Sappi Limited

Stephen Robert Binnie - Executive Director and Chief Executive Officer Berend John Wiersum - Chief Executive Officer of Sappi Europe Mark Gardner - President and Chief Executive Officer of Sappi North America Mohammed Valli Moosa - Non-independent Glen Thomas Pearce - Executive Director and Chief Financial Officer

Brian Morgan - RMB Morgan Stanley Research Ross Krige - J.P. Morgan David Roux - Bank of America Merrill Lynch

Thank you. Good day, everybody.

Thank you for joining me on the call. I'm joined by a number of my colleagues and I'll be going through the presentation deck, the investor presentation deck and I'll refer to page numbers as I move through.

Starting on Page 4, highlights for the quarter, EBITDA, excluding special items of US$211 million, that's up from $208 in the prior year. And then bottom line profit $102 million compared to $88 last year.

Earnings per share excluding special items, US$0.17 same as last year and then net debt was $1632 million up from $1329 million. The main reasons for the jump obviously are the acquisition of comp which occurred during the year or quarter $132 million and then the stronger euro versus the dollar as we convert that had a significant impact and obviously the higher CapEx that has come through.

During the quarter we completed the acquisition of Cham speciality paper business and that's integrating nicely into Sappi. Moving to Slide 5, the EBITDA and operating profit, you can see the impact over the last couple of years and the growth that has come through, some of the key metrics, net debt on the back of the number that I just explained to you is slightly higher at 2.2.

Leverage, we continue to target lower than two times, and that remains in place and we will maintain that discipline. EBITDA margin percentage at 14.1 still healthy and then return on capital employed 16.8%.

Moving to the earnings page, on Page 6, pleasing to see sales volumes growing across the board in all regions and in all the segments, weather it is dissolving pulp packaging, graphic paper are all up so that was encouraging. Then we were able to realize higher selling prices, and again in all our businesses and clearly that had to be done and in graphic paper to offset the impact from higher raw material costs primarily pulp which you see in the red block under variable costs.

The exchange rates had a significant impact. The fact that we've got a stronger Rand now against the U.S.

dollar the net impact of all of that was $10 million down on last year giving us a 211 you see us still achieving. Across to Slide 7, the product contribution split, dissolving pulp was 45% of EBITDA, a little bit lower than the previous quarters or recent quarters, but that's because of the stronger Rand that I referred to, printing at 39% and packaging at 16% and that is rising and will continue to rise as we integrate Cham and complete the conversion projects.

Moving to Slide 8, the debt maturity profile and this paints a good picture, there's no short-term material debt. The next larger item would be the securitization in 2020 and you know we would expect to rollout although we don't anticipate any challenges.

And then our bonds, our euro bonds have 22 and 23 so we have quite a bit of run rate there. On Slide 9, the CapEx development, a little bit later in the presentation I'll be talking about all the projects that are underway, but obviously we've got the conversions from graphic paper to packaging that we have undertaken in the U.S.

and in Europe and the expansion and debottlenecking projects for dissolving pulp and again I'll go into more detail, and that's why the number has written in 18 and in 19 relative to where we've come from and in recent years. Turning to the divisions and on Slide 11 we talk about printing and writing, graphic paper, it's encouraging that operating rates have been healthy.

All our machines are full in both the respective regions. We've clearly benefited from the fact that they were capacity closures and conversions in those regions and it's a lot to – or it's ensured that the supply-demand balance is more in line which has enabled us to put through the series of price increases which we had to do because of rising paper pulp prices.

We began, I think we began raising prices April last year, April '17 and we've seen a series of these since then each quarter and there's been a further one announced for the next quarter as well. There's always a lag effect, but you can see in our performance and our profitability we have been able to implement these selling price increases to offset much of the impact from pulp.

The conversions will reduce our exposure once they are completed to this market. We continue to make investments and focus on efficiencies, investments that we make will be to lower costs and a good example of that is the graph on PM9 and investment that we announced I think last quarter for $30 million, ongoing focus on costs and efficiencies.

Then moving to packaging and specialties on Page 12 there is always a global push now towards paper based packaging to replace plastics and that's creating further opportunities for us. We are very excited about the prospects.

Most of the markets that we're in are growing between 1% and 5% and in fact we've been beyond this. We would expect more conversions across the board in a highly fragmented market.

We've recently announced price increases to offset the higher pulp costs. Cham, was completed at the end of February and I have a slide on that later and I'll go into more detail.

The conversions that we've announced will boost our capacity and because we are limited by the capacity we have available currently, but obviously with Maastricht having recently being completed and the board space and Somerset in the process of being finalized that will give us opportunity to grow our packaging. And then the Cham and the Rockwell technologies will give us further scope for growth.

Then on dissolving pulp and I've moved to Slide 13, the demand continues to be strong. We've seen a lot of new viscose capacity coming onboard which has depressed viscose prices a little bit, but dissolving pulp because there has been strong demand continues to be stable and we would expect that to continue for the foreseeable future.

As we look across the board there is a little bit of new capacity coming onboard in '19, but relative to the market demand growth we think the balance in the market is very favorable. The fact that paper pulp prices have been rising has helpful support the DWP pricing as well.

The pricing are being in steady over the course of the least couple of months and we would expect that to continue. We continue to look for opportunities to grow our capacity and obviously we've got the debottlenecking projects underway at the moment.

Moving to Slide 14 Sappi Europe and they've done a great job at putting through price increases to offset the higher raw material costs. We got – an example of the one product on the top right and you can see that that's been continuously rising over the last year.

The markets have been relatively better and as I said earlier, our machines are all full. At the same time specialities and packaging is going extremely well.

Volumes are 12%, that excludes the Cham and that will expand further as we move more of our Maastricht capacity into folding boxboard. The costs were up mainly as a result of pulp, but latex has also been an issue as well.

Then on to Sappi North America, similarly we've put through a series of price increases. The market dynamics in that market with some recent closures have been more favorable and again our machines are full and which has helped us to put through these price increases, at the same time dissolving pulp demand has grown and we swung a little bit more capacity to dissolving pulp at Cloquet during the quarter relative to last year.

In addition to pulp costs, energy and chemicals have also risen, but you'll see from the performance that we were able to offset those. Then on to South Africa, obviously we're up against the stronger Rand compared to a year ago, approximately 12 Rand to the dollar a year ago was 13, so that has a significant impact so obviously profits would be lower than last year.

However, in spite of that the performance has been good and DWP volumes have been strong. At the same time, packaging has had an excellent start to this financial year and we've seen volume growth there which has more than offset the or demand growth which has more than offset any impact from the dark conditions in the Western Cape.

Then if we turn to the four pillars of our strategy and the first one is the cost advantages and focus on cost, on Page 18 we continue to do a lot of good work on our procurement side. We talked about this last quarter, the $60 million and we are still on track to achieve that in this financial year.

The focus on the continuous improvement across all the [indiscernible] has offset some of the impact from raw material costs and in Europe we continue to look for opportunities to debottleneck pulp capacity because Europe is only about 55% pulp integrated and clearly with in a cycle like this where raw material pulp prices have been rising that has put pressure on us. The Saiccor expansion, which we will grow into a little bit more detail later, will help lower variable costs and then we've got on PM9 paper upgrade which will deliver nice payback and lower costs.

Then rationalizing the current businesses, the two big conversion projects underway in Europe firstly at Lanaken we will progressively move out of lightweight coated as we complete at Lanaken, reduced exposure at Maastricht and Somerset as we finish that conversion. On Page 20, maintaining of a healthy balance sheet, as I said earlier we are still committed to the two times net debt to EBITDA ratio and we'll use that as we move through this period of conversion and growth projects.

The finance costs are approximately $60 million to $70 million per annum. And we renewed our RCF during the quarter, that's been unutilized, but it is always nice to see that we can achieve that and we did at a lower spread 165 bps versus the previous rate of 119 so that's encouraging.

Then on Slide 21, in terms of our growth into the higher margin areas, we have debottlenecking at our various DWP mills and the investments that we've made in terms of the Rockwell technology and the Cham acquisition, we think we can grow further at our South African packaging mills in Ngodwana and Tugela and we continue to look for opportunities for additional hardwood timber supply in South Africa. And then last quarter we talked about it that we applied for the environment approval for the expansion of Saiccor by a further 110.

We're hopeful that we'll get that soon in the environmental approval and then we can commence the whole construction which would be complete early in 2020. On Slide 22, the Cham acquisition has gone very well.

Integration is proceeding according to plan. There have been no surprises for us or no material supply surprises.

We're very happy with the assets that we've acquired, the people are fitting in very well into Sappi and we continue to believe that there will be synergies of $10 million to be realized within the next two years which would give that business a $30 million EBITDA which is what we said at the time of the acquisition and just to remind it's the two mills which you see pictures of in Northern Italy. Further opportunities as we accelerate growth.

We were finally able to sign the Ngodwana Energy Biomass project with the Department of Energy. Construction begins in March 18, this Sappi has an equity share of 30%, so we equity counter, we don't consolidate this on to our balance sheet and it will deliver good returns and good economic empowerment benefits as well.

Moving to Slide 24, the speciality packaging expansion, and this is just a reminder of all the component parts of the conversions that are underway, but the primary one being the Maastricht conversion to folding boxboard. They will continue to make some coated wood free on the machine but that will ramp-up as we move ahead towards more and more folding boxboard.

And then the other big one is at Lanaken and I talked about that already, but enabling us to make the coated wood-free on PM8 there. The Somerset construction is in the - or is just being completed literally in the last couple of days.

We are now in the process of testing all the products and there will be a ramp-up over the next couple of years and we've targeted an additional 350,000 tons of packaging and specialities on that machine. In terms of DWP, just to remind you once again, we have the small project is five core which gives us 10,000 in the short-term, then in Ngodwana the additional 50,000 will be completed in September of this year and then Cloquet an additional 30,000 tons by next financial year.

And top of all of that, there is Saiccor expansion that I referred to the 120,000 sorry 110,000 and then we continue to scan the external market for opportunities to boost our dissolving pulp capabilities further. And that brings us to the outlook and on Page 27 just to summarize and recap, dissolving pulp demand remains good, prices are stable and we have a favorable outlook over the next couple of years.

Q3 will be impacted. But we have shifted old free dissolving pulp mills during this quarter.

In Europe operating rates are strong. Paper prices have been rising and as you saw we had further price increase on Somerset conversion as we talk is in the process of being completed and again we've been able to put through selling price increases.

Packaging continues to grow as customers switch to paper based solutions. So taking all that into account, obviously we're still up against the stronger rent, but markets across all our segments are in pretty good state.

So taking all into account with the shots we say that the Q3 performance will be broadly in line with last year in terms of profitability. So operator that's me going through the deck, I'll hand it back to you for questions.

Yes, thank you and I've got two questions, the first one is the last call you mentioned that there was capacity switching from dissolving pulp to paper pulp and I'm just wondering whether you've seen any more of that happening given that we're seeing paper pulp prices continuing to outpace dissolving wood pulp? And then secondly in the U.S., I know that you are looking at a price increase for June or July for fine paper, I just wanted to know whether that feels like a realistic option for you?

Okay, in terms of the switching of capacity between dissolving and paper pulp, I don’t think there's been anything materially changed since our last earnings call. A lot of it has already shifted across to paper pulp.

Mohammed, is there any other major changes you've seen in the last few weeks?

Steve, no. Only just to add that the switch from dissolving pulp to paper pulp is not only going from dissolving to bleached paper pulp, but also from dissolving to unbleached Kraft pulp in China.

Okay thanks, and then Mark, how confident are you on your price increase for July?

Well we just announced the price increased on the upgrades on Friday and we expect that to go through. We generally see about 25% to 30% of price coming through and as we announced and then by the end of 90 days about 80% of that will be through.

Did you get that James?

Not really, it’s promising it sounds like, is it?

Yes, we’re confident that we can get it through and in the short term 25% to 30% and by the time we get a couple of months out we are confident that we will get 80% of what was announced?

This is the July increases you are talking about is it or was this the…?

Yes.

Okay, good thank you much.

Hi guys, thanks very much and congratulations on this. So if I can just ask you make - and announcement in the presentation deck about increase in supply in speciality packaging and could you just expand on that a little bit?

Are you talking…?

It's on Slide 12, so on Slide 12 you say more conversions expected into various grades [ph] of a highly fragmented market.

Look there has been announcements by other competitors out there, not specifically in the same grades as us, but clearly with the global push towards paper to replace plastic, everybody is looking for opportunities. And with potential new legislation in the U.K.

and in Europe it's really a bit of a race. We're getting a lot of contacts from FMCG companies wanting to focus on paper based solutions for their packaging and it's really a very exciting time.

And obviously the fact that we’ve been making investments in this area, we’ve acquired come Cham and the conversions that are underway, we think the opportunities are vast. Berry, I don’t know if you want to expand any further?

No, I think that answers it, Steve.

Steve, just the concern obviously is, this is obviously a fast cycle [ph] industry, and here we obviously just worry that with attracted looking markets tend to attract a lot of supply and just interested to get your thoughts in that regard and I’m just worried that we’re chasing the fact here that that could end in sales?

Yes, look in the sectors that we are in, the competition that we’re up against there tend to be smaller niche players. We’re not talking the mass packaging categories.

They are - many of them are highly technical and the machines that compete in that space are not the larger machines, they tend to be smaller machines and based on that we are reasonably confident there won’t be a mass shift from the large producers into those categories.

Okay, got it. And then if you could just remind us the payback periods on these conversions three to four years, if I may say, is that intact?

Yep. Still intact.

Nothing changes there, okay if we can just think in terms of that CapEx outlook for 2019 that you've provided small increase in 2018 and roughly what portion of that would be mentioned as CapEx…?

It’s between 150 and 200.

150 and 200 and then in terms of return criteria for the expansion components of that CapEx could you give us a rough number, anything about 20%, 15% what sort of numbers should we be thinking about?

All the big projects that we've looked at are between 15% and 20% IRRs.

Between 15% and 20%?

Right.

Okay. That’s excellent.

Thank you very much, I appreciate it.

Good afternoon everyone. Thanks for the call.

Just with regards to the Somerset conversion and perhaps the SPS [ph] market in North America and what - if you could may be just give an idea of how many, what sort of sales volumes you would expect from that Somerset SPS? And then in terms of processing if you could give us some insight into that market would you expect [indiscernible] volumes perhaps how will, what do you expect the margins to be versus Cham speciality margins.

All right, Mark, I’m going to hand over to you just to talk about the ramp-up. Obviously we've got certain commitments at the movement, but there will be a time peers for ramping up, so if you want to elaborate further?

Mark?

Yes, can you hear me okay.

Yes, can you hear me now?

Already, we are in the process of starting [indiscernible] machine up now and we'll be ramping that up over the course of this month into next. We did see the SPS market as being a fairly large part of them by the operating machine, but I'll just remind all on the call that the machine also will be making C1S chemical papers and also graphic paper.

So it’s not - we’re not planning on the machine to be 100% dedicated at this point in time to any one market segment. The total volume as you mentioned earlier Steve, out as we ramp up over the next year or so could go as high as 350,000 tons of packaging grades and large part of that would be in the board grades.

Yes, and Mark, just there was a second question just on the pricing?

Well, we’re looking at the market pricing and we feel comfortable with that market pricing. Our product we are quite confident will be a very good product in the market and we won’t be surprised and we have had to expect that the product will drive a lot of demand just because of the design of the product and quality we expect off this rebuild machine.

So I think question was do we see discounting in the market, we don’t that’s not part of our strategy.

Okay, thanks very much guys.

Good day guys. Thanks for the time.

Just few questions from my side, just within our coverage I think some of the factors that we have struggled with is certainly the less transparent costs in the fee, such as wood as well as wages and perhaps you can just comment on the direction of wood and wage costs across your businesses in the U.S. and Europe?

So that’s my first question. And then my second question is, I mean what will the delta be in the scheduled annual maintenance impact versus last year, because I’m still struggling to re-consult to your guidance and my feeling is that we could see a high impact from annual maintenance shuts?

And then just my last question is quite a high level one, but can you perhaps comment on the risks from potential land expropriation in South Africa? Thanks.

Okay and we will take each of the questions in turn. Firstly on wages, in Europe and U.S.

we would expect those to be in line with inflation around 2% to 3%. And the second part of the question was on wood, the near term outlook is lower prices on the wood front particularly in the U.S.

The annual maintenance shut, obviously the first one we’ve obviously got is the fact that we've got Somerset which has an extended shut for the conversion and then also we have the Saiccor shut as well which is about, I’m looking at it relative to last year it is probably an incremental $5 million relative to last year is the impact and Ngodwana was in Q3 last year is Q3 this years, so there not a material difference, so the two bigger ones relative to last year are the combination of Somerset and Saiccor. Combined if I add the increase at Saiccor of about as I say $5 million and then the remaining time period for Somerset, you are looking $5 million or $6 million, so that’s about $10 million relative to last year additional costs of shut.

Does that answer your question David or not that one specifically?

Yes, Steve that does. Thanks very much.

Yes, then just the last one on land expropriation?

Yes, I mean clearly that's a very sensitive issue and we’ve been engaging and we’ve made submissions. We are using business leadership as our communication vehicle.

We’ve had comprehensive discussions with them and we’ve had issuances indirectly through business leadership that the threat of land expropriation will not impact on productivity, it won’t impact on jobs, economic growth for the country, so it’s not something that we are seriously worried about. Clearly we have to engage and the risk is out there but we are receiving favorable responses to our indirect discussions on the matter.

So it's not something we're overly concerned about.

Great, thank you very much.

Thank you.

Hi guys, thanks for the call. Just a couple of questions from my side, first one is probably for Mark really on the price increases in North America.

What's your comments around speculation that we also have sort of decided against pursuing a coated fine paper sort of price increase going into the sort of summer period? And then can you just give us some color on what the sort of market dynamics look like there right now?

Second question is on the Cham paper deal, I mean obviously and specialities there's a lot of qualification occurs into these products with the clients, does this acquisition potentially speed up qualification times in processes that your European business would have had to gone through otherwise? And then third question is essentially on the cost benefits of producing more DWP at Cloquet, I sort of estimate that producing more DWP is costing you about $2 million a quarter, so call it $8 million a year at what sort of point does to Sappi have to have the conversation with [indiscernible] to say that current process may be unsustainable and we have to actually produce more paper pulp internally because this is not economically viable to give away $8 million to $10 million a year?

Okay, let's take the last question first. As you'll appreciate, the contracts we have with our customers are long-term and there maybe sort time dynamics at play, but we sign long-term contracts with volumes commitments and if during that period there are short periods of time where the pricing differential moves slightly against those then we have to live with those consequences.

We have to look at the overall profitability of the business which is extremely profitable and then we have strong relationships with the customers. So we've committed those volumes and we can't really move in and out on such a short-term basis.

The second question was on Cham. I don’t think it will have a material impact on qualification.

Many of the grades that there are in obviously we're going to keep those customers and if I look at Maastricht for example where we're going to be ramping up, Cham doesn’t make the board grades, so I don’t think it would have a material impact there. Berry, you're not seeing any improvement?

No, no, not really Steve because the customers we sell to cannot take the risk of accepting something which is uncertified, unqualified. So we do some recipe sharing between the mills and that's certainly providing a benefit, but when it comes to downstream particularly food based customers looking at a new paper from any mill, no matter what their history is, they need qualified.

Yes, thanks Berry and then Mark you go after the question just a little bit more on the price increases and again how confident we are perhaps a situation that is competitors are not pushing through price increases and what's the state of the market, do you want to elaborate?

Yes, I will rather a little bit, first do not speculate about any of our competitors, I have no comment on competitors' actions or what they are doing. We are putting through price increases due to a very strong demand and as we mentioned obviously our backlogs are, our machines are full and we actually made headwinds on cost side, particularly in chemicals and logistics and therefore are going to need to move the price up.

We put through I think four web price increases and two sheet spread price increases. We are seeing good realization on that.

So our market seems to understand that prices are needed to continue to protect and support the supply side of the business and so actually like the busy season inventory levels are and hopefully we can meet the demands that we have out there for our customers and therefore we're focused on.

Thank you, Mark.

That's great, thanks guys.

Hi good afternoon, I don’t know [indiscernible] one off tax payment you needed to make in South Africa you reported, and you talk about cash taxes in $18 million higher, but did all of that come from this one off impact can you give us a number?

Okay it wasn’t great line there, but I think what you asked was the higher tax this comes through as was that a one off impact and at what levels and…

Yes, you mentioned that it was imparted to, it was parted due to the transfer pricing you show historically in South Africa, I just wondered what the number was?

Glen, do you want to just chat up briefly about the tax?

I think what we do is we look at our tax cash cost over an annual basis. If you look at it on a quarter-on-quarter it usually is different quarter-on-quarter.

But our tax charge for last year from a cash point of view was $100 million and we're anticipating it to be about $15 million to $10 million less than that for this fiscal. Overall we are looking at a tax charge on a percentage basis of between 28% and 29%.

No, my question is about your Q2 cash taxes of $50 million. In the comments you said $80 million higher year-over-year and it is mainly due to this one off you had in South Africa about transfer pricing.

I’m asking if that difference of $18 million it was 100% coming from this issue or was there something else in it?

No, the $18 million is just 100% from that yes, sure.

Okay and then the in terms of Cham paper you talk about synergies, did you quantify how much you expect and over what kind of a timeframe?

$10 million and by the end of two years we’ll have - be running at that level.

Okay, great and then during your previous call you had mentioned when it came to your capital structure that your priority at the movement was your CapEx expansion plans and you were monitoring the markets as your 2021 [indiscernible], but it wasn’t high on your list of things to do, is that kind of how you’re still looking at it?

Yes, for the time being, it’s not something we’re planning on doing and clearly the market continues to look favorable and as that window opens we’ll monitor it, but it’s not something that we are - it’s not immediate priority for us, no.

Okay, and the fact that your advance 2023 is become callable April next year, is that a factor in terms of timing like to do something together in April next year when both of the loans are callable or not really you could just something…?

It’s not really an immediate factor for us. As they move into the callable window we will monitor it, but our focus at the movement obviously is on these conversion and debottlenecking process.

Okay, fair enough. And then in terms of in your presentation slides you mention dissolving wood pulp capacity coming on stream in 2019.

I mean, given the way things are currently when projects are expected to finish what sort of capacity we’re talking about in terms of percentage of the market?

Look, as we look forward, let’s talk the demand side first. We continue to believe that the market will grow somewhere around 5% or 6% and if you convert that into actual tons you are talking 400,000 or 500,000 tons per annum.

And as we look at the new capacity that’s coming on board, it’s not an excess of that, so we think the market balance will continue to look favorable over the next few years.

Okay, so you expect the additional capacity to be absorbed by the increasing demand?

Yes and so I’m talking about 5% approximately.

Okay and lastly on the coated wood-free a competitor of yours mentioned during their call that the deliveries in Europe for the whole market was up 1% last year in 2017 fiscal year and which is 2% to 3% structure decline that we normally see in this market in Europe specifically. Having finished such a good year do you think in terms of volumes this year in Europe in coated wood-free we would see some sort of accelerated decline when it comes to volumes having done a good year already?

I don’t know what their inventory levels are like and I think they mentioned they were already seeing some softness, is that something you also see or not really?

Yes, I don’t think really and clearly over a longer period we have seen a gradual slowing on the pace of decline. You’re right ’17 was a better year.

The European economy was stronger and the demand for graphic paper benefited on the back half that, ’18 the start the early months of ’18 have not been as positive as ’17, but that doesn’t change our longer term outlook. And we've said it many times that we continued to think in the near term future we'll be down about 2% or 3% and that’s – and despite what happened last year and we’ll take it when it comes, we continue to believe it will be down 2% or 3%.

And that’s what we built into our models and that’s why we wanted to take capacity out of coated wood-free and allocate to other segments and primarily focusing on the packaging side.

Great, very helpful. Thanks so much.

Thank you.

Okay operator, if there's no further questions, I'd like to thank everybody for joining us on the call today and we look forward to discussing our results at the end of next quarter. Thank you very much.