Good day, ladies and gentlemen, and welcome to Sappi Limited's third quarter of 2022 results conference call. All attendees will be in listen-only mode. There will be an opportunity to ask questions when prompted. If you should need assistance during the call, please signal an operator by pressing star and then zero. Please note that this event is being recorded. I'd like to hand the conference over to Steve Binnie. Please go ahead, sir.
Thank you, operator. Good day, everybody. Thanks for joining us for the call. As always, I'll move through the investor presentation, calling out the page numbers as I go along. I'm gonna start on page three, which is the highlights of the quarter, and i t's fair to say we're thrilled with the results. It's another quarter of record profitability of $371 million of EBITDA that was up on the $337 record that we made in the last quarter and, you know, well above anything that we've ever achieved before. Also well above all the analysts' expectations that we saw, their forecasts. It was built off of strong global paper markets. We obviously seen demand bounce back nicely.
And at the same time, obviously some capacity came out of the market, and that enables a situation of tight balance. And because of that, we were able to push through higher selling prices to offset the headwinds of sharply rising costs. Our variable just incidentally, and you probably picked it up from our numbers, but our variable costs were up 26% year-on-year. You know, significant headwinds. However, our selling price is up 31% to offset that. Graphics, a record quarter, with margins of 22%, and then packaging and specialties continues to grow strongly, record profitability, and margins further upwards.
So really pleased with that, with all the investments that we've been making in that space. It was obviously a quarter that began with the floods in KwaZulu-Natal, t hat also contained a number of significant annual maintenance shuts. Our three dissolving pulp mills and the Matane high-yield pulp mill as well. On top of that, we had renewed logistical challenges, you know, particularly in South Africa, post the floods. Perhaps one of the biggest highlights is our reduction in net debt, where we're down now year-on-year over $500 million, s o very very pleased with that. You know, from a year ago, we were sitting at $2 billion, we're down to $1.5 billion now, giving us a leverage of 1.4.
I would expect us to continue to reduce debt as we move forward. Slide four just summarizes the EBITDA, eighth consecutive quarter of growth from the horrible days of COVID and, as I said, to new record levels and very pleased with that performance. Moving to Slide five, which is a bridge of our earnings to last year. And the, well, the big story is obvious. Significantly higher costs. You can see the impact of pulp, energy, wood chemicals across the board, delivery costs year-on- year. But we were able to push through higher selling prices in the paper segments. The pulp, obviously we had lower volumes in the current quarter, and we'll probably talk about that a little bit more.
Obviously, the shutdowns and the floods impacting that. Slide six just puts things in perspective on the cost side. I already said earlier, year-on-year costs up 26%. This one is indexed off of, we go back to Q1 of 2020 just to really show you how things have moved, a nd the energy has more than doubled. Obviously, driven in large part by the situation in Ukraine. The natural gas, we have a lot of exposure to, and that has been in particular volatile. But it's not just that. Obviously, pulp up 41% in that period. Big rises in chemical delivery costs. You know, over this period, variable costs up 39%.
The fact that we've been able to achieve this record profitability despite these significantly higher costs is very pleasing and demonstrates that we are able to mitigate what we've experienced. Slide seven has the per-product contribution splits. Obviously a little bit distorted in the short term now because graphics are having such a strong year. And p ulp, obviously with the lower volumes and the shocks coming through in that quarter, is disproportionately lower. I would expect that to bounce back strongly in the last quarter of the year. Slide eight is our net debt leverage. Obviously, following the profits and the strong focus on cash, a significant reduction. We are now at 1.4.
We've already shared with you our initial short-term target is 1.3, and I'm sure we're gonna get there very soon. Slide nine, the debt maturity profile. Nothing, nothing in the next few years to be concerned about. The next major refinancing is securitization, but that's something that we regularly refinance, t hat's in 2024, and we'll be confident to do that once again. Slide 10 has our CapEx, i t's unchanged from prior quarters, w e're gonna come in just under the $400 million mark. Still sticking with that as a guidance for the full year. Slide 11, we like to share this because it's something that we constantly face as a challenge. The ongoing ocean freight challenges, reliability levels still low.
Prices of containers has come off their highs. However, these are market prices, but h owever, from a Sappi perspective, we typically have certain fixed prices and all that. Our year-on-year is still higher than a year ago, albeit that we're lower than these levels. But it is higher year-on-year. Slide 12, paper pulp prices, interesting to reflect. Obviously, prices were relatively high at the start of the year. You saw a flattening, a little bit of a decline, but in the last couple of quarters, renewed upward movement, which obviously affects the costs of our paper business. But other pulp prices have followed them upwards, including dissolving pulp, hardwood pulp. We do benefit on the other side as well.
Slide 13, I already mentioned that gas has been a major challenge for us, obviously linked to the Ukraine situation and the Russian situation. The graph shows you where it's come from EUR 30 up to wherever it is today. It's just under EUR 200, significantly volatile. But as I said, we have been able to mitigate much of that impact through higher selling prices. As you know, we have fixed a portion of our exposure here, but there's renewed volatility, and certainly post the quarter end, we've seen prices surge higher. TSo i is a challenge for the business as we move forward.
Then turning to the segmental, moving through them, and firstly on slide 15 is the Pulp Segment. This is a quarter which we, as you know, we did plan all our big shuts. Those went well, but unfortunately, obviously they followed the floods earlier in the quarter. For a mill like Saicor, which, as you know, is a big plant, it is. Having both the shut linked to the floods followed by the maintenance shut, clearly that created unstable conditions and meant production was challenging. And in addition to that, we post the floods, the ports took some time to get back to normalized levels of productivity. So once again, there was some delayed shipments at the end of the quarter, I think, w e did announce that 24,000 tons.
In terms of the market itself, though, market conditions are good. There is supply-side constraints in addition to our flood situation. Obviously, some of our other competitors have had challenges as well, and that's helped keep the DP prices high, a t the moment, they're over $1,200 a ton. We'll obviously benefit from those higher prices in the fourth quarter that we're in and as we move into Q1 of next year as well, i t's looking very good. The packaging and specialities on slide 16 just business doing very well across the board in all regions. Demand is robust.
We've been able to lift our selling prices to offset costs, margins improving and another record quarter. In terms of volume, actually, we were a little bit of victims of our own success because we went into the quarter with lower inventory because we sold so much earlier in the year and our machines were full, but business in a very good place. And then slide 17 is the graphics. A remarkable turnaround, obviously, boosted by initially a restocking post-COVID, but then obviously benefiting from a rebound in demand, capacity coming out of the marketplace, shortage of paper, creating the tight market conditions which supported selling price increases to offset the higher costs and enabled us to achieve these record profitability.
And then, turning to the regions, firstly in Europe, an amazing turnaround, EUR 200 million of EBITDA, substantial improvement. Obviously, facing higher costs across the board, but obviously including energy, we were able to put through higher selling prices to offset those things. Packaging continuing to be strong, enabled the profitability that you see and an EBITDA margin of 21%. North America have had a number of consecutive great quarters and it's continued once again, market's tight, and a similar story, able to offset higher costs with selling prices. In addition to that, we lot of great work done on the mix in our packaging business and in graphics, we are able to positively shift to more profitable products for us.
The U.S. graphic paper market continues to be tightly supplied, and the region made, also an EBITDA margin of 21%. And then in South Africa, a difficult quarter, fair to say. It started with the floods, obviously, that started the quarter and put us on the back foot. Yes, we were able to claim the lost production and lost inventory from insurance, but it does put you on the back foot in terms of stability in these plants.
We did have the shutdown, which, you know, in Ngodwana and Saicor, which are our two biggest mills, so that would have impacted on the volumes as well. Like everywhere else, substantial cost inflation. The DP prices, just to remind you, would have been lower than the prior quarter because of the lag impact of our contractual pricing. On the paper side, packaging strong, volumes constrained by low inventory levels were fully sold out. Then the other paper market segments all good and favorable there. As I mentioned earlier, volumes impacted by port efficiencies, and it took the port some time to normalize after the flood.
We're also encountering challenges with rail, both from Gauteng down to Durban and from Saicor to Durban as well. The rail link was washed away by the flood. We've had to transport that product by rail and raw materials coming in, s orry, transport by road. Slide 21 is our four pillars of our Thrive25 Strategy. That's what we remain focused on. Obviously, there are short-term challenges and dynamics, but ultimately we are focused on our longer-term targets, which is split across these four pillars.
Firstly on operational excellence, clearly when costs are rising and selling prices are so good at the moment, it's important that we maximize production, keep the machines full, and look for those cost advantages where we can. A lot of great work done on our safety front. Our numbers are improving across all the regions, so we're very pleased with that as well. Enhancing trust, I've got a slide on Science-Based Targets, but in addition to that, you know, we are in a strong position. Our forestry certification continues to give us a competitive benefit.
We're a Level 1 BBBEE level, and we're also spending CapEx associated with the Science-Based Targets, which amount to about $70 million per annum. We look to grow our business further and look for opportunities. We've not spent a lot on projects that have been completed or close to completion. Firstly, on labels at Gratkorn on one of the machines, we're ramping up nicely. That business is going from strength to strength. We've put in a new coater at Alfeld to give us more enhanced functional paper. That project is completed next month. A nice project at Somerset on the PM1 to boost our capacity there by a further 30,000 tons. Smaller projects, but all add to profitability moving forward.
Obviously maximizing DP volumes is critical, a little bit challenging because of the floods, but the conversion which we completed earlier in the year went very well and has ramped up as expected. The equipment is behaving as we expected, so absolutely no problems there. And then ultimately sustaining our financial health, w e've had strong cash generation. You know, we talked about it, that we want to reduce our target debt below the $1.3 billion level in the short term, and I'm sure, as I said, we'll get there soon. And turning to slide 23. Very excited that our Science-Based Targets have been validated and approved. We announced them publicly last week. It's our commitment is to a 41.5% carbon reduction by 2030.
These have been validated, so they are science-based. We have a detailed capital plan in place, which is incorporated into our CapEx projections. In addition, you know, with the higher energy prices that are out there and the volatility there, we do think we will get energy cost benefits from those projects as well. Turning to the outlook. Slide 25. Firstly on pulp, Pulp markets are expected to remain tight, which should keep DP prices at these elevated levels. Obviously, Sappi benefits because we are a quarter in arrears. So as I said earlier, looking good for Q4 and Q1, and our feelings are that prices are gonna remain high for the short term.
The profitability of our Pulp Segment will be significantly higher in Q4 because we're gonna have higher volumes and higher selling prices. So we're feeling very good about that. Packaging continues to be robust across all the region. Only problem, low inventories, but other than that, all looking good. Then graphics, yeah, there are small early indications of the graphic paper market softening a little bit, but bear in mind, we've come from the best conditions in over 20 years, so you can't expect that to continue forever, b ut our order book remains healthy. The challenge we face is obviously input cost inflation, and it's mainly in Europe. We are able to offset in North America.
We are because of the improved outlook for pulp, South Africa looking good as well. But in Europe, we obviously face higher costs, i n terms of sales and selling prices and volumes, all looking very good in Q4. So notwithstanding those cost pressures, we're anticipating another strong quarter. And I reiterate, it is a strong quarter, it may not be the record that you've just seen, but it's gonna be one of the best quarters ever for Sappi. And the only reason we're calling it down is that costs in Europe are higher, w ith gas prices at EUR 200 currently, we have to be cautious about that impact on our business. And it gets more and more difficult to pass on all these higher costs all the time.
But the business is looking good, and demand is healthy. It's only because of costs. But it will be a very strong quarter. So operator, that's me gone through the presentation. I'm gonna hand it back to you for questions.
Thank you very much, sir. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star then one on your telephone keypad or the screen. A confirmation tone will indicate that your line is in the question queue. You may press star two to exit the question queue. Just a reminder, if you'd like to ask a question, you're welcome to press star and then one. The first question comes from Wade Napier of Avior Capital Markets.
Hi, Steve and team. Thanks for the time this afternoon, and I'd just like to say congratulations, great set of results. Could you just help us with South Africa and the sort of recovery that you would expect there into the future, sort of? Maybe if you could just like break that recovery up into like an operational recovery and then potential logistics and infrastructure. I'm just trying to get a sense of what to expect there because it was a soft sort of Q3. Then, a sort of second question from me is, you flagged sort of indicative signs of demand softening across the graphic paper business. You know, obviously margins at the moment are exceptionally sort of high, and I'm just wondering how you're sort of thinking about managing sort of future demand erosion.
Are you gonna sort of look to sort of reduce prices to support sort of volumes? Or are you gonna sort of take an approach of, you know, we'll keep prices as high as possible to sort of keep profitability exceptionally high? Because I think, historically, if I sort of look at previous instances of economic downtime for the group, generally 100,000 tons downtime costs you about $30 million. I mean, given the fact that the group did, you know, $230 million of EBITDA from the graphic paper business, you know, I think that's a comfortable sort of, you know, I would be taking downtime instead of giving up pricing. I just wanna. I'd be interested to hear your thoughts on that. Thank you.
Okay. Thanks. I'll take each question, but in both I'll pass to Alex to talk further about South Africa, and then I'll pass to Marco and Mike just to briefly talk about the impact of demand erosion. You know, firstly on South Africa, the big recovery is obviously gonna come from the fact that DP volumes are gonna be substantially higher. And in this quarter we obviously had the shut, which impacted by approximately 50,000 tons. Then at the same time we had the floods as well, which, you know, the combination of the inventory in the warehouse and the stock production combined, that was a further 50,000 tons.
And then on top of that, you had the logistical challenges at the end of the quarter, 24,000. You know, you add that all back and the, you know, this. The Pulp Segment should be getting close to 350,000 tons sales per quarter. Obviously in the quarter that we've just done, dissolving pulp was only 217,000. The significant volume recovery that will come through from that. The dissolving pulp price, the lag impact of pricing, the Q2 price, which impacted Q3, was lower than Q1. The Q3 price, which is now gonna impact Q4, is substantially higher. You've got the combination of significantly higher selling prices and significantly higher volumes. The one headwind we've got is obviously costs.
Like everywhere else, costs are going up. That's more than outweighed by these positive factors. I'll let you know the paper business, Alex. I'll let you elaborate further, but those are in a good place.
Thank you
Alex.
Maybe just to add to that, you know, obviously the cleanup operations took quite a while just in the quarter. That's behind us now. This is warehouses and also in the mills. I think the positives are that, we've managed to secure extra shipping capacity. So that is going to help us, going forward, you know, just considering the supply chain issues. And rail is still a challenge, t here's been significant washaways and some of those are only going to be repaired around about April next year. But we are making very good progress in terms of shipment, through Maputo as well as an alternative, and that will help us from just to take some pressure off Durban Port for from our perspective. I agree with Steve. I think, you know, good upside potential.
As I alluded to earlier, on the packaging side, demand is strong and we're only victims of our own success, which is relatively low inventory levels. In terms of your second question, Wade, on graphics, you are right that these are supernormal margins and you wouldn't expect those to carry on forever. When we make selling price increases, we have to anticipate where costs are going to be. And clearly, there's a lot of volatility, so it's not an exact science., but y ou have to err on the side of conservatism as you think about it. For example, natural gas prices in Q3 are, w e're at EUR 102 per MWh .
At the moment, they're sitting at just under EUR 200. We're estimating a little bit below that, but there is significant volatility. The, I want to put it in perspective for you because I think it's important. Every EUR 10 move in MWh for our European business has about a EUR 6 million impact. You do the math, you know, if you think it's gonna be up EUR 60, EUR 70 , you're talking, you know, you multiply that by six, you're talking EUR 50 million less or higher costs.
And that's why we called out the earnings outlook to be slightly below the Q3 earnings. In terms of the trade-off between demand and pricing, we agree with you. We believe that these prices need to be protected because of the uncertainty and the cost and you know, taking a little bit of downtime is a small price to pay. I'll let Marco talk and then after I'll turn to Mike and he can just talk a little bit about the North American environment. Marco on Europe.
Yeah. Thank you, Steve. I think you got it right. The downtime is still rather difficult to predict. We're currently in a situation that, yes, activity is getting somewhat softer. Difficult to determine whether that is the summer activity that we're in right now. There is a reversal of the bullwhip that we saw, where there was very speculative buying in the previous quarter, which has eased down somewhat. Then there's obviously the fear of a recession that trickles through a little bit. It's difficult to estimate what the structural drivers behind the volume demand are right now, and therefore we remain very careful to keep our margins where they are.
Also because of what Steve has said, that the cost fluctuations will not get any more predictable, and they might be as volatile as in previous quarters. So, we will stay cautious on our pricing strategy and keep our margins as healthy as possible. It is also true to say that the volume to price relationship will lead, if necessary, to taking small downtimes if possible of it, if necessary.
Having said that, we're not anticipating in the very near future any material downtime. It's just as we think about the trade-offs. We're still very confident about the outlook for Q4 top line. Mike, just maybe you just wanna talk about that trade-off in your environment.
Thanks, Steve. To be honest, you know, the demand in North America on the graphics side is still fairly strong. Clearly, we're having a bit of a margin squeeze as raw material prices in North America have been increasing as a result of inflation and some of the energy costs here. You know, the nice thing in North America is we've balanced up, you know, our mix between pulp, packaging and graphics, where we're not as dependent on the graphics business as a whole for the earnings in North America. So we've got a very balanced portfolio now. We do see a little bit of margin squeeze, but with demand still strong, you know, our challenge is the pricing driving our customers to other mediums. So t hat's clearly something that we focus on.
Thanks. Thanks, Mike. Wade, thank you.
Thanks, Steve. Sorry, can I just make a quick follow-up on the sort of sensitivity, the EUR 10 per MWh sensitivity for EUR 6 million of the. Is that on an annualized basis or a quarterly basis?
That was quarterly.
That's quarterly. Okay, perfect. Thank you.
The next question.
Okay.
Comes from-
Go ahead, operator.
Thank you. The next question. Sorry, can you please hold for me? Ladies and gentlemen, just a reminder, if you'd like to ask a question, you're welcome to press star and then one on your telephone keypad to place yourself in the question queue. I'm gonna ask please for those persons who were in the question queue, if you can please redial and place yourself in the question queue. The next question comes from Andrew Jones of UBS.
Hi, Jones. I just have a few questions on the cost pressure going into 3Q. If you could just talk a little bit about within the different divisions, different product divisions, could you talk about how you were seeing broad sort of cost split after the wild swings that we've seen so far in the quarter that's just gone? And just talk us through some of the moving parts aside from obviously gas that we're aware of, what, you know, what sort of inflation are you looking at going into the fourth quarter of the year on each of those big buckets of the cost split? Thanks.
Okay, thanks. You know, looking across the broad buckets, the biggest rise we are seeing is in energy, which we spent a lot of time talking about. But it's not only in energy, right? For the paper businesses, pulp continues to rise, particularly in Europe because that's where we buy more from external sources. And then the chemicals, delivery costs, freight, it's really broad-based. We're expecting, you know, all in, you know, another significant rise. What I was describing to you is that certainly in North America and South Africa with the recovery in the top line in South Africa, we will be able to mitigate those impacts. Europe, a little bit more challenging because we are more exposed to the energy and pulp rises. So that's why we called out, you know, the outlook statement to be down on Q3.
Mm-hmm. Okay, that's clear. Just on the guidance around volumes, I mean, you mentioned DWP, you were talking about maybe like around 350, the sales volume in 4Q, if you sort of strip out the one-offs from 3Q. But on, you know, on the packaging side and on the paper, you're, you know, assuming that you don't have any major sort of shutdowns given margins are still pretty good in paper, what sort of volumes are you thinking about in those two divisions in 4Q?
We're not gonna give specific numbers, but what I would say broadly is that we're feeling comfortable about demand, we're feeling comfortable about being able to sell our products, and volumes should be no less than Q3 in those segments.
Mm-hmm. Okay. Great. Thank you.
Thank you. The next question comes from Brian Morgan of Morgan Stanley.
Hi, guys. Thanks very much. Steve, your stock's trading on a fraction of the multiple of the European peer group. Have you given any thought to redomiciling at all?
To doing what?
Redomiciling.
Mmm Brian, you trying to catch me? Yeah, look, you know that there's certain reserve bank restrictions and so on and so forth, w e are committed to South Africa. We don't watch the daily moves in the share price, w e're focused on our longer term strategy and delivering value for shareholders that way. It would be very difficult for us in the short term to move our listing elsewhere.
Okay. Can I ask on gas? You've spoken in the past about having gas hedges in place, but those are fixed price contracts, are they not?
Well, some of them. Yeah, we've talked about it in the past, about 60%, next year, 50%, I think, 55%, yes.
Can you chat to us a little bit about-
Yeah.
Could you chat to us a little bit about how the emergency energy plan in Germany at various stages affects those contracts?
Well, look, there's a lot of speculation about that. Those are not certain. It's not clear whether they would impact on fixed price contract, whether it was a levy on top of the current fixed price, or there was to be rationing. It's not clear. And I guess your question is what would we do? You know, my argument back on that would be, you know, if there was to be a levy on fixed price contracts, that would be applicable to everybody. And so, it would be equally impactful. I've given you the math behind it, w e've proven that we've been able to be resilient with substantially higher costs. Nobody knows whether there will be a levy or not.
It's all speculation. Clearly, it would not be good for our business. If that's what you're asking, that would not be good, but it would not be good for Germany as a country. And you know, we would have to manage that situation. There's certain things we can control and there's certain things we can't. We've done a great job at mitigating that impact. We've been forward thinking. We've put through fixed price contracts as best we can to mitigate that impact. If there was to be force majeure over and above that then you know, we would have to react to that situation, but you know, that would be a disaster scenario, obviously on the part of the energy providers. And a t the moment, it's pure speculation. I don't know what more to say.
That's fine. That's perfect. Thanks very much. Yeah.
Thank you.
The next question comes from James Twyman of Prescient Securities.
Thank you very much. Yeah, fantastic set of results. I've got a few questions. Firstly, on coated paper in Europe, I understand you've got a price rise, another price rise attempt underway. Could you sort of articulate more on that in terms of sort of scale and whether it's just coated fine or includes magazine and specialty? And obviously how likely you, what you think you can be successful there. And then on gas prices, how much of your gas costs are sort of at monthly spot prices, would you say? And also, what would you say was the hedging gain that you achieved in the quarter? And I ask that just 'cause some other paper companies have said how much their sort of exceptional gain they've been getting from that is.
Yeah. Okay. On the price increases, I'll let Marco elaborate further, but obviously it's an anticipation of the higher, mainly gas prices that which has been much of this conversation today. It's just been announced and obviously the team are working on it. We've been able to put through selling price increases in the past. If we can be successful here, this will clearly mitigate a lot of what we've talked about,but i n terms of confidence of being able to push it through, Marco, you wanna comment?
Yeah. Thanks, Steve. You're right. We're confident that we have the right pricing strategy, which means a good balance between covering our costs but also keeping our customers' interest very high. What we don't want to do is put additional pressure on the value chain. So what we've done is we put out other price increases from mid-September, which therefore will have only a minor effect on quarter four. It's dependent on graphics and specialties. It's between 8%-10% for coated woodfree and uncoated and paperboard and around 18% for specialty grades, slightly dependent on the product and the mills that are producing that. In terms of our general pricing strategy, we're confident, but then it depends on the dynamics as well, how far we can drive them.
Thanks, Marco. On the second question, James, it's not that we quantify the gain. The way we think about it is obviously we've fixed the price in that at a point in time. Clearly we fixed these when prices were well below 100. I've quantified for you the impact of every EUR 10 movement in MWh . As I said to you, the spot prices in the quarter that we just reported were just over EUR 100 . 2/3's of our exposure was hedged at a significantly lower price than the 103. Now, if prices were to stay where they are today, then I've given you the math.
Obviously, on the fixed contracts, that would be a similar price level, so you would only be exposed on 1/3. Clearly, if there was the levies that Brian's question alluded to, then it would be on the full volume. Does that make sense?
Yes. So your pricing, sorry your costs, you're talking about the fact that you're exposed to 1/3 because 2/3's is hedged.
That's correct. Right? So the numbers that I gave you were the impact of every 10 EUR increase on top of that per quarter, the EUR 6 million that I referred to. So you know, this is hypothetical, right? Because the prices move every day. But the average price in the quarter that we've just gone in was EUR 102, EUR 103. You know, if it was to be EUR 150 in this quarter, you know, it would be five times six , it would be a EUR 30 million impact on our numbers. Does that make sense?
Okay. It does. Thanks so much. Could I do a little cheeky follow-up?
Yeah.
It just in terms of your guidance for Q4, clearly South Africa is going to be a lot stronger in a pricing perspective and a volume perspective. The U.S. is normally quite a bit stronger as well from a seasonal perspective. It seems as though the European business therefore has to be very substantially weaker. I know you've mentioned cost, but it does seem extreme for you to be making less money next quarter than this quarter.
James, today's gas prices are $190.
Yeah.
Nine times six is 54. I don't know what more I can say than that. That's where prices are today. We're obviously putting through selling price increases that will hopefully mitigate it, but it does put it in perspective, doesn't it?
No, absolutely.
Thank you.
Thank you. Ladies and gentlemen, just a further reminder, you can ask a question. You're welcome to press star and then one, and that will place you in the question queue. The next question comes from Sean Ungerer of Chronux Research.
Welcome, Steve. Thanks for the time. Just in terms of my first question, if I look at your commentary around running low on certain inventories, could you sort of unpack in terms of how we should think about working capital evolution in Q4? And then secondly, the comment around some sort of softening filtering through on the graphic paper side. Can you just flesh that out a little bit more? Sorry if I didn't hear the earlier line. It was a bit bad. I've got a follow-up one after that. Thanks.
Yeah, I'll let Glen handle the working capital question. Just to finish the conversation on graphic paper. There was a question earlier about volumes for graphic paper for Q4, and what I was saying is that we're still confident in our volumes. Although it's a softening, it's. Everything becomes relative, right? It's a softening from the best conditions in 20 years. It's still good. It's just not the best it was in 20 years. So, we're still confident in volumes, w e're still confident in terms of top line numbers for Q4. Clearly, as you think forward to the 2023 financial year, you know, can you maintain record profitability? Nobody's saying we will, because there is an anticipated global economic slowdown. So we all have to be realistic.
But we can still have a very good quarter, and we can have a very good year next year, just not a record year.So, i t's not that markets are weak, it's just that they're relatively speaking slightly softer.
Just, I mean, Steve.
Yeah.
Sorry, Steve. Just to finish that comment specifically out. I mean, how are you actually tend to be seeing that coming through? Is it? Are you starting to see orders slow down? Are you starting to see canceled orders come filtering through? Is it more coated woodfree? Is it more coated mechanical? I'm just trying to get a broad color on that. Thanks.
Yeah. It's not North America. Mike touched on that. It's more in Europe. And it's, remember our order book was getting longer and longer and then we had to curtail the order book and because we were so full. Our order book is still relatively full. It's just not as long as it was. And it's across all the graphics categories in Europe, so it's coated woodfree and mechanical. But it's not cause for concern. The reason we're calling out a lower EBITDA is got nothing, i t's not because of top line demand and sales, it 's because it's all on cost, Sean.
Gotcha. Okay.
Glen, on working capital.
Hi, Sean. Yes. Quarter four is usually our cash inflow quarter, and historically we see a reduction in our working capital movement from quarter three into quarter four. This quarter we anticipate to be no different to what has historically happened. We expect stocks to go down and overall, you know, our working capital at the end of quarter three, when we measure it as a percentage of net sales, was just under 11%. We expect that to move down to about 10% by the end of the year.
Okay, excellent. Thanks, Glen. And then just Steve, just a follow-up, and just to make sure that I heard correctly earlier. When you sort of gave the run rate for DP volumes per quarter of 350, was that DP and pulp or just DP?
That's just DP.
That's just DP. Yeah.
Okay, cool. I mean, I don't wanna take it as guidance, but do you think that's a realistic number to print in Q4? A t this stage, o bviously assuming no funnies in terms of logistics, et cetera?
The one risk factor I would call out is logistics, Sean. So you know, could there be spillover? You know, we're trying to secure more and more break bulk. Alex talked about it earlier. As we've talked about in the past, we don't lose the pricing on that. It just would be a spillover into Q1. In terms of everything else, you know, all favorable. The only headwind or the big headwind we face is higher costs just like everywhere else.
Mm.
So urthe entire cost curve across dissolving-
Yeah.
Pulp has moved up considerably.
Because just on a rough calc Steve, so I mean if I look at, you know, if you do a run rate of, say 350,000 times DP for the quarter, you've got a higher price filtering through. You know, incrementally you should have a delta of probably, I don't know, at least $70 million odd of DWP EBITDA coming through into Q4. If you sort of look at the read through on spot energy prices, you know, even if you call it $60 million delta for the quarter, I think there's obviously cost pressures filtering through somewhere else to sort of link it back to your guidance.
Sean, it's not just energy in Europe. Pulp prices are up, freight prices are up.
Okay.
I just gave you the gas number.
Got you. Okay, cool. Thanks, Steve.
Thank you. Ladies and gentlemen, just a final reminder. If you have a question, you will press star and then one.
Is there another question, operator?
No, not at all. Just to advise you that we have no further questions on the line. Can I hand back over for closing comments?
Great. Thanks, operator. Thank you everybody for joining us today, and we look forward to discussing our year-end results in three months time. Thank you. Bye-bye.
Thank you. Ladies and gentlemen, that concludes today's event. Thank you for joining us. You may now disconnect your line.