Sappi Limited

Steve Binnie - CEO Mark Gardner - President & CEO, Sappi North America Berry Wiersum - CEO, Sappi Europe

Roger Spitz - Bank of America Merrill Lynch Nishal Ramloutan - UBS David Roux - Bank of America Merrill Lynch Brian Morgan - RMB Morgan Stanley Bill Hoffmann - RBC Capital Markets James Hutchison - Barclays, Africa Chris Ellis - Babson Capital Richard Phelan - Deutsche Bank

Thank you. Good afternoon, everybody; good morning to the listeners in the U.S.

Similar to prior quarters, I will read through the slides. I'll call out the slide numbers to make it easy to follow.

I'm going to start on slide 4 which has our key highlights for the quarter. Firstly, earnings per share excluding special items was $0.02.

That's the same as last year. This, as you know, is typically our lowest quarter for the year and we did have significant shuts.

So I think taking that all into account, being flat on last year is a reasonable performance. Profit for the period, taking into account all the special items, was $4 million versus $17 million last year.

EBITDA excluding special items was $109 million versus $140 million last year and we did indicate in our results announcement that the effect of the CapEx projects, the one-off incremental effect was about $27 million. So you should deduct that from the $140 million to compare the underlying operating performance.

Pleasingly, our net debt continues to come down. You can see at the end of the quarter it was $1.917 billion.

That's over $300 million down on the same time last year. Slide 5 has the history of our EBITDA and operating profit and you'll see that Q3 is typically always the smallest quarter and this year was no exception to that.

In Q4 which is normally our strongest quarter, you will see a significant bounce from these levels. Slide 6 contains the earnings bridge, EBITDA earnings bridge between Q3 of 2014 versus Q3 of 2015.

Just to call out a few highlights, volumes were down on last year. That's a combination of switching from dissolving pulp to kraft pulp at Cloquet.

We also took some curtailments because of the weak U.S. graphic paper market which had about a $10 million impact on EBITDA for the quarter.

And then, on price and mix, we see some positives there. Firstly, the dissolving pulp prices have risen.

And then also, in Europe, because of the higher exports on the back of weaker euro, we saw some benefits of that coming through. On the costs side, variable and delivery costs were under a little bit of pressure, mainly because of the higher pulp and energy costs.

Europe, as you know, is short of pulp and hardwood pulp prices remain very high and they're also obviously dollar denominated which adds to the challenge. The fixed costs is up and that's as a result of the extra shuts that we had relative to last year.

And then you can see exchange rate had a significant impact. We've grouped that all together on the far right-hand side.

Had a negative $14 million relative to last year. Slide 7, we're showing the product contribution split between specialized cellulose and paper.

We've done this on a 12-month rolling basis because you do have the seasonality of our business and we feel that this gives you better insight to the relative sizes and contributions. You can see that EBITDA, paper still represents 57% so it's still a very important business for us.

On an operating profit basis, obviously specialized cellulose makes higher margins and that is 62% of the overall contribution. Slide 8 shows the evolution of the net debt and, again, just this is something that we've talked about in prior quarters but you saw the peak way back in late 2013, early 2014.

We've seen it come down significantly since then. Q3 is normally a quarter where it's relatively flat.

As we look forward to the end of the financial year, you are going to see a significant reduction and we should be close to the $1.8 billion level absolute number by the end of the financial year. Slide 9 has the maturity profile of our debt and firstly you can see that in 2016 there are no material debt maturities.

2017, we have a big euro bond maturing of $400 million. We'll begin the work on that to refinance that next year.

And obviously, if debt markets remain where they're at currently, this could represent a significant opportunity to lower our finance costs further. Slide 10 has our CapEx.

We've split it between maintenance and efficiency projects. 2013, as you recall, was high following the dissolving pulp investments.

Thereafter it's come down and I've mentioned this before, we set ourselves a ceiling of about $300 million. Roughly about half of that is maintenance CapEx and you see that in the 2014 number and in the 2015 projections.

2016 and we may get the question later, in 2016 I would expect it to be also within that $300 million. Then, moving to slide 12 and turning our attention to the divisional overview, firstly, on paper it's fair to say that the strong dollar has had a significant impact on performance and on trade flows.

It's adversely impacted our U.S. business and we've had benefits, certainly on the selling side, in Europe.

In addition to that, in the U.S. we have seen weak apparent consumption for coated wood free.

On selling prices, because of the shifts in currencies, coated wood free selling prices have been under pressure but we have seen upward movement in Europe and in addition to that obviously we had higher exports from Europe. Softwood pulp prices costs for us are relatively stable, but the frustration is the very high and rising hardwood pulp prices and that's put pressure on our European business.

Wood prices are still high and they've yet to normalize. They're coming down a little bit, but they're still relatively high in the U.S.

Our strategy here will be to implement price increases when and where the market allows. Clearly, the U.S.

at the moment, it would be very difficult with the underlying demand to do that. But in Europe, we recently announced some price increases and that market is gaining momentum and a significant proportion of that price increase we think we can get through.

We continue to look at reducing fixed and variable costs, maximizing efficiencies and productivity and then we would reduce capacity in line with our anticipated demand reductions. On the specialized cellulose side, firstly it's fair to say that over the last year or so we have seen a deceleration of capacity expansion and in fact some capacity has switched back from dissolving pulp back to paper pulp products.

The good news is that underlying demand trends are still moving upwards. We've talked about this in the past and we still believe it will be around about the 5% per annum mark going forward.

On the costs side - sorry, on selling prices and costs, commodity grade prices for dissolving pulp are still relatively low. We fix our prices with our big customers at the moment every six months.

The quarter that we've just reported on was relatively flat on the previous quarter. However, we're optimistic that we can get higher prices in the second half of the year.

The one challenge we have over recent weeks is that we've seen recent oil price declines on the back of the commodity cycle and that could put pressure on dissolving pulp going forward. Input costs have been declining for non-U.S.

based producers and clearly our Ngodwana and Saiccor mills do benefit from that and we move down the cost curve. Our strategy is to manage that capacity, maintaining strong close relationships with our key customers and we continue to investigate adjacent end uses.

Turning to the respective regions, firstly on Europe on slide 14, the top left-hand side you can see the EBITDA margin trend. Q3, as I said earlier, is a typically lower volume quarter.

We will see a bounce in the fourth quarter. The top right has our outlook in terms of demand going forward.

We still believe that the mechanical paper market is in a more difficult place than coated wood free. We project about 5% down going forward and coated wood free between 2% and 3%.

I think it's fair - to summarize Europe, I think it's been a fair quarter. Demand has been reasonable and we have got higher prices than we did a year ago.

And then, on North America, again a similar format for the slide on slide 15. Clearly it's been a very difficult quarter for us, mainly impacted by the currency shifts.

I think we're more positive in terms of our outlook. Q4, our Q4 is a much stronger quarter for us and, again, you look back at the last couple of years and you'll see it's the biggest quarter for us.

We're seeing the order book improving in this bigger quarter for us and we would expect to see the margins recover somewhat. Going forward, we're projecting demand for coated wood free down about 3%.

And then, turning to South Africa on slide 16, the EBITDA margin came down in this quarter, but it's important to point out that the two big mills, Ngodwana and Saiccor, did have shuts. You can see that the impact was about ZAR200m.

It's important to emphasize that this is a timing difference. The shuts for these two mills occurred in a different quarter last year, in Q2 last year, so on a year to date basis you've got a true comparison.

The graph on the top right has the evolution of the dissolving pulp prices and you can see that after being flat for a considerable period of time, from about April onwards we've seen a significant increase. And as I mentioned earlier, we should start to see the benefit of that in the second half of this calendar year.

Post the quarter end, we announced the intention to sell Enstra's recycled packaging business and the sale of the Cape Kraft Mill. We believe that we don't have a competitive advantage in the recycled market and we made the call to exit that market.

Slide 17 has the five pillars of our strategic focus. This is consistent with what we communicated to you in the past.

The next few slides, we have one on each. Firstly, on slide 18, focusing on cost advantages.

We will continue to look for opportunities. We recognize that in many of our businesses we're in commodity grades and we need to be at the bottom end of the cost curve.

Some of the examples of projects that we've undertaken have been the natural gas conversion at Somerset Mill, the investments we've made recently at Gratkorn and similarly the Kirkniemi power plant conversion which we've been undertaking this year. We do think there's a sizeable opportunity for Group procurement initiatives and we're putting significant resources behind that to achieve that savings.

And then, on slide 19, the next element of our strategy is to rationalize declining businesses. And then really, as I've said previous quarters, we're pragmatic and we're realistic about where the demand is going for graphic paper and we need to manage our capacity with those demand expectations.

Some of the projects that we've undertaken have been the cessation of coated paper production in South Africa. A more recent example has been or will be the shift of the Husum volumes back to the European mills and that will enable us to improve profitability there.

And then, on slide 20, I mentioned earlier that we try to keep our CapEx within $300 million and with that in mind we've been able to make some smaller investments and we will continue to look for smaller opportunities. There's been upgrades at Tugela and Ngodwana and we do think that there are opportunities in our containerboard business, virgin containerboard business in South Africa.

Last quarter, we announced the nano-cellulose pilot plant in the Netherlands and that project is ongoing. We will continue to focus - and I've shifted to slide 21.

Our immediate priority is to strengthen our balance sheet and focus on cash generation. We have sold a number of non-core assets in recent years and we had further opportunities this quarter.

I've already mentioned the sale of Enstra and Cape Kraft Mills. We anticipate that those deals will be complete early in the new financial year.

We continue to work on Twello. I know it's taken some time, but these deals are complex.

And we're still working on that and we still believe that it is an opportunity for us. We will look for further opportunities to lower our finance costs and I think that, as you saw from an earlier slide, there's a sizeable opportunity coming up with the bonds that are maturing in 2017.

On slide 22, we turn to the next component of our strategy and that's to accelerate growth in adjacent businesses from a strong base. As I've said, we will continue to focus on strengthening the balance sheet, but as we get closer to the debt targets that we've set ourselves, we do believe that that will give us more flexibility.

The areas of opportunity we think for us, going forward, are going to be in specialty packaging. Alfeld's doing well and the profitability there is ramping up nicely.

We're doing a lot of internal work on lignins and sugars. I think you saw a recent announcement with regard to our joint venture with Borregaard for a further investment in lignins and we'll continue to look for opportunities there.

And then longer term, dissolving pulp continues to grow. We think it's a market where we have a competitive advantage and we need to work closely with our customers moving forward.

Finally, turning to slide 24, our outlook for the rest of the financial year. Firstly and I've called this out already, graphic paper markets remain difficult and currency movements are playing a major impact on flows in this financial year.

Dissolving pulp prices in China have risen over the past four months and the weaker rand has helped support the profitability of our South African business. CapEx in this quarter should be about $80 million which will give us $245 million for the full year.

The debt will come down further. I already talked about the fact that it should come down to $1.8 billion.

And as soon as the proceeds from Cape Kraft and Enstra come in, that's another approximately $50 million that will help us bring down debt even further. We will continue to work on the Twello forestry which - and this is a number we've given you previously, but that is approximately $60 million.

Earnings per share for the full year is expected to be substantially better than that of the prior year. Obviously, we're benefiting from the lower finance costs that are pulled through.

Important to call out that we have had significant impact from all these one-off projects, both in Q1 of this year and Q3, as we've discussed. So that's me going through all the slides.

Operator, I can put it back to you now for questions.

Firstly, how much of your dissolving pulp volumes are where you fix them for six months? And do prices reset every January 1 and July 1 or is it on different timeframes?

Yes. It's important to stress that we do have longer-term contracts in place, but we - as this market's come under pressure, we've been negotiating short-term price concessions.

In recent periods, it's been on a six-month basis. So the price increases that you saw now for Q2 were consistent with Q1.

Those that are now - we're in the process or we've been in the process of fixing prices for this quarter and for the rest of the financial year, so you will see the benefit coming through in our final quarter numbers. To your first specific question, that's probably 85% of our volumes.

Okay. So what you're saying is you have these contracts out there, but when you say fixing for six months, it's actually saying, okay, outside the contracts, look, Mr.

Customer, I'm going to fix it for six months at this price. It's not that the contracts are written for six months; it's that you're giving concessions.

Yes, that is correct.

Okay. What is currently pushing up Chinese dissolving pulp pricing?

What's the driver there?

I think there's a number of factors at play, but most importantly you have seen a reduction in VSF output which has allowed us - which has pushed up VSF prices. So, our customers have been making better margin and that has allowed us to pass on some of - some higher prices on to our customers.

As you know, prices came under significant pressure in the back half of last year. You saw cotton prices, polyester prices coming under pressure.

Then, after Christmas they started rising. Cotton - we saw, I think it was about a 10% rise in cotton and polyester prices.

I do concede to you that in the last couple of weeks they've come under further pressure. So it was a combination of prices for our substitute products coming - rising.

It was also improved margin for VSF producers. And then the other aspect at play is that a number of the dissolving pulp producers switched back to making paper pulp, so there was less capacity and we were one of them.

As you know, we switched back some production at Cloquet. So there was less volumes in the marketplace.

Could you say the North American coated wood free pricing? What did it do sequentially from last quarter to this quarter?

Mark, do you want to talk about the pricing in the U.S. market?

I don't have a whole industry view on that, but I would say in our case it was pretty flat, quarter to quarter.

Okay. And in Europe, you talked about getting price increases in coated paper.

Were you referring mainly to coated wood free or in coated mechanical? It sounded like coated wood free is better, as it usually is.

So where were you looking to get those price increases that you announced?

I'll let Berry expand further, but it is across the board. Berry, do you want to take that further?

Yes. There has been more recent momentum really over the past couple of weeks.

Also, as pulp prices have gone up, perhaps against expectations, we're now seeing movement on the coated mechanical front as well. And also, the activity level has been brisker than we had expected, both on mechanical and on coated wood free.

One more and I'll turn it over. What does Q4, fiscal Q4, working capital inflow/outflow look like?

Should it look like last year's Q4 or - it varies. I'm just trying to get a handle on what that looks like.

We're expecting an inflow just short of about $70 million coming through in the last quarter of Q4.

Can you give me that number again? I didn't hear it.

Excuse me?

What was that number you said? I didn't quite catch it.

$70 million.

Just coming to North America, so maybe just you'd add some color to exactly what happened there, because I think the last call you were previously indicating that you don't see imports as a threat and it seems to be big about that, so just some color on that. And then just on North America, so what do you expect or what can you do to actually be sustainably profitable in that business?

And are there any plans, for instance, to offset these imports coming into the country?

Yes, look, it's a combination of factors that are happening. As you pointed out, we didn't see an increase in imports on the last results call that we had.

After that, when we started to look at the Q2 numbers, we did see a pickup in imports. But interestingly, a lot of that is actually coming in from Asia, places like South Korea and Japan and less - obviously Europe there was some, but it was mainly from the Asian region.

I think a bigger story has been less exports coming out of U.S. We exported a significant proportion and that's been down substantially relative to prior years.

Our key focus and that leads us into the next point or the next part of your question, is that our key focus now as we have taken curtailments, it's mainly because we've got less exports. And we're actively pursuing opportunities within the U.S.

marketplace to enable us to fill production at those mills. Mark, do you want to elaborate a bit further on that?

Yes, we mainly moved out of some export markets, as Steve mentioned and are bringing the product back. We have markets that we didn't serve that much in prior quarters and even prior years that are now much more attractive than export.

And we also have product extensions and we're moving a fair amount of our volumes into some specialty grades that we've been developing and those offer us quite a few opportunities as well. So we expect to be able to fill the machines back up and do it with a lot less exports than what we were doing.

So, is the intention to cut prices to try to recoup some of that market share?

No.

And then, just maybe an indication of what your mills are currently operating at in North America, what operating rates.

Our operating rate is about the same as the industry is and what I see on industry specs is around - this last quarter would be around 85%, plus or minus a few percentages. We're looking at products not where we actually have to go in and battle with price, but we've got products that are in demand that we had really constrained the availability of those products and we're talking with customers who have been looking for and hoping that we could actually provide some more to them.

Along with the fact that we're also moving, as I just said, a fair amount of volume into specialty packaging and specialty papers out of both Cloquet and out of Somerset which offers us some expansion opportunities in the markets that we haven't been in before.

So, two questions from my side. The first is just on CapEx.

In terms of this proposed $300 million spend in 2016, could you just give us a split of towards which regions this will be allocated? And then similarly, for this year and 2015, what is the split between regions?

So that's this year and then next year. And then, secondly, on pricing, the attempted coated wood free price increases that you're trying to push through in Europe, you started to see some traction on reels.

What are we seeing on sheets on the ground in terms of increases? And perhaps you can put some numbers to this in terms of the uptick.

Thanks very much.

Okay. On the CapEx question, it's roughly - okay, the split changes because this year you had the big CapEx projects in Europe.

David, I don't have the exact splits here, but looking at 2016, it's roughly - South Africa is about 30% to 40% of that number and then the balance, U.S. is about $40 million to $50 million and Europe is the balance, yes?

This year, as I said, it was more swayed towards Europe because of the big projects. And then, sorry, what was your second question again?

On the coated wood free increases in Europe. What are we seeing on sheets, because we have seen some evidence that increases are gaining traction in reels?

Berry, do you want to talk about that split between reels and sheets?

Yes, certainly, Steve. As far as reels is concerned, the market has been fairly strong, also because wood free coated reels prices have been extremely low, so it's been substituting LWC.

With the exit of Husum, quite a lot of wood free coated capacity gets out and that's put some strain on the market so wood free coated reels are going up strongly. Wood free coated sheets are going up slightly slowly, more slowly.

They have gone up in August, not very much, about 1%. They will go up substantially in September and we already see that in the order books.

As printers and converters come back from their holidays, the pulp prices start to work through and there is a greater determination. I can't tell you exactly what it will be, but it will be quite significant in September.

Can you just give us an idea of the core cost inflation levels in South Africa at the moment?

It's about 5%. Obviously, within that you have a number of different dynamics at play.

You've got higher energy prices, you've got labor increases, but overall it's about 5%.

And then just to - sorry, just to harp on this a little bit longer, I'm trying to understand the volume picture in North America right now. The year to date number looks as though sales tonnes are down 12% on the nine month and the prior nine month period.

Is that related to pulling back from export markets?

Predominantly, yes and we had to take curtailments as a result of that. The other thing that's in that number would be the lower dissolving pulp, because we switched some of that production back to making pulp for the paper mill.

Would the biggest component be the export tonnes?

Yes, that would be.

Okay. In your opinion, what happens next on the supply side in the U.S.?

We've got 3% declines in demand. Nobody really seems to be moving on the supply side.

What happens next?

Yes. Mark touched on it earlier.

We're looking for opportunities to switch some of our production towards more specialty grades. Look, what you've got to take into account, this seasonally is the lowest quarter.

Q4 is our biggest quarter. So you're already seeing higher volume activity that would come through for this quarter.

But overall, as we assess the market, our priority, as I said, is to switch that lost volume from export markets into local opportunities, focus on the opportunities for specialty grades and obviously maximize output from the mills.

And then the last question is just on the net debt. I think you said $1.8 billion by yearend or around that.

What sort of level are you targeting, just an update on that and what is your thinking in terms of dividends and growth going forward now?

As I said, we would target $1.8 billion by the yearend. Then, we'll have the sale of the two mills coming through next year and then we should generate operating next year about $150 million.

I don't - in terms of dividends, it's not something we're contemplating at this stage. Over time, we've set ourselves a target of getting to 2 times EBITDA.

So it's not something - I don't anticipate dividends in 2016.

Just I want to go back to the U.S. markets.

I wonder if Mark can give us a little more color on a couple of things. One, in Cloquet, how much dissolving versus wood pulps are you making?

And then, two, just thoughts on the coated markets here in the second half of the year, whether demand levels are recovering normally, seasonally or are we still seeing extra weakness?

Yes. On your first question, we're about two-thirds dissolving wood pulp and one-third kraft and anticipate that that's the way we'll stay for a while.

We can quite easily, with our process there, move back and forth. And it depends on both our strategy and what makes the most economic sense at the time.

In terms of the second question, of the markets, we're seeing - we're starting to see the typical seasonal pickup. I do believe we will find the markets to be very similar to prior years, going into our Q4 and Q1 next year, calendar Q4.

But each year that total demand is down and therefore I do believe we'll see it continuing slightly down, between 1% to 3% per annum in total demand. So, right now, our expectation and so far our experience has seen the start of the seasonal pickup that we normally see during this time of year.

And Mark, we saw prices in July here sliding a little bit here in the U.S. and you are talking about prices firming over in Europe.

Can you give me your thoughts on where you see the price trends going?

I think the U.S. prices will come under pressure if we see a lot more imports coming in, but hopefully the European prices that are starting to move a little bit will continue to move.

It all comes down to overall demand and supply and how it does. Hopefully, the market stays a little bit better balanced as we go into Q4.

Right now, we're feeling that our prices will stay relatively stable as we move into Q4.

And then, Steve, just you guys mentioned asset sales. I think you were talking about $60 million for four sugar mills, so a couple of mills.

Can you just go through the asset sales that you're talking about right now?

Yes. We've sold - we signed deals to sell two small mills in South Africa, Cape Kraft and Enstra.

They are approximately - the sale proceeds of that in dollar terms is about $50 million. The EBITDA that we were getting from those mills was only about $4 million.

We're in the process of going through competition approval and all that and that will likely happen early in the new financial year. The two mills that we're talking about were focusing on recycled paper.

Our core strength is in the virgin linerboard and fluting in South Africa. So these were non-strategic for us.

The other asset that we mentioned was the forestry. We've got some excess softwood plantations in South Africa and we've been in negotiations with a potential buyer which hopefully we can conclude in the near future.

Just regarding the $27 million impact of the maintenance shuts during the quarter, I think you'd previously guided it to be around $21 million. Was the increase in that simply a function of high opportunity cost of taking the mills down or was there additional work required or any complications in getting those mills back online?

Yes, that's right. It was the higher opportunity cost and also there was a bit of currency at play as well which impacted, ironically, the opportunity cost.

But clearly, the rand had weakened in that period, so there was some higher costs and then also the higher opportunity costs coming through. So it wasn't that the - the projects were successful.

There was no issue there.

Steve, I think you touched about this when you were speaking about Europe, but you said you were transferring Husum volumes back. I think that's from Metsa Board; is that right?

So how will that impact the European business in the second half of the year? My second question is, I know we've spoken quite a bit about the U.S., but maybe six months ago the guidance was for 2015 demand to be flat and it looks like it's now going to be about minus 3%.

What sort of change within the market, from a demand point of view, would you say there has been?

Yes. The answer to your first question about Husum, that's right, it is a shift across from Metsa.

In terms of specifically the second half of the year, Berry, do you want to just talk about a little bit more detail there?

Yes. It starts in this quarter.

So the Husum ramp down will start during this quarter and be complete in the final quarter of the final year. So over the next six months, we will see a gradual shift of volume from Husum to our own mills.

In terms of your second question, yes, you're right. Six months ago, we were saying that the market was going to be relatively flat to slightly down.

We're now projecting 3% down. The market is in a softer place.

The underlying demand for coated wood free has softened. And obviously, at the same time we've had all these currency impacts which have impacted on exports.

So, yes, the market is softer than we had projected. Mark, I don't know, is there anything else you wanted to add to that?

No. I would say only that there continues to be a shift going on in terms of some of the spend for - whether it goes into paper or into other forms of media and I think there's a little bit of that continuous cycle of change going on as well.

Also just following up on the demand side, on page 14 with Sappi Europe you've got some demand projections which show coated wood free and coated mechanical, in fact, the decline increasing in future years from last year. I'm just wondering, with Europe strengthening in terms of broad economic metrics, what's the basis for the more conservative declines that you've got baked in there?

That's the first question.

Yes, you're right. The recent trends have been better than this.

Look, we really use these forecasts as we budget forward and we try to anticipate and plan for our business. So we do want to be conservative as we think about the outlook.

At the moment things are better, but clearly some of the dynamics of the U.S. marketplace, there is a concern that you could have a delayed impact into Europe.

But as things currently stand, things are better than these numbers have indicated.

And then secondly, I think you indicated earlier in the call that as far as potential next refinancing steps, you'd be looking at the $400 million bond due 2017 maybe early next year as a potential refinancing opportunity. Is that fair?

Yes. The 2017 bonds have a call window of three months.

They mature in 2017 June, June 2017. We will be looking at opportunities if they arise during the 2016 year.

No, I just want to thank everybody for joining us on the call and I look forward to chatting to you again at the end of the financial year. Thank you.