Acquisition of M-real Coated Graphics Paper Business 29 September 2008

Transcription

1 Acquisition of M-real Coated Graphics Paper Business 29 September 2008 This document is not an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration with the United States Securities and Exchange Commission or an exemption from registration. There will be no public offering of any securities in the United States.

2 Forward looking statements Certain statements in this presentation that are neither reported financial results nor other historical information, are forward-looking statements, including but not limited to statements that are predictions of or indicate future earnings, savings, synergies, events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors, that could cause actual results and company plans and objectives to differ materially from those expressed or implied in the forward-looking statements (or from past results). Such risks, uncertainties and factors include, but are not limited to, the risk that the Acquired Business will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected, expected revenue synergies and cost savings from the acquisition may not be fully realized or realized within the expected time frame, revenues following the acquisition may be lower than expected, any anticipated benefits from the consolidation of the European paper business may not be achieved, the ability to obtain governmental or regulatory approvals of the acquisition on the proposed terms and schedule, the failure of shareholders of Sappi to approve the acquisition or the related financings, the highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand, production capacity, production, input costs including raw material, energy and employee costs, and pricing), adverse changes in the markets for the group s products, consequences of substantial leverage, including as a result of adverse changes in credit markets that affect our ability to raise capital when needed, changing regulatory requirements, unanticipated production disruptions (including as a result of planned or unexpected power outages), economic and political conditions in international markets, the impact of investments, acquisitions and dispositions (including related financing), any delays, unexpected costs or other problems experienced with integrating acquisitions and achieving expected savings and synergies and currency fluctuations. The company undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or circumstances or otherwise. Regulation G disclosure Certain non-gaap financial information is contained in this presentation that management believe may be useful in comparing the company s operating results from period to period. Reconciliation's of the non- GAAP measures to the corresponding GAAP measures can be found in the quarterly results booklet for the relevant period. These booklets are located in the Investor Info section of 2

3 Introduction 3

4 Introduction Sappi is acquiring M-real s Coated Graphic Paper Business, one of the leading coated paper producers in Europe M-real Graphic Paper Business: Europe s No 3 in Coated Woodfree paper Europe s No 4 in Coated magazine paper 2007 Sales of 1.3 billion Drivers for transaction Imperative to fix our European business & improve profitability Consolidation in the European industry will achieve this goal We believe this acquisition will create significant shareholder value 4

5 Introduction Our Goal: To be the most profitable company in the paper, pulp and chemical cellulose sectors Our strategy is not about size, but about profit and returns One of our key strategic measures is : ROCE (as a minimum to beat cost of capital*): Profitability Cash generation Effective balance sheet structure Sappi believes that the acquisition will: Return our European business to acceptable levels of profitability & returns Provide an opportunity for significant value creation Strengthen our market leadership through a wider product offering and larger geographic footprint * Sappi group nominal pre-tax weighted average cost of capital: September 2008 = 11% 5

6 Transaction Overview 6

7 Transaction Overview Sappi is acquiring the graphic paper business of M-real for a total consideration of 750 million Sappi is acquiring all the know-how, brands, order books, customer lists, intellectual property and goodwill of the Graphic Paper Business of M-real, which includes: Four graphic paper mills: Kirkniemi & Kangas (Finland), Biberist (Switzerland) & Stockstadt (Germany) Capacity: Graphic paper* 1.9 mmt pa Distribution agreements for the output of a further two mills which remain under M-real ownership: Husum PM8 (Sweden) & Äänekoski PM2 (Finland) Capacity: 0.5 mmt pa Coated woodfree paper Sappi entered into long term supply agreements for wood with Metsäliitto and for pulp and other services with M-real M-real has plans to close 0.6 million tons of coated woodfree capacity independent of this transaction * Includes 0.3 mmt Uncoated woodfree paper; mmt = million metric tons 7

8 Transaction funding overview EUR million Sources of Funds Equity 500 Equity sources : - Rights offer - M-real to hold Vendor Note 250 Assumed net liabilities 50 Total sources 800 Uses of Funds Acquisition consideration 750 Fees and Other costs 50 Total Uses 800 Equity rights offer: Improves balance sheet ratios Will strengthen credit view of agencies Details to be provided at a later stage Vendor note Tenure 48 months Stepped interest rate Two major shareholders managing 34% of Sappi s shares agreed to vote in favour of acquisition: Allan Gray Rand Merchant Bank Asset Management 8

9 Transaction Rationale 9

10 Transaction rationale Sappi s strategy calls for a structural solution to key problems in the European coated paper market Transaction achieves required consolidation in a fragmented market Supports Sappi s position as a global leader with a focus on industry leading cost position The transaction strengthens Sappi s No. 1 position in coated woodfree paper & Sappi becomes No. 3 in coated magazine paper in Europe Synergy potential of 120 million; working towards higher internal target Sappi acquires M-real s world class brands (including Galerie Fine) and M- real s established customer base Price per ton of acquired capacity ( 400/$600) low compared to recent similar transactions, which have been priced at >$800/ton 10

11 Transaction rationale The acquisition meets Sappi s strategic and financial criteria: Increased profitability & return from synergies Improved cash flows Improved balance sheet ratios Increased customer base and consolidation of market share Maximised flexibility of capacity utilisation Expanded product and brand range Sappi believes that the acquisition will create significant value 11

12 European Coated Paper Prices Sappi estimates that a 1% price movement on the total coated paper sales of the combined new business will result in a 30 million ($45 million) movement in EBITDA. 1, Germany ( /ton) CWF 100gsm Sheets CWF 100gsm Reels LWC 60gsm offset reels 775/ton 720/ton 695/ton 400 Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Source: RISI 12

13 US Coated Paper Prices Consolidation has had a positive impact on US coated paper prices 1,100 1,000 CWF #3 60lb Rolls CGW #4 50lb Rolls CGW #5 40lb Rolls $1,085/ton $1,060/ton $1005/ton Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 (US$/ton) Source: RISI 13

14 European Coated Fine Paper Market - before Pre acquisition & independent closures* million metric tons 14 Local Demand Exports Capacity Operating rate Operating rate 100% 95% 90% % 80% 0 75% Source: EMGE; Sappi * Closures independent of transaction: M-real 0.6 mmt; Sappi 0.2 mmt & Burgo 0.2 mmt. (mmt = million metric tons) 14

15 European Coated Fine Paper Market - after Post acquisition & independent closures* 2009: Reduction of 1 million* tons capacity & 0.4 million tons of exports ** million metric tons 14 Local Demand Exports Capacity Operating rate Operating rate 100% 95% 90% % 80% 0 75% Source: EMGE; Sappi * Closures independent of transaction: M-real 0.6 mmt; Sappi 0.2 mmt & Burgo 0.2 mmt (mmt = million metric tons) ** Reduction in exports through Sappi+M-real Graphic Paper Business after acquisition 15

16 Combined entity will hold leading capacity shares in European coated paper markets Capacity * (000s tons) European Capacity Share - Coated Woodfree (000s tons) 6,000 5,000 4,000 3,000 2,000 1, ,123 4,283 3,398 2,108 2,598 2,525 2,558 1,290 1,440 1, Sappi Before M-Real Before Combined Before Sappi Estimated * ** Closure* Coated Woodfree Coated Mechanical Total (incl. Uncoated & Specialities) 3,000 2,500 2,000 1,500 1, % Sappi 13.6% Lecta 12.4% M-Real 12.1% Stora 11.9% Burgo 10.9% UPM 5.1% Arjowiggins 23.2% Sappi Estimated ** European Capacity Share - Coated Magazine (000s tons) European Capacity Share - Total Coated (000s tons) 3,000 2,500 2,000 1,500 1, % UPM 15.0% Stora 12.3% 11.5% Burgo M-Real 8.1% 7.8% Myllykoski Norske 4.6% 4.4% 4.1% Sappi Leipa SCA 14.0% Sappi Estimated** 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, % UPM 13.5% Stora 12.1% M-Real 12.0% Burgo 11.3% Sappi 7.0% Lecta 3.9% Myllykoski 3.8% Norkse 2.9% Arjowiggins 18.3% Sappi Estimated ** * The total capacities shown on this graph includes Uncoated Graphic Paper of 0.3 mmt and Coated Speciality Paper of 0.2 mmt ** Estimated after closures independent of transaction: M-real 0.6 mmt; Sappi 0.2 mmt (mmt = million metric tons) 16

17 Brands and customer base acquired M-real Brands Acquired Sappi is acquiring all of M-real s world class brands including: M-real Customer Base Sappi will focus on retaining and developing relationships with M-real s key customers Galerie - The Choice of World Class Brands These brands are well recognised & have strong representation at major merchants 17

18 Cost position The acquisition will enable Sappi to further improve its low cost position resulting in a saving of ~ 12/per ton Cash cost*/ton ( ) Sappi Europe before Sappi Europe + M-Real Reduction in cash cost per ton of 12 equals 52 million ** ($78 million) EBITDA p.a. Source: Sappi * Cash Cost = Net Sales - Operating Profit Depreciation (after synergies achieved) ** 4.3 million tons * 12 = 51,6 million 18

19 Synergies Synergies estimated at 120m with a higher management target Five main synergy areas These are recurring annual synergies Cash savings compared to 2008 combined EBITDA baseline Further opportunity in other areas: Manufacturing Excellence and Complexity Reduction Synergies have been reviewed by AT Kearney and Deloitte & Touche a. Production recipe & capacity flexibility b. External Spend reduction c. SG&A savings d. Supply Chain improvement e. Working Capital improvement Total million Synergy phasing: 1 st 12 months 70 million; 2 nd 12 months 100 million; 3 rd 12 months 120 million One off costs expected to be +/- 30 million The synergy estimate is not a profit forecast or a profit estimate and should not be treated as such or relied on by shareholders or prospective investors to calculate the likely level of profits or losses for Sappi. Reporting of the synergy estimate complies with the accounting policies of Sappi. 19

20 Financial impact on Sappi No selling price movement included in numbers below. Price sensitivity: 1% price change = 30 million ($45 million) change in EBITDA Impact of the inclusion of synergies of 120 million ($180 million)* Incremental change Sales (no synergies included) EBITDA Operating profit Net profit Earnings per new share* ($10/share) million +1, cents US$ million +2, US cents IRR = 11%-20% based on a range of synergies from 120 million to a higher internal target (IRR was calculated pre-tax and finance cost and takes into account maintenance capex) Net Debt/Total capitalisation ratio improves by 4% post transaction * Level of synergies expected in year 3 after acquisition; The synergy estimate is not a profit forecast or a profit estimate and should not be treated as such or relied on by shareholders or prospective investors to calculate the likely level of profits or losses for Sappi. Reporting of the synergy estimate complies with the accounting policies of Sappi. ** Earnings per new share ($750 million ( 500 million) / $10 = 75 million shares) not rights adjusted; /$ =

21 Sappi s acquisition history Tons (000 s) 6,000 Sappi has a successful track record of growth through acquisition in both Europe and the US 5,000 4,000 3,000 Sappi has extensive experience in successfully integrating acquisitions Existing Sappi fine paper capacity* Acquired fine paper capacity* 2,000 1, UK Operations 1992 Hannover Papier German # SD Warren US # KNP Leykam European # Potlach 2008 M-Real Graphic Paper * Includes coated woodfree, coated magazine, uncoated woodfree & coated speciality paper capacity 21

22 Description of Assets Description of assets acquired 22

23 Assets & businesses acquired Annual production capacity (kt) Sappi Europe Mills Paper Pulp Alfeld, Germany Blackburn, UK Ehingen, Germany Gratkorn, Austria Lanaken, Belgium Maastricht (1), Netherlands Nijmegen, Netherlands TOTAL 2, (2) Annual production capacity (kt) M-real Mills Paper 1. 8 Biberist, Switzerland Kangas, Finland Kirkniemi, Finland Stockstadt, Germany Capacity acquired 1, Husum PM8, Sweden Äänekoski, Finland 200 Pulp (2) Gohrsmühle, Germany Hallein, Austria TOTAL 3, Planned to be shut down Will remain under M-real s ownership and the output will be sold by Sappi on behalf of M- real under distribution agreements. Notes 1. Only Maastricht PM5 machine to be closed resulting in a reduction of 70Kt of coated woodfree capacity 2. Mechanical pulp 23

24 Mills to be acquired Kirkniemi Mill Finland Coated papers for web (reels) printing Products are part of the well recognised Galerie stable of brands: Galerie Lite; Galerie Brite & Galerie Fine 3 Paper machines Capacity of 740,000 tons of coated magazine paper p.a.; 338,000 tons of mechanical pulp p.a. Produces 295 MWh from leased power plant Kangas Mill Finland Produces Galerie Silk, a coated magazine paper Capacity of 210,000 tonnes p.a. 1 Paper machine rebuilt in 2001 Stockstadt - Germany Produces coated and uncoated fine paper for sheet fed printing Pulp integrated and own power plant Capacity of 210,000 tons coated woodfree paper; 210,000 tons of uncoated woodfree paper; 170,000 tons of chemical pulp; 2 Paper machines Biberist Switzerland Produces coated fine papers for the graphic arts industry & uncoated fine paper mainly for office use Capacity of 430,000 ton of coated woodfree paper & 75,000 tons of uncoated woodfree paper 3 Paper machines 24

25 Coated paper production to remain with M-real Sappi entered into distribution agreements for the output of the following mills: Husum PM8*; and Äänekoski PM2 Husum PM8 and Äänekoski will continue to produce coated woodfree paper & remain under M- real s ownership. Sappi will sell the paper on a commission basis on behalf of M-real. Husum PM8, Sweden Annual capacity of 285,000 tons of coated woodfree paper Mainly for magazine paper market Products: Galerie Fine Gloss ( gsm) coated woodfree paper with high brightness, smoothness and improved opacity Sappi has the option for five years to acquire the coater at Husum Äänekoski PM2, Finland Produces coated woodfree art paper on one paper machine, under the brand name Galerie Art Annual capacity 200,000 tons * PM = Paper machine 25

26 Wood & pulp supply agreements Wood Supply Agreement Metsäliitto will procure wood and sell to Kirkniemi at market price as follows: Evergreen with a minimum term of 12 years; notice period 3 years; 100% of Kirkniemi requirement Wood to Stockstadt to continue under existing arrangements Pulp Supply Agreement M-real supplies 620,000 tons of market priced pulp; Duration : Evergreen with minimum periods of : 5-8 years to Kirkniemi and Kangas (Finland) 3-5 years to Biberist (Switzerland) and Stockstadt (Germany) 26

27 Conclusion Why are we doing this? We believe this transaction will fix our European business: deals with the primary structural issues through consolidation improves our profitability through synergies increases our leverage given improved supply/demand dynamics provides a platform for future growth 27

28 Supplementary Information 28

29 Coated Paper End Use Western Europe Coated Woodfree Coated Magazine 68% 3% 9% 20% Commercial print: Catalogues 10% Brochures 20% Direct Mail 25% Inserts 17% Posters & Banners 20% Other 8% 46% 4% 50% Commercial Print Books Magazine Other Commercial Print Magazine Other Source: RISI, Pira Int. 29

30 World Capacity Share Coated Paper Market Tons % 8.8% % 7.2% 6.9% % 5.4% 5.2% % 3.9% 3.1% 2.6% % 1.8% 1.8% 1.7% 0 UPM Sappi NewPage Stora Burgo M-Real APP Nippon Oji Lecta Verso Myllykoski Hokuetsu Arjowiggins Norkse Sappi Est. * Europe North America Asia & ROW * Estimated after closures independent of transaction: M-real 0.6 mmt; Sappi 0.2 mmt (mmt = million metric tons) 30

31 World Capacity Share Coated Woodfree Tons 000 4,000 3, % 12.5% 3,000 2, % 2, % 1, % 5.2% 5.0% 4.8% 4.8% 4.5% 4.5% 1, % 2.7% 1.7% 1.7% 1.6% 0 Sappi APP NewPage Stora Lecta Nippon UPM M-Real Burgo Oji Hokuetsu Arjowiggens Verso Hansol Mitsubishi Sappi Est. * Europe North America Asia & ROW * Estimated after closures independent of transaction: M-real 0.6 mmt; Sappi 0.2 mmt (mmt = million metric tons) 31

32 World Capacity Share Coated Magazine Tons 000 3, % 2,500 2,000 1, % 8.5% 6.8% 6.3% 7.5% 1, % 4.4% 4.0% 3.8% 3.4% % 2.6% 2.4% 2.3% 1.5% 0 UPM Stora NewPage Burgo M-Real Myllykoski Norske Verso AbitibiBowater Nippon Oji Sappi Leipa SCA Chenming Sappi Est. * Europe North America Asia & ROW * Estimated after closures independent of transaction: M-real 0.6 mmt; Sappi 0.2 mmt (mmt = million metric tons) 32

33 End