Good day, ladies and gentlemen, and welcome to Secular Limited's 3rd quarter of 2020 results conference call. All participants will be in listen only mode. There will be an opportunity to ask questions improuted. All the benefit of the participants have chosen via the HD Redfirmed Please ensure that it gives you my preferred permission to make us up order will be for accessing the question queue. If you should need assistance during the call, Please note that this conference is being recorded.
I'd now like to hand the conference over to Mr. Steve Beney. 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 3, the highlights for the quarter and Obviously, the severe impact from COVID, tells a a big story about the the results for the court quarter.
It had a substantial impact on profitability. Predominantly on on sales volumes, and and that was mainly associated with our 2 largest segments, graphic paper, which was down in volume terms, 40%. And dissolving pulp 29%. So you can see it was a significant impact. As you look at the quarter, April was tough, but then, May June were even harder.
It looks like dissolving pulp bottomed in late May in terms of volume declines and graphic paper in June. We've seen since that date, we've seen some recovery, and I'll I'll I'll talk about that a little bit more as we go go forward. Pleased to say that the packaging segment continues to grow volumes, and profitability profitability the same time. And and and certainly, that that strategic decision to, refocus into area has been very successful and and and will be one that we'll continue to do as as we go forward. The Naturally, during this climate, there was a strong focus on liquidity.
And cash flows, and, we will talk more about, our resources in a couple of slides time. The, the liquidity on hand at the end of, the quarter, we we had cash of a $190,000,000, an undrawn RCF facilities of 503,000,000. In an effort to manage our, liquidity and and 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 and and the rest, obviously, in dissolving pulp. The with with a quarter like this, the, EBITDA down, significantly on a year ago, which would also impact on the on the leverage ratio, which, reached 4 times. Moving to slide 4. The earnings bridge and and the the lower volumes that I talked about you can see is reflected in the the red volume bar. And then selling prices also, were done.
And that predominantly relates to dissolving pulp, and that's something that we've talked about in in prior quarters that even going into the, the COVID crisis dissolving pulp prices are at historical lows. In the other areas of the business, well, mainly in graphics, we We saw prices coming off a little bit. But, holding up you know, 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 and then fixed costs a lot of that relates to, labor and and and and and personnel costs. On this bridge, you can see, it was down 49,000,000.
I know in the results announcement, we we mentioned 67. The difference the 18,000,000 difference is, is an exchange exchange rate differential because, obviously, the rent and, and and the euro was weaker against the dollar during that period. And then the the net impact on exchange rates was a positive 17 giving us the 26,000,000 EBITDA that we saw Slide 5 shows the product contribution. Now, obviously, the the significantly lower volumes and profitability from dissolving pulp and graphics distorts this picture somewhat and and interestingly, in in this quarter, packaging has actually become our our our largest contributor However, obviously, as as the recovery continues, when we move ahead in the next couple of quarters, then this will normalize once again and and and packaging. And, sorry, dissolving Pulp and Graphics will will be a bigger contributors.
Moving to slide 6, I suppose there's no surprises on this slide. The, margins and volumes and in the 2 big segments coming down. But I'm we're we're we're very pleased with the progress on the packaging front volumes continue to go up and, you know, also at a very, reasonable margin as well. And and that's something we would expect to continue. Moving to slide, 7.
It's the debt maturity profile. And I'll I'll just call out a couple of changes. Firstly, and I've already mentioned that we have We still have a $190,000,000 of cash on hand. The, in the 2020 maturity, you'll see a number of 144,000,000, which is the RCF. Now, although, it 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, but it is in place till 2023. So it's slightly slightly misleading that it's it's it's reflected in that block, but the full maturity is 2023. Other, bigger numbers to, call out are the, securitization facility, which matures in 2022.
And that's something we've had in place for a number of years, and we would expect to continue and, you know, well ahead of that maturity we will, look to roll that over. Moving then to slide 8, the CapEx, The number for 2020 is now down about 350,000,000. Earlier in the year, we were talking, you know, just under 500,000,000. So it's come not come off substantially. And obviously, that's linked to the the deferral of, or postponement and or cancellation of some non essential CapEx.
The bigger number 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, to be about 350, which includes, obviously, the Saiccor, the Ferrell. Turning to the segments, and I'll jump to, page 10, the in Europe. Volumes, dominated by the decline in in in graphic paper. The, and you can see the overall volumes for the, for the region were down 32%, but that's you know, almost entirely because of the 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 and also, from a cash flow it it it obviously benefited the cash flow. You do have a a p and l, a negative p and l impact because you have lower stocks but, net net, it was the right thing to do. The packaging continues to, to to to do well for us. Within the within the segment, there are different categories of goods, and I talked about this last quarter, the the the kind of more essential food hygiene related products did well.
Certain nonessential luxury goods, did less well. And, were impacted by by the lockdown. That's why you have the mixed, the mixed performance, but I am pleased to say that profitability did increase here. We we did benefit from lower costs. Yeah, specifically in Europe, lower pulp wood, latex costs, And then, on the fixed cost front, we, we were able to take a substantial cost 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 a fire during the quarter on Alpha PM 3, which was a bit of a headache because the product made on the the PM 3 machine goes into the packaging and specialty segment. That, ironically, is is is one of the, was one of the doing very well. So it was a bit of a 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 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 and, you know, close on 70% the volume increase. And that's that's the the ramp up, that we've talked about for for over the last few quarters. As we continue to ramp up, following the conversion at Somerset. It's it's going very well for us.
It's increasing profitability as as we said it would. And, there will be further further increases in the year ahead. The dissolving pulp had an impact in the North American business, and we have used that opportunity to make more paper pulp for, for for the cloquet paper machines. We took out, fixed costs and variable costs. Again, once again, taking advantage of some of the following legislation in the US.
The South African business is summarized in page 12. We negatively impacted by the lower dissolving pulp volumes. And, in that segment, again, we we took commercial downtime. We did benefit from exchange rates the as the round weakened, looking at some of the others, well, may may maybe just to call out one thing. 1 of the initiatives, to to to help with the liquidity and cash flow.
We we were able to push out some annual shots And we did have a 200,000,000 savings benefit from that, predominantly good one. The Packaging segment does continues to do well despite the despite the COVID 19. And, we we we are we're positive about the outlook, as we as we go forward. Unfortunately, some of the smaller segments, or products, particularly newsprint and uncoated office paper, were severely impacted by lockdowns and And in fact, we saw 60 60 percent odd declines, in the quarter. The 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, covenant suspension to March 2021. We are so the first time it will be measured is in June 2021. We are we're well aware that the clock is ticking on that, and we will proactively engage with our bankers to ensure that we, we have a flexible arrangement following the expiry of that period. We did repay some a South African debt that matured During the, quarter, we put in place a a bridge that was funded through a a bridge facility, and we issued a new South African public bond.
So the appetite is still there. The CapEx, I I've mentioned a couple of times, but we obviously deferred CapEx as much as we could. The project recommenced at Saiccor on in July, it's it's going once again. It's going well. Obviously, things appear to be on track.
We we we'll we expect to complete, in third quarter of the new financial year, But I do call out, obviously, with the rise in COVID cases in South Africa that that that could be a risk factor, you know, for the construction firms as well. We also just deferred the shut So now I I mentioned that already, but it was predominantly in Goodwana. Please that we did some we continue to do good work on the on on the procurement side, in earlier quarters, we talked about 64,000,000 coming out for the year, and we actually think now we can get to a 100 and fixed costs, I've mentioned a couple of times, but we we took, 67,000,000 out for the quarter. Turning to the markets themselves and that 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 grape graphic papers globally. Our volumes were down about 40% followed the markets.
The the one thing I should point out is that certain of our export markets have been particularly weak. And I and I and I call that out because, you know, somewhere like South America has been even more more impacted, particularly, as the, the COVID 19 has moved into that area. The newsprint and office paper, is in that segment. So that that was also a negative factor. And then we we we we benefited from the the lower costs.
And as I said earlier, prices did drift downwards. I think I've already mentioned it, but just to just to repeat, if we look at the graphic segment, June actually was the worst month for us. It it it obviously, April, April slipped and and and May was was a bit worse and then June, similarly so. But subsequent to that, as as we've gone into July, things have been a little bit better. It's not a V shaped recovery, but it is it is it is recovering, and we would expect that to continue in the months ahead.
Packaging, I think a great story. Yes, there was 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 is substantial.
Impact on 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 and and subsequently July as well.
Same time, our our our customers, a lot of their plants, recommenced production engine. They were they were in lockdown. So they they they had ceased production. But that that began once again in June. So that's helping us a is a bit.
Exchange rates have moved in our favor in South Africa. So that will entrench our leadership position from a cost perspective. However, having said all of that, and and and things are picking up, but it is important to be mindful of the fact that when we went into this COVID crisis that, there was excess viscose production. And because of that dissolving pulp prices were weak, the long term outlook is more favorable, but clearly we have to get through, the worst of this COVID crisis. In this segment, we also have, the BCTMP that we sell from, Martin, pleased to say that it's it's going well, albeit that, pulp prices or pulp prices are weak at the moment.
We also sold, a little bit of, craft paper pulp, on our on our swing machines. To ensure that we could fill fill them up somewhat. Slide 16, we we thought it was useful to include, but it it just one one slide on, US retail clothing sales, and and I know you guys many of you will will will will see these numbers, but we we thought it was useful to include it because it does show the recovery path, of clothing sales. And And it and it matches how we're thinking about the recovery and dissolving pulp. And I'll talk a little bit more about that in another slide.
Flight, 17. Just, last quarter, we talked about our 2025 strategy, which we rolled out across the business, earlier this year. And in summary, it covers 2 distinct phases. Firstly, on slide 18, that's the short term. And 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 gonna stop all the good work that we're doing on future opportunities, but we're certainly not gonna be investing in in those at at this point in time. We we need to get our balance sheet back in back to the levels where we we desire it to be. Slide 17 talks about, beyond that period. And you know, in that period provided everything is back on track, then, you know, we we would start to look at further opportunities. And it's predominantly in, in the packaging space where we've been very, very successful.
And also in the, biotech space as well. As you know, we've we've invested in some pilot plants in recent years, and, I would 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 I I'm not gonna read it out to you, but but two changes in emphasis as we move forward. 1 is on sustainability. Or 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 as as we move forward and work with our customers.
And then the other thing is obviously innovation and R And D, and we we we continue to have a strong focus there. And, as as as we develop new product, for packaging and and biotech, this will be an area where we will, place great emphasis. Slide 21, just to the various pillars and briefly touching on on on some of the initiatives, but, on costs, we we recognize it's all about costs and staying at the low end of the cost curve. So a lot to focus on on efficiencies and procurement savings. That will that will continue.
Interestingly, the Saiccor expansion will help improve efficiencies and lower costs. And as we get up to full volumes which will be, you know, obviously, after after we finish in Q3 next year, but that will lower our cost base. The, rationalizing of declining business, you'll see the we would have seen a recent announcement whereby we closed the stocks that PM 2 machine, which is something I'd we did talk about in earlier quarters. And then also Westbrook, PM 9 and and that that that paper for Westbrook will now be made or for the release business will now be made, at our other mills in in the US. So that those combined will take out about 25,000,000 of costs, next year or on an ongoing basis.
I've talked about the focus on the on on the balance sheet. So I'm not I'm not gonna repeat that. And then accelerating growth into the higher margin segments. We we still have further scope for ramp up at Somerset Maastricht, they were delayed a little bit, because of, lockdowns and some of our customer staff you know, weren't able to, you know, 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 we'll start to benefit from those. The, and and barrier coating is a is a big opportunity, and and we'll continue to with customers and invest in that area. So our outlook for, next quarter on page 22 We estimate volumes for this quarter to be around 75 for graph the dissolving pulp and 70 for graphics. The one thing I would say about the number on dissolving pulp is as you as I mentioned earlier, we are making more paper pulp at cloquet. So and and that's a choice we've taken because because of pricing.
And, if you were to back that up, the actual market, for dissolving pulp, we is actually probably at a minimum of 80%. So the 75 doesn't doesn't give you our view on the market. It's just that's where we think our volumes will be. The market dissolving pulp is recovering a little bit faster than than the graphics. The prices, obviously, still under pressure, across all the pulp categories, and and that's, you know, that 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 at in South Africa, at the port and and with shipping issues, and a lot of that, that's obviously linked to the COVID. And, you know, as the number of infections with risies in South Africa, that has impacted staff, or labor at the ports and and has reduced productivity. We are proactively working with the port management, and and they're aware of the challenges, but it is a risk factor. If it does affect, it it it would be a short term delay. But but it but it is a headache that we have.
Packaging continues to grow, and the the categories that have been underperforming, we would expect to accelerate as the lockdowns ease. Graphics, slow recovery underway as well. And I mentioned this earlier, we we we We don't think this is a V shaped recovery. We think it's gonna be gradual. There will be improvements in Q4 and further improvements in Q1.
Specifically with graphics, you know, we we we don't anticipate the volumes will get back to what they were pre COVID. But I do want to stress to everybody that there is 20% of the market capacity coming out in both US and Europe. So we don't need it to get back to 100%. If if if volumes can get back to 85%, then this market will be in balance once again. And and, certainly, that's a key, a a a key number for us as as we as we monitor the the the recovery path.
So, you know, as we think about graphics and dissolving pulp, we we think that the full recovery to the levels that I've referred to is only gonna happen in in in 2021, in the middle of our financial year 2021. The cycle expansion, is gonna be, completed in the third quarter as we mentioned. And you know, that's something that we're excited about. Although prices are low, we when we do get those incremental tons, because of our low cost base, that will, make a significant contribution as we get into q 4. Of next financial year and q 1 and to the 2022 financial year.
But as as you would expect, in the short term, our focus on liquidity and cash flow. That's the presentation operator. I'm gonna put it back to you now for questions.
Thank you. On your touch tone further to keep out on your screen. At each time we'll hear a confirmation tone. Following this process, we'll place you in a question queue. If you decide your questions have been agreed and you should sorry question.
Just a reminder, you've left our suggestion. You're welcome to press star and then 1. The question comes from James Triman of Princeton Security. Used.
Yes. Thank you very much. Yes, a few questions. Firstly, could you, you've clearly been cutting your inventories, in graphic paper. Could you just say whether they are now at a low level or it's 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? And then just finally, if you do do another conversion, or 2, what would be the cost of those, very, very proximally?
Yeah. Just on inventory levels on graphics, you'll see from the numbers, we we, We cut our, inventory substantially during the quarter for graphics. I have been asked questions by others about, you know, why didn't the overall inventories not come down further? I I I just point out a couple of factors on that. Firstly, the packaging side, we vol inventories did go up.
And secondly, because of the, the the deferral of the, shots, particularly at Ingridwana. We were carrying, some extra inventory for that. When the shut occurs in Q1, obviously, we'll we'll sell the product then. So that that's why it didn't come down as as much as the overall sales. But with regards to graphics, yes, we we we we we we aggressively, cut inventories.
We we we do envisage a little bit of, downtime in, q 4, but not nearly, to to the levels that we, we we saw in in in Q3. And maybe, Barry, and Mike, I'm just gonna 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 has has said in the next quarter. At the moment, we still got a a small amount to take out perhaps 20% of what we took out in quarter 3. So we don't expect that to have a major impact on the profitability at quarter 4.
North America, we did bring inventory levels down quite a bit and expect them to come down slightly in Q4. Our Q Four, we do expect to see, some return as things in North America have been opening up. So we're balancing, you know, customer needs and and inventory levels going forward as things open up.
Thanks, Mike. Viscos, I'll I'll give you a little bit of a background, and then I'll Mohammed, I'm gonna pass it to you just to elaborate a little bit further. But, what we've seen both, in the dissolving pulp space and and in viscospace, substantial, capacity temporarily, closed. However, things are they they have been progressively better in, in recent weeks. On dissolving pulp specifically, there's a there's still a substantial proportion of the, producers not not making product.
However, you know, obviously, viscose prices continue to to be under pressure you know, as as as, suppliers look to to to recover from the situation, Mohammed, just you just wanna briefly talk about the viscose market?
Yes, Steve. What what we have seen is because of the that are relatively high VSF stocks, and the very low margins of the fiscal side, a a lot of the VSF producers, especially in China, have taken lines down temporarily to try and balance supply and demand. And, but what we have seen off late is an increase in the operating rates. So we've gone from about, I would say, just under 60% operating rate for viscose industry in China to today around the 65, 66%. So still low.
But, but that's where the industry is, is operating. What we're seeing on the, I should also add that, you know, this particular period July, August, September is also the seasonally slow time. So there's also that impact, on the viscose industry. Whilst a lot of the discos 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. So that's also bringing in some balance at this point in time.
Thanks, Mohammed. And then, James, on your third question on the conversion, I'm a bit hesitant to give a number. I I don't envisage, as converting any machine in the next 2 or 3 years. You know, obviously, it will depend on, you know, how quickly we can get, that that the debt levels back and profitability, but levels back to where we want them to be. You know, obviously, when we converted Somerset PM 1, we we know you know, that cost about 200,000,000.
And and, yeah, we we we still have to do our investigations. And you know, one of the things that we we would be mindful of is not to spend, substantial amounts of CapEx. So as we evaluate opportunities, we look we we we we we we strive to do ones that will cost less from a cash flow perspective. So there's a lot of work that still needs to be done before we we we we finalize and and and and and ultimately decide which which route to go.
Thank you.
James, have a completely questions?
Lovely. Yes. Thank you.
Thank you. The next question comes from Alexander Beltland of Bank of America.
Thank you very much.
Three questions from my side. The first one on your volume outlook to, the second quarter and specifically on graphic there. When you're talking about 70% is that just reflecting kind of 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's anything more you think you can do on to mitigate the operational gearing of the volumes up through into the fourth quarter.
And then finally, on working capital or in capital management and if we should expect any meaningful, working capital, you know, cash inflow in the, in the fourth quarter? Thanks.
Thanks. I will, I'll take the first two, Glenn, and then I will pass to you on the working capital. The the volumes that we talk about in, in the fourth quarter for graphics there is a bit of market share gain. However, there there's mixed performances in the market. You know, there's there's certain countries where the recovery path is is faster than others.
And, you know, as you as you would expect, places like Germany and France. They eased lockdowns sooner, and their their recovery is ahead of those. Similarly, interestingly in the U. S, that things are starting to pick up as well. However, 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, but a lot of volumes do do go into South America, and Latin America. And as you as as you know, Mexico and Brazil still are are deep in the crisis. So the volumes in those countries are, you know, is as low as 20%. So that's what's lagging lagging us.
So, you know, you have certain countries at 80% and you have others 20. The blend of all of that, is is giving us the 70 that are that that that we talk about. And 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.
But, you know, on balance, as we look at all the markets and the blend, we we we we we we are, you know, we're confident it can be at least 70%. The the operating gearing, Look, we took substantial costs out of the business, in in q3. Now But unfortunately, when you, you know, when you take out volumes of in the neighborhood of of what we've talked about, 40% on graphics and 30% in the dissolving pulp. It you you do carry those fixed costs, so it has a substantial impact on the business. So our recovery is all linked to volumes.
As these as these volumes recover and we get to the 70 75 that we talked about, in Q4, and and we would expect Q1 to be to be ahead of that, then you're gonna get the you know, the the benefit, and it and it and then it and it flows to to to the bottom line. In terms of actual initiatives to save costs. You know, obviously everything we were doing in Q3, we're gonna we're gonna try and do in Q4, but we do we, you know, we we we do expect better volumes. So that that that will will help with the with the with the ratios. Glennan, do you just wanna talk about the inflows of working capital in Q4?
Yep. Thanks, Steve. So, we had an inflow of 20,000,000 on our working capital for the quarter 3, a quarter 3 fiscal. And, historically, our quarter 4 is has been a an inflow of working capital as the working capital levels at the end of September. Are the lowest, across our fiscal.
So we anticipate that same trend to continue, this year. And we will be in excess of the $20,000,000, inflow that we saw in quarter 3, it will have a further inflow in quarter 4.
Okay. But on a full year basis, should we expect inflow or an outflow
We expect, yes, we do expect an inflow for the full year basis.
Thank you.
The next question comes from Wade Napier of Avio Capital Markets.
Hi, guys. I'm interested to hear your thoughts on your European coated mechanical business. And the uncoated woodfree business. I mean, 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. So how are you sort of thinking about your coated mechanical business in this environment, sort of, for the next sort of 12 months or so.
And then the then the encoder would freeze out, you you obviously closing PM to a stock start, and that sort of leaves a standalone uncoded wood free mall within Europe. I mean, how does that sort of fit into your portfolio going forward? And then I've got some questions on the fixed cost savings that we saw in Q3. And obviously, there were some benefits from the the furlough schemes, etcetera. 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 and uncoated Berry, but I'm gonna allow you to just expand further. You know, obviously, you know, through through carouseling, our our coated mechanical business now is predominantly now in in the cook mimi mill. We, you know, that market, obviously is is under pressure as well.
But, we don't have the same, leadership position that perhaps we have, in coated wood tree. So, you know, it's it's it's obviously something that we we we we we continue to monitor. And, you know, we we we we will, you know, we'll manage going forward. But at least it's now ring fenced at at at one location So, Barry, I'm I'm gonna pass it to you. You you can and you can also just talk about the uncoated market as well.
Yeah. Sure, Steve. As far as the code of mechanical business concern, the 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 vaccination went right down and advertising went right down.
And advertising there was hit very hard indeed. And advertising, industry is going through quite a tough period as well, but we have started to see also encoded mechanical in recent weeks order sizes beginning to pick up. But that's one of the rather important things is that, you know, if order sizes start to pick up, it means that there's a bit more confidence in the market. So we've taken out a lot of good, coated mechanical capacity, of course, by exiting Lanak and So the and that's we exited there, upwards of, of 300,000 tons of capacity. Mechanical coated.
So that means our business is smaller. It's also a slightly better quality business router. The basic LWC we're into the mechanical, the mid weight sector and the very lightweight side of the sector, these are slightly more, niche like products. So we have there a business that that should should be okay in the next in the next few years. Then coming on to uncoated, we have a niche business in uncoated, where the capacity is around about 200,000 hands.
That is all we don't make anyone else. We also have made that machine capable of making the very high quality luxury coated products. So it'll be a machine which is is mixed. It's highly integrated because it got its own pulp mill. It's in the middle of the of the German market.
So we think by getting PM2 out, we have made that mill now viable.
Thanks, Barry. Then on the fixed costs and
the continuation of the savings, Glenn over to you. Yes. Just as far as our level of fixed costs, if we compare quarter 3 to what we're anticipating in quarter 4, We're going to be marginally up in, in quarter 4, and that's just from a, from a a seasonal adjustment for relative to quarter 3. But, as far as the total fixed cost savings concerned, we expect it to be in line with what we saw in quarter 3.
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?
Wait. Across the 2, it's we're looking on a per annum basis. Obviously, they'll be closed, you know, at the end of the financial year. But going forward on an annual basis, we we're expecting, between 20 to 25,000,000.
Great stuff. Thanks guys.
Please let me ask you to limit your questions to a maximum of 2. Thank you. The next question comes from Tom Elliott of Raul London Asset Management.
Good afternoon, gentlemen. Can you hear me okay?
Yep. 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 and talk about being proactively, you know, you would proactively engage with your your bankers to ensure flexibility at the end of your your covenant waiver. So just wanted to ask, when you had your previous discussions with your banking group, what what would they like, what what would the you know, your banking group open too. 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 wanna get a bit more of a flavor on sort of what you meant by that and how discussions went last time.
Yeah. Thanks. I mean, 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. The we we proactively put in place the covenant waiver period.
Obviously, we did it early in in in the, in the virus timeline, and, you know, we were doing this in March. And and I think we were one of the first companies to put in place a covenant waiver. We know that we've still got, what we we've we've, you know, we've still got a few months, but we we don't wanna wait till the last minute. So we we are, proactively talking to them and discussing you know, with regards to a specific timeline, that's not something that I I I I can give at this stage, but All I can say is that, you know, the the the the the bankers are supportive and they they, you know, they understand the situation and and they And and they understand that this specific quarters, obviously, the quarter that we've just had and and and probably the one we're we're in at the moment that that has has a substantial adverse impact associated with the the virus. So we need to need to figure out how we can bridge that gap before we get back to normalized levels.
So we will we'll update you as soon as as as soon as we've got developments, but, we we're encouraged by the discussions.
Okay. Thank you very much. That's very helpful. 2nd question, I know you've already talked about working cap, but, I just wanted to get it sent now. I think, please correct me if I'm wrong.
I think, The the payables, there's a bit of an unwind quarter on quarter in payables. So 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 the payables in the next quarter?
No, I think on the payables, we You'll appreciate that some of our suppliers were also under pressure. So we we we try to we we try to avoid lengthening terms. That was, you know, that obviously that's something we we could fall back on in the end, but we didn't We didn't implement that, in in the quarter. So I think that as we go forward from here, we would expect, payables to normalize and and follow the activity of the business. There hasn't been any major major adjustments in, payables days.
Okay. Thank you very much.
And then just a clarification, I think in the call you referenced, some Rand's denominated issuance. I think that's after quarter end. So I just wanted to clarify, versus 2 q end, sorry, 3 q end, is there going to be any additional debt or any additional liquidity we should expect from those random denominated facilities?
I'll let Glenn elaborate, but but, obviously, you know, we had the one monitor.
Sorry? Or or or to answer or to ask in a or or to ask in a different way, perhaps, to simplify was the random dominated transaction purely refinancing?
Yes. Effectively. Yes. That's the right way.
Okay. Perfect. Thanks very much, guys. Cheers.
Thank you. The next question comes from Brian Morgan, the pardon me, Morgan Stanley.
Hi. Thanks, guys. So just to just can you just chat about the next 6 months, outlook for graphic paper? Where, you know, the last 3 months we've had, further schemes benefiting the industry, arguably defending defending prices, And so those photo schemes roll off in the next, in the next few months, we know that, store store has told us that they're going to be selling out of inventory until the end of the calendar year. So, so I'm just trying to get a sense of how how how the industry is going to look as those further schemes roll off, is it going to be able to balance itself, or could we could we see a bit of pricing pressure coming to through the end of the year?
Look, I, unfortunately, obviously, competitors are taking out substantial capacity, both in Europe, and in the US with the recent announcement that's a pro proxy. And and then we we we are closing stocks at PM 2 as well. So 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 and 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 the their options are getting less, and they want to be sure to secure sources of supply. So that that combat some of the the risk factor that you that you referred to. I do think that, you know, prices have drifting downwards over the last couple of months. Some of that's because of the weak, the weaker market and and obviously lower raw material costs.
But I I think I've touched on it already. If if if the market can get back to 80, 85% volumes of what it was pre COVID, then markets are back in balance. So that's for us is the key number. Get it get it back to that's what we're targeting, getting it back to 85% of what it was previously. Now that's not gonna happen overnight.
We've given you what we think, q 4 will be. And I I I I I think q 1, you know, you're gonna see progressive upward movement from there. To get back to the 85 may take a little bit longer, and and we're we we we're thinking about the middle of next the financial year to get it back to 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, 40%, and you've got supply competitors, you know, trying to sell out their inventories. I I think it's, I think it's actually done reasonably well under the circumstances And we we we think that if that market balance remains, then we we can continue to, you know, try and hold the prices.
Okay. Cool. Thanks.
The next question comes from Sean Angra of Konex. Research.
Good afternoon guys. Thanks. And just two questions and one clarification. In terms of the 2025 strategy. Could you just comment, a little bit on, Rosie?
I didn't pick that up in the slides. And then Secondly, in terms of capacity closures in the US, could you maybe comment a bit more whether you think that will actually be permanent closure or there's a risk of those assets being purchased. And then on clarity in terms of working capital unwind, if you look at Q4, historically, there's been quite a nice, Cash and growth and with capital above averaging about $80,000,000. Is that the number we should be looking at rather than the 20? Thanks.
Ladies and gentlemen, please remain on line. We seem to have lost our main speaker. Thank you. I can hear you. Please go ahead.
Sorry, Sean. Apologies. Our online draw No worries. Sorry. Did you just I lost my train of thought?
Do you just wanna repeat your question?
Yeah. Just in terms of the 2025 strategy, just How are you thinking about it from a return so to speak to in terms of Rosie? And then secondly, in the US, the capacity closure do you deem that permanent, or do you think there's a risk that the death gets purchased out and gets up and running again? And then just in terms of clarifying working capital in q 4. Normally, there's a average info of about $80,000,000.
Should we expecting that rather than the 20,000,000? Thanks.
Yep. Hey, Sean. I think Clint gave you the number for, for for for q, q4 on working capital. But I'll let him, I'll let I'll let him elaborate further. Just, I Mike, on the second question, I'll I'll start and then I'll pass it to you.
You know, in Sean, with regards to 2025, I I think, you know, primarily, our focus is obviously on the in the short term. It's getting the balance sheet right, getting that leverage ratio back below 2. We still have our long term targets of getting at least 12% return on capital employed for investment projects. And I I if 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. Yeah.
It it 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 you know, with with the packaging side that we can we can grow the business, but, you have our assurances that we we're not gonna commit large sums of capital until until things normalize and get and we get the balance sheet back. We've done it before, and we'll do it again. Mike, I on the capacity closure, obviously, it's a it's it's a it's a big opportunity for us and we will be targeting, some of the customers of the, you know, of of the mill that, of the mills that are being closed. But, with regards to the risk of, somebody else picking up that mill and whether it's permanent, Mike, I'll I'll I'll put it to you.
Well, I could offer that, it would only be pure speculation on our part. You know, 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. And I think that's, the 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 evening, Glenn. Just got the last one.
Yeah. Just as far as the working capital is concerned, we had We've had a net outflow on working capital for the 9 months of $70,000,000, and we expect for the year to be to have a net inflow.
Sean, you can work that one out.
Maybe, maybe not. No. I'm joking. Thanks.
The next question comes from Mikhail DuPaul of UBS.
Thank you. Good afternoon, everybody. So I just wanted to ask a bit about the dissolving Whirlpool mark. If you could just start there, with the with the pricing that you see in China now for the hardwood import prices. What's the level right now was it in, in June, and in May, just to get a feel for for the magnitude of the price pressure that you are in the bot.
We can start there.
Okay. Mohammed, I'm gonna I'll start and then hand to you. We've seen we saw a bit of a decline, from where it was last quarter. It dropped from about 6:35 to 6 I think today it's 6:07. You know, under the Circa, again, it's a drop, and I know it's off historical lows, but, under the circumstances when we got volumes that the west were dropping for for textile demand of, you know, 40, 50%, it's it's actually held up reasonably well.
Mohammed, I'll pass it to you. And, again, once again, you, you know, you can talk about how things are kind of going on the, you know, broadly on pricing and how things are restarting in dissolving pulp markets?
Yes. Steve, I think what, what we are seeing is that, you know, the current prices are just not sustainable. We are seeing a increased activity, level in terms of, downtime announcements from a number of supplies from the US, South America, Europe. And also in China, there's been a significant amount dissolving pulp capacity that has been taken up. The molds are either making a paper pulp, a hardwood or softwood or even unbleached craft pulp.
Are all not running. So, so for me, it's it's it's signaling that, you know, the pricing is at a point now where is just not, not sustainable. But your numbers are correct in that currently, the index, is at, the hardwood index is at 607. And, and the other thing that is changing is the exchange rate. You know, the renminbi has strengthened over 2 to 3%, in the last month or 2, and that should also help provide some, some support for U.
S. Dollar pricing. In terms of the viscose market, again, what we are, this is a seasonally slow time. Operating rates have stabilized at around the 66%. And, And because of the the very, low margins, I think, a lot of the VSF guys that have taken, the downtime are also trying to manage the, the supply and demand situation.
Thank you, Mohammed.
Okay. Yeah. That's that's helpful. I just ask you know, on the on the inventory situation, I mean, you you touched upon that a bit earlier in your presentation, but how would you assess the inventory situation in DBP? In the whole value chain right now, both upstream and downstream.
And when would you expect 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 a viscosable fiber. Both?
Yeah. Again, I'll I'll let Mohammed elaborate further. But what what what we saw obviously, when when when lockdowns commenced, we everything just came to a standstill and and and and customers stopped stopped ordering and and there was excess inventories in the in the supply chains. What you've seen in recent weeks is a is a reversal of that. Suddenly, producers who, you know, 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 the norm the the normalized long term levels.
But they have come down substantially over the last, few months. Sorry, Mohammed. I don't know if you want to add to that?
Steve, no, I think you've you've you've covered it. I I would just add again that, you know, 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 twenty twenty they estimate about, 700,780,000 tons that will that has been taken out. So I think that's also helping bring the inventories back down. So I would say inventory levels for DP are probably low because of, the amount of downtime that, that's been taken out.
The inventory levels, in the textile value chain is higher than normal. But as the, the lockdown eases and as the retail stores start picking up. And as we, I think, showed in one of the slides, you know, buying activities improving and that's also starting to bring down the inventory levels.
Right. Thank you very much. Thank you.
Thank you. Jasmine, the final question comes from Ross Krueger of JP Morgan.
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 the main the maintenance deferral. And when would you you expect to incur that that maintenance typically by which quarters, if you can give that sort of detail.
And then just on product and raw material prices, Obviously, you guys shown that bridge and, there was a negative, negative impact in Q3. Just thinking about where prices are for your products and materials in July August. How do you expect that to play out there? Do you see any improvements?
Yeah. On your first question, the delay, 9,000,000. And, that would be incurred in Q1. The the the the second question with regards to to sorry. Sorry.
Do you mind repeating the second question, Ross? Apologies.
Yeah. No worries, Steve. Sure. So just 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 and raw materials have moved now in in in July and into August how do you see that evolving, those jaws?
Yep. Look, the one thing I I would say is that, pulp prices across the board are are low. A lot of that obviously is linked to the whole COVID thing. So whilst it doesn't help with, dissolving pulp, it it it it does help our paper business and and, you know, the the the pulp costs for our paper business So things we we had expected the prices those costs to start rising, which has not has not happened so far. So that that that should be favorable for us and offset some of the the pressure that we're feeling, elsewhere you know, on selling prices, you know, we've talked about it.
There has been a little bit of lower in in in recent quarters, but we think with the market coming in balance that we, you know, we we we we we can try to hold prices, as as we go forward. Selling prices.
Gentlemen, that was the final question. Do you have any closing comments?
No, operator. Thank you very much. I 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 3 months time. Thank you very much.
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