Good afternoon, ladies and gentlemen, and welcome to Secut Limited's 1st Quarter of 2020 Results Conference Call. All participants will be 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 on the call today. As always, as I move through the investor presentation, I'll call out page numbers as I move through. And I'm going to start on page 3.
The highlights for the quarter And you can see some of the earnings numbers on the left hand side. The numbers are lower than they were a year ago, EBITDA 139, lower than the prior year and predominantly because of the lower dissolving wood pulp prices, which had a significant impact on profitability. I'm pleased say that the Packaging segment continues to grow and the margins improved in that area and will continue to improve And that's despite some pressure that we've experienced in our South African containerboard segment or business. And we'll talk a little bit more about that later. In graphic paper, I think a pretty good quarter In spite of market declines of double digit, we were able to gain substantial market share and maintain our profitability there.
So pleased with that progress. And then the Manhattan integration continued in the quarter. We made the payment for the acquisition. The integration is going well and there's no material surprises. Turning to page 4, the earnings bridge and, just calling out a few things.
Firstly, the sales volumes were lower than last year. And that's two areas really. Firstly, the South African packaging containerboard side that I mentioned earlier, and the in Europe, our coated mechanical business volumes were less. However, obviously offsetting that has been volume increases in the other packaging segments. Pricing, you can see a significant negative impact, and that's predominantly linked to the lower dissolving wood pulp prices.
We've done some good work on costs, variable costs down. We've seen some savings there, across the board actually, but in pulp costs, chemical costs and the energy prices costs in Europe. Overall, the exchange rate impact negated itself, we've seen a stronger dollar, which obviously impacted our South African business and, and, I know European business with that exchange rate, but that offset itself So there was no net material impact giving you the earnings for the EBITDA for the quarter of the $139,000,000 that I mentioned earlier. Slide 5 has our product contribution split and this is obviously evolving. Packaging continues to grow.
And obviously because of lower dissolving pulp prices, the, the contribution for dissolving has come down and will continue to come down because obviously this is on an LTM basis. So the lower prices will pull that contribution down as we as we move forward. But I'm pleased with the progress that we're making on packaging and it will continue to, increase its share and and is now becoming a very meaningful contributor to overall profitability. Page 6 has the volumes and EBITDA margins by segments, I'm not going to call out all the numbers, but just, obviously, it was a quarter because of lower dissolving pulp prices and you can see its impact on the margins. But when you look at graphics, and packaging, we actually did pretty well.
And margins, you know, compared to historical norms at good levels, we we're ramping up on packaging and that was in spite of the softer South African packaging that I mentioned earlier, and then graphics, you know, pretty, pretty good just under 10%. Moving to Slide 7, the, maturity debt maturity profile We've done a lot of good work over the years and pushing out maturity dates. The next key date for us is that little block in yellow is some South African debt that's maturing in April. And we'll be obviously looking to refinance that, you know, as it matures. And we don't anticipate any problems there.
Turning to Slide 8, the CapEx, for this year, looking at about $460,000,000. A big chunk of that is the Saiccor expansion. Next year, as we look into 2021, we said it in the results announcement, we haven't other than the cycle, we haven't committed any material CapEx. Obviously, we're monitoring the situation. We haven't finalized our budgets yet for next year.
We're monitoring where pulp prices are going to be and what it means for our available capital, but irrespective, we would expect it to be substantially lower than the current year and certainly much closer to the $300,000,000 mark. Turning to the segments, And firstly, Europe, which is on Slide 10, I think it's fair to say that Europe had a a good quarter. Obviously, we experienced market share, sorry, market declines for graphic paper across the board. Of around about 10%, but we, in Coty, Woodfrees have been able to give substantial market share. We did take some downtime, about 28,000 tons, but that's predominantly in on the mechanical paper side.
The ramp up following the conversion at Lanaken will help us with that going forward. The pleased to say that packaging, across the major sub product categories within packaging and specialities, all growing and we're making good progress there and We continue to believe this further opportunities. We also did a lot of good work on the costs, managing our costs downwards and that helped to protect margins. And I'm pleased to say, with the headwinds that we're facing on graphic paper, The region was able to deliver a 5% improvement in EBITDA. North America, on the next page 11, is, firstly, on sales funds on the left, you can see that, was up 17%, but we we do include, the Matan volumes, if you post the acquisition, if you back them out, volumes were still up 7% obviously predominantly in the packaging space as we ramp up.
What's noting that from a segmental perspective going forward, products segmental perspective going forward, we include we will include the external sales from Matan in the DWP segment and obviously the internal volumes are used in the Packaging business. So that will move into that segment. Turning to the product, the business is underneath. Packaging, we're making very good progress. We're improving the product mix as, as we ramp up and that obviously boosts machine efficiency.
DWP pricing, obviously had an impact also in North America. That's why you see the year on year earnings down on a year ago. But if you look at packaging and specialties, and graphics, you know, we've shown improvements on that side. Graphic demand actually was down 16% in the quarter. Our decline was substantially less and we were able to gain market share.
We took about 20,000 tons of downtime in the quarter. Managing to hold our prices pretty well, And again, the region was able to achieve cost savings in a number of the categories. South Africa, a tough, tough quarter. But obviously it's predominantly linked to the lower dissolving pulp prices. When you see, a decline of $2.72 a ton year on year, on that kind of volumes, it does have a severe impact.
And unfortunately at the same time, unfortunately, there was some short term pressure on container boat sales. There was a buildup in inventory towards the end of the last financial year. There was a bit of a drought impact as well, in parts of South Africa. So it forced us some downtime in South Africa itself. The domestic economy also not helping matters and in addition, obviously a little bit of impact on containerboard, but also impacting the other paper categories.
We had some headwinds as well for higher energy costs. Turning to the product segments on Slide 13. Firstly, graphic paper, we have seen double digit declines over the course of the last year. However, When we look forward and we look at longer term trends, we continue to believe that that will normalize at about 5% declines going forward. And then what to we anticipate further big capacity reductions, in the industry, which will also boost operating rates.
You know, there's some big closures expected, in the next 12 months. From competitors. Selling prices, we've seen small declines, but they're holding up pretty well. And our team continue to look for opportunities to lower costs and they've done a good job, over the last year or so. Pulp being the major one, obviously pulp prices are low and that is benefiting input costs.
Our strategy, ongoing focus on costs, managing our operating rates through taking downtime when we need to, but obviously focusing on gaining market share as competitors close. We on the capacity side, in Europe specifically that we've talked in the past about an evaluation that we've done on our assets in Europe and that is close to completion and we'll be making an announcement very basic. Pulp integration is key here and obviously, that's why we acquired the Matan to lower our costs and reduce volatility. Packaging on the next slide is 14, Page 14, the we continue to believe that this is a exciting area of opportunities for us. And, I mentioned it in the past, brand owners are pushing for paper based solutions to replace plastic.
Innovation is key in this segment and specifically, barrier technology is very exciting. And we think, we can grow further in that area. Selling prices have been pretty stable. And again, all the good work done on the costs, is helping margins. We need to continue to ramp up following those conversions that we've made, we're making good progress, but we now need to fill those, those machines with packaging.
And we'll expect the volumes to increase going forward. Innovation is key. And as you would appreciate in something like this, and sustainability is a key differentiator, which we believe puts us in a strong position. Page 15, obviously, I've mentioned already, but we need to ramp up at Maastricht and Somerset. And, things are on track there.
The South Africa, yes, I know there's a little bit of short term pressure, but we continue to believe that there are containerboard expansion opportunities, and we'll continue to monitor that, as we move forward. Our focus is on niche sectors where we think we can have a strong competitive position, and obviously, linking back to our innovation and, sustainability. The we do we do invest in R&D in this area and it's give we believe is giving us a competitive advantage, very excited by bio coating. And we think in the short term, we can boost volumes on that site by between 525,000 tons. Obviously, taking advantage of the plastics to paper train.
Slide 16 is the DWP markets. Yes, it's been challenging in the short term because of selling price pressure. The underlying demand for viscose and dissolving pulp continues to be strong and continues to grow at 6% per annum. Unfortunately, there was a lot of additional viscose capacity that came on board. It's lowered viscose prices.
Put pressure on our customers, and ultimately led to lower dissolving pulp prices. At the same time, on the supply side, with paper prices being low. We haven't had any relief from swing producers moving back. However, hopefully paper pulp prices are starting to rise and that will, create opportunities for some producers to move across. In the very short term now, we have the added uncertainty created by the coronavirus.
It's fair to say that production in across China has stopped, and it's impacting volumes and trade flows. It has been the Chinese New Year. So that holiday period is coming to an end this week. They did expand it by a week. It's uncertain what the impact will be, but clearly adds another risk factor to volumes in the short term.
Selling prices, there are unprecedented low levels. The majority of viscose producers and a significant proportion of dissolving pulp producers are cash negative So we continue to believe that that will help, pricing as we go forward. We are growing our capacity at Saiccor. That project is going well. 55% complete and is expected to be finished, towards the end of this and in the year, I think in October.
The, similarly in this segment, the sustainability message is key and we believe gives us a competitive advantage. We obviously have the wood certification and we believe that gives us a differentiated Turning to the strategy, and I'll jump then to Slide 18, which, talks about cost. And I've mentioned it a few times, but clearly, we've done A lot of great work over the last few years with ongoing continuous improvement initiatives and cost initiatives. And we will continue to do that. We've now we identified $64,000,000 of opportunities in the current year and we're on track to achieve that.
Pulp integration, I've talked about a few times, but that's, obviously, that's why we acquired Matan, and we're in time, obviously, the smaller debottlenecking opportunities in Europe, which will boost, our integration and the cycle expansion will lower the costs at the cycle mill. Page 19, talking about graphic paper, obviously, we have taken curtailment in recent quarters and we need to continue to ramp up on our packaging grades. And at the same time, manage our exposure to this market downwards anticipating the market declines. The conversion we made at Lanaken will help us because that gets out of LWC, and obviously the comparisons that we've made will will help us well reduce our exposure. I've already mentioned that we've been looking at our capacity in Europe and we'll be making announcements.
Slide 20 has the balance sheet and the focus Obviously, with the lower profitability, the leverage ratio has increased. We talked about at the end of last quarter. I don't think there's any surprises there. We did push our covenants for 4.5 and we did anticipate, that this would the leverage ratio would increase. Again, to stress there's no major CapEx commitments beyond, the Saiccor expansion.
I've talked about 300,000,000 next year and strong focus on working capital. And then 21 accelerating growth in the higher margin growth segments. Yes, look, I'll concede obviously dissolving pulp margins in the short term under pressure, but, we do think the long term fundamentals are favorable and margins will recover. Packaging, I've mentioned a few times on the call, we significant opportunities, on barrier coating and down in South Africa and containerboard side. Slide 22 is the outlook CWP prices remain under pressure.
There's been a little bit of a tick up in January, but obviously, there's still pricing still relatively low. The ramp up of the conversions will continue and that will provide us with more improved product mix and price realization and improve machine efficiencies. We believe we've got a strong innovative position and particularly in barrier technology. And that will help drive both in the Packaging segment. Graphic papers markets remain difficult However, we've demonstrated that we've been able to gain market share and we think we'll continue to gain market share as closures occur.
Given the current EWP pricing and obviously the short term uncertainty around coronavirus, we, we're putting out an estimate EBITDA to follow the trend in sorry, in Q2 to follow this first quarter trend. So operator, that's I've gone through the presentation. I'm going to put it back to you now for questions. You.
Have each time in queue a confirmation
you.
The first question comes from Brian Morgan of RMB Morgan Stanley.
Hi, guys. Thanks very much. I'll start with an easy one, if I may. So in cycles, 110,000 ton debottlenecking this year. Could you just give us an idea of how those volume, how cycles volumes are going to evolve over the course of the year?
Are we going to see are we going to see a shutdown in the fourth quarter perhaps for this for the debottlenecking or does it carry on seamlessly?
There's no material impact on volumes. So essentially it's seamlessly. And then obviously from Q1 in the new financial year, you'll start to see the ramp up of the additional 110,000, but no material impact on volumes this year.
Okay, cool. That's good. Thank you. And then the second one is just on DWP Markets and supply side and there's a lot of new capacity out there. You can't obviously comment on specifics that you know, I can.
So Araka is adding a lot, I guess, adding a lot of lensing. They've all got projects out there. In a market that looks very soggy. Could you just touch us about how you're seeing things? What what do you think they've seen that we don't see, that, that looks like the market's going to
be very well supplied for a very long time. Maybe just chat to us about that? Look, clearly, Brian, we can't talk about individual, competitors or customers that are adding capacity. But, you know, broadly speaking, amongst the ones you mentioned, they have some integration strategy and they have, and they're adding significant viscose capacity and, it's to meet their own demand. You know, Sappi typically has long term contracts in place with committed volumes and that will continue to be the case.
Broadly speaking, in terms of market balance, yes, there is additional capacity coming on board, but if you look out over the medium term, there's significant amount of demand growth as well. And we believe as if you look at 3 to 5 years, balance in the market, looks reasonable even with the additional capacity that we're adding. And again, maybe just one last comment. Some of the producers that you mentioned, they don't sell into the spot markets. So it doesn't directly impact on pricing.
The next question comes from James Twyman of Precient.
Yes, thank you very much. I've got a couple of questions. The first one is the cloquet mill in the U. S, it's clearly starting to make losses. And my understanding is that that's probably piling up quite a bit.
Any idea, any comments you can give on that would be helpful on the size of those losses. But shortly as this situation gets worse and worse, it must come a point where you actually say to your customers, we can't keep throwing dollar bills away to supply you. It seems like a situation that doesn't seem to be sustainable? And then secondly, on CapEx, you were talking about CapEx of $350,000,000 to $400,000,000 now you're looking at $2.50 to $350,000,000 in 20.21. And that really means that you could hit 250 in 2021.
If things stay as they are, which they probably will, those are my questions. Thanks.
I'll briefly answer the first one and I'll hand it to Mike as well to elaborate a little bit further. And then I'll come back to the CapEx, your second question. With regards to locate. I mean, obviously, we've got swing capabilities. And we have reduced our volumes a little bit on dissolving which has enabled us to make more pulp for the paper business and has lowered our costs and has helped margins on the paper side.
We obviously don't give profitability by mill, but the mill is not making losses.
Steve, very little to add. We're leveraging the ability to swing, which is helping us manage costs and maximize results from cloquet?
Yes, yes. I mean, we have I think that's what you were getting at with your question. We do have certain long term commitments, on the dissolving pulp side, but In terms of where we have flexibility, we've taken advantage of that. CapEx, look, we've given a range. Clearly, as dissolving pulp prices are as low as they are, we have to be very cautious with regards to our CapEx levels.
We haven't completed our budgets yet for next year and we're monitoring the situation. If things and I know it's if and buts and all those things, clearly, if prices were to remain very low and profitability continued to be under pressure, then it would be on the lower end of our guidance. However, if things improve and profitability starts to increase, that would give us more flexibility We haven't committed any material CapEx. You know, we continue to monitor the situation.
That's good to hear. Thank you very much.
The next question comes from Wei Du Napier of Avio Capital Markets.
Hi guys. You mentioned sort of wood certification being an advantage in your dissolving wood pulp business. Can you give us an idea of what the global certification levels are amongst your peers and whether you're able to structure premium on pricing for that certification? Then secondly, I mean, you sort of speak about a lot of the DWP capacity going into to graded viscose producers. And, I mean, it's well understood that lensing are bringing on dissolving.
We're capacity. So in 3 to 5 years' time, how are you sort of strategically thinking about placing the increased volumes in dissolving wood pulp that you're likely to bring online. Are you going to sort of target another third large customer as per Berlin earlier in Nanjing size. And my final question is just could you map out Matan's, external versus internal pulp sales over the next couple of years. I just want to see how that aligns to your sort of growth outlook in specialty packaging markets?
Okay. I'm going to take the first one initially, and Mohammed, I'm going to pass a little bit more to you. Dissolving pulp increased capacity, I'll talk about. And then my turn, I'll say a little bit and Mike will elaborate further. I mean, firstly, on your first question, again, we can't comment specifically on cost competitors certification, but we do know that it does provide us a strategic advantage.
There are certain competitors, which I'm not going to name, who don't have that certification. In terms of a percentage, I don't know the exact percentage, Mohammed. I don't know if you know
I think, well, Steve, I
think it depends really on the kind of certification, whether you're talking FSC or PFC. All I would add is that The advantage that activities around the location also. So not just only on the certification, but we don't sit and source our word from areas that are considered sensitive, especially along the lines of ancient and endangered, definitions. That a lot of the NGOs are pushing. So that's a big part of the advantage that we have when we talk certification
And where do you see our key customers have the they have the highest ratings from someone like Canopy and it puts them in a stronger strategic position. And obviously, we support that. The DWP capacity, being added, yes, a lot of it is integrated Bear in mind that our high proportion, including the additional tons that we're adding at Saiccor will be committed on a long term contractual basis. So we don't, anticipate any problems with demand going forward through this additional capacity. We continue to look to extend long term contracts and we don't think it carries significant risk.
The, the return, Obviously, the number will change as we ramp up further on our packaging grades because we use it for packaging. But in the short term, Mike, we're probably looking at about 1000 tons used internally of my tons capacity across Europe and North America?
I think that's reasonable. And please remember that, both North America, sapi North America and sapi Europe were customers of Latan prior to the purchase. So internally, the numbers might go up subtly over the next couple of years, but, there will still be a significant portion that's sold over the market. Yes.
Maybe just a follow-up on my second question. So I mean, sorry to harp on this, but lensing on bringing on 500,000 tons of dissolving wood pulp capacity cycle is increasing, their production by 110,000 tons. And you and you're not expected to see any sort of, any sort of implications to that over the next 3 to 5 years?
Lynn, it's very difficult to comment on specific customers. However, we believe that, the capacity that they're adding is to meet their increased viscos and lyocell capacity. Additional capacity we are adding, we will sign up on a long term contract. So it will be committed volumes. I can't name customers, Wade, do you know that?
Thank you. The next question comes from Ross Krehe of JP Morgan.
Afternoon. Thanks everyone. Just one question on each product segment. In graphic paper, would you be able to provide some expectations around downtime into Q2? In the DWP market, you guys have talked about higher cost production at Wound And Viscos and DWP.
Are you seeing any signs of capacity closing? And if not, do you have any understanding of why that would be the case? And then on specialties, volumes were down in Q1. It looks like you're seeing quite significant volume growth. If I look at Slide 33, sorry, Slide 31 in the appendix, suggest you're still expecting specialty volumes to grow at group level and for the full year?
Okay. Thanks for the questions. Mohammed, I'll come back to you on the second one. On graphic downtime, for Q2, we in Europe, the it's predominantly on the mechanical space, mechanical paper. In coated woodfree, it's relatively small, and not that material.
On mechanical, we're probably looking at about 30,000 tons. However, and I know it's going to lead to another question. We all know that there's a strike in Finland at the moment. And maybe, Barry, I'll come back to you and you can just give a little bit on that after I've finished my answer. In the U.
S, we're relatively small. Our latest estimates, somewhere we've seen about 10,000 to 20,000. In terms of curtailment. Second question, Viscos, Mohammed, did you want to elaborate a little bit further? We are seeing closures and curtailment happening in viscose across the, across in China and outside, you want to just elaborate further there?
Yes.
There's public information around a closure in Canada. One dissolving with pulp producer. There's lots of anecdotal information from the market about some challenges that a producer in Brazil has been having where they've been running on and off. And what we have seen more recently is a large number of, Chinese dissolving wood pulp producers. And they're really sitting with the high high cost structures, largely because of the wood.
In China, if you look at the domestic Chinese dissolving wood pulp production, most of them are reliant on imported wood chips and wood makes up about 70% of their total production costs. And what we are starting to see in the last couple of months, a more significant amount of dissolving wood pulp coming out of their production So they're making less production, they're making other grades like unbleeds, crop, pulp and also some paper pulp. So we're starting to see more of that, happening in the last couple of months. One of the reasons I think, the response of, let's say, more downtime to, to the very low prices has been delayed is largely because of contracts related to wood chips These are annual contracts and a lot of these contracts have now run their course. A lot of these, producers are now starting up negotiations on which subcontracts, so it's giving them the flexibility to start taking more downtime.
Thanks, Mohammed. Your last question, just to just clarify, the reason for the decline is actually because we had softer demand in South Africa. We took curtailment in our South African business. And I think, Alex, it was about 20,000 tons in the quarter. Just to just to quote, in terms of the regions themselves, and North America's volumes were up 43%.
And the, European volumes were up 6%. So we're making good progress there. It's not to do with the recent conversions that we've made. This is a, ring fenced into Alaska because of the short term challenges that we face here. I just want to just briefly talk about the finish situation?
Very briefly, the Finnish Mill, Geeami, it has been down since Monday of last week. There is, as yet no resolution to the strike, so there is progress being made. We were due to take some downtime last week anyway. So the downtime, as a result of the strike, will more than compensate for the day.
Sorry, Barry, just to make it clear to everyone listening, it's an industry strike. It's not our strike.
To make that quite clear,
yes, this is a collective agreement as an industry strike, about the increased working hours that had been planned by the previous government's competitiveness pack. And, the two sides are still trying to resolve the differences. And Kit Demi just happens to be part of that strike.
Okay. Thanks, guys. Sorry, Steve. Can I just clarify? So assuming a I mean, I understand the South African issues on specialties.
I mean, would you then assume, I mean, is it fair to say you'd expect growth in for the year, assuming things don't get materially worse in Southern containerboard business, within specialties?
The U. S. And Europe, we expect to continue the trends and continue to grow profitability. In South Africa and I'll let Alex elaborate further, we think there was short term dynamics at play there. Particularly with regards to inventory builds.
But, Alex,
Steve, there was significant stock build in the last quarter of the previous financial year. So we've seen the impact in quarter 1. Our view is we'll sell as many tons in this fiscal year as we did last year. We'll catch it up in the next three quarters.
Okay perfect. Thanks a lot.
The next question comes from Sean Angra of Kronix Research.
Good afternoon, Steve. Can you hear me? Yes. Okay, awesome, great. Just in terms of the outlook for DWP process remain low, How does that sort of tie into your thinking on the ramp up for Saiccor as well as a swing capacity at Clicae?
And then obviously, you're weighing that up with client commitments. And then secondly, just in terms of your aspiration, maybe desperation to get back 2 times net debt to EBITDA. So the covenants have been adjusted for the next 2 years. Sort of maybe explain that a little bit of that unwind weighing up I guess, CapEx reductions with gross aspirations. And then just lastly, if you could just expand on this timing and maybe the quantum of investment related to potential containerboard in SA?
Thanks.
Okay, thanks. Look, based on all the fundamentals that are out there, we do believe dissolving pulp prices will recover in the medium term. Obviously, the coronavirus is added a little bit in the short term. As we think about the, the outlook and pricing on dissolving pulp and obviously, we talk to many external parties and we listen to their opinions. We believe that in the second half of 2020, we are going to see recovery.
Various estimates out there between of $50 kind of $50 of untype numbers, but clearly that hasn't materialized yet. And that's we need to get through, you know, the short term pressure. The specific question on swing capacity clearly, there's an opportunity at cloquet because we can make paper pulp for our paper business and we'll maximize that opportunity. At Saiccor, the, you'll appreciate that you make commitments to 3rd party vendors and, there's contracts in place and you can't you can't pull back on that because it would come at significant costs. So that project is ongoing.
The by the time the product comes live, we would or the machine comes live, we would we would expect the dissolving prices to be off their bottom. As I say, we look to commit those volumes on a long term basis. And profitability will improve as a result. It also lowers our costs at the mill at Saiccor. In terms of your question, as it rolls into then CapEx and our leverage and our net debt as we move forward, clearly, as I said earlier, there are no long term other material commitments.
After we finish paying for the Saiccor expansion, the CapEx will come down, quite dramatically. And that means that your leverage ratio does come, come down considerably And that's why we were comfortable to negotiate, a 2 year increase in the leverage ratio. Because we believe that that sees us through the higher CapEx levels. And then thereafter, you know, if you do the math thereafter, our leverage ratio comes down considerably. Just to reiterate the point I made earlier, the CapEx will monitor the situation.
If dissolving pulp prices don't come off the bottom, then we'll be more conservative. If however, things improve the way we think they will, then that will open up opportunities after we complete there's the cycle project for to do other initiatives. But as things stand, we are being very cautious. We're not committing large volumes we're monitoring the situation. Alex, do you want to just talk about the container board?
I'm obvious that the containerboard market for agricultural exports is growing at about 5% a year, and we obviously want to maintain our market share there. The first investment will probably be a fairly small one, roughly 15% of our current capacity. And hopefully, we can, build on that as, CapEx becomes available.
The next question comes from Mikhail Dupell of UBS.
Thank you. Hi, everybody. A couple of questions from my side. I would start with some questions on the to sell them on Whirlpool pricing. First of all, you mentioned in your press release that you have seen some slight improvement in the pricing right now, if you could just elaborate a bit on that.
Where are we now level wise in January, February? And what's the latest indication there? And then also looking at the second half of the year, you mentioned market estimates pointing to recovery. So I was just wondering what would what would be the key drivers behind that assumptions?
Yes. On the first one, it's been a marginal improvement. It's only been a couple of dollars a ton. However, you do look for the positives in this, The price has not dropped since, I'm trying to remember now. It's probably October the last time the price has dropped because I think in November, there were already at the current levels.
So it certainly has flattened off over the last 3 months. And, as I say, a marginal increase, albeit small, but it is a move in the right direction. Why are we confident about the recovery? As I said earlier, it's not that we think it's going to happen instantaneously. But we believe that with paper pulp prices already starting to rise, that will create opportunities for swing producers.
We believe that with so much of viscous capacity, cash negative, and similarly dissolving pulp about a third of dissolving pulp capacity is cash negative. So all those fundamentals combined, causes to believe that there will be a recovery. We can't say it's going to happen next month, but we do believe as as the year unfolds that everything points towards, an improvement in pricing. Mohammed touched on it earlier, there's a number of producers already reducing capacity or and taking curtailment, both on viscose and in dissolving pulp, and all of that will serve
Okay. And then just a follow-up on that in terms of fiscal state of fiber pricing. We saw another leg down there in December. Have you seen any more movements downwards on that side as well in January or February? Has it stabilized?
No, we haven't seen any further declines. But obviously now, the coronavirus means that, again, it creates uncertainty. Interestingly, it could be both positive and negative for pricing because suddenly now you're not getting viscose producers out of China. A significant proportion of volumes come out of Indonesia. This could actually help short term pricing.
And could be that trigger. But again, it's uncertain. So we have to see how things play out. It hasn't got worse things have been level in recent weeks.
Okay. And then just a final question. Switching to the U. S. Coated paper market.
It seems this pricing held up surprisingly well there in 2019. And now we have seen some slippage at the end of last year going into this year, how do you see that market evolving right now? Is it getting out of balance or or are there enough closures? So how would you characterize that market now?
Yes. I mean, obviously, you saw from our numbers that the market was under significant pressure. You know, you saw volume declines last year 16%. So that has put us under pressure. We believe that further capacity will come from our competitors.
And then within SAPI itself, obviously, we're ramping up on Somerset PM1, which means we will be taking capacity out of the market. So pricing when a market isn't declining like that, you do see some negative impact on pricing. Our goal in the short term, obviously, is to ensure that we keep our machines full and we don't take the impact of significant curtailments. So that's our tactics in the short term. It's very difficult to be specific on individual competitors and capacity reductions, but we We continue to believe that substantial capacity will come out both in Europe and in the U.
S, actually.
Okay. That's very clear. Thank you very much.
Thank you. The next question comes from Alexander Berhund of Bank of America.
Thank you very much. Most of my questions have been answered. I just have a follow-up on Finland and the Phoenix strikes. If the strike goes on, I mean, for the full 4 weeks, do you think that that could tighten the graphic paper market in Europe in any material way. And also, do you see this as an opportunity to continue to gain market share in graphic paper via your mills that are not in Finland?
It's a good question. I mean, obviously, things are uncertain and they may play out differently, but I would say, we have less exposure to Finland than our competitors. So that You can interpret that.
That's very clear. Thanks.
That it could be an opportunity.
Alexander, does that complete your questions?
Yes, that's it. Thanks very much.
Thank you. The next question comes from Sashank Gupta of Goldman Sachs.
Hello.
Session.
The operator, let's move on.
Hello. Sorry. The next question comes from Simeon Kieran of Mizuh
Good afternoon. Just on the previous question on the leverage covenant adjustments, are you providing the new levels?
Yes, we've included in the results announcement and we'll continue to do that. Obviously, you've got the net debt number on the balance sheet, but that includes this new IFRS adjustment for operating leases. We backed that out and we we do provide what the leverage levels are in terms of the covenants themselves and it was two point eight times at the end of the quarter.
And what they are compared to what are they tested against you have that as well?
The the covenant level is 4.5.
4.5. Okay. And that's flat for the next 2 years?
Yes. That's correct. For the quarter 1, it was 3.75. The quarter that we're in at the moment quarter 2, our quarter 2, it's up to 4.5, and it's at that level for the next 2 years.
And on the corona virus issue, you have about 20% of your revenues that goes to Asia and the other, how much of that is actually China on average?
We don't have that specific number here. I mean, clearly, it is a material number. I mean, predominantly affects our dissolving pulp. We have volumes going into China. And then our release business, we have impact.
And then on the paper side, the graphic and packaging, a little bit of volumes also going in. So, we are exposed, and as I said earlier, it's very difficult to gauge what its impact will be because everything has been closed. Next week, the holiday season is over. And we'll be able to assess the full impact. But again, with things like this, there are certain markets that may tighten up and it may help pricing, but equally, you know, the short term volumes could be impacted because of a lack of flows of product.
Generally, a lot of news are coming from China. How much of that is accurate, how much isn't we are not too sure on our end either, but, that the impact potentially could be both on the demand and also production shuts, I guess?
Assessing the situation. As things currently stand, you know, everyone's top production is not a lot happening. Okay. We'll get a better assessment next week.
Okay. And in terms of your contracts with the 2 major customers for DWP. When are those are up for renewal?
They, they're on a long term basis. They're, I don't want to give you individuals, but they're between 3 5 years.
From now?
Yes.
Okay. And maybe I did not hear you well. Did you say that for coated woodfree you are looking at your capacity in Europe and, potentially can make announcements may I research you?
Yes, that's correct. We'll make, we will make an soon.
Okay. As to the
Yes. What's the outcome of our assessment? Yes.
Okay. Okay. And lastly, on your guidance for Q2, I can run under exact wording right now, and I'm a bit sure it was purposefully, made that way. But what do you mean by trends in terms of margins or the year over year declines? You said it was in line with Q1.
Yes, we were looking towards the year on year decline.
Okay. That's very helpful.
And the final question is a follow-up from Mikhail Dupejal of UBS.
Yes, thank you. Just a brief follow-up on the DBP And VSF market. Could you tell us where the operating rates are right now in the respective markets and where they are projected to be, atyearend?
The viscose rates, viscose operating rates are low, Mohammed, in the low 70s.
In China, yes, coming out of a Chinese New Year, it's been around the 75%, 76%. And as you go through the year, because you're going to get into a seasonally strong time, do expect that rate, if history is anything to go by to lift a little bit, plus you've got underlining demand growth, which should also help lift the overall operating rate as you go through the year. And that's viscose dissolving pulp is in the high 80s. Yes, dissolving pulp is in the high 80s, 85. I would say, in fact, more recently in China, the domestic guys have taken out a large amount of production so even lower in terms of dissolving wood pulp.
Okay. And again, moving towards the end of the year, same trend there, I guess, as in WiesF.
Sorry, I didn't hear you.
Yes, I think in the very short term, we wouldn't expect those operating rates to change that significantly. The kind of volumes is relatively stable, throughout the year. It's less seasonal than than some of the other businesses.
Okay, got you. Thank you.
But we're still seeing volume, demand increases we're still seeing 6%, 7%, 8% type increases. So the demand side is, overall, is still pretty good. Obviously, to my point I made earlier, the big pressure point has been the excess viscos that's come on board capacity.
Alright, that's clear. Thank you very much.
Gentlemen, we have no further questions from the lines.
Great. Thank you everybody for joining us, and we look forward to discussing our results at the end of Q2. Thank you very much.
Thank you. Ladies and gentlemen on behalf of Sappi. That concludes today's conference. Thank you for joining us. You may now disconnect your lines.