Good day, ladies and gentlemen, and welcome to Sappi Limited's Third Quarter of 2020 Results Conference Call. All participants will be in listen-only mode. There will be an opportunity to ask questions when prompted. For the benefit of other participants who have chosen via the HD web phone, please ensure that you give your microphone permission to make yourself audible before accessing the question queue. If you should need assistance during the call, please signal an operator by pressing star and then zero. Please note that this conference is being recorded. I'd now hand the conference over to Mr. Stephen Binnie. Please go ahead, sir.
Thank you. Good day, everybody. Thanks for joining us. I will be going through the investor presentation and calling out page numbers as I move through so that you can follow. Starting on page three, the highlights for the quarter. Obviously, the severe impact from COVID-19 tells a big story about the results for the quarter. It had a substantial impact on profitability predominantly on sales volumes. That was mainly associated with our two largest segments, graphic paper, which was down in volume terms 40%, and dissolving pulp 29%. You can see it was a significant impact. As you look at the quarter, April was tough. May and June were even harder. It looks like dissolving pulp bottomed in late May in terms of volume declines. Graphic paper in June.
We've seen since that date, we've seen some recovery and I'll talk about that a little bit more as we go forward. Pleased to say that the packaging segment continues to grow volumes, and profitability at the same time. Certainly, that strategic decision to refocus into that area has been very successful and will be one that we'll continue to do as we go forward. Naturally, during this climate, there was a strong focus on liquidity and cash flows. We will talk more about our resources in a couple of slides' time. The liquidity on hand at the end of the quarter, we had cash of $190 million, and undrawn RCF facilities of $503 million. In an effort to manage our liquidity and obviously our inventory risk, we actually took a significant proportion of production downtime, 595,000 tons.
That was predominantly, in graphics, about $490, and the rest obviously, in dissolving pulp. With a quarter like this, the EBITDA down significantly on a year ago, which would also impact on the leverage ratio, which reached four times. Moving to slide four, the earnings bridge. The lower volumes that I talked about you can see is reflected in the red volume bar. Selling prices also were down, and that predominantly relates to dissolving pulp. That's something that we've talked about in prior quarters that even going into the COVID-19 crisis, dissolving pulp prices are at historical lows. In the other areas of the business, well mainly in graphics, we saw prices coming off a little bit, but holding up reasonably well under the circumstances. We were able to take substantial costs out of the business.
Variable costs obviously benefiting from lower raw material prices. Fixed costs. A lot of that relates to labor and personnel costs. On this bridge, you can see it was down $49 million. I know in the results announcement we mentioned $67. The $18 million difference is an exchange rate differential because obviously the rand and the euro was weaker against the dollar during that period. The net impact on exchange rates was a positive $17, giving us the $26 million EBITDA that we saw. Slide five shows the product contribution. Obviously the significantly lower volumes and profitability from dissolving pulp and graphics distorts this picture somewhat. Interestingly, in this quarter, packaging has actually become our largest contributor.
Obviously as the recovery continues when we move ahead in the next couple of quarters, this will normalize once again and packaging and dissolving pulp and graphics will be bigger contributors. Moving to slide six. I suppose there's no surprises on this slide. The margins and volumes in the two big segments coming down. We're very pleased with the progress. On the packaging front, volumes continue to go up and also at a very reasonable margin as well. That's something we would expect to continue. Moving to slide seven, it's the debt maturity profile. I'll just call out a couple of changes. Firstly, and I've already mentioned that we still have $190 million of cash on hand. In the 2020 maturity, you'll see a number of $144 million, which is the RCF.
Although it's reflected in the 2020 block, that's a facility that matures in 2023. Obviously, from an accounting perspective, it's regarded as short-term in nature, so that's why it's included in the block. It is in place till 2023, so it's slightly misleading that it's reflected in that block. The full maturity is 2023. Other bigger numbers to call out are the securitization facility, which matures in 2022. That's something we've had in place for a number of years, and we would expect to continue and, well ahead of that maturity, we will look to roll that over. Moving to Slide eight, the CapEx. The number for 2020 is now down about $ 350 million.
Earlier in the year, we were talking just under $500 million. It's come off substantially, and obviously that's linked to the deferral of, or postponement, or cancellation of some non-essential CapEx. The biggest number there is the Saiccor expansion, which has now been pushed out and will be completed in 2021. As a consequence of that, we expect the 2021 number to be about $350, which includes obviously the Saiccor deferral. Turning to the segments, I'll jump to page 10 in Europe. Volumes dominated by the decline in graphic paper. You can see the overall volumes for the region were down 32%. That's almost entirely because of the drop in graphics. We were forced, as a consequence, to take production downtime of 369,000 tons.
That had the double benefit of ensuring we didn't sit with inventory risk, also from a cash flow perspective, it obviously benefited the cash flow. You do have a negative P&L impact because you have lower stocks, net-net, it was the right thing to do. The packaging continues to do well for us. Within the segment, there are different categories of goods, I talked about this last quarter, the kind of more essential food, hygiene-related products did well. Certain non-essential luxury goods did less well and were impacted by the lockdown. That's why you have the mixed performance. I am pleased to say that profitability did increase here. We did benefit from lower costs, specifically in Europe, lower pulpwood, latex costs.
On the fixed cost front, we were able to take substantial costs out of the business and obviously benefit from some temporary unemployment legislation in some of the countries in which we operate. We did have a fire during the quarter on Alfeld PM3, which was a bit of a headache because the product made on that PM3 machine goes into the packaging and specialty segment. That ironically was one of the products doing very well. It was a bit of a headache that that happened for us at the worst time. Pleased to say that the repairs have been done, and it's operational again from the 20th of July. Turning to North America. Similar story, that we saw substantial declines in graphic paper, and we took 107,000 tons of commercial downtime.
Packaging picked up significantly, close on 70% the volume increase. That's the ramp-up that we've talked about over the last few quarters as we continue to ramp up following the conversion at Somerset. It's going very well for us. It's increasing profitability, as we said it would. There will be further increases in the year ahead. The dissolving pulp had an impact in the North American business. We have used that opportunity to make more paper pulp for the Cloquet paper machines. We took out fixed costs and variable costs. Once again, taking advantage of some of the following legislation in the U.S. The South African business is summarized on page 12. We were negatively impacted by the lower dissolving pulp volumes. In that segment, again, we took commercial downtime. We did benefit from exchange rates as the rand weakened.
Looking at some of the others, well, maybe just to call out one thing, one of the initiatives to help with the liquidity and cash flow, we were able to push out some annual shuts. We did have a ZAR 200 million savings benefit from that. Predominantly at Ngodwana. The packaging segment continues to do well despite the COVID-19. We're positive about the outlook as we go forward. Unfortunately, some of the smaller segments or products, particularly newsprint and uncoated office paper, were severely impacted by lockdowns. In fact, we saw 60% odd declines in the quarter. Like the other regions, the business took out substantial costs, both on variable and fixed costs. Turning to slide 13, and just some of the issues on COVID itself.
Firstly, on financing, as you know, we negotiated a covenant suspension to March 2021, so the first time it will be measured is in June 2021. We're well aware that the clock is ticking on that, and we will proactively engage with our bankers to ensure that we have a flexible arrangement following the expiry of that period. We did repay some South African debt that matured during the quarter. We put in place a bridge that was funded through a bridge facility, and we issued a new South African public bond. The appetite is still there. The CapEx, I've mentioned a couple of times, but we obviously deferred CapEx as much as we could. The project recommenced at Saiccor in July. It's going once again. It's going well. Obviously, things appear to be on track. We expect to complete in the third quarter of the new financial year.
I do call out, obviously, with the rise in COVID cases in South Africa, that could be a risk factor for the construction firms as well. We also deferred the shuts, and I mentioned that already, but it was predominantly in Ngodwana. Pleased that we continued to do good work on the procurement side. In earlier quarters, we talked about ZAR 64 million coming out for the year, and we actually think now we can get to ZAR 100 million. Fixed costs, I've mentioned a couple of times, but we took ZAR 67 million out for the quarter. Turning to the markets themselves, onto page 14. Graphics, as you would expect, with the lockdowns, significant impact on retail, companies not advertising, that caused a significant reduction in demand for graphic papers globally. Our volumes were down about 40%, followed the markets.
The one thing I should point out is that certain of our export markets have been particularly weak. I call that out because somewhere like South America has been even more impacted, particularly as the COVID-19 has moved into that area. The newsprint and office paper is in that segment, that was also a negative factor. Then we benefited from the lower costs, and as I said earlier, prices did drift downwards. I think I've already mentioned it, but just to repeat, if we look at the graphic segment, June actually was the worst month for us. Obviously, April slipped, May was a bit worse, then June similarly so. Subsequent to that, as we've gone into July, things have been a little bit better. It's not a V-shaped recovery, but it is recovering, and we would expect that to continue in the months ahead.
Packaging, I think a great story. Yes, there were certain products negatively impacted, but overall doing well and we will continue to ramp up at Somerset and Maastricht. In the short term, lower raw material costs helping us as well. Dissolving pulp, once again, the retailers, the clothing stores did go into lockdown. It has a substantial impact on volumes right across the supply chain. Obviously, you saw a growth in e-commerce, but that was not enough to offset the negative impact. I've mentioned that we were down 29%. We were at the low in late May. June actually was a bit better and subsequently July as well. Same time, our customers, a lot of their plants recommenced production in June. They were in lockdown, so they had ceased production. That began once again in June, so that's helping us a bit.
Exchange rates have moved in our favor in South Africa. That will entrench our leadership position from a cost perspective. Having said all of that, and things are picking up, it is important to be mindful of the fact that when we went into this COVID crisis, that there was excess viscose production. Because of that, dissolving pulp prices were weak. The long-term outlook is more favorable. Clearly we have to get through the worst of this COVID crisis. In the segment, we also have the BCTMP that we sell from Matane. Pleased to say that it's going well, albeit that all pulp prices are weak at the moment. We also sold a little bit of kraft paper pulp on our swing machines to ensure that we could fill them up somewhat.
Slide 16, we thought was useful to include, it just one slide on U.S. retail clothing sales. I know you guys, many of you will see these numbers, we thought it was useful to include it because it does show the recovery path of clothing sales, it matches how we're thinking about the recovery and dissolving pulp. I'll talk a little bit more about that on another slide. Slide 17. Just last quarter, we talked about our 2025 strategy, which we rolled out across the business earlier this year. In summary, it covers two distinct phases. Firstly, on Slide 18, the short term. As you would imagine, a strong focus on the balance sheet, reducing debt, maximizing cash generation and efficiencies and costs and all of those things.
We're not going to stop all the good work that we're doing on future opportunities, but we're certainly not going to be investing in those at this point in time. We need to get our balance sheet back to the levels where we desire it to be. Slide 17 talks about beyond that period, and in that period, provided everything is back on track, then we would start to look at further opportunities. It's predominantly in the packaging space where we've been very successful and also in the biotech space as well. As you know, we've invested in some pilot plants in recent years, and I would like to think that in time we'll be able to commercialize some of those opportunities.
If you move to slide 19, and it was mentioned on the previous page, but on 19, this is our strategy statement, and I'm not going to read it out to you. Two changes in emphasis as we move forward. One is on sustainability. Like many industries, the sustainability story is growing in prominence and will be a big part of our strategy, and it will allow us to give us a competitive advantage as we move forward and work with our customers. The other thing is obviously innovation and R&D, and we continue to have a strong focus there and as we develop new products for packaging and biotech, this will be an area where we will place great emphasis.
Slide 21, just to the various pillars and briefly touching on some of the initiatives. On costs, we recognize it's all about costs and staying at the low end of the cost curve. A lot of focus on efficiencies and procurement savings. That will continue. Interestingly, the Saiccor expansion will help improve efficiencies and lower costs. As we get up to full volumes, which will be obviously after we finish in Q3 next year, that will lower our cost base. The rationalizing of declining business, you would have seen a recent announcement whereby we closed the Stockstadt PM2 machine, which is something we did talk about in earlier quarters, also Westbrook PM9 and that paper for Westbrook will now be made for the release business at our other mills in the U.S.
Those combined will take out about 25 million of costs next year or on an ongoing basis. I've talked about the focus on the balance sheet, so I'm not going to repeat that. Accelerating growth into the higher margin segments. We still have further scope for ramp up at Somerset and Maastricht. They were delayed a little bit because of lockdowns and some of our customer staff weren't able to come to work, so we had to slow down some of the trials that we're doing, but those are all recommencing again, and we'll start to benefit from those. Barrier coating is a big opportunity, and we'll continue to work with customers and invest in that area. Our outlook for next quarter on page 22. We estimate volumes for this quarter to be around 75 for dissolving pulp and 70 for graphics.
The one thing I would say about the number on dissolving pulp is, as I mentioned earlier, we are making more paper pulp at Cloquet. That's a choice we've taken because of pricing. If you were to back that out, the actual market for dissolving pulp is actually probably at a minimum of 80%. The 75 doesn't give you our view on the market, it's just that's where we think our volumes will be. Dissolving pulp is recovering a little bit faster than the graphics. The price is obviously still under pressure across all the pulp categories and that's something that we would expect to improve in time, but we need things to normalize in the market. We do have a headache in South Africa, at the port and with shipping issues.
A lot of that's obviously linked to the COVID and, as the number of infections rises in South Africa, that has impacted staff, our labor at the ports and has reduced productivity. We are proactively working with the port management and they're aware of the challenges, but it is a risk factor. If it does affect, it would be a short-term delay, but it is a headache that we have. Packaging continues to grow, and the categories that have been underperforming, we would expect to accelerate as the lockdowns ease. Graphics, slow recovery underway as well. I mentioned this earlier, we don't think this is a V-shaped recovery. We think it's going to be gradual. There will be improvements in Q4 and further improvements in Q1.
Specifically with graphics, we don't anticipate the volumes will get back to what they were pre-COVID, I do want to stress to everybody that there is 20% of the market capacity coming out in both U.S. and Europe. We don't need it to get back to 100%. If volumes can get back to 85%, this market will be in balance once again. Certainly that's a key number for us as we monitor the recovery path. As we think about graphics and dissolving pulp, we think that the full recovery to the levels that I've referred to is only going to happen in 2021, in the middle of our financial year, 2021.
The Saiccor expansion is going to be completed in the third quarter, as we mentioned. That's something that we're excited about. Although prices are low, when we do get those incremental tons, because of our low cost base, that will make a significant contribution as we get into Q4 of next financial year and into the 2022 financial year. As you would expect, in the short term, our focus on liquidity and cash flow. That's the presentation. Operator, I'm going to put it back to you now for questions.
Thank you. Ladies and gentlemen, at this time we'd like all for questions. You're welcome to press star and then one on your touchtone phone or the keypad on your screen, at which time you'll hear a confirmation tone. Following this process will place you in the question queue. If you decide a question has been addressed, and you wish to pull your question, you're welcome to press star then two on your touchtone phone to remove yourself from the question queue. Just a reminder, if you'd like to ask a question, you're welcome to press star and then one. The question comes from James Twyman of Prescient Securities.
Yes. Thank you very much. Yes, a few questions. Firstly, you've clearly been cutting your inventories in graphic paper. Could you just say whether they are now at a low level or at a very low level, in terms of whether we're likely to see many more of that? Secondly, in the viscose market, that still seems to be weakening. What are you seeing there in terms of that market, in terms of closures of players there? Just finally, if you do another conversion or two, what would be the cost of those, very approximately? Thanks.
Yeah. Just on inventory levels on graphics, you'll see from the numbers, we cut our inventory substantially during the quarter for graphics. I have been asked questions by others about why didn't the overall inventories not come down further? I just point out a couple of factors on that. Firstly, the packaging side, inventories did go up. Secondly, because of the deferral of the shuts, particularly in Ngodwana, we were carrying some extra inventory for that.
When the shut occurs in Q1, obviously, we'll sell the product then. That's why it didn't come down as much as the overall sales. With regards to graphics, yes, we aggressively cut inventories. We do envisage a little bit of downtime in Q4, but not nearly to the levels that we saw in Q3. Maybe Berry and Mike, I'm just going to put it, just very briefly, you can just talk about your relative graphic inventory situation.
Yes, Steve. As far as Europe is concerned, inventories went down very substantially indeed, and are now at a level which we would consider appropriate to a business if it recovers to the levels that Steve has said in the next quarter. At the moment, we've still got a small amount to take out, perhaps 20% of what we took out in quarter three. We don't expect that to have a major impact on the profitability in quarter four.
Thanks, Berry. Mike?
North America, we did bring inventory levels down quite a bit and expect them to come down slightly in Q4. Our Q4, we do expect to see some return as things in North America have been opening up. We're balancing customer needs and inventory levels going forward as things open up.
Thanks, Mike. Viscose, I'll give you a little bit of a background and then Mohamed, I'm going to pass it to you just to elaborate a little bit further. What we've seen both in the dissolving pulp space and in viscose space, substantial capacity temporarily closed. They have been progressively better in recent weeks. On dissolving pulp specifically, there's still a substantial proportion of the producers not making product. Obviously viscose prices continue to be under pressure as suppliers look to recover from the situation. Mohamed, do you just want to briefly talk about the viscose market?
Yes, Steve. What we have seen is because of the relatively high VSF stocks, and the very low margins of the viscose side, a lot of the VSF producers, especially in China, have taken lines down temporarily to try and balance supply and demand. What we have seen of late is an increase in the operating rates. We've gone from about, I would say, just under 60% operating rate for the viscose industry in China to today, around the 65, 66%. Still low, but that's where the industry is operating.
I should also add that this particular period, July, August, September, is also the seasonally slow time. There's also that impact on the viscose industry. Whilst a lot of the viscose industry has taken out capacity temporarily, we've also seen in the last couple of weeks, I think, an intensified level of activity in terms of announcement from dissolving pulp producers taking out capacity as well. That's also bringing in some balance at this point in time.
Thanks, Mohamed. James, on your third question on the conversion, I'm a bit hesitant to give a number. I don't envisage us converting any machine in the next two or three years. Obviously, it will depend on how quickly we can get the debt levels back and profitability levels back to where we want them to be. Obviously, when we converted Somerset PM1, we know that cost about $200 million, and we still have to do our investigations. One of the things that we would be mindful of is not to spend substantial amounts of CapEx. As we evaluate opportunities, we strive to do ones that will cost less from a cash flow perspective. There's a lot of work that still needs to be done before we finalize and ultimately decide which route to go.
Thank you.
James, has that concluded questions?
Lovely. Yes. Thank you.
Thank you. The next question comes from Alexander Berglund of Bank of America.
Thank you very much. Three questions from my side. The first one on your volume outlook to the fourth quarter, and specifically on graphics there. When you're talking about 70%, is that just reflecting your view on the underlying demand on the market, or do you also expect to be able to gain some market share from competitors exiting? Secondly, I wonder if there is anything more you think you can do to mitigate the operational gearing on the volume drop through into the fourth quarter. Finally, a question on working capital or in capital management, and if we should expect any meaningful working capital, cash inflow in the fourth quarter. Thanks.
Thanks. I'll take the first two, Glen, and then I will pass to you on the working capital. The volumes that we talk about in the fourth quarter for graphics, there is a bit of market share gain. There's mixed performances in the markets. There are certain countries where the recovery path is faster than others. As you would expect, places like Germany and France, they eased lockdowns sooner, and their recovery is ahead of those. Similarly, interestingly, in the U.S., things are starting to pick up as well. There are markets which are lagging. Now, if you think about our European business, about 25% of that goes into exports, and that's predominantly Asia, which is doing okay. A lot of volumes do go into South America and Latin America. As you know, Mexico and Brazil still are deep in the crisis.
The volumes in those countries is as low as 20%. That's what's lagging us. You have certain countries at 80% and you have others at 20%. The blend of all of that is giving us the 70% that we talk about. Within that, we do think that with the closures both in Europe and the U.S. of substantial capacity, we do think there's opportunities out there for us to hopefully target further volumes and market share gains. On balance, as we look at all the markets and the blend, we're confident it can be at least 70%. The operating gearing, look, we took substantial costs out of the business in Q3.
Unfortunately, when you take out volumes in the neighborhood of what we've talked about, 40% on graphics and 30% in the dissolving pulp, you do carry those fixed costs. It has a substantial impact on the business. Our recovery is all linked to volumes. As these volumes recover and we get to the 70 and 75 that we talked about in Q4, and we would expect Q1 to be ahead of that, you're gonna get the benefit and it flows to the bottom line. In terms of actual initiatives to save costs, obviously, everything we were doing in Q3, we're gonna try and do in Q4, we do expect better volumes. That will help with the ratios. Glen, do you just want to talk about the inflows of working capital in Q4?
Yeah. Thanks, Steve. We had an inflow of ZAR 20 million on our working capital for the quarter three fiscal. Historically, our quarter four has been an inflow of working capital as the working capital levels at the end of September are the lowest across our fiscal. We anticipate that same trend to continue this year, and we will be in excess of the ZAR 20 million inflow that we saw in quarter three. It will have a further inflow in quarter four.
Okay, on the full- year basis, should we expect a inflow or an outflow?
Yes, we do expect an inflow for the full- year basis.
Thank you.
The next question comes from Wade Napier of Avior Capital Markets.
Hi, guys. I'm interested to hear your thoughts on your European coated mechanical business and the uncoated woodfree business. In terms of the coated mechanical business, it doesn't seem to be the same sort of level of supply side response as we're seeing in the coated woodfree side of things. How are you sort of thinking about your coated mechanical business in this environment and sort of for the next sort of 12 months or so?
The uncoated woodfree side, you're obviously closing PM2 at Stockstadt, and that sort of leaves a standalone uncoated woodfree mill within Europe. How does that sort of fit into your portfolio going forward? I've got some questions on the fixed cost savings that we saw in Q3, and obviously, there were some benefits from the furlough schemes, et cetera. What should we expect going into Q4 and maybe even into Q1 next year? How much of those sort of benefits will sort of carry on through?
Okay. Thanks, Wade. I'll briefly start on the coated mechanical and uncoated, Berry, but I'm gonna allow you to just expand further. Obviously, through consolidating, our coated mechanical business now is predominantly now in the Kirkniemi mill. That market obviously is under pressure as well, but we don't have the same leadership position that perhaps we have in coated woodfree. It's obviously something that we continue to monitor and we'll manage going forward. At least it's now ring-fenced at one location. Berry, I'm going to pass it to you, and you can also just talk about the uncoated market as well.
Yeah, sure, Steve. As far as the coated mechanical business is concerned, what we saw was publishers still pretty anxious to keep the printed side going because it's such a major part of their own income. What we did see was that pagination went right down and advertising went right down. In fact, advertising there was hit very hard indeed. Advertising industry is going through quite a tough period as well. We have started to see also in coated mechanical in recent weeks, order sizes beginning to pick up. That's one of the rather important things, is that if order sizes start to pick up, it means that there's a bit more confidence in the market. We've taken out a lot of coated mechanical capacity, of course, by exiting Lanaken. We exited there upwards of 300,000 tonnes of capacity mechanical coated.
That means our business is smaller. It's also a slightly better quality business. We're out of the basic LWC. We're into the mid-weight sector and the very lightweight sector. These are slightly more niche-like products. We have there a business that should be okay in the next few years. Coming on to uncoated. We have a niche business in uncoated, where the capacity is around about 200,000 tonnes. That is all. We don't make it anywhere else. We also have made that machine capable of making the very high-quality luxury coated products. It'll be a machine which is mixed. It's highly integrated because it's got its own pulp mill. It's obviously in the middle of the German market. We think by getting PM2 out, we have made that mill now viable.
Thanks, Berry. On the fixed costs and the continuation of the savings, Glen, over to you.
Yes. Just as far as our level of fixed costs, if we compare Q3 to what we're anticipating in Q4, we're going to be marginally up in Q4. That's just from a seasonal adjustment relative to Q3. As far as the total fixed cost savings are concerned, we expect it to be in line with what we saw in Q3.
Great. Maybe just a follow-up question on the fixed cost side, related to the closures at Stockstadt and Westbrook. Could you sort of quantify what you'd expect to take out from those closures in terms of costs?
Yeah. Wade, across the two, we're looking on a per annum basis. Obviously, they'll be closed at the end of the financial year. Going forward on an annual basis, we're expecting between $20 million to $25 million.
Great stuff. Thanks, guys.
Ladies and gentlemen, in order to accommodate everyone who is in the question queue, please can we ask you to limit your questions to a maximum of two? Thank you. The next question comes from Tom Elliott of Royal London Asset Management.
Good afternoon, gentlemen. Can you hear me okay?
Yeah, we can hear you.
Fantastic. I've got two questions and then a clarification. I just wanted to touch on something you alluded to earlier in the call when you talked about that you would proactively engage with your bankers to ensure flexibility at the end of your covenant waiver. I just wanted to ask, when you had your previous discussions with your banking group, what were they like? What was your banking group open to? Do you feel you'd be able to acquire another 12-month covenant waiver if you had to? Was this discussed last time around? Just want to get a bit more of a flavor on sort of what you meant by that and how discussions went last time.
Yeah, thanks. Firstly, I would say that the relationships with our banks are strong, and they go back a long way, and they understand our business, and we have very transparent relationships with them. We proactively put in place the covenant waiver period. Obviously, we did it early in the virus timeline. We were doing this in March, and I think we were one of the first companies to put in place a covenant waiver. We know that we've still got a few months, but we don't want to wait till the last minute. We are proactively talking to them and discussing. With regards to a specific timeline, that's not something that I can give at this stage.
All I can say is that the bankers are supportive and they understand the situation, and they understand that this specific quarters, obviously the quarter that we've just had and probably the one we're in at the moment, has a substantial adverse impact associated with the virus. We need to figure out how we can bridge that gap before we get back to normalized levels. We'll update you as soon as we've got developments, but we're encouraged by the discussions.
Okay. Thank you very much. That's very helpful. Second question. I know you've already talked about working cap, but I just wanted to get a sense. Now, please correct me if I'm wrong, I think the payables, there was a bit of an unwind quarter on quarter in payables. I just wanted to get a better sense of your payment terms for payables. Has most of that unwind now occurred? Should we be expecting more of an outflow related to payables in the next quarter?
No, I think, on the payables, you'll appreciate that some of our suppliers were also under pressure. We tried to avoid lengthening terms. Obviously, that's something we could fall back on in the end, but we didn't implement that in the quarter. I think that as we go forward from here, we would expect payables to normalize and follow the activity of the business. There hasn't been any major adjustments in payables days.
Okay. Thank you very much. Just a clarification. I think in the call you referenced some rand-denominated issuance. I think that was after quarter end. I just wanted to clarify, versus 2Q end, sorry, 3Q end, is there going to be any additional debt or any additional liquidity we should expect from those rand-denominated facilities?
I'll let Glen elaborate, but obviously, we had the one bond.
To ask in a different way, perhaps to simplify, was the rand-denominated transaction purely refinancing?
Effectively, yes. That's the right way to, yeah.
Okay, perfect. Thanks very much, guys. Cheers.
Thank you. The next question comes from Brian Morgan of RMB Morgan Stanley.
Hi. Thanks, guys. Can we just chat about the next six months outlook for graphic paper where, in the last three months we've had furlough schemes benefiting the industry, arguably defending prices. Those furlough schemes roll off in the next few months. We know that, stores told us that they're going to be selling out of inventory until the end of the calendar year. I'm just trying to get a sense of how the industry is going to look as those furlough schemes roll off. Is it going to be able to balance itself? Could we see a bit of pricing pressure coming through the end of the year?
Look, firstly, obviously, competitors are taking out substantial capacity both in Europe, and in the U.S. with the recent announcements. We are closing Stockstadt PM2 as well. There is about 20% capacity coming out of each respective market. You're right that some of the competitors that are closing machines are selling through their inventories, and that is a risk factor. However, I would combat that by saying that customers are looking for long-term sources of supply, and they want to build relationships. They know that their options are getting less, and they want to be sure to secure sources of supply. That combats some of the risk factor that you referred to. I do think that prices have drifted downwards over the last couple of months.
Some of that's because of the weaker market and obviously lower raw material costs. I think I've touched on it already. If the market can get back to 80%, 85% volumes of what it was pre-COVID, then markets are back in balance. That for us is the key number. That's what we're targeting, getting it back to 85% of what it was previously. That's not going to happen overnight. We've given you what we think Q4 will be, and I think Q1, you're going to see progressive upward movement from there.
To get back to the 85 may take a little bit longer, and we're thinking about the middle of next financial year to get it back to those levels. I know your question was specifically on pricing, so it's drifted downwards, but it's actually held up reasonably well under the circumstances. When you think volumes are down 40% and you've got competitors trying to sell out their inventories, I think it's actually done reasonably well under the circumstances. We think that if that market balance remains, then we can continue to try and hold the prices.
Okay, cool. Thanks.
The next question comes from Sean Ungerer of Chronux Research.
Good afternoon, guys. Thanks. Just two questions and one clarification. In terms of the 2025 strategy, could you just comment a little bit on ROCE? I didn't pick that up in the slides. Secondly, in terms of capacity closures in the U.S., could you maybe comment a bit more whether you think that will actually be a permanent closure, or there's a risk of those assets being purchased? On clarity in terms of working capital unwind, if you look at Q4 historically, there's been quite a nice cash inflow from working capital above averaging about $80 million. Is that the number we should be looking at rather than the $20? Thanks.
Ladies and gentlemen, please remain online. We seem to have lost our main speaker. Thank you. We can hear you. Please go ahead.
Sorry, Sean. Apologies. Our line dropped here.
No worries.
Sorry. I lost my train of thought. Do you just want to repeat your question?
Yeah. Just in terms of the 2025 strategy, just how are you thinking about it from a returns perspective in terms of ROCE? Secondly, in the U.S., the capacity closure, do you deem that permanent or do you think there's a risk that gets purchased out and gets up and running again? Just in terms of clarifying working capital in Q4, normally there's an average inflow of about $80 million. Should we be expecting that rather than the $20 million? Thanks.
Hey, Sean, I think Glen gave you the number for Q4 on working capital. I'll let him elaborate further. Mike, on the second question, I'll start and I'll pass it to you. Sean, with regards to 2025, I think primarily our focus is obviously in the short term. It's getting the balance sheet right, getting that leverage ratio back below two. We still have our long-term targets of getting at least 12% return on capital employed for investment projects. If the balance sheet's back to where we want it to be, I see no reason why we can't strive to achieve those goals. It is unfortunate that our balance sheet is where it is, because there are some very exciting projects out there, and we've demonstrated that with the packaging site, that we can grow the business.
You have our assurances that we're not going to commit large sums of capital until things normalize and we get the balance sheet back. We've done it before, and we'll do it again. Mike, on the capacity closure, obviously it's a big opportunity for us, and we will be targeting some of the customers of the mills that are being closed. With regards to the risk of somebody else picking up that mill and whether it's permanent, Mike, I'll put it to you.
Well, I can offer that it would only be pure speculation on our part. The track record of our competitor that's shutting the mill down has a record of not allowing the assets to restart and compete in their markets. I think that's the only thing that I could speculate on at this point. There's been no additional information surrounding what their intentions are, but that is what their history is.
Good.
Glen, just the last one.
Sure. Yeah, just as far as the working capital is concerned, we've had a net outflow on working capital for the nine months of $70 million, and we expect for the year to have a net inflow.
Okay, great. Thank you.
Sean, you can work that one out.
Maybe, maybe not. No, I'm joking. Thanks.
The next question comes from Mikael Doepel of UBS.
Thank you. Good afternoon, everybody. I just wanted to ask a bit about the dissolving wood pulp market. If you could just start there with the pricing that you see in China now for the hardwood import prices. What's the level right now? Where was it in June and in May? Just to get a feel for the magnitude of the price pressure that you are talking about. We can start there.
Okay. Mohamed, I'll start and then hand to you. We saw a bit of a decline from where it was last quarter. It dropped from about ZAR 635 to six . I think today it's $607 . Again, it's a drop, and I know it's off historical lows, but under the circumstances, when volumes at the VSF were dropping for textile demand of 40%-50%, it's actually held up reasonably well. Mohamed, I'll pass it to you. Again, once again, you can talk about how things are kind of going broadly on pricing and how things are restarting in dissolving pulp markets.
Yeah. Steve, I think what we are seeing is that the current prices are just not sustainable. We are seeing an increased activity level in terms of downtime announcements from a number of suppliers from the U.S., South America, Europe, and also in China, there's been a significant amount of dissolving pulp capacity that has been taken up. The mills are either making paper pulp, hardwood or soft wood, or even unbleached kraft pulp, or not running. For me, it's signaling that the pricing is at a point now where it's just not sustainable. Your numbers are correct in that currently, the hardwood index is at $607.
The other thing that is changing is the exchange rate. The RMB has strengthened over 2%-3% in the last month or two, and that should also help provide some support for U.S. dollar pricing. In terms of the viscose market, again, this is a seasonally slow time. Operating rates have stabilized at around the 66%, and because of the very low margins, I think a lot of the VSF guys that have taken the downtime are also trying to manage the supply and demand situation.
Thank you, Mohamed.
Okay.
Yeah, that's helpful. Can I just ask another question on the inventory situation? You touched upon that a bit earlier in your presentation. How would you assess the inventory situation in DP in the whole value chain right now, both upstream and downstream, and when would you expect the inventories to normalize?
Sorry, just to be clear, is that specifically with dissolving pulp?
No, I actually think both on dissolving and as well as viscose staple fibers. Both.
Yeah. Again, I'll let Mohamed elaborate further, but what we saw, obviously, when lockdowns commenced, everything just came to a standstill, and customers stopped ordering and there was excess inventories in the supply chains. What you've seen in recent weeks is a reversal of that. Suddenly, producers who had stopped production are now seeking to fill their pipelines once again. With regards to historical norms, overall inventories of viscose are above the normalized long-term levels, but they have come down substantially over the last few months. Sorry, Mohamed, I don't know if you want to add to that.
Steve, I think you've covered it. I would just add again that there's a significant amount of capacity on the DP side that has been taken out. There was an article on RISI very recently where they indicated for the first half 2020, they estimate about 780,000 tons that has been taken out. I think that's also helping bring the inventories back down. I would say inventory levels for DP are probably low because of the amount of downtime that's been taken out. The inventory levels in the textile value chain is higher than normal, but as the lockdown eases and as the retail stores start picking up, and as we, I think, showed in one of the slides, buying activity is improving and that's also starting to bring down the inventory levels.
All right. Thank you very much.
Thank you.
Thank you. Gentlemen, the final question comes from Ross Krige of JPMorgan.
Hi, everyone. Thanks very much. Just two last questions from me. Firstly, on the fixed cost savings, how much of that was related to the maintenance deferral, and when would you expect to incur that maintenance, specifically by which quarters, if you can give that sort of detail? Then just on product and raw material prices. Obviously, you guys shown that bridge and there was a net negative impact in Q3. Just thinking about where prices are for your products and raw materials in July and August, how do you expect that to play out there? Do you see any improvement?
Yeah. On your first question, the delay, ZAR 9 million. That would be incurred in Q1. The second question with regards to Sorry. Do you mind repeating the second question, Ross? Apologies.
Yeah, no worries, Steve. Sure. Just thinking about sales, product prices, and raw material prices in terms of revenue or price movements and variable cost movements, that was obviously a negative impact in Q3. Just thinking about where prices and raw materials have moved now in July and into August, how do you see that evolving, those draws?
Yeah. Look, the one thing I would say is that pulp prices across the board are low. A lot of that obviously is linked to the whole COVID-19. Whilst it doesn't help with dissolving pulp, it does help our paper business and the pulp costs for our paper business. We had expected the prices, those costs to start rising, which has not happened so far. That should be favorable for us and offset some of the pressure that we're feeling elsewhere. On selling prices, we've talked about it. There has been a little bit of lower in recent quarters, we think with the market coming in balance that we can try to hold prices as we go forward. Selling prices.
Great. Okay. Thanks, Steve.
Gentlemen, that was the final question. Do you have any closing comments?
No, operator. Thank you very much. I'd just like to thank everybody for joining us on the call today, and we look forward to discussing our year-end results in three months' time. Thank you very much.
Thank you, sir. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your line.