Sappi Limited

Steve Binnie - Chief Executive Officer Gary Bowles - Executive Vice President Sappi Specialized Cellulose Mark Gardner - President & CEO, Sappi North America

Roger Spitz - BofA Merrill Lynch Brian Morgan - RMB Morgan Stanley James Hutchison - Barclays Lars Kjellberg - Credit Suisse David Roux - BofA Merrill Lynch Ian Gazard - BlueMountain Capital Management Joan Sehim - Spread Research

Thank you. I'll go through the Investor presentation and what I'll do is call out the page numbers as I go through so that you can refer to it.

Firstly on Slide 4, highlights for the year. EBITDA was $739 million, up from $625 million last year.

Bottom line profit almost doubled from $165 million to $319 million. Please to say that the net debt came down further and we reached E$1,408 million and that's down $363 million from last year further re-imposes our ability to generate cash.

Very pleased to say that we declared our first dividend since 2008. The amount of dividend was US $0.11 and it will be paid in January.

For the quarter EBITDA was $209 million, up from $201 million that was a strong number last year and again this year. And bottom line profit up from $83 million to $112 million.

Moving to Slide 5, just graphically you can see our evolution of the EBITDA and profit. Just some of the key ratios.

Please to say that the net debt to EBITDA has now come down to 1.9x, over some period of time we would be talking about our target being below 2 and very pleased that we got below this quarter and clearly that was one of the triggers for us declaring the dividend that we talked about. EBITDA percentage continues to improve and was up at 15.6%, again nice improvement there.

On Slide 6, the EBITDA bridge from last quarter for last year to this year. Just highlighting some of the key items.

Firstly our volumes were down and we did talk about it nearly a quarter but graphic paper, our traditional quoted graphic paper continues to be under pressure and we have seen volumes come off there. However, we are able to offset the impact of that through good cost management and you can see positive bars there coming to on variable and delivery costs.

Exchange rate, we did also benefit from that. The weaker rand during the course of the year.

On Slide 7, the contribution split between Paper and Specialized Cellulose, perhaps start on the right hand side the operating profit 61% coming from Specialized Cellulose and 39% from Paper. But when you look at EBITDA which is obviously a proxy for cash generation, you can see it is roughly half/half.

So Paper continues to play a role. Within the Paper 54% clearly there is our traditional coated graphic paper but we've also got specialty which continues to grow nicely.

Moving to Slide 8, the net to EBITDA and you can see there has been a tremendous improvement over the course of the last -- this is two years, you can see coming down from 4.6 times to 1.9. And on Slide 9 you can see what that means on our cash flow basis and from the bottom of our cash generation at the end of -- well that was July 13, that was just after we invested in the conversion at Cloquet and Ngodwana.

You can see that over the course of the last three years we've generated over $1 billion of cash. Moving to Slide 10, our maturity profile of our debt, all the bonds that we refinance in the last year or two are out in 2022 and 2023.

In the near-term, we have $400 million bond which is maturing in 2017, that's the biggest part of the 513 that you see on the left hand side. And we anticipate using our cash reserves to pay off those bonds and the cash is the gray bar on the left.

So we've been able to generate cash to be able to do that. Moving to Slide 11, our CapEx, 2016 have been pretty consistent with recent years.

You can see our maintenance CapEx has been around $150 million. As we look forward into 2017, we expect a similar number and our overall CapEx we expect to be higher this year at $350 million.

And the reason for that is we are investing in South Africa in our debottlenecking opportunity for dissolving pulp and we've set aside some capital for specialties growth as well. Turning to the divisions and firstly on paper on Slide 13.

In terms of supply and demand, it is fair to say that the graphic coated paper market have been tough during 2016, probably a little bit softer than we even had forecasted this time last year. And as a consequence of that operating rate have declined.

We continue to see closures to offset some of that but the market has been under pressure. On the specialty side on the other hand, we see those markets continue to grow in the sectors wherein between 1% and 5%.

As a result of the softer demand, selling prices have been declining but we've been able to offset the impact of those lower selling prices by focus on cost and clearly the market for pulp and energy has been lower, so that assisted us further. Our strategy will be to continue to anticipate demand as we move forward and take out capacity if it doesn't make sense.

And we look for opportunities to convert capacity towards specialty which is growing. And with the strong focus on costs.

Within the geographies, firstly on Europe, very good result for the year. We've seen nice growth despite the fact that the demand has been soft, all-in- all, we have seen flat pricing for the year.

If you recall in the early part of the year, prices rose and then came back in the second half of the year. Specialty volumes were up for Sappi up 15% and our margins continue to improve there.

As I said earlier, we were able to take cost side of that and ensure the profit growth came through for us. On Slide 15, Sappi North America, similar, the market look challenging and we've seen prices down 5% from a year ago.

Offsetting that dissolving pulp at the Cloquet mill obviously, it was a strong market there and we were able to boost profitability and similar to Europe we were able to do a lot of good work on costs and that ensured the profits for North America were up significantly on the prior year. Slide 16, turning to dissolving pulp, it has been a very good year for dissolving pulp.

The demand has been strong, prices have been rising and we've been able to sell all our capacity. One of the reasons for the good growth is that it has been the cotton linter pulp supply has been constrained, and that tightened the market further.

Selling prices have been rising along side cotton and VSF, and obviously with our South African business the weaker rand has boosted our profitability from a cost base. Our strategy will be to maintain that low cost position.

We were optimistic about the growth in this market. We talked about it many time 4%-5% per annum and we believe that there will be growth opportunities as we move forward.

In the short term, we are looking to add another 100,000 tonnes in South Africa over the next year or two. And then beyond that we are looking at opportunities to grow further whether it is in South Africa or outside.

On Slide 17, in South Africa, in addition to the dissolving pulp that we talked about the containerboard has been strong albeit that it was impacted by the drought situation but underlying demand has been good and volumes were up on a year ago. We saw higher selling prices across the board which boosted profitability.

And as I said already dissolving pulp prices have been very good and the weaker exchange rate did put some pressure on input cost. We have to import some of those raw materials.

Moving to slide -- turning to then to our strategic focus. Our five pillars of our strategy.

And I'll talk about each one of those in turn. And on Slide 19 on the cost side, we recognized that we are in commodity business as we continue to focus on cost efficiencies.

A number of smaller projects in South Africa, we've invested in some new turbine at a couple of mills. In Europe, we think there are efficiency opportunities at some of our mills like Lanaken and Kirkniemi.

And importantly on the side, we got our group procurement initiatives underway. We talked about this already but we want to realize at least $100 million of that $100 million, $13 million was realized in the current year.

And that takes us to Slide 20 then which just reinforces the point that I just made but in addition to $13 million of the $100 million that we've realized, we do have ongoing continues improvement initiative. And if you look at all the good work that we've done over the course of the last few years, you'll see that we continually improved our efficiency on our cost base.

And of the $100 million we think we can get another $50 million in 2017 and that will offset the lower graphic paper prices that we talked about earlier. And our focus areas look at across the board, it is all our raw materials and on the freight side as well.

Then on Slide 21, rationalizing our declining businesses. I've said it many times we are pragmatic about where our coated graphic paper is going and we try to anticipate demand, we are -- we continue to look for opportunities to convert some of our capacity towards specialty grade like we what we did at the Alfeld mill couple of years ago.

And that's ongoing work as we move through the year. On Slide 22, moderate investment.

We think there is opportunity in South Africa to boost our packaging businesses further. Ngodwana and Tugela, there are some electricity opportunities and have already talked about the debottlenecking.

And we continue to look for opportunities to expand on the specialty front. And obviously we are mindful of the two times net debt target that we've set aside, we'll always use that as a guiding principle and we will not overstretch this balance sheet.

Moving to Slide 23, the balance sheet, we done tremendous work at improving the balance sheet, debt will come down further in the course of the New Year. And as I said earlier, we got the bonds, there are 2017 bonds that are maturing and we will repay that with cash.

And then accelerating adjacent businesses from a strong base on Slide 24. In addition to the specialty that I talked about, we do think there are opportunities with lignins and sugars; the nanocellulose pilot plant that we got.

We got sugar pilot plant at Ngodwana. So we've set a little bit of capital aside to look at these opportunities.

And turning to our outlook which is on Slide 26. Dissolving pulp market continue to be strong and albeit that they have come off a little bit in the last couple of weeks.

But they are significantly higher than they were at a few months ago. Demand for graphic paper has been weak and however we've been able to offset that through good work done on cost and that's allowing us to maintain margins.

So taking all of that into account and exchange rate clearly the rand is stronger now than it was a year ago at this time. So that will -- that does put a little negative pressure on our numbers but at these levels we expect the 2017 EBITDA to be in line with the good performance that we achieved in 2016.

CapEx is $350 million that I talked about. And I've already mentioned the bonds.

So operator I am going to turn it back to you then for questions.

Thank you. Good afternoon.

Should we interpret the EBITDA guidance for 2017 as an improvement in dissolving wood pulp EBITDA being generally equally offset in a rough manner with the decline in the graphic paper EBITDA?

Yes. Marginally, so with the cost that we are taking out of the business and on the graphic paper side.

We are able to offset lower selling prices. So there is a marginal shift but we've been pretty realistic about our expectations for the year.

From a capacity point of view there is no additional capacity coming on board. So overall it is only a marginal shift.

What you're saying is that, actually, the guidance for both DWP and graphic paper will each be like they were respectively in 2016. It's not that there's a shift between them.

They're both going to be roughly in line with 2016, is what you're saying, I think.

Yes, look, if you look at where markets are currently, dissolving pulp prices are higher. But that's been offset by a weaker rand --sorry a stronger rand.

With the rand -- I think at the moment what is it about 13.50, 13.60, we had a weaker rand during the course of 2016.

Got it. And do you see within graphic paper, any shift between the US and Europe in terms of EBITDA there?

From 2017 to 2016?

Not a significant shift. Clearly, imports do come in from Europe into the US market but it is -- we are not anticipating a dramatic shift in terms of our contributions, no.

Got it. And you've been talking in the past about making a greater shift towards some of the specialty dissolving wood pulp grades.

I know you're already in there to some extent; at least that's my understanding. But it sounded like you were going to do a bigger push.

Would that come post this current debottlenecking, or would it come when you were talking about adding more significant capacity in the future? What might be the timing of that shift?

Yes. What we are doing at the moment is we are evaluating all the machines in the group that currently make coated paper.

We are evaluating whether it would make sense for them to perhaps switch their capacity towards specialty. It is work in progress at the moment and we will be able to give further update as we move during the course of the year.

In terms of timing, if it is something that we choose to pursue, it would occur late 2017 and into 2018.

Hi, guys. Thanks very much.

Just -- you make the comment about capacity that needs to come out, particularly coated mechanical capacity that needs to come out in Europe. When would it be -- when do you think it will become critical that that type of capacity is removed?

Are we six months away from a point where the industry is forced to take capacity out?

Look based on our numbers we look at ourselves. And based on where we are at the moment the mills are still cash positive.

So it doesn't make sense for us to take capacity out. As I said -- my answer to the last question, we are evaluating the machines and seeing whether there is an opportunity to convert one of them to specialty that likely to be the immediate answer.

We are not looking to close a mill or a machine at this stage.

Yes. So, during the course of 2017, you would look to do a conversion?

We would look to commence one perhaps.

Yes. Okay.

Perfect. And in terms of your net debt, are you expecting to remain below two times for every quarter -- every reporting quarter?

That would be our target at this stage, yes. And clearly and Brian just to be clear going forward that is our guiding principle.

Obviously, three or four years down the track if we were to make an investment, a larger investment in dissolving pulp, you may temporarily go above that but it wouldn't be by much. And that would be our guiding principle as we allocate our capital and control our CapEx.

Hi, good afternoon. Congrats on another solid quarter, and I think more importantly for getting yourselves in the position to be able to reinstate the dividend today.

A couple of questions from our side please. Just firstly on the dividend, how should we think about that going forward?

Have you decided on a policy in terms of payout ratio or cover corridor? And then I've got a couple of other questions, so maybe just take them one at a time.

Yes .Our policy will be to go three times. The dividend we declared today was five times covered.

It will be three times, obviously at the end of this financial year we will make call whether -- when is the right time to get it to 3 but our longer term goal is to get it to three.

Great. Thank you.

And then just secondly on -- I'd like to get your views on dissolving pulp prices beyond the first quarter guidance you've given. I mean clearly, part of the current strength is down to variable supply and demand dynamics.

But then some of the other supportive pillars -- as you mentioned, constrained cotton linter pulp supply, beside there cost get support of that, and then higher viscose staple fiber prices seem steady short-term, or at least sort of short-duration. So, how do you see dissolving pulp prices developing into the second quarter and then into the back end of 2017?

Look, as you know the bulk of our business is on contractual basis. And the prices are set with reference to the previous quarter's average prices on for CCS.

We are getting to the -- we are half way through this quarter which would be the reference point for our pricing for Q2. So we are fairly confident of obviously Q1 and Q2 prices.

As we get to the back half of the year, look prices have spiked considerably in the last couple of months. And sure that come back in the last two or three weeks.

But they are still significantly higher than they were a few months ago. So we are reasonably confident the prices in the second half of the year can be relatively strong compared to what we've seen in 2016 and 2015.

Okay. Thanks.

And then just, the last question is just around your dissolving wood pulp production at Cloquet. Just given that you're less concerned around the drought situation in [Kazilin], and have you started scaling back production in -- dissolving wood pulp production in North America?

Roughly we are two third, one third, at Cloquet two-thirds being dissolving pulp. Clearly when we had the drought situation in the US --sorry at Saiccor, made a little bit more at Cloquet.

Based on the current economics, it is favorable to make dissolving pulp at Cloquet. So we are maintaining those volumes.

However, we have to evaluate the situation as we move through the rest of the financial year. So we are still making craft paper but dissolving pulp volumes are a little higher.

Thank you. I just want to come back to Europe a bit.

If you look on the specialty paper offering that seems to be doing very well, can you give us any sense of how big a share of volume that is in Europe and more specifically, what sort of activities you're engaged in -- i.e. in which niches, if you like?

Okay. I'll start with the answer and then I am going to hand over to you Gary.

In terms of volumes, it s around about -- overall about 300,000 tonnes in specialty and that's something that clearly we want to grow as we move forward. As I said in the presentation it was up 15% for the year.

It is primarily at the Alfeld mill but at some of other mills we are making a little bit of specialty. And to my point earlier we are looking at all our machines as we move forward.

Gary you want to spend a little bit further on the different grade.

Sure, Steve. There are three big businesses, really, that we are involved with.

One of them is flexpack, this is lightweight coated one side packaging going into such areas as soup pouches and banderoles and yogurt lidding and these sorts of things .Then there is a release liner which goes into such things if you got the decoration on police cars and things like that or on plane and it tends to get applied through release paper technology. And the third big area is the board, so this SBB/SBS board which goes into cosmetics' very, very high quality packaging.

And in that particular market there seems to be a bit of a squeeze coming in. Not so much maybe on SBS side, but generally on high-quality paperboard.

Are you seeing any of that, and how would -- how competitive would you be in that business?

Well, in the quality area that we operate with there are very, very few players. And that market is growing; we find we are growing with it.

We do not find if there is a particularly hostile competition at this time. You know never what the future brings but it is quite different from sort of the rather larger folding books board area which I agree with you is getting a bit crowded.

Very good. And just finally, how much money or interest cost savings would you save if you cash in the $400 million bond, just to clarify?

The $400 million bonds come at a coupon rate of 7.725. And, yes, we'll be cashing that in.

So, you can work it out from there.

Hi, guys. Can you hear me?

This is actually David, his colleague. But anyway, Steve, perhaps you can just talk about your current supply agreements in DWP, in particular one of your larger customers in Austria.

Now, it seems that there's an increasing focus there on backward integration, which would make sense given where market prices are. And I mean it doesn't necessarily sound like this would be limited to new capacity.

So my question to you is do you see any risks to your current contracts there? And say there was some risk there; would you be comfortable that you could place these volumes elsewhere in the global market?

Look the contract we signed are long term contacts and that will see us through the next four or five years. So we've already locked that out.

In terms of the customer that you are specifically referring to, yes, they do talk about backward integration but they do have very aggressive growth plans. So if you do the math, the possibility of backward integration really applies to the incremental volumes.

Having said that, it is not that they are looking -- they are necessarily looking to build their own pulp line, what they mean is they are referring to strategic alliances as well that's a possibility. So it is ongoing discussion that we have with them.

And in terms of the risk, all I can say is that we've fully sold out and we continue to be fully sold out and in fact we can't make enough with the product. So we have other customers out there that are looking for additional volumes from Sappi, and clearly we've locked up significant proportion of our volumes on long-term contracts.

So we do think there are opportunities to place additional volumes with other customers.

Great. No, that answers my questions.

Just lastly, what is the actual CapEx number allocated to debottlenecking DWP in the forthcoming year? And then, lastly, can you perhaps tell us how much of EBITDA comes from specialty paper?

On the second one, it is not something we disclose yet but it will -- it could something that we will disclose in the future as we expand the business. In terms of the CapEx for the debottlenecking, it is about $100 million.

Yes, thanks for taking my question. I just had a question on the rand.

We're seeing a little more optimism in commodity markets. The rand has come up a little bit.

How are you positioned if the rand strengthens a lot, and have you considered hedging?

Look, the rand is volatile as you indicated. And long term to try and hedge the rand is extremely difficult.

And what we've got to focus on is the things that we can control and is to make sure that we are amongst the lowest cost producers. Typically our big competitors are also in emerging market economy and their currencies go with the rand.

So we can only focus on what we can control and that's to make sure that our costs are low and that we are efficient in the manufacturing of dissolving pulp.

Okay. Thank you.

That makes sense. And just to follow up is on input costs, are you seeing any trends there?

Some of the players here in North America are talking about higher input costs. What are you guys seeing?

I'll let Mark expand further but clearly pulp prices have been low over the course of the last few months. And they are still relatively low and there has been a little bit of upward tick which pushes cost low but they are lower than they were this time last year.

On the wood side, Mark, I'll let you expand further but wood prices have been coming down further.

Yes, Steve, thanks. Yes, in North America our wood basket where we are located in Minnesota and Maine, we have seen over the last year with the work that we have been doing in just the demand on those baskets and the good weather that's finally been in place for extended period.

So the wood costs have come down fairly significant from where they were a year ago. And looking forward, the work we doing I think the wood cost would stay fairly flat or possibly could even go down further.

Hi, thanks for taking my question. You say that specialty paper volumes were around 50% whereas market is already1% to 5%.

How do you explain this outperformance? And also, will you be interested in M&A to penetrate the specialty market?

I didn't hear you entirely but I think what you were asking was that considering the volumes and the markets have been out 1% to 5%, would we consider M&A? I think what's important is that we reached our debt targets.

And yes, that does provide us with more flexibility as we move forward. I would refer you to the point that I raised earlier and that's we would always use that net debt to EBITDA of two times as a guiding principle so we would never overstretch this balance sheet.

Yes, there might be smaller opportunities out there but as I say we wouldn't overstretch the balance sheet.

Yes. Just a quick follow-up.

Steve, you mentioned that the dissolving wood pulp prices had eased off a bit. Could you give us any sense by how much?

It is not by much Lars, it is about $20 in the last couple of weeks but I think they were as high and Gary correct me, I think they went as high as $9.80, $9.90, Gary?

Yes. Steve, that's correct.

About $9.80 and as you said dropped off about $15, $20 in the last couple of weeks.

So you can see not significantly higher than what we saw during the course of 2016 financial year.

For sure. Absolutely.

And can you share what you've sort of put in your forecast in terms of trajectory in pulp prices -- in those prices, going forward?

Yes. We had assumed it was relatively flat during the course of the year, relative to where we had come from.

So it was in the -- it was about $850 to $860.

Okay. So, for your assumption, your guidance, you're assuming a relatively flat average price for dissolving wood pulp through 2017.

Yes. Look, Lars, just to be more specific clearly we know what our Q1 prices are and we got feel already for what Q2 maybe and then as I say for the rest of the year we had assumed at $850 beyond that.

Thanks operator. I just want to thank everybody for joining us on the call.

And we look forward to updating you on our results for the end Q1. Thank you very much.