Good afternoon, ladies and gentlemen, and welcome to the Safi Limited Q3 2021 Results. All participants are currently in listen only mode. There will be an opportunity to ask questions later during the conference. Please note that this call is being recorded. I would now like to turn the conference over to Steve Binney.
Please go ahead, sir.
Thank you. Good day, I'm going to go through the investor presentation, which you all have, and I'll call out the page numbers as we move through the slides. And I'm going to start on page 3, which includes highlights for the quarter. I'm pleased to say that we Did see a return to bottom line profitability after the significant impact of COVID over the last year. So that was a nice milestone.
EBITDA overall was up to €145,000,000 that was up 29% on the prior quarter. So continued progress from the lows of COVID a year ago, and we're pleased with the outcome. In terms of the segments itself, firstly, it was a record EBITDA For packaging and specialties, and as you know, this is something that we've been strategically redirecting our business towards over the last Couple of years and it's really is paying dividends and very pleased that it could reach a new high. Over and above that, Dissolving pulp markets were strong, pricing good and EBITDA continued to rise. I will remind you that the prices that we our contracted prices that we have do Run quarterly in arrears, so there will be further upside in the quarter ahead as the prices from this quarter are realized.
The demand for graphic papers improved and actually reached 90% of Q3 2019, which is a pre COVID level. And if you remember back to prior quarters, we talked about What would be the impact of COVID? And in fact, our estimates were about a 20% impact on the market. Market levels have been better than that and we've been able to gain market share on top of that. So actually the recovery of the volumes is now Faster than we had expected and that no longer volume is no longer the challenge.
It's now rising input costs And that's predominantly driven by higher pulp costs and then obviously global logistical challenges. And I'll talk about that a little bit more As we move through the presentation, also pleased to say that the liquidity is strong. All the challenges that we had During the COVID period are now behind us, and we move forward with a much better profile. Moving to Slide 4, the earnings bridge, EBITDA bridge from now this is from Q3 last year to Q3 this year and obviously this was at the height of the COVID impact. And naturally you would expect So a significant recovery on volumes across all the segments, and that's the big positive block.
Pricing, obviously benefiting from significantly higher DP prices Predominantly and as I say more to follow in the quarter ahead. Unfortunately, up against higher costs And we did break this down a little bit for you. Firstly, on pulp, the net impact Since last year on our volumes is about £76,000,000 delivery costs £15,000,000 However, offsetting that a little bit was some savings on wood and energy And chemicals, albeit that chemical costs have turned. This is a year on year comparison. So there was an initial decline And then a subsequent rise, which is putting some pressure on us.
Fixed costs year on year look higher, but I remind you all that this time last year, we had staff on furloughing and no one was traveling and no one was coming into the office. And There was a lot of administrative costs that were not being incurred and that's why it looks Higher than a year ago. Turning to Slide 5, the product contribution split. As the business is normalized, obviously, the EBITDA split will change. Packaging at this point in time is still at a fairly high level, Approximately half of our business, DP picking up, and it will obviously rise further.
And similarly, as we Get higher selling prices for our graphics, we would expect that to normalize. So in the short term, Packaging and specialties will come down relatively speaking, but it's only because the other two segments are rising. On the right hand side, you see the volume split. We continue to look for opportunities to redirect Graphic, some of our graphic capacity towards packaging and specialities. Slide 6 has the Volumes and EBITDA margin by the product segments and just taking each one in turn.
Firstly, Graphic Paper, You can see volumes picking up and confirming what I said earlier. Unfortunately, the margins went back A little bit this quarter and it's because of the rising costs, which I talked about. We are implementing selling price increases And we do expect a catch up and we'll talk about that a little bit more when we go through the regional discussions. Packaging and Specialty is just a great story. Margins continue to go up And volumes continue to go up.
There's all been a little bit up and down in terms of volume, but I'll remind you that this is Often directed or influenced by the timing of shipments. And obviously, In this quarter, we were impacted by the extended shutout cycle Linked to COVID, and I'll talk about that a little bit more. But margins rising and we'll continue to do so. Slide 7, The leverage net debt leverage and you can see a significant decline from the last As you would expect, earnings starting to rise. We start to drop those weak quarters that were influenced by COVID.
And you're going to see Further significant declines in the next 2 or 3 quarters as we drop those remaining weak quarters. And By the time our covenants come back, we'll be well inside The leverage levels or the covenant levels. Slide 8 is our maturity profile. And again, I think tells a great story. All our material debt now pushed out.
The next fairly sizable one that you see there is the 2024, That's just a securitization structure that we roll over and we'll do that well in advance. So really Beyond that, your longer term bonds now 26 and beyond that period. So a very Clean maturity profile, which confirms all the great work that's been done. Slide 9 has our CapEx. It hasn't changed since the last quarter.
Our estimate for the year about 400, a little bit higher than what it was at the beginning of the year. But as you know and we did Share this with you. The exchange rates and the fact that the rand and euro are stronger relative to the dollar Did push it up slightly and that's why we estimate about €400,000,000 for the year. Moving then to product segmentals and we'll sorry, geographical segmentals And we start in Europe. Firstly, obviously, volumes, we are encouraged And I've talked about that a couple of times already on the call.
During the quarter, as those volumes were recovering, we still had to take About 85,000 tonnes of downtime, but as I say market volumes and our volumes specifically got better and better. For the quarter overall, you can see coated woodfree is actually 94%, which is a great recovery And bodes well for being able to implement selling price increases. Cottage Mechanical was Somewhat was 76. It is we are seeing continued improvement, but Just to emphasize that that comes out of a 1,000,000 in Finland, Kootenimi. So it's a much, much smaller segment for us.
Our challenge obviously now has shifted from volumes to costs. And We've been able to implement some selling price increases, but we are playing a bit of catch up. I suspect Looking forward and looking at the next quarter or 2, it's likely that there's still going to be catch up to come. And The margin improvement, we would anticipate probably after Q1. At that point in time, We get to be confident that we've caught up with all the rising costs.
Packaging and Specialties, mixed performance, volumes overall good driven by paperboard and self adhesive papers, But some more discretionary categories were still impacted by the weakness of the European North America Had a great quarter across all their categories. We don't see it in the announcement, but I think it was the Best Q3 in 20 years for our U. S. Business, really very strong and very pleased. Firing on all cylinders, Strong demand recovery on graphic paper, which has enabled us to push through selling price increases.
And we were able to keep we're slightly different to Europe. We're playing a little bit of catch up in Europe because The market was not as tight. In U. S, we were able to keep pace with the selling the cost Increases. Packaging doing very, very well.
And you can see the volume increases there and Demand for our products are good. Our focus going forward is going to be on optimization of our product mix. Pulp side also strong good prices for GP and BCTMP, which I've talked about. Unfortunately logistics It's a headache and it's a headache for all the regions. We did lose about 11,000 tonnes out of the North American, which is filled into Q4, and that's something that's obviously still with us at the moment.
The variable costs rose by 5%, but as I said, we were able to put through higher selling prices. In South Africa, Nice rise in volumes sorry, in terms of profitability. Very strong demand for our containerboard, which goes into fruit exports out of South Africa, very strong. Unfortunately, On the DP side, we were impacted by the extended shut at Saiccor And that was influenced predominantly by COVID and travel restrictions. Unfortunately, The equipment suppliers, we were not able to bring them into South Africa, and we had to use domestic Contractors who were not familiar with the equipment, it meant that the shut took much longer than we had expected.
And then the subsequent ramp up It was more complex and ultimately, we lost the 40,000 tonnes. Logistics also had a say there as well. Those production challenges that I mentioned Are now behind us. The costs were higher, one, because of the mill shut itself And obviously higher freight costs coming through. Then turning to product markets.
Firstly, dissolving pulp. The average price for the quarter was €10.88 which was very nice. It did come down From the peak of just over 1100 down to I think it ended the quarter at about 1050 at the moment today it's about 10.10. But We are encouraged by the fact that in recent weeks, fiber prices have started rising once again. Fiskars prices are up.
Cotton prices have hit new highs. Polyester prices are rising. And we are Optimistic that this will support DP prices. In the long, long term, we've always said we don't expect DP prices to remain at these elevated levels, but the short term fundamentals continue to be good. Included in the segment is obviously BCTMP.
You can see the tonnes there 37,000. Obviously, we lost the 40,000 tonnes because of the cycle shut And then the shipping challenges both in the U. S. And in South Africa added up to 21,000 markets are good, demand is strong, Biggest headache is logistic challenges and obviously it's been exacerbated by the civil unrest that we've had in South Africa recently, which caused More backlogs at the Durban port and then in the last couple of weeks TransNate's IT problems. So it just meant more backlog, vessels bypassing The Durban port, really the port just trying to catch up.
So that's why That's why it's been a headache for us. Packaging and specialities From strength to strength, North America, I talked about focusing on the optimizing the product mix now because the Somerset PM1 machine is full. In Europe, we do have some opportunities on those non or those most discretionary related products. And at Maastricht, we can add more volumes there as well. So we are positive about the demand.
Obviously, from a Sappi perspective, they are or the segment is Facing the higher costs as well because we do buy pulp in Europe. And once again, we are executing on selling price increases to offset So that this tends to be more contractual business than the spot that you find in graphic markets. But we are confident that we will achieve those selling price increases to offset the costs. Page 16 has the graphic paper. And I've mentioned a few times, but European overall graphic paper, if you include Kodu, Woodfree and Mechanical, was about 80.
It's subsequently gone higher, U. S. At 88%, and you've seen our volumes at 90%. So It just emphasizes the market share that we have. Our machines are obviously full in the U.
S. And are The need to take downtime in Europe will be substantially reduced. The only headache we have From a volume perspective is logistics. The profitability under pressure because of input costs, But we will push through on the selling price increases. Slide 17 talks about cash management, a good story to tell.
And I mentioned it earlier, but just some specific issues. The convertible Bonds that we issued in South Africa subsequent to the quarter end, about 26% We're converted by the bondholders, which will lower our debt And frankly, will save us interest costs going forward. So I actually think it's a good thing for The and then the leverage covenants are resuming in December, but we'll be well inside of that. Also pleased to say that we're on track to achieve our savings plan on procurement for the year at €69,000,000 Moving just to a couple of other slides that we have just demonstrating the recovery and some of them you're familiar with. But firstly, on Dissolving Pulp, on Page 19, the top left, you can see that Retail apparel sales are in Europe and in sorry, in China and particularly in U.
S. I've had a major recovery. Europe was on the path to recovery. The 2nd wave obviously slowed that down a bit. I'm encouraged by this because that tells you That Europe still has a way to go, which will help keep markets tight.
The graph on the top right just shows you the pricing of viscose versus DP and obviously they're both risen sharply. You'll see the slight decline is, but this doesn't take into account the last few weeks and viscose has actually been upward Globine, which is good for DP pricing. Slide 20 has the Coated wood free paper in both in the U. S. And in Europe.
And the dark As are the year on year and as you would expect, as you annualize COVID, very big positives. But even if you Take into account the 2 year comparison, the pre COVID levels versus 'nineteen, You can see that recovery going less than 20%. And then in fact, in the June month, actually was positive or Close to flat. And similarly on Europe, same thing, you can see it's close to 0. So a huge recovery.
That If you take the 3 months together, that gives you the averages that we reflected on the other slide. So the recovery in the markets The graphics has been better than we had feared and faster than we could have hoped for 6 or 9 months ago. Slide 21, just and we could have included many slides here To demonstrate the challenges that not just Sappi, but everyone is facing with global shipping, this just shows it's from See intelligence, it shows you the reliability of shipping deliveries. And you can see from about July last year, it was just a steep downward movement. And At the moment, reliability is around 40%, which is pretty shocking to be honest.
And obviously, we're managing our way through that. And unfortunately, I'd like to say That it's over, but it looks like it could carry on for another few months yet. And I know You've all read stories about the various industries and what's going on there. And clearly, it's a big focus of our attention. Slide 22 just talks to our pillars of our Thrive25 strategy.
I'm not going to go through it, but just Briefly, driving sales growth, that's going to be looking for opportunities to redirect more of our capacity from Graphics into the packaging space will obviously have the additional volumes from the Saiccor expansion And hopefully, in time, more biotech products coming through as well to give us additional volumes. The financial health, I think we've come a long way in the last 6 or 9 months and the business is in a much stronger position. On operational excellence, we will continue to look for opportunities to take costs out and focus on efficiencies. And very pleased that we will make at least that €69,000,000 for the year. And then enhancing trust, It's obviously with the recent unrest in South Africa, working with your communities It's critical.
And although we had lost production at our mills, they were not damaged. And the reason one of the reasons we think is because we do maintain very good relationships with the local communities and that's something that We will expand on and we will continue to drive. On top of that, We committed to science based targets. I mentioned that last time, and we'll be making those public in the next well, fairly soon. On Slide 23, just to reiterate, the focus on the short term is on Continues to be on boosting the balance sheet further, getting things back to normal, Getting our margins back in graphic paper to normal and overall profitability And we achieved in the 2022 financial year.
Beyond that, we haven't committed to any large projects, but We do think there are opportunities out there. We'll continue to evaluate them and in time make decisions whether those are Things that we need to pursue. Just turning to sustainability, and I move to Slide 25, not to read through all the Partners that we've had, but you can see from all the announcements that we've been making and it's evidenced here that the sustainability Plays an ever increasing role on our business from all our stakeholders, our customers, the regulators. And it's important that we maintain these partnerships And drive our sustainability message forward. Slide 26, just some of the Achievements, very pleased to say that we got a platinum level rating by Ecovadis.
We've just recently been reconfirmed as a FTSE for good index on the JSE. We're a level BEE Sorry, a Level 1 BEE contributor, which is just phenomenal and a lot of good work being done. Turning to the outlook on Slide 28, the dissolving pulp, We are positive. We say here on the slide a gradual weakening of the market pricing in the 3rd quarter. Yes, that's true.
But it has stabilized subsequent to the end of the quarter. And I've already mentioned that Viscose prices are rising once again. And we'll get the benefit of those elevated third Quarter pricing in Q4. Packaging, good robust demand in North America and South Africa and opportunities to Grow volumes in Europe further. Graphics focus on getting those selling price increases through.
But volume back to normalized levels. Obviously, we had the impact Of the civil unrest and we did put out a same announcement, you've seen these numbers. We lost about 28,000 tonnes of production of DP and 7,000 of paper. Impact on that is about €16,000,000 On logistics, I've mentioned it throughout the presentation. It's difficult to give an exact estimate of how much will spill over into Q1.
Our best estimate and which is embedded in these estimates is about 55,000 tonnes, Potentially up to 55,000 tonnes could move forward into 1. Included in that is about 200,000 to 25,000 tonnes of DP And the rest, graphic paper, predominantly out of Europe. And I think it's important that you've got those numbers to put it in context. The Transnet cyber attack over the last couple of weeks just came on top of everything else. They are back and operating at the port, but obviously it's a big backlog.
Some ships' vessels have bypassed. And we're just trying to get our volumes out as quickly as we can, negotiating with The shipping lines to get more space trying to persuade them to take more direct routes to our customers. We are a huge Exporter out of the Dublin port, and I think we're the 2nd largest. So we do have some influence, and we'll try and use that as much as But you'll appreciate that there is risks. The logistical challenges that are referred to affect all our regions.
It's Europe, it's the U. S. And it's and obviously South Africa exacerbated by The civil unrest and Transnet attack. Then turning to the EBITDA guidance. So you'll appreciate because the uncertainty on the volumes and obviously the impact Of the civil unrest, we had to be cautious in our EBITDA guidance, we are calling it up, but we wanted to be careful not to call it up Too much because we don't know what how much of that 55,000 tonnes we will may spill into the next quarter.
Okay. Operator, that's the end of the presentation. I'm going to hand
now. The first question we have is from Brian Morgan from RMB Morgan Stanley.
Hi, guys. Thanks very much. Can we just chat about BWP volumes over the next couple of quarters? I just want to make sure that we're all on the same page. If I look at the Q3, 313,000 tonnes, 40,000 tonnes lost because of the maintenance shut, 21,000 tonnes shifted into the Q4.
So that's and then you've got 37,000 tonnes of BCTMP. So that's 337,000 tonnes That you would have been able to do in the Q3, potentially 20,000 to 25,000 tonnes lost in the 4th quarter. So What sort of numbers should we be thinking about for DWP for the Q4? And then obviously for next quarter, you've got the expansion coming through. So how can we think about Is there any volume progression in the next couple of quarters?
Yes. I think look, Brian, there's obviously some risk Associated with the shipping that I referred to, in that estimate I gave you of the 55,000 tonnes, As I said, about 20 to 25 is dissolving pulp, Of which about half is Cloquet in the U. S. And half in South Africa. Looking at the volumes and to your specific question, in spite of that, we do think that there will be a bounce In volumes out of both regions.
We were anticipating higher volumes In the Q4, I clearly can't give you the exact number, but the volumes will be Higher in Q4, in spite of the spillage that I referred to. We're probably yes, we're probably looking at 40,000 or 50,000 tonnes more.
Okay. That's perfect. And then for the 1st fiscal quarter when you got the expansion coming through, does Does it capture you in the Q1 or is it the 2nd quarter story?
Yes. Look, Obviously, we're planning to start up early in the quarter, And it takes a little bit of time to come through. So there'll be some tonnes, but Clearly not you know the expansion is 110. You're not going to get the 110 divided by 4. It's going to be less than that.
Yes. So will it take a year to get up to full run or is it quicker? No, no, no.
We'll by the time we get To Alex, end of the second quarter, definitely. Yes. It's worst case 6 months. Yes. Worst case.
Yes.
And then in terms of I was a bit surprised by the coated paper guidance where you say that you only really expected Price increases to come in after the Q1. So, how can we think about margins And paper in the 4th quarter and the Q1, could they potentially be down on the 3rd quarter?
No, Brian, what I was saying is the pulp costs the full impact of the higher pulp costs is still to come through. So we do have higher selling prices, but we're still paying catch up. So And we're talking mainly Europe here, obviously. The U. S.
Is fine. But if There will be significant selling price increases in Q4, but there will be higher costs In Q4. And then there will be then we expect the pulp costs to plateau and come down. And then there will be a further quarter of selling price increases to get us back to by the time we get to the beginning of our Q2, What we would be believe would be normalized margins.
So in the Q4, would you expect the prices To offset the increased pulp prices? The price increases?
Approximately. Perfect.
That's fine. Thank you very
much. Thank you. The next
So My first question is, we've got 20,000 tonnes of delayed volumes. I assume that the pricing is going to be The Q3 pricing or do we get a little bit of a benefit from the Q4 pricing? That's probably a little bit hopeful. But And then secondly, just back to that last comment about coated fine paper. The selling prices are going up in Q4, Costs are going up in Q4.
So does that mean you think the losses will stay the same? Or do you think that you could get to breakeven In Q4, I wasn't sure quite which one you were meaning there.
Yes. I'll take the second question first. Yes, what we are saying is there will be a further rise in costs in Europe, But a further increase in selling prices, which means approximately similar levels of margins to this quarter. On the first question, James, you'll appreciate we can't get too specific here. You've got customers listening as well.
But Mohammad, I will Manav, do you want to talk briefly to that?
Yes. Steve, it's the volumes that are overflowing From Q3 into Q4, because they belong to Q3, we'll have the pricing of Q3, Even though they are shipped in Q4?
Yes. But equally that will apply to Q4 into Q1?
That is correct, yes.
Okay. And just yes. And also just quickly, Lensing said yesterday that their new machine is starting up mid next year and ramping up Surprisingly quickly by the end of next year. I know you're pretty relaxed about that because of your contracts, but could you just chat around that Faster ramp up and whether that does change anything from your perspective?
James, we're not concerned by that. We are confident that Lensing will utilize that additional volumes either internally And or the market will have grown significantly and Buy enough to absorb the additional volumes. We're not worried about that.
Okay. Thank you. Thanks so much.
Thank you.
A couple of questions on my side. First of all, on the DWP market, You mentioned that the VSF pricing is now up in July and that's an encouraging sign, I guess, for the EP pricing as well. But Could you talk a bit about what's happening in the BASF market trend? I mean, why are the pricing moving up? And what's happening in August?
If I look at the downstream inventories, they're actually quite high yet. So I struggle to see what is supporting the higher pricing of VSF Currently. That would be my first question. And then the other question on DWP markets would be On the capacity side of things, so we do have a bunch of swing mills out there. What are they doing now?
What are you seeing in the market? Are they swinging back from paper grade to DWP or not? And also if you could talk a bit about other capacity changes and demand
Mohammed, I'm going to come back to you on the first question. I'll say something briefly and I'll come back to you. On the second question on capacity, Quite a significant proportion of the swing capacity has already come. You can't Name competitors, but there's 1 or 2 of our competitors that have had major production challenges, Which is in the short term has offset that additional capacity that swung back. So as we stand here today, a major proportion of the swing capacity has already come back.
So we don't think that's a major threat in the short term. And we think the market will continue In terms of viscose, I mean, obviously pricing, I'll let Mohammed elaborate further, But markets have tightened, demand is picking up seasonally and inventory levels have started coming down again, Which is supporting pricing. But Mohammad, I'll let you expand a little further.
Yes, Steve. Yes, I think the first one just to reemphasize that we are going into the seasonally strong time usually from about the middle of August. You historically see VSF prices starting to move up. So that's what I think is starting to happen again, certainly as the yarn guys to replenish VSF, which was already at a relatively low price. So they took advantage of that.
But the markets have tightened and prices have moved. The other big contributing factor is the inter fiber position of viscose relative to cotton specifically. What we have seen is that the cotton prices over the last couple of weeks have moved up quite nicely. Specifically, if you look at The grade that we track, the benchmark grade in China, which is the cotton 3,128, that So far through July, it's up about 10%. And the main drivers around that is This expectation of increased demand, whilst at the same time some reduction Of cotton in terms of the output for the new cotton year.
And also This issue around the whole cotton from the Xinjiang province continues to gain momentum. There's new legislation that's going to come out in the United States, which Put additional pressures for retailers sourcing cotton from that part of the world. And I think that's encouraging And import of cotton from the U. S. By China and other countries.
And then polyester prices also, if you look at that In through July, it's up about 5%, largely on the back of higher oil prices, even though oil tends to be Very volatile, but 2, I think more the expectation that demand for oil for second half of twenty twenty one It's going to be a lot better than the first half of twenty twenty one. So that I think is what we see as the main drivers For this improved VSF pricing. I suppose the other thing I could add to that is the viscose industry in China also is a lot more consolidated Than what it has been in the past. If you look at the top 3 producers today, it's probably about 65%. And I think that also That's create an environment for managing prices.
Okay. That's very helpful. Thank you. And then on another topic, if I may, on the European Quoted fine paper markets, what were the trends, I mean, that you saw in your Financial year Q3 in terms of volumes growth year over year in Europe for good defined purpose Specifically and also what are you seeing in terms of growth trends now when we are, well, already past July and into August? How is that demand recovery trending in Europe right now?
And where do you see operating rates in that market?
Okay. I'll let I'll just give you a brief comment and once again, I'll let Marco expand further. But As I spent quite a bit of time talking about the recovery in the graphic paper markets. And During the quarter, coated woodfree market volumes were, I think it was 83%, Up on pre-twenty pre COVID levels 2019. Our volumes were actually 94.
So we are encouraged. And that trend we are continuing to see in July. So the impact of COVID has been much less Than we had feared. But Marco, I'll let you elaborate a little bit more if you want.
Yes. Yes. Thank you, Steve. I think we have been encouraged as you say with the general trend. The levels that we see the market ultimately get to might be even closer to 90% than the initial 85 That we have estimated.
As you say, the market share development We'll most likely continue. We have the capacity still to do somewhat better than the market trends. And therefore, there's no reason to believe that there will be any change on that. But the summary is that the recovery It's taking place somewhat faster and to levels higher than what we initially anticipated.
Okay. And in terms of operating rates in the market or for yourself in July, August, anything you can say about that?
Yes. The Operating rates have recovered to the high 80s. And if that continues, that demand recovery that Marco referred to then we should move back above the magical 90s And that's when the market is in balance. And why that's very important is it makes executing selling price increases Easier to do. Okay.
That's clear. Thank you very much.
Thank you. Next question we have is from Sean from Chonix Research.
Good afternoon, guys. Thanks for the time. A couple of questions. I'll start off with the first one. Just in terms of Yes, net debt evolution, I think obviously though the covenants are under control.
But just sort of looking at Q4, CapEx used to be quite weighted to the second or to last quarter of the year at least of about $150,000,000 And also with the cycle expansion delayed, I thought maybe that number would have come in a bit lower. If you could just expand on that and if there is any So, not going to CapEx into Q1 next year. And then just sort of linking that to net debt. If you look at sort of working capital unwind over the last So 2 years in Q4, there's been a nice inflow north of $130,000,000 How do you guys sort of see that playing out? And then once then I'll
All right. I'll talk briefly. Glen can talk about the closing net debt. Just on the Saiccor expansion, the estimated overrun linked to Solve it and the delays that we've had is about $30,000,000 When would that occur? Some may be Q4.
Some of it as we've indicated with the timing I might shift into Q1. The big driver for the higher CapEx Relative to earlier in the year, was that a lot of it was exchange rates actually, because the project It was in rent and also even our European CapEx. And obviously, when they got stronger relative to the dollar, In dollar terms, your cost went up, but the actual rand cost didn't go up. So that's what's contributing So why we get to the €400,000,000 Glenn, you want to talk about the net debt closing? Right.
Just to get back to your comment with regards to the working capital. So usually our historically our working capital in the current quarter, the quarter 3
Was minus
to slightly positive and you see that we've We reduced our working capital by about $37,000,000 for the quarter. So you're not going to get that large Inflow in terms of the working capital in our Q4 because we've managed to get some of it already in the Q3, it will be above the €37,000,000 But it's not going to be the 130s that we had historically. With that as a background and the additional CapEx coming through in the final quarter, we're going to be more or less breakeven from a net cash flow point of view. So our deck will remain relatively stable.
Okay. Awesome. That's perfect. Thanks guys. And then just in terms of the conversion of the convertible that was flagged in the results.
I think sort of looking forward, do you guys have sort of any further visibility on Potential conversions or how do you sort of see that playing out over the next 3 years, financial years?
No. We don't have visibility on that and that's really dependent on the decisions made by the bondholders. So they have the option to exercise the conversion above the conversion price which is So ZAR 33 and they have that option available to them for November 2025. Sappi has the option to convert after December 2023 If the share price exceeds 30% of the conversion price. So your ZAR33 If the share price is above 30% premium on the ZAR33, which is about ZAR43 After December 2023, we have the option to convert.
Okay. Excellent. Thanks, Lee. And then just going to Europe quickly, just to make sure I understood clearly. In terms of Q4, The expectation is to sort of remain margin neutral quarter on quarter.
In other words, keep it all positive. Is that correct?
Yes, approximately, yes.
Okay. Okay. Excellent. And then just moving on to
And Sean, if I may, just to emphasize the point. If you look at the pulp costs and some of the other chemical costs and even freight costs, If you look at all of those, we believe we're getting close to peaks now. And in fact, you've seen pulp paper pulp prices Starting to decline in China, which tends to lead European paper pulp prices. So that's why we're getting a degree of confidence that hopefully we're getting close to a ceiling or a peak in those costs. And then we need to obviously catch up with selling price increases.
Cool. Thanks, Steve. And just turning to the WPS. So if you strip out the timing issues from logistic delays as well as The impact from the shut, I mean, what did you sort of say has been your expectation on cycle versus what is delivered Year to
date. Yes. I think all in across The mills as I said earlier, we're probably looking at about 50,000 tonnes more than this quarter.
Okay. Steve, but I was just actually just referring to sort of year to date. If you sort of take away the expectation of the shut and the delay in deliveries, I guess the actual sort of operations from a volume perspective, how is that sort of performing in line with your I guess your original expectations?
Yes. It's obviously less, right? We lost the Alex, we lost the 40,000. We obviously maybe over to
you, Jaaf. For the rest of the production, we're actually fairly well on track. Maybe there was 10,000 tonnes in it, but nothing more than that. Yes. And then Okay.
Great.
Then to the bigger and then obviously earlier in the year, you know we lost the tonnes at Goodwill now because of the oxygen.
Yes, exactly. 100%. And if you sort of look at these lost tonnes, the 40,000 tonnes in the quarter as well as the sort of knock on in Q4, Is there any way to make up this tonnage? Or is it sort of in the base of the year now and it's done with us?
Yes. The 40 is gone, but all the other tonnes that we're talking about related to logistics Sean will sell. It's just a case of is it going to be in Q4 or Q1?
Obviously, the
items we've also lost. Sorry, the other thing we haven't mentioned is the 28,000 tonnes related to the KZN Riot.
Okay. Okay. Perfect. And then just last question from my side. Just in terms of the Cycle expansion ramp up, I mean, mine standing is most of those volumes are contracted.
So I guess from your customer end, Are they going to delay their ramp up or they're just going to buy volume to the market?
Yeah. We're obviously working closely with them and we're trying to get volumes to them as quickly as we can. You'll appreciate I can't comment specifically on that customer.
Okay, cool. Thanks guys.
Thank you. The next question we have is from Ross Creek from JPMorgan.
Afternoon. Thanks, everyone. Sorry for laboring these points. I'm just making sure I'm understanding correctly. So maybe if I just start on graphic paper margins in Europe.
I can't quite square the comment, I think it was to Brian's question on graphic paper margins. It sounds like those are expected to improve, albeit remain well below Normalized levels. Then it sounds like you're expecting margins to be at similar levels in Q4 in Europe overall to Q3. Is That's correct.
Yes. We're not saying graphic in Europe will improve. What we're saying is that There are further cost increases that have to come through, but there are also further selling prices that are coming through. And The net impact approximately means that the European margins, including Graphics Will be approximately the same.
Okay. Okay. Thanks, Steve. And then When you talk about margins being more normal from Q2 2022, are we talking what like pre COVID typographic paper margins?
Yes. We've obviously had these pulp increases. We've had increases other chemicals. And maybe it's best illustrated with a number. Approximately, our cost per tonne by the time we get to Q4 is going to be up about 100 Euros a tonne from pre the rise that we've experienced.
So we need to offset that by a similar rise in selling prices of €100,000,000 We've got some already and there's some to flow in Q4 And there'll be some to flow in Q1. Once we get that and we can get our selling prices up by the same rise in costs, Then our margins will be back to pre COVID levels.
Okay. Understood. Thanks, Steve. And just One last one on resolving pulp volumes. I think you detailed a lot of the issues you guys are facing.
Just maybe, I mean, Even regarding all those or taking account into all those issues, it sounds like you're still expecting pretty material volume growth sequentially for the next 2 or 3 quarters. You've already quantified Q4. And then as cycle expansion comes on stream, Some of those delayed volumes come through. We should see continued growth there. Is that a reasonable conclusion?
Yes. I mean maybe just Said in a different way, to summarize, Thicore after the expansion project Is sized to make 890,000 tonnes. We are going to start production on The new line early in Q1. It takes a little bit of time to ramp up. Alex said earlier in the second half of the year, We're confident that we can be operating at full volumes.
So there's going to be a period In Q1 and a little bit in Q2 where you don't have that full volume. So it's 110,000 For the full year, the additional capacity in the first half of the year, there'll be a gradual ramp up. You're going to lose a bit in Q1 and a lesser amount in Q2. And ultimately, The goal will be to get it up by the second half of the year to the run rate to achieve the 890. Now obviously, if you think about the current year and you take into account the lost production Because of the unrest, we lost 28,000.
We lost 40,000 because of the extended shut. That's going to be volumes that we'll get next year over and above the additional capacity.
The next question we have is from Wade Napier from Avior Capital Markets.
Good afternoon, everyone. Thanks for the time on the call today. Just a couple of questions from me on this business. I was sort of under the impression that their prices are sort of largely fixed to contracts and they would sort of see a bit of margin pressure into the sort of Q3. So is the South African business, which is sort of Aligned to rising containerboard prices really driving that margin uplift in the specialties business in Q3.
So just a bit of color there. And then my second question is on the graphic paper market. Is there any risk that the strong recovery that we've seen over the last couple of months, Is there sort of any pent up demand in this market that is potentially sort of making this recovery look better than it is? And With that in mind, do you sort of see any risk that price increases in the first half of next year that you're sort of flagging Maybe don't quite materialize like you think they could do.
Yes. Okay. Thanks, Wade. On the two questions, I'll speak briefly and I'm going to hand to Mike and Alex respectively to just talk About the respective markets. But the margin improvement is actually coming from both regions.
We have seen buoyant demand in South Africa for containerboard and Alex will talk about that some more. And then in the U. S, although our machines are now full, we do have the ability to optimize the mix On the machines. And that's helping boost profitability. Yes, we've got rising costs, but We have been able to execute on higher selling prices as well.
So Mike maybe just at a high level To talk about the packaging markets in the U. S?
Thanks, Steve. In the U. S, the start of this year, we were able to fully load The machines have not had to take any curtailment as a result of lack of demand. With that, we've been able to continue to put through price increases in the specialties and packaging. And we've been able to be ahead of our inflationary costs, if you will, in North America.
In addition to that, we've continued to work on mix optimization. This was our plan all along. Initially, we loaded up 1 PM1, the packaging machine in Somerset with Available orders and from this point on we've been optimizing that mix to what fits the machine and is most profitable For the region.
Thanks, Mike. And Alex, just packaging. Thanks, Stephen. Local
agricultural crops have been very, very good, which means our customers have Displayed a very strong demand for containerboard and obviously on the back of fruit exports. And then secondly, if you look at worldwide containerboard prices, they've Increased rapidly. So those are the 2 drivers and we actually see this going to continue going forward.
Thanks, Alex. On the second question about the graphic recovery, look there's no doubt there's a catch up that's underway. The demand fell off so hard and you see it was at 50% down at its worst. So there has been A recovery linked to COVID restrictions being eased and the like. We're encouraged by a few things.
I mean, firstly, our base case and I've said it many times on these calls, Our base case, we thought demand was only ever going to get back to 80%, maybe 85%. Marco mentioned it earlier. And clearly, we've gone above those levels and we're at 90% plus now. And what is pretty amazing is that we're doing a 2 year comparison here, right, back to 2019. I'm encouraged because not all segments of the economy are back up and running.
And The travel industry is a big customer of ours. The entertainment industry is a big customer of ours. Yes, retail has picked up, but Financial Services has not been using the same levels as they had been doing pre COVID. So there There's still further opportunities. And even if demand were to fall back a little bit, Because of all the capacity that's come out and just to remind you, right, in the U.
S, 25% of capacity came up. In Europe, 18% of capacity come up. So operating rates in the U. S. Are 100%.
They're theoretically Above 100 actually. At Europe, I've already mentioned about in the high 80s, but With the pickup that we're seeing now in June, July, August, Because that those operating rates I gave you was for the quarter, it's actually higher than that now. So that market's Also going to be back in balance. So there is scope for some pullback At these operating rate levels. Now the selling price increases that we're talking about are ones that Either we've already implemented or we've announced.
We have a series of selling price increases that are coming out in October. We are already talking to our customers. So we are confident that we can execute on those selling price increases. We're under no illusions. We know that longer term graphic paper will continue to decline.
And Our strategy to combat that is to redirect more of our capacity away from graphics towards packaging. That will be done in a phased manner. But in the short term, the volume fundamentals Our challenge is rising raw material costs and we need to combat that and that's what we're executing on at the moment. And if operating rates are in the 90s, then we're able to do that.
Thanks, Steve. I appreciate the color.
Thank you. We have a follow-up question from James Tyler.
Yes. Hi, there. Sorry, I know everyone's got somewhere to go. But I've just got 2 Quick follow ups, which the first one is, did you say that the Saiccor expansion is going to cost an extra $30,000,000 And if so, is that Therefore, going to be that €30,000,000 likely to be increased CapEx for next year. And then secondly, I'm a little not really quite understanding This 55,000 tonnes of volume, which it sounds like you're talking about being delayed into Q1, could you talk around that in terms of whether that means that We're going to see a big pickup in volume in Q4 for Dissolving Pulp, but we should actually see another substantial pickup in Q1 as well.
Okay. On the CapEx, The additional €30,000,000 yes would move in It's likely to move into next year. Yes. So and you know I've talked about this James that We haven't committed to any large projects, but there's a strong probability that that Will be in next year's CapEx, yes. The 55,000 tonnes I referred to at The beginning was not all dissolving pulp.
It was About 25,000 tonnes of dissolving pulp. And then the balance mainly is out of Europe, Which relates to graphic paper. I've talked very strongly about how volumes have recovered, but The logistical challenges out of Europe are also very tough. And as you know, we export out of Europe About 25% of our volumes and that goes to South America, the U. S, Asia, Australia, that is at risk between the quarters.
Now The guidance that I've given you, we've assumed that that is going to spill into Q1. And It's one of the reasons we are conservative about our earnings guidance. Does that
Yes. So you're effectively saying that you know now already that when you get end of September, there's going to be additional delays because of logistics. You can tell that already.
James, you know what it is. You guys want us to And earnings outlook, so we have to do our best estimates. And We have to be realistic about the challenges that are out there. So we deliberately are conservative.
If I can add, if we look at the Durban port, things are getting back to normal, but there are significant And the ramp up is fairly slow. So we can see that it could be unrealistic to estimate higher volumes being shipped out of it.
So said another way, our base case our base estimate is that that 55 will spill into Q1. And that's what we've Consider it when we gave you our earnings guidance.
See, thank you very much. Thanks.
Thank you. The final question we have is a follow-up from Sean from Konex Research.
Thanks guys. Just two 2 more. In terms of maintenance for DP in FY 2022, could you just outline What your expectations are in terms of timing? And then just secondly, Steve, you made a comment earlier. Sorry, maybe I misheard you.
But did you say incremental 50,000 tonnes of DP in Q4? And if so, how does that tie into your the 55 kT guidance with 25 kT related EWP. Thanks.
Yes. The 50,000 in Q4 is Taking into account that 55,000,000 I don't want to confuse anyone. The 55,000,000 is the whole business. It's not just DP. Yes.
25,000 tonnes is DP. The 50,000 tonnes extra from Q4 It takes that into account, yes.
So Steve, just to confirm, sorry to interject there, but So of the $55,000,000 $25,000,000 relates to DWP, correct? And then are you saying that Incrementally, there will be 50,000 tonnes of DWP in Q4. However, if for whatever reason the shipments are actually in time, We could then expect the extra 75,000 tonnes in Q4.
Yes. I doubt you'll get that 25,000 tonnes. Alex has said Alex has said it's not all South Africa by the way.
Yes. So
I'll take care. It's already early August. We kind of know when the ships Are likely to sell and how much tonnes we're going to get. Similarly in the U. S, we know that there's some delays there.
So It's our best estimate as we I would be surprised if we got that 25.
Okay. So worst case So you're saying worst case scenario when you get 50 extra?
Look, you're boxing me in here, but the logistics challenges are all out there and Durbanport It's coming up. This is our best estimate.
Okay. So if things had to really work out well for you guys, it would be 50,000 tonnes extra EP plus The 25 with the sales aligned.
Yes. I don't think you'll get the 25. Okay.
Cool. Perfect.
Okay. The timing of the shuts, Mike
Klokaszczuk? No major change, Steve, next year. It's the same time it will be in Q3, roughly the same length.
Yes. And then Alex, the Saiccor and obviously the Ngodwana one, which is the bigger one.
Yes. We obviously need to take It's not only the 3rd recovery boiler and the other 2 recovery borders. And then there's a little there's some work being done to try and move The Ngodwana shut out a little bit longer. And we've not finalized that, but there's an opportunity there.
The The Englodwana shot will occur during the year, but we're hopeful that we can push it out a little bit later in the year and That's consistent with what we did last time.
Okay. Thank you. So, no one is like the Q3, Q4 story for FY 2022 and then cycle. I don't know if I missed that.
The cycle set I think is in the Q3 of next year fiscal year.
Awesome, guys. Thanks very much.
Thank you. Sir, that was our final question. Do you have any closing comments?
Nothing more to add. I just want to thank everybody for joining us Thank
you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.