Sappi Limited

Thank you. Good day, everybody.

I'll through the investor presentation and I’ll call the page numbers as I go through as always, and I am going to start on Slide 3 which has some of the highlights for Q1. EBITDA up 15% and bottom line net profit of 29%, and earnings per share up 14%.

Moving across the page, our margins did improve from last year which was 12.9% up to 13.9% and our return on capital employed from 14.1% up to 14.7%. Just in terms of the climate that we are operating in, it was a quarter where some of the market - our major markets that we're in did deteriorate significantly particularly from December onwards for graphic paper.

We did see ramp up on the packaging front - following the conversions that we did last year. Moving to Slide 4, the EBITDA bridge and the big story that this tells you is that we continue to have significant pressure from raw material costs and that's predominantly pulp prices.

They are significantly higher than they were a year ago, and we were able to put through higher selling prices to offset that. Volume is showing a slight decline, but obviously we have Cham - the acquisition of Cham in the numbers which were not there in the prior year.

So it tells you there are volumes elsewhere were down and that's predominantly in the printing and writing papers and on the back of the soft market. Moving to Slide 5, the product contributions split and I'll focus on EBITDA there and you can see there’s a lot of sales dissolving pulp 41% and printing papers 41% and packaging continues to ramp up at 18%.

Slide 6, maturity profile for our debt. You could see that there are no major debt maturities in the next couple years.

Obviously the 22s and 23s are getting closer two maturity and we do get closer to the non-core windows and that's something that we monitor as we move forward. Slide 7, is our CapEx and we estimate the CapEx for this year will be 590 million with the maintenance portion of that somewhere around the 150 mark.

Turning our attention then to the product divisions statements and firstly on Slide 9, the printing and writing graphic paper markets. It’s fair to say that there has been a significant reduction in demand.

We saw that particularly from December onwards and it did put pressure on us and obviously we'll talk about the outlook statement a little bit later but we do expect that to continue into Q2 as well. Looking forward for the rest of the year and obviously beyond that we do expect capacity reductions to come in Europe and the U.S.

to offset that. The forecast from the industry experts that the operating rigs will remain pretty, pretty good as that capacity comes on.

On cost prices we talked about in previous quarters, but pulp prices did run hard last year and during this quarter we did saw it come up a little bit from those historical high predominantly on weak Chinese demand. We have seen some declines now in North America and Europe as well.

On the paper price selling price side prices were stable. Obviously when markets do get soft like they are at the moment you have an increased focus on costs and we continue to look for opportunities to streamline and take cost side of the business.

And perhaps the one opportunity as we look forward is pulp integration. We are short pulp and we look for opportunities there to improve our integration rate.

At the same time, we will get benefits as we take our own capacity out of the segment as we ramp up further on the packaging grades following the conversion at Somerset and Maastricht. And that brings me then to Slide 10, which is the packaging segment and we have seen more capacity coming into the space.

In terms of macro trends there is a strong push on downstream brand owners for packaging based solutions which we obviously want to take advantage of those opportunities that will bring us. The paperboard categories have been good particularly in South Africa but even in the European environment.

However, there was some short-term pressure on some of the consumer packaging categories and we believe that’s linked to the economic slowdown that is been occurring in Europe mainly. The selling prices did rise obviously as we try to counter the impact of the higher raw material costs and as I said already the pulp prices we seen a little bit of decline in recent weeks and months.

Our big focus here is to maximize this opportunity and clearly ramp up the volumes following the conversions that we've done. On Slide 11, dissolving pulp and demand for the product continues to be good and the market we believe will continue to be strong.

On the supply side, yes there has been more supply coming to the market, but as you look forward the increase volume demand we think will cater for that increase capacity comes through. Our estimates are that the majority or the vast majority of the swing capacity has already moved to dissolving pulp.

And we believe that’s because of the fact the paper pulp demand in China has dried up in recent months. Selling prices for dissolving pulp are down a little bit and we believe that's on the back of us obviously of lower VSF prices.

However, we do expect them to stabilize and rebound and for the reasons that have outlined in terms of the market balance. And we have the extra volumes that comes through from the debottlenecking projects and obviously we got the bigger project is Saiccor to boost production and that will come through in 2020.

Turning then to the regions and firstly Europe. We saw overall tons down 1.6% but obviously we had come for the first time so if you back that out you see that our printing and writing volumes were down seven.

So it was tough, it was a tough market and the overall market was down by more than that so we did gain some market share there. Specialty packaging volumes were up 50 obviously including Cham if you back that out 4% like-for-like growth and that, obviously that's the start of the ramp up coming through offset a little bit by the softer demand that we saw in those consumer product category that I mentioned earlier.

Top line sales up nine on the back of the higher selling prices. There is a bit of a mix issue there because of Cham on a like-for-like basis packaging and specialty prices up 10%.

EBITDA down slightly at 2% and is predominantly on the back of the higher variable costs and you can see up 17% and a big reason for that is the higher pulp costs. In North America down 6% and sales up 3% and nice growth in EBITDA, up 61% relative to last year.

A lot of the pressure point is the same soft coated paper market and obviously we're getting the ramp up on the specialty side. We have improved selling prices to offset costs which helped us and as Somerset ramps up further, we should progressively see further improvement, so overall a reasonable quarter.

In South Africa, strong improvement both off the back of higher volumes and selling prices. The market for packaging in South Africa has been strong, and we continue to grow there.

And then on the cost side, fixed costs were inline with inflation but obviously with higher volumes the cost per ton has been coming down. So that's good work there.

However, we do have the impact of raw material cost rises impacting a little bit but it was a good quarter for South Africa, and in fact a record quarter for South Africa. The strategy pillars, and I'll start on Slide 16.

First, the cost I've mentioned already that cost is always important but fairly in tons when markets do get weaker, it gets increased focus. We do believe that there's further 16 million opportunities on efficiencies and procurement.

And in terms of our ongoing improvement initiatives across the mills, we will look for further improvement. And pulp integration is receiving increased focus for us as a business.

We do believe there are pockets of opportunities within our existing mills to improve. And in that Saiccor expansion obviously coming later, we'll also contribute to lower variable costs for one of our biggest mills.

And the Gratkorn upgrade which we talked about on the results of last year, I'm pleased to say that's been completed ahead of time, on budget, and we're confident that that can give us the savings that we built into the project. Moving to Slide 17 and coming back to graphic paper.

This is about obviously capacity and managing the capacity. I've already said that we do expect a significant amounts of capacity, external to Sappi to come out, and obviously internally we will continue to ramp up Somerset and Maastricht, and that will reduce our exposure here and at the same time specifically to mechanical paper we've got the project Lanaken to convert that machine and that will be completed in April of this year.

The balance sheet on Page 18. We had a commitment with you guys about the 2x EBIT and we maintained that, and we have what used that as a guiding principle.

The RCF was renegotiated last quarter, I've already said that we'll monitor the bond market for opportunity to refinance. And I guess we got some good news a couple of weeks back there that Moody's upgraded our credit rating and I think that's a testament to the good work that we've done.

Slide 19. We will continue to look for opportunities to grow into higher margin areas.

The debottlenecking of Saiccor and in Ngodwana were completed last year. Pleased to say that production is going well there at the moment and we should be able to deliver on the promises that we made there.

The Cloquet one will be complete in April. That would give us another 30,000 tons and that appears to be on track and we're confident that that will deliver again on the benefits that we anticipated.

Longer-term we continue to look for opportunities to improve packaging or increase the packaging in South Africa. We got a great business there and we can continue to grow further we believe.

On the buyer side, as you know we've got a number of initiatives under way and lots of discussions with potential commercial partners moving forward and the demo plants are progressing nicely. We have the expansion of Saiccor 110,000 tons and obviously the ramp up of the board grades at Maastricht and Somerset following those conversions.

In terms of the outlook, we expect - and I'm on Slide 20. We expect dissolving pulp sales volumes to increase this year following the projects that I mentioned earlier.

Variable market conditions for specialities on the board side pretty good. Unfortunately pressure points coming from the consumer products in Europe with the economic slowdown that we're witnessing there.

Graphic paper markets have been particularly weak from December. So that is going to put some short term profitability under pressure.

At the same time, CapEx for 2019 is expected to be 590, and the majority of the projects that are listed there, the Saiccor, the Lanaken conversion, and the Gratkorn project that we've now completed. So given those weak graphic paper market and the ongoing elevated pulp prices, we do expect Q2 to be down slightly this year relative to last year.

However, for the full year we do expect profits to be higher. Operator, that's my presentation.

I'm going to put it back to you now for questions.

I just got two questions. The first one is, the U.S.

markets obviously weakened a bit recently. Just wondering how confident you are being able to maintain prices this year in that environment?

I'm wondering what drove specific closure might help there and whether there's any information you've got on how that might help? And secondly, your comment on pulp integration is interesting.

If this is what you're looking at in terms of CapEx for 2020 and 2021 for sort of increasing domestic production of pulp and what sort of - what we're looking at in terms of, is it new recovery boilers, what are you looking out there?

Okay, let's take each question in turn. On the U.S.

market, I'll let Mark spend a little bit further but the one thing I would say is the operating rate are expected to remain pretty good. There are capacity reductions coming and obviously we're part of that process.

We believe that it makes sense to maintain our prices because of the higher costs that have come through. Mark, you want to add any - we don't really comment on specific competitors.

Right. So the market has been very tight through the course of this past year.

It did slowdown in December and this is typically the seasonally slow period of the year. We've got lot of activities underway and we're kind of leaning towards the same as the forecasters are predicting.

We see lots of reasons why the year coming up can have still strong operating rates. And I guess I'll leave it at that at this point.

James on the second question, pulp integration, yes obviously our big project at the moment is Saiccor. And that takes up the capital for 2019 and it goes into 2020.

I suppose we are looking it beyond that. We’re looking around the mills in our group and we do think there are debottlenecking opportunities and opportunities to boost our pulp capacity.

I'm mainly talking Europe, Europe it's about 50% pulp integrated and we’re looking at the mills how can we boost that because clearly with higher pulp prices that does make you vulnerable through the cycle. So yes, it's something that we're working on at the moment and we’ll get back to you in the future.

And just question on your ability to accelerate the ramp-up of the specialty conversions ahead of the timeline that you’ve guided to especially given the weakness on the demand side that we've seen in the magazine paper?

Yes, look it’s obviously getting a lot of focus and these things do take time. We saw it in the past when we converted it also.

If I look at Somerset and I look at Maastricht in terms of the product that we have, we are very happy with the product and we are getting positive feedback from our customers. We are ramping up a little bit slower than we initially anticipated but it is ramping up and it will continue to do that.

So in terms of your specific question can we go faster? Yes.

With the weakness in the graphic paper side of it, we’re going do what we can to accelerate that but it does take time to get accreditation from customers. Berry and Mark anything you want to add there.

I think you covered it.

I think you covered it well Steve.

And then given that you are adding specialty packaging conversion specialty packaging pattern here, I mean you talk about demand weakness in Europe just a question could we not be transferring pain from coated packages specialties at this point?

Yes, look there has been other players that have converted. However, in terms of our relationship with our customers and as we talk to them about opportunities, we do think there is - we do think those opportunities are out there to ramp up according to our original business cases that we build around the conversions.

I don’t think there is anything dramatically changed in terms of how we think about those markets.

And then the third question final one is, just maybe a bit of color on DWP maybe on three to six months view are you expecting a bit of a rebound in pricing first through the new year maybe or how you're thinking about how the margin evolve in the next couple of months?

Mohammed I'll give some brief comments and then I’ll pass it to you. Yes, this is the Chinese New Year and obviously if you look back it is a time when you do have soft demand and prices do come under a little bit of pressure.

If you look at all the variables that are out there in terms of the balance and the market, the strong demand the fact that paper pulp prices continue to be good. We’re still optimistic about the outlook for pricing on dissolving pulp.

Mohammed?

Steve I think you've have covered it. It’s largely a seasonal issue at the moment and post Chinese New Year historically we have seen an improvement in both demand pickup as well as pricing.

A couple of questions. I think starting on DWP obviously in your slide deck you still make reference to external opportunities I think sort of in light, I know pulp prices haven’t come down massively but they have seen a bit of deterioration.

Has anything sort of picked up on that matter?

Sean yes, look it's not secret. We have looked and these assets in this cycle have become very expensive.

We haven't seen an opportunity yet that satisfies our valuation and other returns that we require. So we'll continue to monitor the market but there is nothing as of yet.

And just in terms of European graphic capacities, so obviously there is quite a bit coming out. Could you just confirm that Sappi is pretty comfortable with their positioning without the need to sort of takeout more?

I’ll let Berry expand but yes there are significant capacity expected to come out of the market externally to us. And based on the demand forecast that we have at the moment, we don't believe we need to take further capacity other than obviously all the things that we're working on with the conversions and so on.

Well just to add to that, we are of course taking out capacity through the rebuilds and the conversions that's about 200,000 tons of graphic capacity that will come out. So we’re playing out bit in that game as well.

And just a last one on the guidance for EBITDA to be high year-on-year. Any chance you can elaborate on that?

Well, I mean obviously Q1 was comfortably higher than last year, but Q2 because of the short-term pressure will be down. I mean we can’t give a specific number, but as we sit here today we do feel the back half of the year should be better than what we have provided is the outlook guidance for Q2.

Just two questions for me, both on volumes. Firstly, on specialties, if I take the absolute growth in volumes and try and strip out Cham, it looks like around 20,000 tons of volumes came in from the conversions.

Is that accurate? And then leading on from that, just does that mean we should expect another 180,000 tons over the remaining course of the year?

And then just on graphic volumes, your commentary seems to suggest that demand at Cham will accelerate in Q2. Is that accurate?

Thanks.

Sorry I miss the second question, apology.

So just on graphic paper volumes, it sounds like you expect demand declines to accelerate, so to decline more than what you saw in Q1. Is that accurate?

All right, let me take the two questions. In terms of specialty volumes your numbers is close to the mark.

We do expect that to accelerate as we move through the year and in our original plans, yes 180 is about the right number. And so I would expect each quarter to get larger than the last so 20 ramping up.

And as I look at the full year we’re still pretty close to the kind of 180 level. The graphic paper volume I mean obviously it was particularly weak in December.

The market and a double-digit declines in both markets we did gain some market share. At the moment things are weak but in terms of our bigger picture and as we look forward for the rest of 2019, we wouldn't expect it to be a double-digit level.

In the high single digits it’s kind of the latest forecast and that’s consistent with what you’re seeing from RISI I think, RISI has got 7%, 8% declines Berry.

Yes, that’s correct Steve. I would say it's not getting worse December was the trough - and it's slightly better than that - significantly better than that, but it remains below last year.

Yes, and to that earlier question, asset is down 7% this year as we plan forward in terms of our volume we think we can withstand that. And obviously there is anticipated capacity reductions big ones coming in 2020 so that should see us through.

Mark anything you want to add.

Maybe just of a little bit more in terms of the North American market. We would be right in the 6%, 7% down is what we see.

And a lot of that is happening in the magazines and the catalogs and we've been working for quite a while to reposition our graphics focus and in fact commercial printers probably flat to even slightly up year-over-year when you look at just the commercial printing that's going on.

I just have two questions. The first one is, in the last call you mentioned that some of your paper volumes are fixed on contractual terms and I had around 50% percent of DWP for a fixed - at a specific rate.

Is this still the case and then what rate are those volumes expected for this quarter? And then the second question would be, in terms of your coated paper volumes as well, those also had what was mentioned was in periods of when the pulp prices were rising you weren't able to sort of at the same rate offset the higher pulp prices with higher coated paper prices.

Is that still the case and would it be the case should in this type of environment where we're seeing pulp prices falling, you would actually be able to hold on to the prices higher and benefit from the lower pulp prices?

On the dissolving pulp, we - a large proportion of our selling price is indexed off the CCF dissolving pulp in China. And typically they run all their price quarterly in arrears.

So they do move as prices move but as I said in quarterly arrears. On the coated paper, that comment was specifically related to Europe and predominantly on the real side and specialty.

Berry, you want to add to that?

Very quickly, Steve. On the real side they tend to be 6 months contracts on the whole.

They do have a form of linkage to pulp prices. There's no formal index but they do reflect movement of pulp prices.

On specialities, these tend to be much more annual contracts for about half the business and it is true that they do not move in line particularly with pulp prices. So that does mean that when the pulp prices go down, these prices are more stable, so you should get - you should see a higher margin when those prices go down.

On graphic paper, the 7% to 8% decline you expect for 2019, is that both for U.S. and Europe?

Yes. And that's what our estimates are giving us and it's - we've seen independent industry experts come out with similar numbers.

How does that compare to full year 2017-2018, what was that number for the year that just passed?

Yes, what you see - if you go back 2 years, it reduced dramatically the rate drop and in fact it leveled off. And then in the early part of 2018 it was lower single digits but as I say, it accelerated towards the end, and December was particularly tough because that was the double digit decrease that we saw.

In terms of the pulp integration, you talked about - it sounded as if it will be merely debottlenecking of the existing sites rather than any acquisitions, is that fair to say?

We look at all our opportunities. Our focus at the moment is obviously internally.

The same point I made on dissolving pulp earlier that pulp cycle is against you at the moment and these assets are very expensive. So with that as a background our predominant focus would be internal.

And does that tie in your view is that for paper pulp - the prices although they have come down slightly in recent weeks that it still will be at high levels we have seen for the past couple of years going forward?

Look, based on the industry experience and the market commentators that we see out there, the expectation is that prices for paper pulp will continue to be high. Obviously it will be ultimately determined by market forces, but at the moment there's been a little bit of a decline but we don't anticipate a significant reduction.

When you say bit of decline, can you give it in percentage terms how much is that decline?

Well, look, some of it is public but you you've see declines on the hardwood front or in the magnitude over the last couple of months well depending on whether you're in China or elsewhere. But between - well, $50 in the U.S.

and China - sorry U.S. and Europe and a little bit more in China.

You already said you were 50% integrated in Europe. And in - I think at some point you were actually as a Company, as Group, you were neutral but I guess with the latest conversions for the Group as well, you are short, which regions if you can give us a breakdown of which region is integrated by how much in paper pulp?

Yes, I mean obviously overall we're long dissolving pulp and then with short paper pulp. So if you look at overall economically and you believe that in the long-term paper pulp prices and dissolving pulp prices are correlated, you do have a natural hedge there.

Turning to paper pulp specifically, Europe, you're right, is about 50%. In the U.S., obviously as we ramp up there, our pulp integration percentage has declined to about 70%.

So, yes, those are the numbers. So we need to look at opportunities to close the gap there.

Okay, I understand. And lastly you already mentioned that for your bonds which the short one is callable and 2023 becomes callable in April this year.

You will be opportunistic. Is it just mathematical exercise where you can exercise the way you can be issue at and the cost to do that or you are also considering extending the maturities at the same time so it's not pure mathematical exercise?

We obviously do the math but at the same time you look at market conditions and if it makes sense to extend the maturity then you would look to take advantage of that opportunity.

And so if the markets make sense you know April onwards, it's possible that you would look to come to the markets?

Yes.

No, thank you. I want to thank everybody for joining us on the call and look forward to discussing the results at the end of Q2.

Thank you.