDA would therefore be up in 2015 year over year? Is that the right way to read that?

Yes that's correct.

Yes thanks. Steve I wonder if you could just talk a little bit more about the paper market balances.

What we are seeing is price increases being announced over here in the US for both coated free and coated mechanical interestingly early in the season. So I wonder if you can talk a little bit about why you are seeing the firmness in the market.

Is it because of some of the closures? And then the second question is just given the shift in the US dollar versus euro how do you think about your European assets and potential to ship it into the US markets given the softness in Europe right now.

Yes. On your first question in terms of the US I'll start the answer and then I'll hand over to Mark.

We did put through a price increase in the middle of last year and we were able to execute on that and pull through on that. More recently we announced towards, I think it was in October, we announced a second price increase which was effective in January.

We didn't get through the full amount initially but some of our competitors have now followed us with their price increase and we are feeling pretty confident that we can get that full price increase through as well. There has been significant capacity reductions Mark?

Yes. The coated mechanical side or the publication papers particularly are very tight.

I think the operating rates for North America are in the high 90s right now which is allowing for the industry to move a little bit on price. That carousels or that spills over into the coated wood free market as well.

And we've been very pleased with the demand that we've been having and foresee it probably continuing into the near future.

And then in terms of the euro impact on the European business, obviously the weaker euro is creating opportunities for us and that's improving our profitability in the export space, which includes the US as well as the Asia and America markets as well. So that is boosting profitability.

Berry, I don't know is there anything you want to add to that?

We've had a vision in North America for quite a long time as part of our overseas sales part of our strategy. And over the last year we've been creating some new products to expand that business and sit alongside our North America mills.

And that's working extremely well. What has happened of course is that the margin from that business now looks a great deal better than it did before.

And with that margin increase do you see opportunity for incremental volumes moving into the US?

There's some yes, but I certainly wouldn't say that the US is the only opportunity there are lots of dollar based markets where the opportunities are extending South America, Central America, Middle East all these markets are dollar based and there you see a similar sort of opportunity.

Thank you. And Steve just a final question on the dissolving markets, can you just talk a little bit about your contract positions in 2015 versus 2014 just a general characterization?

Were you at basically similar volume levels and prices or how should we think about the general dissolving markets in 2015 versus 2014?

Yes. As you know we've had long-term contracts in place which incorporated pricing arrangements.

But with the market coming down as significantly as it has we've had to make some concessions with our key customers. And we've basically followed the market down with our pricing.

So I you look at the prices that you're seeing in China for dissolving price our prices have moved alongside those. Gary anything that you want to add?

[Indiscernible]

And then just is there a comment on volume wise relatively stable year on year?

Yes volumes are fine other than the issue about switching to the kraft pulp at Croquet, the volumes elsewhere are good. And we've been able to sell that amount.

Good afternoon. I was just wondering if you could probably unpack the performance of the Alfeld specialty mill in Europe.

You said volumes have improved and pricing and product mix have improved. I just want to try to understand what percentage of Europe's revenue and what percentage of Europe's EBITDA does that specialty provide?

And what scope is there going forward for further improvement from that mill? And then secondly, my second question would be given Metsa Board's announced exit from the graphic paper market what volumes of coated mechanical and the timing of those volumes does Sappi expect to inherit going forward given that Metsa's exiting the market?

Thank you.

On Alfeld, as I said earlier we've seen a significant pick up. That was generating losses last year and has moved into a profitable situation.

We don't disclose that number separately so I'm not going to give the number. What I would say is that if you look at it relative to our overall business it's a relatively small percentage of Europe's overall EBITDA generation.

Berry, do you want to talk about Metsa?

Yes. The Husum mill is scheduled to be rebuilt into a different product line that particular PM8 starting some time at the backend of the year.

We don't have a precise date for when it's going to stop producing yet. Its capacity is well known it's about 300,000 tonnes.

At this moment in time it splits its capacity between some papers for Metsa's own sale and some of ours. But there will be north of 200,000 tonnes of paper that we can carousel to other mills at one point.

So we'll see of course how the market develops by then if it continues to decline at the current rate of course that volume will come down as well. An exact volume number I cannot give you but yes there will be some that we can carousel.

Hi guys. Can you just quantify the coated woodfree price increase in Europe?

And also when I look at volume declines in Q4 they look quite high, could you split that between coated mechanical and coated woodfree?

On your second question, as I said earlier over the last year or so we've seen coated woodfree demand down about 2 percentage points. The coated mechanical has been in the high single digits 7% 8% level.

And in terms of the price increase Berry, do you want to talk to that?

Yes. What you see of course is the beginnings of the effect of the exchange rate already in this quarter and that is a noise factor because that obviously pushes the price up by a fair degree on those sales outside Europe.

Within Europe there was a price rise in the autumn of between 3% and 4% it depended on the country, and that's largely stuck.

Okay, thank you. I was asking specifically in Q4 volumes off the back of that price increase just because I wanted to check that coated woodfree volumes hadn't come off given the price increase have gone through.

No, no there's been no effect like that.

Yes volumes in Q4 were fine.

Okay that's great. Can you just [Multiple Speakers].

But the lower -- bear in mind your may be looking at the volumes that are in the accounts, but bear in mind we had the shuts from -- related to Gratkorn with the project so that's also changing the trend lines that you're seeing.

Okay so your underlying market is still 2%.

Yes.

And just to check I'm reading it right the EUR42 million EBITDA that doesn't -- or takes into account the EUR12 million one-off costs so in theory it would have been EUR54 million without the Gratkorn.

Correct

Or the 40 -- okay, alright that's brilliant thanks guys.

No, I just want to thank everybody for joining us on the call and we look forward to discussing our next quarterly results in three months' time. Thank you.