Sappi Limited's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Sappi Limited (SPP)

Q2 2012 Earnings Call

May 10, 2012 9:00 am ET

Executives

Roeloff Jacobus Boëttgerr - Chief Executive Officer, Executive Director and Member of Group Executive Committee

Alexander van Coller Thiel - Member of Group Executive Committee and Chief Executive Officer of Sappi Southern Africa

Barry John Wiersum - Chief Executive Officer of Sappi Fine Paper Europe

Mark Gardner - Chief Executive Officer, President and Director

Analysts

Caroline Learmonth - Barclays Capital, Research Division

Lars Kjellberg - Crédit Suisse AG, Research Division

Nishal Ramloutan - UBS Investment Bank, Research Division

Sean Ungerer - Avior Research (Pty) Ltd.

Ross Gilardi - BofA Merrill Lynch, Research Division

CJ Baldoni

Kevin J. Cohen - Imperial Capital, LLC, Research Division

Nitin Dias - JP Morgan Chase & Co, Research Division

Presentation

Operator

Good day, and welcome to the Sappi Limited Second Quarter Results. [Operator Instructions] Please also note that this conference is being recorded. I would now like to hand the conference over to Roeloff Boëttgerr. Please go ahead, sir.

Roeloff Jacobus Boëttgerr

Thank you very much. Good morning, and good afternoon to you ladies and gentlemen, and thank you very much for dialing in to our second quarter results presentation. If I could, as usual, draw your attention to the second slide forward-looking statements and Regulation G disclosure requirements.

Moving on to Slide 4, the quarter results. Profit for the quarter, $58 million, a big improvement on the equivalent quarter year ago. Consequently, also, earnings per share at $0.11, and taking it on a year-to-date to $0.20 a share. Cash generation for the quarter strongly in line with the equivalent quarter a year ago at $91 million. And our net debt, despite quite a lower CapEx in terms of our projects, at $2.1 billion.

What's intriguing to us is that our performance, particularly for Europe, has been much improved based not really on market conditions, but mostly the cost savings that we've implemented in that business. The chemical cellulose business continued to perform very strongly during the quarter.

Moving on to Slide 5, the financial summary. I think here, with our guidance through the slide in detail, we all have a -- it's a story of the top line, generally under pressure in terms of both volume and price. But the bottom line, when one looks at margins and the profitability, fairly good. And that on the back of, I think, an improved business in terms of competitiveness and cost base. That, to us, is pleasing, and we think sustainable going forward.

On Slide #6, the operating profit development. The good thing was the fourth consecutive improvement in operating profits. Not at the level where we want it to be, but it's a different business to the one that we completed before, and in our opinion, a higher-quality business with bigger prospects.

EBITDA, on Slide 7. Very much a similar thing, with good prospects to improve on that going forward. Earnings versus the prior quarter slide that most of you probably are familiar with. Not much to say about this. Adjusted EPS pricing and basic EPS $0.11 for the quarter versus the $0.09 and $0.07 the previous quarter with a few adjustments during the quarter, as we actually planned to have.

We look at our divisional businesses. So geographical businesses start at 10%. For us, the most pleasing fact of the year is the European business now achieving our targeted margins of above 5%, on the back of our aggressive intervention in that business. Because, as you all know, we weren't much helped by either volume or price in that business; it's more cost strength. North American business margins, improving. Not yet at a level where we want it to be, but certainly much improved on the previous quarter, and that's the average for the quarter. The -- it continuously improved during the quarter. At the end of the quarter, it was close to the double-digit numbers that we got used from that business. South African margins decreasing on the back of a stronger rand and pricing pressure, demand pressure particularly on the Paper business in South Africa. Chemical cellulose continued to perform very well.

Moving over to Europe, on Slide 11. Operating profit is up quarter-on-quarter, as well as year-on-year. Much improved cost base for this business, and the overall quality of the business has certainly improved. Market conditions remained challenging. Prices were generally lower, but despite that, margins were up. The business also continued to perform very strongly in terms of cash generation, and generated more than half of the total group cash generation for the quarter, which is in line, in fact, with historical performance from a cash perspective. But it's now falling to at least the operating and net profit.

In North American business on Slide 12. Much improved operating performance, but not yet at last year's levels or the levels that we're targeting. Margins have improved, but as I said, some way to go to get to the 10% plus. Production efficiencies and liabilities improved significantly throughout the quarter, and indeed we were still experiencing a little bit of startup issues during the beginning of the early weeks of the second quarter. Pulp prices has the biggest effect on this business, and although it has improved slightly, if I compare this quarter to the equivalent quarter a year ago, pulp prices are a lot lower. And that has put pressure on our margins. The casting and release business enjoyed improved prices and volumes during the quarter, particularly in the Chinese markets. Paper prices and volumes under pressure, but we have seen that price is now moving up. Here at Sappi, we've announced further price increases, but not only us, but most of the players in the North American markets. And indeed, that's the pace for Europe where paper price increases have been announced and by just about every player in that market.

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