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Sappi Limited (NYSEMKT:SPP)

Q1 2012 Earnings Call

February 08, 2012 10:00 am ET

Executives

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

Mark Gardner - Chief Executive Officer, President and Director

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

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

Mark Richard Thompson - Chief Financial Officer, Executive Director and Member of Group Executive Committee

Analysts

Caroline Learmonth

Lars Kjellberg - Crédit Suisse AG, Research Division

Campbell Parry - Investec Securities Ltd., Research Division

Sean Ungerer - Avior Research (Pty) Ltd.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Bill Hoffman

Tarek Hamid - JP Morgan Chase & Co, Research Division

Ross Gilardi - BofA Merrill Lynch, Research Division

Unknown Analyst

Roger Williams - Centaur Asset Management (Pty) Ltd

Operator

Good day, and welcome to the Sappi Limited Q1 2012 Results. [Operator Instructions] Please also note that this conference is being recorded. I would now like to turn the conference over to Roeloff Boëttgerr. Please go ahead, sir.

Roeloff Jacobus Boëttgerr

Thank you very much. A very good morning and a good afternoon to everybody, and thank you for calling into our Quarter 1 2012 results presentation. I'd like to draw your attention to the second slide, the forward-looking statements and Regulation G requirements.

Starting on Slide 4 with the Quarter 1 2012 results summary. Profit for the period was $45 million, the equivalent quarter a year ago at $37 million. These results, I think, are characterized by the fact that there have been very few -- a few special items. Earnings per share, USD $0.09 compared to $0.07 for the equivalent period a year ago. Sales were down, but margins were up sequentially. Operating profit, excluding special items, $100 million versus $157 million in the equivalent quarter a year ago. That quarter's results been [indiscernible] quite substantially by the fact that, that quarter included an additional week, and [ph] this presentation, when you do a compare quarter-on-quarter also of the operating units, it is important to note that, that quarter-on-quarter a year ago was benefiting from that from additional week. But I won't harp on that going forward.

Net debt of $2.175 billion are up $75 million on seasonal working capital increase as it remains within our targeted range and is not where we want it ultimately to be but very much in line with where we thought it will be at this point in time. And I'll talk more about that later.

The European businesses' performance benefited from the restructuring and cost reduction actions that we've implemented. We've targeted $100 million per annum, and we are at that run rate in the first quarter. In other words, we did see a saving of $25 million in the first quarter.

Our South African chemical cellulose business performed particularly well and achieved the highest operating margins in 3 years.

Our North American business was negatively affected by higher pulp prices and, very important piece, our technical and reliability issues, which we've experienced at our Somerset pulp mill of a once-awful nature, which will not repeat itself going forward.

And looking at the operating profit, excluding special items, [indiscernible] graph on Slide #6. You'll see that we've now had a third quarter in a row improving operating profits, not at the levels where we want it to be, and we are expecting this trend to continue into the second quarter as we gain momentum with the actions that we implemented in our business.

The EBITDA trend on Slide #7, very similar, going up from 3 quarters ago of $164 million to $194 million. But we've got to get back to the EBITDA numbers of $200 million-plus, $220 million-plus soon.

Moving on to Slide #8, dealing with the earnings versus the prior quarter. We -- here, we're talking about adjusted earnings per share. We've had a very tough quarter in our fourth quarter last year, with all the restructuring charges and asset impairments leading to a $0.02 a share versus the $0.07 a share for the first quarter.

Moving then on to the divisional overviews, and I'm referring you to Slide #10 with the divisional operating margins. Our South African business returning to margins that is more in line with our thinking. But I need to point out here that most of that margin was produced, or more than the margin that you see there being produced by the chemical cellulose business as the paper businesses are still not performing at reasonable margins in South Africa. They're improving but still very, very low, and the chemical cellulose margins in the high 20s. Therefore, a lot of upside to the South African margins once we fix our paper businesses, and that's in a process of happening.

[Indiscernible] our European margins improving but still not at the levels where we want them to be. We said to you that we believe margins 5%-plus would be acceptable to us, but we are expecting further improvement in the margins from Europe going forward despite market conditions that will remain, in our opinion, tough in that region.

North American margins coming down to levels lower than what we've seen them in quite some time, most of that, or a good proportion of that reduction in margin as a result of once-over reliability issues in our Somerset Mill. As I said, that's been resolved. Pulp prices certainly also negatively affected those margins. We expect margins to grow quite significantly in the coming quarter but not to the 10% area yet as long as pulp prices remain as low as they currently are.

Moving then on to Europe more specifically, and we're now comparing the quarter 1 of 2012 versus the same quarter a year ago. We've seen volumes down. No surprise about that at all because the market has been fairly tough. Prices have also moved down, but costs have moved down at a more rapid rate than those 2 combined with the net effect of the underlying business in Europe indeed being stronger than the first quarter of the previous year. That, I think, is important to point out because at first glance, it appears as if this business did not perform better than the covenant period a year ago. But the underlying performance of the business was much stronger because the effect of that extra week was indeed quite significant in our European business and, at that point in time, prices were still -- and volumes were bigger [ph].

We benefited from the cross-selling of the products to other mills following the closure of the Biberist Mill, and that was very successful. Our customer service certainly improved, and the way we serve our customers and our [indiscernible] have been running full in a market which was down, obviously benefiting obviously from the Biberist closure as well. And then we are happy to say to you that the cost reduction has been successful, and we're running at that run rate. We need to do more, and we certainly are committed to further improve on that.

I've said already quite a lot on the Sappi Fine Paper North America, North American performance on Slide #12. Volumes were down. Prices were down, mainly pulp-related. Our Paper business performed very well and continued to perform well. I don't think it is a surprise to anybody that pulp prices have been under pressure. Costs were up, and we're talking input costs, not the costs under our own control. And that's been very well managed. And the net result of that, the operating profit moving down. We do expect that to improve quite significantly in the second quarter. But as I said before, we won't achieve those 10%-plus margins with pulp prices being where they are at the moment.

Our South African business, 2 distinct areas here that's worth spending a bit of time on, on Slide #13. The Paper business, as we've seen, volumes being down on the previous year. Prices are -- here [ph] did move up, but costs moved up quite significantly and we're talking more input costs here. The benefits of our restructuring, which is going well and according to plan, will only materialize as from our third quarter or second half of the financial year. It's important, again, just to remind you that the costs related to this restructuring have been accounted for in our previous financial year, and we will not see additional charges. And when I talk about the actions they -- we have now finalized the restructuring in terms of the administrative, accounting and administration areas of our business. What remains is in the operating units and, in particular, the closing of the pulp mill at our Enstra Mill, the kraft pulp mill at Tugela and the closing of our paper machine at our Tugela Mill. The benefits of this will be $30 million-plus per annum, and we should start getting that from the second half of the financial year, as I say.

Chemical cellulose business, volumes were down not because of that -- demand [ph] at all. So it had to do with some delays in shipments of product as a result of issues in the harbors, and we also had some bit of production issues. Prices, well, it was a good. Demand was very strong, and costs are coming down. The rand-dollar exchange rate plays a major role here. And although we've seen pulp prices coming down, it was more than compensated for by a weakening rand. Where we are at the moment? We've seen a strengthening rand but also an increase in pulp prices. So we expect this business to continue to perform fairly well.

Moving on to the strategic focus. And I'm not going spend time on Slide #15 with the 4 key elements to our strategy, which we've been explaining for quite some time. I'd rather take you very quickly to how we are, in our opinion, doing in terms of giving effect to the strategy and delivering on it.

In terms of optimizing the performance of those businesses that are performing reasonably well, we have strength somehow in our North American business, as I've alluded to. Some regions, market-related problems [ph] are under our control. Those under our control, we believe we've dealt with, and we'll see the improvement coming through in the second quarter.

Chemical cellulose, strong order book. The mill is running very well. We've got long-term commitments for our production at that mill. But also, and I'll talk later about that for the expansions that we're busy working with.

In terms of fixing our underperforming businesses, we believe we've made very good progress with the fixing of our European business. That's a job that is continuous and will continue in a tough market. But the capacity management following the Biberist closure certainly had a positive effect and the Äänekoski closure of recently also will have further benefit in terms of capacity. Solid performance on our cost reduction, and we have a number of other items in areas which we're working on to further improve that business. We're obviously dependent on market conditions, but, looking forward, we expect the performance of this business to continue to improve meaningfully in the second quarter with what we now know about the market.

Our South African Paper business, that's a business that's consistently underperformed for the last 2 years. Certainly, we are seeing improvements in many, many areas of that business, but we will only start getting the real benefits from our third quarter going forward. A strengthening rand will put a little bit of pressure on this business because it make imports more competitive, but the rand is still relatively weak compared to what it was a year ago and we simply don't know where the rand will be going. These restructuring benefits will not only have cost benefits but certainly also in terms of our product line and the way we serve our customers. That's not included in the $30 million that I'll be talking about.

In terms of investing for future growth, we'll make investments, $500 million, over a 2-year period into our Cloquet and Ngodwana mills. That's going really well at this point in time. We can report that we're on time, on budget and looking forward to start up as planned and that we're also very satisfied with the long-term commitments for those volumes coming from those mills at this point in time. And that also is going according to plan. We are more convinced that the mills will be very competitive from a cost point of view, and I think that's very relevant given the number of announced additional capacity that we'll -- announced capacity additions over the next year or 2. And we believe that we will be certainly in the lowest-cost quartile with all our mills for chemical cellulose.

Specialty businesses in both our North American and European businesses are going well, and we're growing both those businesses. And we'll continue to do so, but that would not require major CapEx in the near term.

Forestry resource, a very important one for us, and we're continuing to look at opportunities to increase on that.

We are continuously looking at synergistic energy projects. What we mean by that, it's only in areas where we know mills will have a long life, where we've actually cut [ph] the operation of those mills and we -- would not result in major capital expansion for us. But there's nothing on the cards of major size at the moment.

Moving on to our fourth pillar of our strategy, which is our balance sheet and liquidity. This is an area which will get additional focus from us going forward in that we feel the other 3 areas of our strategy is well under control and we're going to try to reduce -- not try, and we're actually aiming and confident that we'll be reducing our debt to below, and I'm talking net debt here, the $2 billion mark post-completion of Ngodwana and Cloquet projects. And in fact, that target is within 18 months from where we are now to be at that level. Thereafter, we'll continue to work hard in reducing our gearing to new order of magnitude. And an example of one those measurements would be net debt-to-EBITDA.

I'm not going to talk a lot about our maturity profiles, but we feel comfortable that the structuring of our debt and the debt structure is a healthy one. The first maturities of any significance is the 2014 bonds, and that's an important metric that we need to deal with when the time is right, but it's also an important opportunity for us to further reduce the cost of our debt. And I think you'll see in our -- in this one that [ph], that has come down quite significantly following our last year's restructuring and repayment of debt. The slides -- on Slide 21 deals with that maturity profile in further detail, and I'm not going to go through that.

Moving then on to our outlook in the last 2 slides of this presentation. Market conditions remain uncertain, but we are indeed experiencing reasonable operating rates in all our major markets and operations. The focus is on delivering the benefits of our restructuring cost reduction actions announced and implemented during the -- or of which implementation started in the fiscal 2011 year.

Our European business continued to realize the benefits of our ongoing plans, and we expect further improvement at current demand levels for our second quarter. The North American business is to improve on higher pulp production, and I'm now referring to the problems we've experienced at our Somerset Mill. Greater demand for casting the Release Paper. We did see some differences [indiscernible], but that has actually recovered quite well. And there's a potential for our market pulp prices. Indeed, we are seeing pulp prices moving up now.

The SA restructuring proceeding as planned. As I said here, the benefits coming through in our second half. Demand for chemical cellulose remains relatively strong. And as I said, our expansion plans remain on track.

I've mentioned the debt target of below $2 billion. Our net cash generation is very important to us, and we actually expect our cash generation to turn positive for the full year, and that is after the CapEx, including these major expansion projects, given constant exchange rates, and, in fact, for our debt to start reducing coming in [ph].

Provided there's no deterioration in market conditions, we expect a sequential improvement in our operating profit, excluding special items. And, as we've have pointed out to you, it is our aim to minimize special items in this year and keep our results clean so that the wins that we do have in our operating profit falls through to the bottom line in terms of earnings.

In summary, and this is not on the slides, the way we, as a management team, see our business is that we've effectively turned around the ship in the right direction now to a large extent. There are still some fine-tuning to be done. What we now need to do is to gain momentum in doing what we are doing. We are very committed to accelerate value creation for our shareholders through improved profitability, stronger cash generation and a greater debt reduction program despite the additional CapEx to position ourselves also for growth. That brings me to the end of the presentation. I have all my executive colleagues around me at this table to answer your questions to best of our ability. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Caroline Learmonth of Absa Capital.

Caroline Learmonth

Three questions please. On the pulp issues in North America, can you just explain a little bit more about why these issues were once-off and they won't be happening again? And then secondly, on release liner, you mentioned that as part of your potential strategic growth areas. So just explain your strategy there given that you did suffer weak market conditions in the fourth quarter. And then just finally on dividends, I've seen some comments on the newswires around dividend policy. Can you just give us to your formal views on dividends?

Roeloff Jacobus Boëttgerr

Well, Caroline, you have an ability to always be first in with the questions. We're very happy to answer them. Pulp in North America, and Mark Gardner [indiscernible] anything, will give it to you in much more detail. We'll try not to go into too much detail. But essentially, and I'll give him an opportunity now, with the plant shut and on start-up, we did experience some technical matters and -- which delayed the start-up of the mill to produce pulp. That resulted in us having to buy in market pulp at a much higher cost. It did not affect our paper production, but it did affect the input costs and variable costs in our mill quite significantly during the quarter. That mill has stabilized and running well. Mark, would you like to very quickly just mention what it is that we've had to deal with without going into massive detail?

Mark Gardner

Yes. We went in through our annual outage at Somerset, which we take in October. Then coming out of the outage, we ran into a problem with our line count, which held the pulp mill back considerably on it's productivity for a couple of extra weeks, basically the entire month of October. That problem was corrected, and it is behind us. We then ran into some problems with the recovery boiler, which impacted us in the month of December, carrying through December into January. That has also been corrected and is now behind us.

Roeloff Jacobus Boëttgerr

Thanks, Mark. And just your question on release business. Again, in North American business here, what -- it is a business where the markets are growing. We are the market leader. We are as excited about that business as we've ever been. Demand in all our markets has indeed been a very good throughout except in China, where we've seen distinct decline for a period of about 1.5 months. There was certainly a situation where we stopped when they were pretty high. That has changed completely, and the market is back to where we've seen them. We did pick up in all our businesses that there was a period where demand -- there was a lull in demand in China. And the reasons that we believe was stocking. It was, I think, uncertainty on certain policies and credit availability to customers. That appears to have been resolved and, as I said, order books are strong. And I need to remind you that the margins remained exceptionally high throughout that period. In terms of dividend, I think there has been some deductions here. We have not changed our minds in any way about dividends. We've always said that we would like to resume dividend payments as soon as we believe it is prudent and when we are sure we will be able to pay dividends on a reliable and predictable manner. The question for us is in terms of shareholder wealth creation, and I know this is debatable as well, is, is it better to repay debt to a level that we believe is reasonable for this company? Or do you start paying dividends immediately? And it is our opinion that not until we reach the target that we set ourselves of debt, netted, being below $2 billion does it make sense from a value creation point of view to commence dividends too soon. We believe that in terms of our performance and what we've done to align our business with market conditions, that we're in a much stronger position that our results, given market conditions, the way they are, and profitability should continue to improve. And we're also quite confident that we will reach those levels of below $2 billion within 18 months. So we're still keen to resume dividends as soon as it makes sense and as soon as we know that we can pay them reliably. I think the $2 billion debt mark is a good guidance when we can start looking at that. But it's not a decision or a policy.

Operator

Our next question comes from Lars Kjellberg of Credit Suisse.

Lars Kjellberg - Crédit Suisse AG, Research Division

I got 3 questions as well. First of all, when you're talking about the European cost take-out programs, you indicated that you were actually at the run rate of $100 million in fiscal Q1. So if you want to talk us through what you expect then in the balance of the year? Second question relates to maintenance. Obviously, they can burden a quarter quite substantially. Can you give us any sense of your major maintenance works and when they fall and not which quarter they -- we should expect them in? And finally, CapEx levels this year and next, if you could share that with us, please.

Roeloff Jacobus Boëttgerr

I'm going to answer the CapEx question, and then I'm going to hand over to Barry to talk to you about the European just so you can listen to somebody else as well. In terms of CapEx, we've made it clear that there's 2 major projects, $500 million of CapEx over a 2-year period roughly spread between the 2 years. So one can expect during this current financial year that $253 [ph] million additional capital to our normal CapEx. And total CapEx over the 2-year period in the region of about $900 million. So for the 2 years, roughly $450 million per annum, but we do have plans to see wherever we can actually reduce that in order for us to come in at a greater volume that we've now set ourselves in terms of bringing debt down to below the $2 billion level good within 18 months. And the assurance I can also give you, we will not cap CapEx at areas where it will affect our ability or where we, so to speak, steal from the future. That is never the intention. But we do believe there are areas where we can actually improve on our CapEx. I think the important thing here is with that average of $450 million per annum, we believe we can bring the debt back down to below the $1.8 billion. Barry, just on the run rates in terms of our cost.

Barry John Wiersum

The run rate that we look at is a those improvements which are not due to input price movements. So we look at influences of real sustainable improvements. And from that perspective, the current run rate would indicate that on the fixed-cost side, about 80% of the improvement is in, and on the variable costs side, about 60%. So there is still a substantial amount to go, which means that the current run rate indicates that we will certainly hit the $100 million. Looking at the improvements still to come, it looks as if we will go over the $100 million by a fair degree. How much exactly, I'll tell you at the end of the year.

Roeloff Jacobus Boëttgerr

Just in terms of maintenance, yes, we try to separate our share of maintenance and planned shuts equally over the year, but that's in -- at areas terms [ph] of impossibility. We have to deal with summer season in the Northern Hemisphere and other issues, now also influenced by the conversions of our mills. But our third quarter is normally the quarter where we take the biggest heat traditionally as a result of all of these. And again this year, we'll see that quarter 3 will be the one where we're the most affected by the planned maintenance shuts. Nothing major in this coming -- in the quarter we're in, and much less also in quarter 4.

Lars Kjellberg - Crédit Suisse AG, Research Division

Okay. And just to clarify, Barry, I mean, when you talk about 80% of the fixed costs and 60% of the variable. What number are we then looking at in terms of those 2?

Barry John Wiersum

I'll tell you at the end of the year when we get there.

Roeloff Jacobus Boëttgerr

Now if you -- we don't want to go there, but what we can say to you is the $25 million. We didn't give you the structure between fixed and variable, and we're not talking here about benefits in terms of pricing we got from input costs. This is internal actions we've taken. On that, at that run rate, we'll get to the $100 million. And as Barry said, on both areas, we believe we can do greater, looking at where we are today. So the $100 million should be higher.

Lars Kjellberg - Crédit Suisse AG, Research Division

And then finally, the Äänekoski closure from the mill, of course, how is that going to impact you? If you just want to go through the metrics of how it will actually impact you and the benefit of that for you.

Barry John Wiersum

The Äänekoski volumes are split between the M-real plant at Husum. So they -- the real business goes there, and the sheet business has been transferred to our Gratkorn Mill in Austria. Some business will go to other suppliers, but we have retained about 75% of the business at this point in time and we're comfortable with that.

Roeloff Jacobus Boëttgerr

Essentially, it is a -- the best reduction in Europe with us loading on those at lower-cost operations. And obviously, we now own the business.

Operator

Our next question comes from Campbell Parry of Investec Securities.

Campbell Parry - Investec Securities Ltd., Research Division

Just 2 questions. Firstly, I want you to just talk very briefly about the recent price dynamics in northern [ph] pulp or viscose staple fiber. And basically, in terms of recent price declines, whether that's driven by the China phenomenon that, Loff, I think you just spoke of about or is this has to do with India's cake process or the new supplier we saw come in stream in the December quarter? And, I mean, secondly, on your term debt, your 2014 term debt, I don't know if Mark's in the room, and -- but assuming the world economy recovers and interest rates begin to rise once more, are you confident that you will be able to refinance that, if need be, at an equal or more favorable rate? And are you doing anything maybe to lock in your current interest rate on that term debt?

Roeloff Jacobus Boëttgerr

Just in terms -- and Alex is sitting here as well. In terms of the VSF pricing, I think VSF pricing is a function of demand. It is a function of supply. It is a function of cotton prices and availability of cotton in the market and other supplies and, to a certain extent, also a function of chemical cellulose pulp supply and its price. So it's a complex issue. The absolute demand has been fairly strong right throughout this period. We did see a lull in demand of VSF for a short period but not to the extent that it affected at all chemical cellulose pulp. We do believe that for the next year or 2, that VSF and pulp prices will be lower than the very highest we've seen in the previous year. I think that's a function of capacity of cotton prices are low at this point in time and crops having been fairly good. That we've all taken into account in the decisions to bring additional capacity to market. In the longer run, we have no doubt that demand will be very strong because cotton will certainly stop [ph] being able to keep up. Cotton prices will continue to vary up and down depending on not only demand but, very importantly, crops. And if one looks at that crop failures and the volatility in weather conditions, there is no doubt in our minds that [ph], that will continue to be. And as Barry said, we have seen lately an upwards movement both in cotton and in pulp prices. Also, stabilization, if not upwards movement, in VSF prices. Alex, is there anything you want to add to that?

Alexander van Coller Thiel

No. Let me just -- in terms of our major customers, they've been running full throughout this period. And in discussions with them, we don't see them actually changing from where they are at the moment in terms of...

Roeloff Jacobus Boëttgerr

I think what, to us, gives us also comfort is the fact that we've been going through a process now of talking to our major customers in terms of our new capacity coming to market and their commitments to those volumes. And they are very bullish about it, and we feel comfortable with what we are able to agree with it not only in the short term but even going up into the long term. So yes, we will be entering a period where there's additional capacity separating our pricing. Today, I think the main issue for us is the cost, the way we're going to settle the cost there. And there, we feel very comfortable with. In terms of the debt in 2014, as Mark can talk to you, we feel very comfortable that there is -- even if interest rates go up, then, in fact, that would mean a more liquid market and a bailable [ph] economy that certainly, from where we are at the moment, there is no doubt in our mind that it will come in lower than what we're paying in the moment, Mark?

Mark Richard Thompson

Yes, Roeloff. Even now we could certainly refinance that debt at lower than the 2 points on the 2014 bonds. But still, being 2.5 years to go, the breakage cost are very, very high still. They do reduce to a manageable level in August this year. And in August 2013, a year before they mature, they -- we can call the bonds at par. But we won't wait for as long as that, not for all the debt anyway. As regards your question about some sort of forward swap or something to lock in the rates for later, yes, well, as you know, we've looked at that. It would involve a very sophisticated derivative, which we would have to revalue to fair value. And -- but you might -- if someone come forward with an idea, you know that is reasonably simple, we would certainly look at it because it's a good idea.

Operator

Our next question comes from Sean Ungerer of Avior Research.

Sean Ungerer - Avior Research (Pty) Ltd.

Just in terms of Europe in terms of excess [indiscernible] capacity over the next 2 years or so, would we [ph] be looking at any [indiscernible] then? Or is it too premature to ask it at this point?

Roeloff Jacobus Boëttgerr

I think it's a very valid question. We've been quite vocal about the fact that we believe that, that market will -- the market will further decline. There is no doubt about that. We know there's -- our business model now and all the actions we've taken are based on that, and we want to be able to produce reasonable results given that. Will it, in the next year or 2, reduce to the extent that we feel we have to make the next move? We don't. We believe that, if we look at our cost base and what we've done now, certainly, with the market conditions as they are and a further decline, there are other people who are going to take a lot more pain than we have. We've done a lot in this business, and we are actually running full. But we're running full as a result of the actions we've taken [indiscernible] in being able to repay those customers, that one being the case going forward. And at that point in time, something's going to have to take more action. Are we quite willing to take more action? But we've done enough, in our opinion, for the time being in order to be in a position where when we take the next step, we want to be the major beneficiary and not our competitors. And indeed, we think that there are others that'll probably move before us, will have to move before us.

Operator

Our next question comes from Bill Hoffman of RBC Capital Markets.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Just a little bit further on the current markets. I just -- I wonder if you could talk a little bit about, one, in Europe. What you're looking at is a potential secular decline rates of demand over there, and then maybe comparing that to the U.S. markets and what your thoughts are for this year.

Roeloff Jacobus Boëttgerr

It's a very good question. It's something we spend quite a lot of time internally. And Barry, would like to, on Europe, just have a word? And then, Mark, what you see in the market?

Barry John Wiersum

Well, we believe that Europe is following somewhat in the way the American market has already developed because the penetration of new media -- electronic media in Europe is slower than it is in the United States and also variable from country to country. So we believe we have not yet reached the floor of the coated paper. It's very hard to tell exactly what it's going to be. At the moment, in general terms, it's quite stable, in fact, as of the last 6 months or so, but we expect that there will be some degree of further decline, probably in the second half of the year in the coated woodfree side. Coated mechanical side, equally, though perhaps a little less so since there is some degree of revival in magazine advertising.

Roeloff Jacobus Boëttgerr

Mark?

Mark Gardner

Yes. In North America, we continue to see and believe that there will be a slow decline in the coated market, much more so in the coated mechanical side and then in the lightweight coated woodfree. However, most of our assets and our product lines are in the heavyweight to medium heavyweight coated woodfree. And there, our demand is holding up very well, and we think that, that section of the market will do much better than the rest of the coated segment as we go forward.

Bill Hoffman

That is helpful. And just with regards to -- it's obviously early in the year. I just wonder if you could give a little bit more color on what the -- whether you see a normal seasonality, the seasonal weakness here early in the year. And then the second thing is just from a pricing standpoint, the dynamics of the customers. Are they becoming more price conscious here? I mean, obviously, they always are, but are they becoming more price conscious here early in 2012?

Roeloff Jacobus Boëttgerr

Well, in terms of seasonality, at this point in time, it follows -- it's actually following normal patterns. We're running quite fully along those. It's very difficult to say to you what's going to happen going forward. But the Bolivian [ph] markets are still not great, and it has been better than we thought in terms of demand to this point. Pricing, if you say our customer is price conscious, you'd have to go and look very far to find an industry where customers are more price conscious. And that remains so. If input costs start creeping up, prices will actually have to go up. And we certainly will do whatever we can to do that. But prices will only move up if demand levels are reasonable. Currency also plays quite a role. So we're not banking on much help from the market when we say that we're going to have improved results. It's more based on internal actions and in a market not deteriorating significantly.

Bill Hoffman

That's helpful. And just final question from a working capital standpoint, that December quarter is quite a significant use of cash. So I just wonder if you can walk us through the rest of the year. How much of that you get back or how much do you think your working capital will increase this year?

Roeloff Jacobus Boëttgerr

We don't -- we hope our working capital not to increase this year, in fact to reduce. We are working very hard on that. This quarter that's passed is one of our worst -- toughest quarter seasonally in terms of working capital. Normally, our third quarter is also not great. You have the shuts, and you have a number of other reasons for that. And so we don't foresee working capital to increase further. And Mark, please?

Mark Richard Thompson

Okay, next quarter, we will have some of the restructuring costs being actually payable. I think less working capital. But after that, it'll improve very strongly.

Roeloff Jacobus Boëttgerr

Very much so. So no major movements, and the trend towards the year to improve.

Bill Hoffman

That assume -- sorry, just a comment on restructuring payments. So assuming your payables will start to go back up again then?

Roeloff Jacobus Boëttgerr

Yes.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Okay.

Roeloff Jacobus Boëttgerr

But not to the extent that we think working capital in totality will go up. We -- and we want to achieve the target we set ourselves to reduce this debt down to below $2 billion within 18 months. We need to work on all the levers, including working capital, to get there. And we have plans in place to deal with every single one of them.

Operator

Our next question comes from Tarek Hamid of JPMorgan.

Tarek Hamid - JP Morgan Chase & Co, Research Division

Can you talk a little bit? I'm just following up on the last question. Just talk a little bit about some of your raw material costs, chemical and energy, both in Europe and North America, kind of what you're seeing right now versus where it was in the fourth -- in the fiscal first quarter?

Roeloff Jacobus Boëttgerr

Folks [ph], certainly, we expect them to go up, and that's happening. Chemicals, also slightly up. On the energy front, nothing at this point in time. In fact, if anything, slightly greater. Would you like to -- Alex and Mark, will you add do that?

Mark Gardner

The chemicals maybe possibly start to go down a little bit as we move through the next few quarters.

Roeloff Jacobus Boëttgerr

So no major movements. Pulp seem to be edging upwards. We're not seeing any rocketing in any of those costs. Energy, certainly not, which is positive. And then on the actions we're taking there, very simply, in our business to keep costs under control does have some positive effects also in the input pricing because we're buying more of this. Again, we're using our group buying power when we can to keep costs down.

Tarek Hamid - JP Morgan Chase & Co, Research Division

And then just going back to kind of coated paper pricing, and those in North America, your realized price was only down $4 per ton for the whole business, but, presumably, pulp was down more than that. Can you maybe just talk about the differential between pulp and coated within the North America business?

Roeloff Jacobus Boëttgerr

We never disclose that, but what we can tell you is paper price did not decline. So you want to -- then we -- our release price is flat, so you're talking pulp.

Tarek Hamid - JP Morgan Chase & Co, Research Division

Okay, understood. And then finally, you talked a little bit about the -- about some of your conversations with the customers on the new capacity that you're bringing online. So kind of any rough percentage you could share in terms of what those commitments look like now for the Cloquet Mill and the South Africa mill?

Roeloff Jacobus Boëttgerr

I think we're at a stage where we wouldn't like to disclose that publicly because we're in negotiations and discussions with many of our customers. We've set ourselves a target to, over the longer term, have commitments of -- in the region of 70%, 75%. That's very high at the moment, we believe, and, in fact, too high particularly given our cost position. But we feel comfortable that a high percentage of capacity will be added. In fact, it is already the subject of long-term agreements. I'm sorry that I can't help you with more information on that.

Operator

Our next question comes from Ross Gilardi of Merrill Lynch.

Ross Gilardi - BofA Merrill Lynch, Research Division

Roeloff, just on -- I realize you don't want to disclose too much, but what were you saying about the 70% to 75% commitments? You think that's too high of a target? Or you're saying that's where you think you'd like to get to?

Roeloff Jacobus Boëttgerr

Actually, we think having between 70% and 75% long-term contracts is a good place to be. At the moment, we're way above that. And that -- we want to develop our markets. We want to get more customers. We want to have it spread out our customer base. And with our capacity coming on at a very competitive rate, we believe we can do that. So no, we're saying that 70%, 75% would be a good target rather than having a 90%-plus where we are at the moment.

Ross Gilardi - BofA Merrill Lynch, Research Division

So 90%-plus for your existing 800,000 tons of capacity, and you think you want to be at 70% to 75%-ish for the additional 500,000 tons? Is that understanding that correctly?

Roeloff Jacobus Boëttgerr

For the global production, what is online [ph], yes. Yes, absolutely.

Ross Gilardi - BofA Merrill Lynch, Research Division

How fast do you think the chemical cellulose market is going to grow annually? I mean, not this year, but what do you think the long-term growth rate is?

Roeloff Jacobus Boëttgerr

Long term, we've analyzed this. And obviously, you want things to change your numbers as the markets go up. But we always come back to growth rates above 5% and, in fact, certain -- some of our colleagues believe, are very conservative and actually shaking their heads at me, saying it's higher. But at minimum, 5%.

Ross Gilardi - BofA Merrill Lynch, Research Division

All right. So just in that context, can you just explain something? I mean, you've got a 5 million-ton market here growing at -- I think growing 5% or 6%, which is, give it 1 million tons of demand growth over the next 3 years, and you're adding about 0.5 million tons of capacity while a lot of other are doing the same thing. So it would seem Sappi would have to take an enormous amount of market share from the other participants that are adding capacity here within the parameters of those figures. Could you just explain that or where I may be off-base or how you're thinking about it?

Roeloff Jacobus Boëttgerr

The market has grown at much higher numbers up until now than the 5% long term, which I've told you which we expect will happen going forward. So at this point in time, we feel fairly comfortable that given the growth that we've seen up until now, that overcapacity will not be as much. We've also seen a lot of the announced capacity being withdrawn or slowed down significantly because a lot of the capacity announcement came when pulp prices were sky-high and [indiscernible] prices were sky-high. And that's come down to much more what we think reasonable numbers. And in fact, we're very happy with pulp prices where they are or even lower. And I think that's proven when you look at our results of the last quarter. The other thing that is very important is we have a very high market share of this at the moment. So our aim is to grow with our existing customers, and then to also in the spot markets and other content [ph] customers to grow there. Admittedly, we need to get our fair share at a little bit or, if not more, then a little bit more than that. And we think, comparing to what we know about new capacity coming to market, we are in a position, from a cost point of view, to be very aggressive in that market, to defend our market share and intending [ph] to grow [ph] our market share and still produce very reasonable, if not exciting, profits or profit margins.

Ross Gilardi - BofA Merrill Lynch, Research Division

Just on that point, though, on the announced capacity being withdrawn, I mean, RISI is reporting about 1 million tons of capacity started up the fourth quarter. Is that incorrect?

Roeloff Jacobus Boëttgerr

I'm not going to say to you if RISI is correct or not. We look at RISI, and we take note of it. But in the marketplace, we're running full, and we're getting firm commitments for large proportions of this new capacity coming to market from existing and new customers to the extent that we feel very comfortable where we sit today that we will have 70%, 75% of all our capacity the subject of long-term supply agreement at very reasonable rates given market conditions as they are today. I think the issue is as well you need to look at delivered cost per ton, you need to look at the absolute quality of the product and where it can be used, and the ability to produce a pulp that suits the manufacturing requirements of the VSF manufacturer. And they -- I think it is not as simple as just converting an old paper pulp mill that couldn't make it as a paper pulp mill and think it's going to be a winner in chemical cellulose. And a lot of the capacity that's being load to market is exactly that. Not all. There are some very good capacity being added as well.

Ross Gilardi - BofA Merrill Lynch, Research Division

Are any of your volumes tied to spot dissolving pulp prices, any of them? Or are you just entirely pegged to NBSK?

Roeloff Jacobus Boëttgerr

I wish some of our -- whatever we sell in the spot market with respect to the spot chemical cellulose price market, not the spot VSF market.

Unknown Analyst

Yes, right.

Roeloff Jacobus Boëttgerr

It's funny at this point in time, irrelevant, as we talk today. Hopefully, going forward, a larger proportion will be spot related. And we know some will be. But now, for the time being, [indiscernible].

Ross Gilardi - BofA Merrill Lynch, Research Division

Okay. And then just on your -- my last question. On your outlook statement, last quarter, you had made a comment that you expect to be in the -- this year's trend to improve on the last year's trend overall for 2012. You made a comment about Q2 or this coming quarter hopefully being better than the one that you just recorded. But what -- do you still expect to grow for all of 2012?

Roeloff Jacobus Boëttgerr

I couldn't hear some of what you said, but yes, I'm going to answer despite it [indiscernible]. We're not giving guidance beyond our second quarter at this point in time. We had a good start to the year in our opinion, particularly at the bottom line level, and we expect second quarter to be better than the first. And if market conditions continue to be, then we are in the right way. But I wouldn't like to go and give you guidance beyond our second. Markets are just not clear enough for me to stick my neck out here and get myself in deep trouble. Lenny, I think we can take one more question before we would have to move on.

Operator

We have one further question, and it comes from Roger Williams of Centaur Asset Management.

Roger Williams - Centaur Asset Management (Pty) Ltd

Could you give us greater visibility on your volumes? Europe volumes were down 16% year-on-year. Part of that is because of the -- there's one week less. But even notwithstanding that, the volumes were down quite a lot. Is -- how much is capacity closures? And how much is the market? And how do you see your volumes progressing for the rest of the year compared to last financial year?

Roeloff Jacobus Boëttgerr

That's a good question. Barry, would you like to [indiscernible]?

Barry John Wiersum

Yes. Obviously, the week -- extra week makes a very big difference indeed for one quarter. But we did exit the uncoated business of Biberist, from the closed Biberist plant. That took a further 60,000 tons on an annual basis out of the volumes. In terms of the markets, there are certainly figures available which tell you what the markets did. We did not lose any further market share, so the rest of it is just with moving with the market.

Roeloff Jacobus Boëttgerr

Thank you very much to all of you. We do appreciate your interest and the questions. And if there's anybody who needs further information, you're most welcome to contact us and we'll try to give you answer to the best of our ability. Thank you very much.

Operator

Thank you very much, sir. On behalf of Sappi Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.

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